How to value life is a thorny issue for economists and non-economists, but I hadn’t expected the question to be also a matter of lively discussion among dinosaurs. And considering the state of decision theory at the time, they do a pretty good job at it.

While travelling to Seattle, I went shopping to the bookstore and purchased “Sway – the irresistible pull of irrational behavior”, by Ori and Rom Brafman. Each of the book’s chapter illustrates a specific bias which leads individuals to make poor decisions, through multiple experiments or real-life stories.

If you are familiar with decision theory, and specifically with decision biases – the way our brain plays tricks with us and processes information poorly, misleading our judgment – you will probably not learn much from the book. Even then, it’s a pretty entertaining read; the style is light, and the anecdotes and cases funny and very clearly explained. If you are not familiar with the topic, I recommend the book: it is a good primer to recognize traps and make better decisions!

The part which was new to me was the chapter “Compensation and Cocaine”. It seems that monetary decisions and altruism are processed in completely different parts of the brain (no surprise so far), but also that when one is active, it shuts down the other. Furthermore, the monetary decision brain is processed in the same place as the center of pleasure derived from sex, drugs or gambling (not sure what this says about the financial sector…), which has very practical implication in designing incentives. From what I gather, altruism provides a stronger motivation than money – but surprisingly, mixing both doesn’t add up: the pleasure center will completely override altruistic motivation, which is then ignored – and reduces overall motivation.

Overall, fun read – recommended!

Dilbert is one of my favorite comic strips ever. Besides being consistently very funny, it is also surprisingly insightful. Today's strip is an excellent illustrations of why diversification alone is not necessarily sufficient to reduce risk: one has to account for correlation between the assets.  

In its October issue, Wired has a short interview of the economist Jagdish Bhagwati, on free trade. I enjoyed his point that most of the free-trade discourse focuses on free-trade agreements which are ultimately large protectionist blocks, and ignores the idea of IP free-trade.

Via Twitter, an interesting NYT piece on political prediction markets. Just like real-life market, they are not immune to unscrupulous manipulation attempts. Apparently, in recent days, the McCain value has had odd fluctuations, possibly indicating agents trying to artificially boost its "price". But how can you recognize a regular fluctuation from an artificial manipulation? The New-York Times piece notes that:

The biggest difference between typical market movements and manipulation is that honest traders will usually try to minimize the impact of their trades on the market price; paying higher prices for an asset only cuts into profits. But a market manipulator, intent on buoying the market’s ratings of their preferred candidate, will work to maximize the impact of their trading on the price.

More on price manipulation and prediction markets here.

Edit, Oct 12, 18:43: and how the financial crisis could have been adopted with prediction markets here...