Introduction

In the aftermath of the worst financial crisis since the Great Depression, NOVA presents
Mind Over Money—an entertaining and penetrating exploration of why mainstream
economists failed to predict the crash of 2008 and why we so often make irrational
financial decisions. This program reveals surprising, hidden money drives in us all and
explores controversial new arguments about the world of finance. Before the current
crash, most Wall Street analysts believed that markets are “efficient”—that investors are
reasonable and always operate in their own self-interest. Most of the time, these
assumptions of classical economics work well enough. But in extreme situations, people
panic and conventional theories collapse. In the face of the recent crash, can a new
science that aims to incorporate human psychology into finance—behavioral
economics—do better? Mind Over Money re-creates some of the new field’s most
compelling experiments. Through entertaining real-life experiments, such as testing the
response of Wall Street traders as they buy and sell stocks or revealing how excessive
spending choices overwhelm consumers’ ability to make rational decisions, NOVA
shows how mood, decision-making and economic activity are all tightly interwoven. By
delivering unexpected insights from leading analysts and powerful experiments, Mind
Over Money exposes the mysterious and surprising nature of the two most powerful
forces on our planet: the human mind and money.

My Review
Just watched a PBS Nova documentary called "Mind over money". It's a film about two
competing models of economics, referred to in the show as 'rationalist economics' and
'behavioralist economics'. 'Rationalists' model each human being as being self-
interested and perfectly rational in pursuing the maximization of their own wealth; this
results in certain mathematical assumptions that allow for an elegant theory.
'Behavioralists' claim that human beings do not act that way; even if maximization of
personal wealth were pursued (which is not always the case), mistakes are often made.

I for one believe that the behavioralists are right. It seems common sense to me to
assume that nobody can reliably do the kind of mental calculation required by perfect
economic rationality, and there are various cognitive biases to skew things the wrong
way. But, I stress, this is merely a belief and I will defer to experts that study these
things. In any case, the rationalist economic model seems to work, most of the time,
because most people, most of the time, behave close to what that model assumes.
That's why, often, it can make useful predictions (though, when its predictions fail, they
fail spectacularly).

The PBS Nova piece also tries to convince the viewer that the behavioralists are right.
So, how well do they achieve that goal?
First piece of experimental evidence is an auction, with a twist. The item being
auctioned is a 20$ bill, which is exactly that. Nothing special about it. Not worth more
than 20$. Now, the bill will be given to the highest bidder, however- the twist- the
second highest bidder also has to pay and will get nothing for the trouble.

The auction happens, and surprise, two people eventually enter a bidding war above
20$. Rationality failed, claims Nova, because if they were rational, they wouldn't have
bid more than 20$. It was the 'fear' of losing that brings the bids above 20$.

If rationality failed, I'd say it failed when entering the auction, if at all. The auction is a
trick, and one needs to look several steps ahead to realize the trap and avoid it. So,
yeah, I can see why you'd expect a rational agent not to commit that blunder. But the
'fear' of losing is a rational fear, once the trap's been sprung. Once a bidder enters the
above 20$ zone, they must, rationally, try and minimize their loss. If said loss involves
bidding higher, at least part of the high bid is offset by the 20$ bill. If they lose, none of
the bid is gained back.

Second piece is a little poll meant to illustrate 'present bias'. Suppose you are given an
option: either receive 100$ in a year, or 102$ in a year and a day. Most people choose
the 102$ in a year and a day, which is deemed consistent with rationalist economics.

Now, let's say we change the option: either 100$ now, or 102$ tomorrow. What's your
choice? Most people choose 100$ today. This illustrates the 'present bias'- we want our
rewards now, now, now!

The problem I see here is that, while I'm already convinced present bias exists, and that
the little poll shows it in action, I'm still not convinced it's irrational. What if I -do- need
100$ (or less) right now? What if having those dollars now opens a good prospect of
earning more later, but if I were to wait one day to get those extra 2$, I lose my chance?

This also reveals that 102$ after a year and a day is only 'better' than 100$ in a year
because I have no idea about what my situation is after that hypothetical year, so might
as well pick the 102$. But I know my situation today. It may well be such that I need the
money, fast.

The anchor effect though was neatly presented, even for my standards. Here's the
setup- again an auction for some product, say, a wine bottle. But, before bidding starts,
the participants are asked to write down the last two digits of their social security
number on a sheet of paper. It turns out that those who wrote the larger numbers, also
tended to make the higher bids.

Incidentally, the documentary claims (and lacking a reason not to, I'll believe it) that the
social security number is random. That means, it is not associated with any trait of its
owner. Having a social security number with a high pair of last digits reveals nothing
about the person holding it. Even so, just writing a high number down tends to push
people to bid higher.
For my money, the explanation of economic bubbles is spot on, and the example of the
Dutch tulip bulb bubble is a neat piece of history. It went like this- in 17th century
Holland, people started buying tulip bulbs at a high price because, since prices were
increasing, one could expect to bump into a bigger fool that would pay even more.
Same thing is supposed to drive other speculative bubbles, like what happened in the
housing markets. And in all cases, the bubble eventually bursts because one runs out of
fools to trick.

