Monday, August 15, 2011

From Grease Devils of Sri Lanka to Daniel Kahneman

I'm a lot worried of the fate of the Greece Devils of Sri Lanka in the hands of the angry mobs.

Have you ever experienced the wrath of a mob against you in your life? I experienced it many times. Once, perhaps in 2003, I was selling a leftist newspaper near a political meeting of a JVP coalition. I stress near because I was not in the meeting venue they had booked for the rally. But they were an upcoming power then and not like today's 'downgoing' gentlemen.

One person I met in an outside corner of the venue was a student of mine who appeared or pretended fond of me until that moment. He was in a programme in which I taught English as a volunteer and he had not lost money even if my teaching was bad.

The newspaper I was selling supported negotiated settlement through power devolution for the ethnic problem. But there was not theoretical stuff at all in that newspaper. It was just a radical tabloid. It was selling well at this particular meeting. After a short while, a group led by a man wearing a suit usually worn by MP security staff came and asked me what our stand was about self determination. I said it was a theoretical issue and could not be discussed on the road. They said we were supporting self determination and asked to leave the place or face circumstances.

I quit as an angry mob was gathering around me from everywhere and that student of mine was also there with eyes burning with wrath. I can imagine the helplessness of a so called Greese Yaka in the hands of a more violent mob.

Now as Sri Lankan people beat Greece Devils to death and the government is trying to channel the wrath of the mobs on the JVP activists in villages to make political mileage from this unexpected development, I recalled a past study on behavioral economy and Daniel Kahneman. Here are some excerpts from outward resources worth reading and further study:

I think prospect theory opens a path to trace the origins of the present fear psychosis of which I have written in Sinhala language elsewhere. Read it.

Daniel Kahneman (Hebrewדניאל כהנמן‎) (born March 5, 1934) is an Israeli-Americanpsychologist and Nobel laureate, notable for his work on the psychology of judgment anddecision-makingbehavioral economics and hedonic psychology.
With Amos Tversky and others, Kahneman established a cognitive basis for common human errors using heuristics and biases.
Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding theeconomic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market pricesreturns and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agentsBehavioral models typically integrate insights from psychology with neo-classical economic theory.
Behavioral analysts are not only concerned with the effects of market decisions but also with public choice, which describes another source of economic decisions with related biases towards promoting self-interest.
Prospect theory is a theory that describes decisions between alternatives that involve risk (i.e., alternatives with uncertain outcomes) where the probabilities are known. The model is descriptive: it tries to model real-life choices, rather than optimal decisions.
The theory was developed by Daniel Kahneman, professor at Princeton University's Department of Psychology, and Amos Tversky in 1979 as a psychologically realistic alternative to expected utility theory. It allows one to describe how people make choices in situations where they have to decide between alternatives that involve risk (e.g., in financial decisions). Starting from empirical evidence, the theory describes how individuals evaluate potential losses and gains. In the original formulation the term prospect referred to a lottery.
Valuefun.jpgThe theory describes such decision processes as consisting of two stages, editing and evaluation. In the first, possible outcomes of the decision are ordered following some heuristic. In particular, people decide which outcomes they see as basically identical and they set a reference point and consider lower outcomes as losses and larger as gains. In the following evaluation phase, people behave as if they would compute a value (utility), based on the potential outcomes and their respective probabilities, and then choose the alternative having a higher utility.

The first text that roused my enthusiasm about Kahneman was in website and it was written by Mr. W.A. Wijewardhana, a senior official of the Central Bank of Sri Lanka. The article is in Sinhala language. Read it.
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