There should be a rule that if Professor Robert Shiller is speaking in public within a hundred miles of you, you must make tracks to hear him. A statistical analysis of my own movements over the past 12 months might show that I’m already following this rule. However, with just the two data points, you should not bet the farm on it…though many have done worse (I know: I’m related to some of them). When they reform Parliament, they should sneak that rule in there for our politicians, and then apply it more broadly to the population at large. Once you’ve read Shiller’s new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (US edition), with Nobel Laureate George Akerlof, you’ll know why.

I’ve more or less finished Animal Spirits, and the purpose of my Monday trip to Policy Exchange was to hear Shiller discuss the book and his new pamphlet for the hosts: a proposal that the UK adopt an inflation-indexed unit of account, like Chile’s Unidad de Fomento, as a means to cure the population of money illusion. I felt blessed to be invited.

Animal Spirits is surely essential reading for any student of our broken times. And The Case for a Basket, which you can download for free, has a good chance of becoming government policy; when I last saw Shiller in London in the autumn, he’d been in to see Gordon Brown, Alastair Darling and Lord Mandelson, if I recall correctly. Meanwhile, as the leading centre-right think-tank, I understand that Policy Exchange will be the leading source of ideas for any future Tory administration, assuming they can keep their moats clean, as it were.

But I could not help wondering if Shiller’s audience was taking all this behavioural economics stuff in, or whether he was just another speaker on the Westminster agenda to be consumed: knowledge of his ideas being a necessary source of signalling to others in polite conversation. Shiller’s argument that our animal spirits have been dangerously discounted by economic thinking surely makes him a heretic in this milieu; the reformation he foretells has barely started. There are a lot of PPE graduates out there, and a greater concentration within 100 yards of Parliament.  Would they not need to go back to school, or be reprogrammed?

But I digress.

To imagine how the “basket” would work, you have to understand it is a unit of account, a measurement of value that would not alter with inflation. Or deflation, for that matter. If you had your house to sell, and wanted to make sure you got what you paid for it a year later, you would offer it at the same basket level. You would avoid having to perform a complex accounting calculation that, on a day-to-day basis, is beyond most of us, including our elected representatives. We prefer to think in nominal prices rather than real terms. So we get easily persuaded that houses are a sure winner when we should all know there ain’t no thing as sure winners. Shiller shows US house prices actually closely track inflation over the longest time. A basket system would be especially useful for fixing ongoing contracts, like legal fees or alimony payments; the “basket” ensures that a figure agreed today will buy the same amount of goods and services in the future for the recipient.

Shiller maintains that the Chilean system — introduced in Chile in 1967, but only really taking off in the 1980s — has worked successfully, despite local complaints about its long-term viability, and could prove just as useful in low-inflation economies like the UK and US.

What I find attractive about it is that it is a simple solution to a complex set of pernicious social behaviours. According to Shiller, all that the government needs to do is supply its institutional credibility to a calculation and then create a website. Electronic payments systems would enable any number of assets and commodities to be listed in baskets and payment settled via a real-time currency calculation. In effect it stops you being defrauded by history.

The idea of Animal Spirits, meanwhile, is not new. Shiller points out that the phrase was used by John Maynard Keynes. But in their book, Shiller and Akerlof seek to increase the emphasis on non-rational factors which modern economics has tended to ignore. Money Illusion plays a key role. But they also emphasise issues like trust, bad faith, and corruption. And there is a wonderful qualification of the power of capitalism, with perhaps more than a gentle poke at our more optimistic libertarian friends:

…the bounty of capitalism has at least one downside. It does not automatically produce what people really need; it produces what they think they need, and are willing to pay for. If they are willing to pay for real medicine, it will produce real medicine. But if they are willing to pay for snake oil, it will produce snake oil.

Shiller is a curious student indeed. He reads old newspapers in his quest to understand mood and capture the narratives that transmit bad economic ideas. In Monday’s talk he regaled us with a newspaper column from the 1880s deploring the a collapsed property boom in Los Angeles. The columnist boldly asserted that never again would people be so stupid. To be fair, for nearly a century that was correct. So how do these animal spirits get going? This is what he and Akerlof say:-

Why do new kinds of corrupt or bad-faith behavior arise from time to time? Part of the answer is that there are variations through time in the perceived penalties for such behavior. Memories of major government crackdowns against corruption fade over time. In a time of widespread corrupt activity, many people may get the impression that it is easy to get away with it. Everyone else is doing it, it seems to them, and no one seems to be getting punished. To some extent, lowering one’s adherence to principles at such times is a perfectly rational thing to do. Lower principles at certain times may also reflect a social osmosis, as information about the probability of punishment for certain kinds of crimes spreads through a net of personal acquaintances, as Raaj Sah has documented. Such a process may be part of the confidence multiplier, as corruption feeds back into more corruption.

