Arguably, the three biggest things you have to deal with nowadays are people, money, and tech. I’ve already written about tech, so this post will be about people and money. The sciences of people and money are, for the most part, psychology and economics, so today I’ll be discussing a brief overview of each.
Psychology, especially cognitive psychology, is heavily based on the assumption that people want to believe that they are rational and logical, and make rational, logical, fact-based decisions, but mostly they don’t.
Economics, however, bases most if not all of its models on the assumption that people will, for the most part, behave rationally.
You will notice the fundamental contradiction.
As such, I’ll talk first about psychology, then economics in theory, and lastly, economics in practice, taking the psychology into account.
The most important thing you need to know about people is that they are brains. The most important thing you need to know about brains is that they are fallible.
The specific ways in which brains are fallible are called biases. Eliezer Yudkowsky defined biases as “obstacles to truth which are produced, not by the cost of information, nor by limited computing power, but by the shape of our own mental machinery.” There’s a decently sized list of them on Wikipedia, but unfortunately it isn’t really comprehensible to laypeople. There’s a decently sized collection of essays about many of them on LessWrong as well, but it’d take you a really long time to read (I know, I’ve read it) and you don’t have all year. As such, I’ll discuss a few of the most common and most stupid.
The probability of one thing happening is always higher than the probability of one thing plus another additional thing happening. If you want to be mathematical about it, if A stands for a thing happening, B stands for a different thing happening, and P stands for “the probability of”, P(A) > P(A&B).
However, in practice people don’t apply this. In a 1981 experiment, 68% of the subjects ranked it more likely that “Reagan will provide federal support for unwed mothers and cut federal support to local governments” than that “Reagan will provide federal support for unwed mothers.” The subjects substituted judgment of representativeness for judgment of probability.
The way to fix this is to understand that each additional detail, no matter how representative, is a burden on the probability. Each “and” decreases the likelihood that the whole thing will happen.
Read more about the conjunction fallacy and the research done to find it.
If I’ve got a map of California, that map is not itself California. It’s a representation. In the same way, the picture of reality that you’ve got in your brain is not itself reality. The map is not the territory. This concept can be hard for humans to grasp, because we have never observed the territory directly: we’ve only got our body, our nerves, our senses, and that’s the closest thing we’re ever going to get. We’ve got a number of different maps but we have no real territory. (This fact becomes really obvious when your maps get messed up: if you get high on LSD, “reality” gets messed up but actual reality stays exactly the same.)
Because we interact with maps instead of territories, we intuitively judge probabilities by how quickly we remember them. That is the availability heuristic. But the map is not the territory, so the availability of a memory is not the same thing as the probability of the actual event.
Read about how the availability heuristic makes people unprepared for large disasters.
Economics in theory
Economics is one of those things where if you can even give a cursory explanation of basic principles, you’ll sound like a genius. I think it’s some combination of 1. the genius implied by understanding money, aka the motivation of the world, 2. all the complicated terms that economists use to describe relatively simple trends and math, and 3. the fact that economics is mainly studied by immensely boring people.
Some members of my family (they aren’t boring, I promise) who actually do understand economics have taught me some basic principles. Now that I have had my share of feeling like a genius for knowing how money works, I’ll pass it on to you. Don’t worry, I made them explain it to me with simple words and minimal jargon, so that’s how I’ll pass it on.
At a fundamental level, companies set their prices so that they’ll get customers, and customers buy things at prices they think are reasonable.
Let’s give an example. If I want to buy ice cream, and ice cream costs $5, I’ll say “okay, sure” and buy it. If ice cream costs $10, though, I’ll say “screw that” and buy a different sweet. So obviously, there is a price that I’m not willing to pay for an ice cream; there is a price at which I as a customer will find an alternative.
On the other end of the price spectrum, it’s not worth the ice cream vendor’s time to sell their ice cream for $1. If I’m not willing to buy ice cream for more than $1, I’m going to be very hard-pressed to find a vendor who’ll sell it to me for so little. Therefore, there is also a price at which it doesn’t make sense for a vendor to sell the product.
We can graph this. If we put price on the vertical axis and quantity (amount of product purchased or frequency at which product is purchased) on the horizontal, we can get some nice lines.
Supply is just how much of the product is on the market: how much ice cream is available to buy. Demand is how much people will buy the thing (either number of products or purchase frequency): how often I buy ice cream. Right there in the middle is “equilibrium”: it’s the optimal price and quantity at which both supply and demand can be at their highest point.
Equilibrium does a great job at setting a price at which people want to buy stuff and companies want to sell stuff. But unfortunately, economics is never as easy as the theory. Politics comes into play.
economics in practice
Let’s imagine that someone comes along and says that it’s completely unacceptable that people can’t buy ice cream for $1. There are underprivileged families, they say, who don’t have more than $1 for ice cream, and those families should be able to buy ice cream, too. They have heartbreaking ad campaigns featuring poor families unable to buy a simple dessert. Their opinion gains leverage, and they start to lobby for a regulation to put an upper limit of $1 on all ice cream sales in America. They win; now vendors are forced to sell ice cream for $1 at most.
People hear about this and start lining up for the ultra-cheap $1 ice cream, but meanwhile, the ice cream vendors are slowly going crazy. They’re losing money on every sale, and they’ll rapidly go out of business. One vendor is still turning a profit, but it’s incredibly small. She can’t support her family on this, so she picks up a side gig, and quits the ice cream business entirely shortly thereafter. Another vendor decides that if he has to make ice cream for $1, he’ll make his portions smaller and use worse ingredients. By doing this he makes it cheap enough that he can keep his business and livelihood afloat. He’s not happy about it though: he misses making quality ice cream.
Meanwhile, the consumers feel gipped. Yeah, they’ve got cheap ice cream, but three out of every four ice cream vendors has gone under, so it’s scarce. Further, the ice cream vendors who are still afloat have decreased the quality of their goods substantially.
The concept of the government introducing a maximum price for something is called an artificial price ceiling. The classic example is rent control in NYC. If you think about it in terms of the supply and demand curve, it’s capping out the vertical axis way below equilibrium, so supply is way too low for the demand.
Now let’s turn it around. Let’s say instead that someone comes along and says that ice cream vendors don’t get paid enough. Ice cream is the American way, they say, and we have to protect American ice cream vendors. They have heartbreaking ad campaigns featuring sad ice cream vendors coming home to cramped empty apartments and sighing over piles of bills. Their opinion gains leverage, and they start to lobby for a regulation to put a lower limit of $10 on all ice cream sales in America. They win; now nobody can buy an ice cream for less than $10.
A lot of people suddenly stop buying ice cream. They buy alternatives: cookies, candy, etc. As a result, ice cream vendors see a steep decline in their sales, because the only people who still buy it are the die-hard ice cream fans, and even they buy it less frequently. The vendors are making more per ice cream, but their sales have been cut so much that it doesn’t matter; they’re making less overall profit. Again, both the customers and the vendors have been screwed over.
The government introducing a minimum price for something is called an artificial price floor. The classic example is minimum wage. This time with supply and demand, it’s forcing the vertical axis way above equilibrium, so demand is way too low for the supply.
Price floors are made to help vendors, but in the end it screws them over. Price ceilings are made to help customers, but in the end it screws them over. Artificial political constraints on economics are meant to help, but no matter who you’re lobbying for you end up hurting everyone.
We can tie this back in with psychology. If humans were really logical beings, we would know that being indignant is not a substitute for doing math. But we don’t realize that; we keep making the same dumb mistakes over and over again. Maybe somebody should compile a list.