The full discussion is here; my final post is here, about climate change. Here’s the guts of it:

Standard economics has a solution: a carbon tax, or a tradable permit scheme, to raise the cost of emitting carbon. We’d all have an incentive to cut down by driving less and turning down the heating or air conditioning, and also by insulating our homes and finding more efficient cars and fridges. Businesses would also cut back, and would have an incentive to develop new technologies.

Behavioral economics draws attention to different considerations. For example, we’re not as smart as conventional economics assumes, which means that we might fail to notice ways to reduce our energy bills. We might also need to be reminded about what our neighbors are doing: psychologist Robert Cialdini showed that we’re more likely to recycle if we think everyone’s doing it. That may hold true for carbon-saving too. And although we’re reminded of high gas prices every time we fill up, we really need to be reminded of them when we’re buying a new car or a new fridge.

So which approach is right? That’s a strange question. They can both be right, and I think that they both are.

Of course, the economic incentives will work. I don’t think there’s any serious doubt that raising the price of carbon would persuade us to pollute less. The Logic of Life showed that we are sensitive to these simple incentives in the most unexpected situations. For instance, raising the risk of unprotected sex persuaded American teens to have more oral sex instead; and two Australian economists, Joshua Gans and Andrew Leigh, have found that tax incentives can persuade pregnant women to delay labor, and even deter people from dying too quickly. (It’s really true: the death rate in Australia dropped in the week before inheritance tax was due to be abolished, and then sharply rose the week immediately after. A lot of people were clinging on to life to avoid their estates being taxed.) If people will change their date of death or the day they have a baby in response to a tax incentive, I am quite sure that they will be more environmentally friendly, too.

But I am also sure the behavioral insights will produce results. Cass Sunstein and Richard Thaler report one dramatic success: people cut back dramatically if the electricity company gives them an “Ambient Orb” that glows red when they’re using a lot of power. There’s no standard economic theory that explains why that should be; and that is just one example.

Group hug in the end - sorry.

This morning I am in Amsterdam, promoting the Dutch version of “The Logic of Life“. The most disturbing thing about this is that my publishers are claiming that I am “the Jeremy Clarkson of economics”. I don’t know what’s worse: being compared to Clarkson or the knowledge that he’s a star in the Netherlands.

Nevertheless, nice to be here. Sadly I will not get time to visit the Aalsmeer Flower Auction, written up brilliantly in John McMillan’s “Reinventing the Bazaar“, one of my favourite economics books.

My second response to Dan Ariely is on video here.

Dan Ariely responds to my comments, this time on video; I won’t even try to pre-empt what he says or how he says it - but don’t miss it.

I read too many American blogs. They use words such as “smackdown”. Anyway, the debate between me and Dan “Predictably Irrational” Ariely continues - the collected posts are being gathered here.

In my reply to Dan’s first post, I finish by challenging him:

The weaknesses of laboratory experiments are not always quite so evident, especially when they are described as compellingly as in Predictably Irrational. So, let me point them out. While laboratory experiments are great for creating controlled conditions, they also create artificial conditions. There are several examples of important clashes between what happens in the laboratory and what happens outside. We know, for example, that procurement managers systematically screw up when bidding in a laboratory auction, but they do much better job in the (apparently identical) real life auctions situations they face everyday.
The economist John List has tried to replicate some famous “predictably irrational” results from the laboratory; the results tend to evaporate in more realistic settings. In one example I describe in The Logic of Life, List shows that the “irrational” result (which is that people given an unexpected raise work much harder than they could get away with) only lasts for ninety minutes. A gratitude effect that lasts ninety minutes is not the basis on which to rewrite your company’s human resources policy.
I’m not aware that any of Dan’s experiments have been challenged in this way, and I was pleased to see that he often tried to carry out his work in realistic settings such as restaurants and bars. So this isn’t an attack on his work–it’s more of a question. Dan, how can we be confident that these experimental results hold up in real life? And what further work would you like to see, to make us more confident in them?

Dan’s reply will be excellent, I am sure, and is due on Monday.

I’ll be debating with Dan Ariely (author of Predictably Irrational) on Amazon’s Omnivoracious blog. After all, our books do seem to contradict each other. Sadly, we’re both far too nice to tear strips off each other, but I suspect there will be a few disagreements…Dan’s first post is here; the Omnivoracious introduction is here. My first reply will be going up tomorrow, or perhaps Friday. And in case you were wondering, the photograph didn’t come from me: perhaps Dan was overly impressed by tales of my economics-based exercise regime.

Here are the details, Tuesday April 15th:

The following event has been organized by our Holland Park Shop and is part of an occasional series taking place at the Louise T Blouin Institute, 3 Olaf Street, London W11 4BE.

15th April 2008 at 6.30pm

DAUNT BOOKS - HOLLAND PARK

In conjunction with

LOUISE T BLOUIN INSTITUTE presents

TIM HARFORD

The Times called Tim Harford’s bestseller, The Undercover Economist “As lively and witty an introduction to the supposedly “dismal science” as you are likely to read.” His new book, The Logic of Life, always entertaining and often provocative, is an astonishing guide to the hidden logic of the world around you.

Tickets £5, includes wine.

Reserve Tickets with Daunt Books - Holland Park : 0207 7277 022
Or email: hollandpark@dauntbooks.co.uk

Do please come along.

A consulting firm specialising in the use of game theory to guide strategic decisions directs me to the following piece of corporate public relations - advice to Barack Obama based on a game theoretic analysis:

Act firmly – To avoid DNC pressure, it is crucial that Obama shows no weakness in his resolve to stay in the nomination race. Show dignity – Even if Sen. Clinton increases her negative messaging, Obama should not respond directly but emphasize his message of unity and hope.

Seek alliances – The analysis revealed that Edwards is an uncommitted player who urgently wants to make a decision. Either candidate could potentially secure his endorsement by aligning with some of his key issues.

Support spiritual values – The game-theoretical tools also exposed how Obama could profit from McCain’s strained relationship with the Evangelical voters; in particular, if Obama embraces some of the Evangelical values, he can lead McCain to abandon his pursuit of key Democratic issues and even influence McCain’s choice of running mate.

This sounds plausible enough, and I am something of a game theory fan. Still, I have some concerns:

Even though the game-theoretical tools make calculations that are inaccessible to the human mind – in this case analyzing 8,388,608 outcomes – the results are made transparent.

That sounds nice. But is it? If the calculations are inaccessible to the human mind, what confidence can we have that the players will follow equilibrium strategies? Still, it sounds fun and not entirely ridiculous. Much much more from me on game theory’s role in the real world in chapter two of The Logic of Life. Chris Ferguson and Tom Schelling are the heroes of the tale, John von Neumann the compelling anti-hero.