The variation through time in the extent of corruption of bad faith is also to some extent a reflection of the fresh opportunities that arise as new financial inventions of one sort or another appear, or as financial regulations allow innovations to be implemented. These innovations may not be understood initially by the public. This variation occurs because of cultural changes unrelated to fear of punishment or to changes in technology. These changes are clearly within the realm of pure animal spirits. Culture changes over time to facilitate or hinder aggressively competitive or predatory activities. Because these cultural changes are difficult to quantify, and fall outside the field of economics, they are rarely connected by economists to economic fluctuations. They should be.

Shiller and Akerlof continue with examples of how widespread flouting of 1920s US prohibition led to a more generalized disrespect for the rule of law. Then in the depression years things shifted again. By 1941,  bridge was the most popular card game in America, encouraging, as it does, cooperation, while also not being played for money. By contrast, the early years of this century have been characterised by the rise of Texas hold’em, bluffing, and the poker face, both literally and metaphorically.

You don’t have to look far for these animal spirits. If Shiller is now more likely to be the first voice the Tories turn to on matters to do with housing markets, this will be an improvement on a previous foray which enlisted the Honorable Kirstie Allsopp, presenter of property porn TV programme Location, Location, Location. I’ve often wondered why the kindling of animal spirits by one of our public service broadcasters had not long ago been scrutinized by a House of Commons select committee or two. But recent evidence shows the same spirits had taken hold there also.

Now if it were real animal spirits we needed to calm, Louis Armstrong would be our man. In the 1938 film Going Places, Armstrong plays Gabe whose music is the only thing that will settle the unrideable horse Jeepers Creepers.  Yes, you know where this is heading. Tell me I’m wrong, but it sounds like he too is asking “where did you get those PPEers?” How they hypnotize!

And did you Twitterers note how Duke upbraids Maxie? “Why don’t you stop thinkin’ up snappy sayings and start concentrating on business…”

Anyone who has read Gerd Gigerenzer’s Gut Feelings will recall the description in Chapter 10 of how the pressure to conform creates moral hazard. A powerful heuristic or default seems to operate: “don’t break ranks”. Failure to adhere can result in peer hostility. The experience of Paul Moore in trying to restrain HBOS executives reveals just how powerful and enduring a force that can be, assuming he is an accurate witness to his own experience at the bank. It goes some way to explain how groupthink can operate in the face of compelling contrary evidence. To quote from his memo to Tuesday’s Treasury Select Committee hearing:-

I am still toxic waste now for having spoken out all those years ago!

This might also reflect why today’s FT report leaking of an “independent inquiry” into Paul Moore’s allegations contained the following observations from the HBOS directors of his behaviour. A case of shooting the messenger?

They told KPMG that while Mr Moore’s technical abilities were “recognised as strong” and he gave his team a “strong sense of purpose”, they doubted his ability to work with his colleagues. His behaviour in one meeting was described by people interviewed by KPMG as “ranging from prickly to ranting to extraordinary to outrageous”.

For those not following these events, Moore was the head of Group Regulatory Risk Management for HBOS until 2005. He alleges that he argued with the board that HBOS’s sales culture was running out of control, creating huge risk for the bank should the economy and housing market turn downwards, and that there was a reluctance on the part of executives to have their decisions or behaviour challenged. At the time, HBOS CEO James Crosby dismissed his concerns and terminated his employment. Crosby then moved on to become deputy chairman of the Financial Services Authority. He resigned yesterday morning.

The full text of Moore’s memo is here. For the time being, it may be one of the most readable and historic documents of modern finance. One suspects there will be others.

Well, in his deposition to the Treasury Select Committee Moore mentions it, but I doubt that this five-minute module is mandatory yet at any business school. Let me know if I’m wrong.

Photo credit: Tim Penn

A recent controversial report from the University of Buckingham found that UK schools specialising in music produce better physics results than those specialising in science. And then education watchdog Ofsted reported that half of the schools it had inspected lacked adequate provision for music education, that music teachers felt marginalized or isolated and did not receive the developmental opportunities they needed.

A couple of years ago Howard Goodall — who in this country is fast becoming to music what David Attenborough is to natural history — was given £10 million to expand the use of singing across the curriculum in primary schools. It was highlighted then that singing could be instrumental in the learning of a variety of subjects but that many teachers lacked confidence to deliver any musical experience at all for their students. A further £40 million or so seems now to have gone into the Sing-Up campaign.

Where teacher confidence is absent, I understand there are cascading techniques to spread music from older to younger children. Perhaps the Sing-Up promotional video hints at that:-

When something’s not working, or some kind of competitive differentiation is needed, there is a strategy (described by Scott Page) called “do the opposite“. So here’s a wild idea. Why don’t we give Howard Goodall the entire national education budget, not just £50 million, and then see what happens? I’d bet things would not get worse. And there’s an outside chance we’d solve many more of our educational difficulties than our current pragmatic approach, in particular the social problems that arise from the inability of barely literate children to take their proper place in an increasingly knowledge-intensive economy.

