Moral philosophy: Goodness has nothing to do with it

Utilitarians are not nice people

IN THE grand scheme of things Jeremy Bentham and John Stuart Mill are normally thought of as good guys. Between them, they came up with the ethical theory known as utilitarianism. The goal of this theory is encapsulated in Bentham’s aphorism that “the greatest happiness of the greatest number is the foundation of morals and legislation.”

Which all sounds fine and dandy until you start applying it to particular cases. A utilitarian, for example, might approve of the occasional torture of suspected terrorists—for the greater happiness of everyone else, you understand. That type of observation has led Daniel Bartels at Columbia University and David Pizarro at Cornell to ask what sort of people actually do have a utilitarian outlook on life. Their answers, just published in Cognition, are not comfortable.

One of the classic techniques used to measure a person’s willingness to behave in a utilitarian way is known as trolleyology. The subject of the study is challenged with thought experiments involving a runaway railway trolley or train carriage. All involve choices, each of which leads to people’s deaths. For example: there are five railway workmen in the path of a runaway carriage. The men will surely be killed unless the subject of the experiment, a bystander in the story, does something. The subject is told he is on a bridge over the tracks. Next to him is a big, heavy stranger. The subject is informed that his own body would be too light to stop the train, but that if he pushes the stranger onto the tracks, the stranger’s large body will stop the train and save the five lives. That, unfortunately, would kill the stranger.

Dr Bartels and Dr Pizarro knew from previous research that around 90% of people refuse the utilitarian act of killing one individual to save five. What no one had previously inquired about, though, was the nature of the remaining 10%.

To find out, the two researchers gave 208 undergraduates a battery of trolleyological tests and measured, on a four-point scale, how utilitarian their responses were. Participants were also asked to respond to a series of statements intended to get a sense of their individual psychologies. These statements included, “I like to see fist fights”, “The best way to handle people is to tell them what they want to hear”, and “When you really think about it, life is not worth the effort of getting up in the morning”. Each was asked to indicate, for each statement, where his views lay on a continuum that had “strongly agree” at one end and “strongly disagree” at the other. These statements, and others like them, were designed to measure, respectively, psychopathy, Machiavellianism and a person’s sense of how meaningful life is.

Dr Bartels and Dr Pizarro then correlated the results from the trolleyology with those from the personality tests. They found a strong link between utilitarian answers to moral dilemmas (push the fat guy off the bridge) and personalities that were psychopathic, Machiavellian or tended to view life as meaningless. Utilitarians, this suggests, may add to the sum of human happiness, but they are not very happy people themselves.

That does not make utilitarianism wrong. Crafting legislation—one of the main things that Bentham and Mill wanted to improve—inevitably involves riding roughshod over someone’s interests. Utilitarianism provides a plausible framework for deciding who should get trampled. The results obtained by Dr Bartels and Dr Pizarro do, though, raise questions about the type of people who you want making the laws. Psychopathic, Machiavellian misanthropes? Apparently, yes.

Traders’ brains: Rogue hormones

Bad trade? Blame the adrenal cortex

IF THE losses at UBS that surfaced this month were caused by a “rogue” trader, would that make his colleagues stable? Not if research being undertaken by John Coates, a neuroscientist at Cambridge University and a former derivatives trader, is anything to go by. His work suggests that hormones drive investment decisions to a far greater extent than economists or bank executives realise. When traders are on a winning streak, their testosterone levels surge, sparking such euphoria that they underestimate risk. When they are acutely stressed, the adrenal cortex produces a flood of cortisol, a hormone that can make them overly fearful and risk-averse.

Mr Coates says he was drawn to study these biochemical processes because he wanted to understand the “unbelievably powerful emotions” that make traders “go crazy”. In past experiments conducted on a London trading floor, Mr Coates saw cortisol levels in traders’ saliva jump by as much as 500% in a day. Remarkably, cortisol increased in direct correlation to implied volatility, a measure of expected future variance in asset prices. “The uncertainty is almost worse than the shock itself,” says Mr Coates. “It’s always a lot worse not knowing where the goddamn monster is.”