A brief look at the wikipedia article on tulip mania paints a more complex picture
however, which may indicate that the Nova doc is a bit hasty in its conclusions. For one,
it's difficult to ascertain just how high the prices were, apparently, and there may have
been some kind of safeguards in place that were meant to reduce loss- or so pro-
speculative historians claim. What can I say, it's a very controversial issue, where
people have actual stakes in. The worst kind of controversies, therefore. Only uber
nerds were ever personally invested in whether light is a wave or a stream of particles.
Attack someone's means of making money though, or their beliefs, and then you have a
fight on your hands.

Back to experimental stuff. The little experiment is, a group of students is asked, how
much would they pay in order to buy a travel mug. Each student writes down an answer,
and the average is 6$. Some of them are given (free of charge) a travel mug identical to
the one put on display, and after an hour they are asked how much are they willing to
sell it for. The average turns out to be 9$.

This is supposed to show that the 'pleasure of owning something' for one hour
increases its price, whereas, if the subjects were rational, they'd be willing to sell it for
the same price.

I'm thinking that some deeper care must be taken here. I don't doubt that the students
would want to sell the mug for as much as they can. And I presume the question they
were asked went something like, 'what is the absolute lowest price that you'd be willing
to sell this mug for (lower than this, you will reject the deal)?' I still think though that, if
they were to actually sell it, they'd be happy to get any amount for it. After all, they got it
free of charge, and if they met someone driving a hard-enough bargain, they might still
settle for less than they claimed.

More convincing (but I have a serious caveat here) is the experiment where subjects
are asked to say how much they would pay for a water bottle. Some are in a 'neutral'
state, some have been primed to be at 'low level sadness' through some method. It
turns out, or so I assume, that the sad group would be willing to pay much more.

In the doc, they only have time to compare and contrast two cases. Neutral person says
1$, Sad person says 10$. Boom, effect. Obviously, that's not how the study was
conducted. Obviously two large groups must have been compared, and some statistical
analysis deployed to show how dissimilar the responses were. It's a pity no time was
found in the doc to present that (to their credit, they indicate that one can find more info
on their website).

Oh, an observation. I'm willing to believe that if someone claims they'll pay 10$, then
they'll pay 10$ or more. You've noticed that if someone claims that they'll sell for 9$ or
more, I'll believe they might still settle for less. In other words, I believe that people will
settle for worse deals than they claim they will.

Vernon Smith's experiment is an interesting piece that I'll need to investigate more. It's,
again, only sketched in the doc, but as far as I can tell it pits a class of college students
against each other, each student being a stock trader. There's real money in it for the
winner, so there's an incentive to play well. The thing they are trading is something that
declines in 'real' value (maybe some perishable commodity?), and the initial prices are
too cheap. The product is undervalued. Apparently, the collective behavior of the profit
seeking traders drives the prices up, until they plateau way above the declining 'real'
value of the thing being traded. Eventually, as the thing reaches 0 real value, prices
drop- the bubble bursts.

Why I like this in principle and think it deserves more attention is that it's a clear, simple,
simulation of a bubble. This is not a historic case like the Dutch tulip mania where one
can wave hands and say we don't have enough evidence to judge. It's a controlled
experiment, where some factors are emphasized to illustrate their effects.

I do wish more time was allocated to presenting the method though. What sample size
of subjects was used, how were the bubbles- if they appeared- analyzed later?

The documentary closes with a brief recap of the 2008 crash, which is presented as a
case of the rationalist theory failing. I think they leap a bit far, but only because as far as
my limited knowledge allows me to see, there is no reason why even perfectly rational
agents would create a stable, efficient, prosperous market. If the game is such that the
rational choice is to stab everyone in the back, then the rationalist model predicts a lot
of perforated people.

In particular, the documentary seems to imply that the 2008 crash was nobody’s fault.
We just had the wrong model of the market, is all, we blindly assumed that it will take
care of our prosperity on its own, we acted on emotional impulse and got fooled by
ourselves.

I'm not above assuming that at least some parts of a bubble are driven by rational
agents who are indeed selfishly- and efficiently- pursuing their own gain, longer term
consequences to others be damned. So I'm not ill-disposed to explanations of the crash
that go beyond systemic failure. It's pretty clear that the system failed because the
magical safeguards it was supposed to generate failed to work. It's pretty clear that it
was not resilient against manipulation in ill-faith.

So yeah, what to say on the whole documentary, as a conclusion? It won't convince

you, if you're not part of the choir. It's very lean on information, for both sides of the
debate. It's not just that the rationalist economists interviewed were edited into sounding
like old codgers (there's at least some truth in what they say, but you wouldn't easily
guess it by the edits), it's also that the arguments marshaled for the behavioralist
explanation are barely sketched.

"At a mere 52 minute running time, what did you expect?" I may be asked. Well, for one,
less tea-bagging with mathematical formulas. This trope needs to die, now. If you're not
going to explain what that formula is, don't show it.