A whole chapter in a book of knackeredness could be devoted to the brokenness of modern musical experience. Music tends these days to be consumed rather than practised. The neat thing about Sing-Up is that it seems to be using technology to reverse this.

The institutions for participation in music are rightly or wrongly mostly organized by the classical music tradition, because that is where the majority of skills to perform and teach resides. But there exists now a kind of philistinism that has separated this world from the bulk of the population, as parents (and I suspect many teachers) prefer something more familiar and accessible (to them) from the world of pop. But in the past, whether it was colliery bands, or church choirs, quite serious music could be a source of social cohesion and, for the able person, a technology for social mobility.

Teaching children songs is a gift they keep for a lifetime, but the repertoire on offer seems to be diminishing. Sing-Up has its own Song Bank of high quality musical assets, which parents as well as schools can draw on. No matter how much music of whatever genre gets played at home, when a child really learns a song so that they can sing it out loud, and with others,  something more than just notes and words are rehearsed: a whole neurological, physiological and social complex gets activated. (Don’t tell anyone, but computer games, even I suspect Guitar Hero, don’t do that.)

When I was in primary school, the very flamboyant cathedral organist cruised in once a week in his rather incongruous metallic lime green Ford Mustang Mach I complete with thunderous tailpipes. We crowded his arrival, and believed, apocryphally, that this exotic vehicle (for small-town Yorkshire c1972) contained its very own mobile phone. He taught us folk songs from across the centuries, and from a standard school songbook. What a breath of fresh air if every child these days could sing the following paean to human fragility; it was my favourite.You wouldn’t catch a self-respecting pop musician touching that material these days, now would you?

Gregory Berns, a professor of neuroeconomics at Emory University and author of Iconoclast: A Neuroscientist Reveals How to Think Differently(UK)/(US), was interviewed this morning on Radio 4′s Today programme exploring the role of neuroeconomics in understanding the current crisis.  He’s in Davos for the World Economic Forum, with all the large fromages.

Back in the day, the Knackered Hack used to dispatch a team of reporters to Davos. Press places were then scarce.  Now I’m watching it all on Twitter, my very own self-organizing newswire, and tossing in the occasional iconoclastic observation of my own.  Who-da thunk it?  Everyone and his dog seems to be there; some shuddering, and not from the cold.

Berns message was about as negative as you can get when considering the current crisis.  He deftly applied the old-dog-new-tricks teaching heuristic to an entire generation:-

One thing that we know is when people make decisions that they are uncertain about is that they look to other people… We have seen along the way how other people’s opinions essentially pollute those judgments. Now,  modern markets are great. Now, economists like to talk about efficient markets and all of that, but the problem is that they are only efficient when people behave as individuals and render independent judgments.  Now I would probably go as far as saying the current crop of adults is a lost cause in that I think we should be focussing our efforts on the next generation and how to teach them to make judgment that are independent of each other and stop this crazy herd behaviour.

So there you have it.  All current adults are sheep.  Better cancel the Twitter account .  You can listen to the whole thing here.  I think it was edited, so there may be some context missing and the above quotation therefore not adequately representative. That’s mainstream media for you.

All that said, like a dog barking in the wind, I myself did tweet the following just a few weeks ago:-

Haunted slightly by counterfactual sense the boom promoted an entire generation of the wrong type of manager”

I’ll come back to that idea soon, I hope.  But in the meantime, given Berns’ imperative that we focus on the cognitive capacities of the next generation, it was a neat little coincidence that a review copy of a new textbook by David Hardman, entitled Judgment and Decision Making, arrived in the post yesterday from Wiley. US version available here.  Just take a look at the contents:-

1. Introduction and Overview: Judgments, Decisions Rationality
2. The Nature and Analysis of Judgment
3. Judging Probability and Frequency
4. Judgmental Distortions: The Anchoring-and-Adjustment Heuristic
5. Assessing Evidence and Evaluation Arguments
6. Covariation Causation, and Counterfactual Thinking
7. Decision Making under Risk and Uncertainty
8. Preference and Choice
9. Confidence and Optimism
10. Judgment and Choice over Time
11. Dynamic Decisions and High Stakes: Where Real Life Meets the Laboratory
12. Risk
13. Decision Making in Groups and Teams
14. Cooperation and Coordination
15. Intuition, Reflective Thinking, and the Brain

Back of the net, as they say in soccer.

David, with others, runs the London Judgment and Decision Making Group, whose seminars I’ve been lucky enough to attend when I’m in town.  If Berns is right, David should be needing a larger venue.  David assures me he will be blogging on the book before too long, so I’ll let you know when that happens.  We can definitely benefit from a regular dose of wisdom from this discipline.  Of course, it’s a little known fact that the Knackered Hack is already one of the leading decision science blogs on the web.  It says so here. And if you are wondering how that happened, the answer remains … well … uncertain.

Photo credit: stephenphampshire