Cortisol prepares humans for danger, partly by helping the brain retrieve important memories. This early-warning system is invaluable in the wild. But raging hormones can eventually wreck investors’ ability to think rationally. Chronic stress over weeks or months can produce so much cortisol that the brain focuses excessively on negative memories and perceives threats where they do not exist. This loss of judgment is exacerbated by other symptoms of stress, such as sleep deprivation.

Mr Coates likens this condition to the state of “learned helplessness” identified in the 1960s by Martin Seligman, a psychologist who delivered random electric shocks to dogs constrained in harnesses. Eventually the animals lost the will to escape, even once they could do so.

Traders and rodents also seem to have something in common. Place a rat in an open field and its fear is obvious. Although visible symptoms of anxiety gradually disappear its cortisol levels remain elevated, showing that it is more stressed than it looks. Mr Coates has seen a similar phenomenon among traders. In questionnaires they displayed no awareness of the rampant stress indicated by their cortisol measurements.

One way to reduce the financial havoc these hormones might wreak could be for trading desks to hire more women. Women have about 10% as much testosterone as men, making them less prone to irrational exuberance. Competitive situations do not activate women’s cortisol response with such intensity, so market mayhem is less likely to impair their judgment. Call it a hormonal-diversification strategy.

Economics focus: Bringing down the house

The effect of ageing on asset prices may make the rich world’s problems worse

SINCE the bursting of Japan’s asset bubbles in the early 1990s, the country has undergone a long and deflationary process of debt reduction. During this period, Japanese policymakers have attracted criticism from (among others) Ben Bernanke, the chairman of the Federal Reserve, for their gradualist approach to reflating the economy. The critics’ charge is this: that although the Bank of Japan (BoJ) pioneered many of the policies that the Fed and others have since followed—such as committing to zero interest rates and increasing bank reserves by the alchemy of quantitative easing—the Japanese central bank still did too little, too late.

Things look rather different in Japan itself, where some say the problem lies in a lack of demand for loans from the debt-strapped private sector, rather than a lack of supply. This is the hallmark of a “balance-sheet recession”, a term coined by Richard Koo of the Nomura Research Institute to describe the process whereby households and companies pay down debts rather than embark on new spending.

In two speeches* this year, Kiyohiko Nishimura, deputy governor of the BoJ, has developed this line of thinking to help explain why Japan’s balance-sheet adjustment has taken so long. Mr Nishimura blames the prolonged slump on ageing, which is furthest advanced in Japan, but is also occurring in many of the world’s biggest economies. His central argument is that ageing depresses asset prices. That in turn makes deleveraging tougher because debt used to finance assets is harder to pay off without incurring losses. This, he says, may have grim repercussions for America and Europe.

The theory behind the link between ageing and asset prices is outlined in a recent working paper by Elod Takats of the Bank for International Settlements (BIS). In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money; the old sell them to pay for retirement. As the working-age population rises—as it did, for instance, after the baby boom—asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen.

In his paper Mr Takats seeks to quantify this effect. He prefers to look at an international sample rather than data on single countries, because that enables more robust identification of the impact of ageing. He also focuses on house prices rather than financial assets, because they are less likely to be influenced by cross-border capital flows. Mr Takats applies two aspects of demography to BIS house-price data from 22 advanced economies: first, total population; second, the ratio of old people to the working-age population, or the old-age dependency ratio. Between 1970 and 2009, he finds that a 1% rise in GDP per person and a 1% rise in the total population each corresponded to about a 1% rise in real house prices. But a 1% increase in the old-age dependency ratio was associated with a 0.66% drop in real house prices.

Using United Nations projections, his analysis suggests that house prices will face strong headwinds in the next 40 years as populations age. American house prices, for example, will rise by about 80 basis points a year less than they would do if you strip out demographic factors, he reckons. For faster-ageing countries such as Japan, Germany and Italy, prices would fall by more than 1% a year, though he notes that other factors may offset the demographic effects and he does not expect a meltdown in prices.

Prices of financial assets do not necessarily shadow those of property: people tend to buy and sell stocks and bonds later in life than they buy and sell homes. But they are also affected by ageing as the old sell them to realise cash. A model developed at the Federal Reserve Bank of San Francisco finds that since 1954 there has been a high correlation between the ratio of Americans aged 40-49 to those aged 60-69, and the price/earnings ratio of the stockmarket. The implication of this relationship for share prices in the future is bearish, it says. Based on standard demographic and earnings assumptions, the San Francisco Fed’s model suggests share prices will fall by 13% between 2010-21. The good news for America is that the relative proportion of middle-aged people should rebound in 2025, implying a strong recovery.

Such estimates should be treated with caution. Ageing, at least in the short term, is fairly predictable, so markets may have already discounted its impact on asset prices. Mr Takats draws attention to the fact that elderly people may end up working longer, which would reduce the pressure to sell their assets.

But the uncertainties run both ways. As Mr Takats points out, overstretched pension systems may spur retired people to run down their assets more aggressively than expected. The BoJ’s Mr Nishimura ventures that the downward pressure on prices may be exacerbated by ageing in countries like Russia and China, whose entry into the global economy helped fuel the world’s recent asset-price boom.

Grey market

If ageing does exacerbate the costs of a balance-sheet recession, what can policymakers do about it? The BoJ, Mr Nishimura says, has sought to counter some of the effects, such as the loss of lending expertise in the banking sector and risk aversion, through “truly unconventional” monetary policy, such as buying low-grade corporate bonds and exchange-traded funds to spur investment in riskier assets; and providing funds for banks to lend and invest in promising new fields, such as innovations for the elderly. But his overall message is stark: repairing balance-sheets when the population is ageing is much harder than when it is young. Some people, he cautions, regard the turmoil since 2008 as a “fleeting nightmare”. But where ageing is endemic, there may be no going back to normal. As the title of one of his papers ominously puts it: “This time may truly be different.”

Sources

* “Population Ageing, Macroeconomic Crisis and Policy Challenges”, a speech by Kiyohiko Nishimura, June 2011
* “This Time May Truly Be Different. Balance-sheet Adjustment under Population Ageing”, a speech by Kiyohiko Nishimura, January 2011
* “Ageing and asset prices”, by Elod Takats, BIS Working Papers, January 2011
* “Boomer Retirement: Headwinds for US Equity Markets”, by Zheng Liu and Mark Spiegel, Federal Reserve Bank of San Francisco, August 2011

Exercise and longevity: Worth all the sweat

Just why exercise is so good for people is, at last, being understood

Bacteria and behaviour: Gut instinct

Tantalising evidence that intestinal bacteria can influence mood

Sep 3rd 2011 | from the print edition

A GOOD way to make yourself unpopular at dinner parties is to point out that a typical person is, from a microbiologist’s perspective, a walking, talking Petri dish. An extraordinary profusion of microscopic critters inhabit every crack and crevice of the typical human, so many that they probably outnumber the cells of the body upon and within which they dwell.

Happily, these microbes are mostly harmless. Some of them, particularly those that live in the gut, are positively beneficial, helping with digestion and keeping the intestines in good working order. That is no surprise—bacteria as much as people have an interest in keeping their homes in sound condition. What is surprising is the small but growing body of evidence which suggests that bacteria dwelling in the gut can affect the brain, too, and thereby influence an individual’s mood and behaviour. The most recent paper on the topic, published this week in the Proceedings of the National Academy of Sciences, reports (like much of the research in this field) on results in mice.

The researchers, led by Javier Bravo of University College, Cork, split their rodent subjects into two groups. One lot were fed a special broth containing Lactobacillus rhamnosus, a gut-dwelling bacterium often found in yogurt and other dairy products. The others were fed an ordinary diet, not fortified with microbes.

The team then subjected the mice to a battery of tests that are used routinely to measure the emotional states of rodents. Most (though not all) of these tests showed significant differences between the two groups of animals.

One test featured a maze that had both enclosed and open tunnels. The researchers found that the bacterially boosted mice ventured out into the open twice as often as the control mice, which they interpreted to mean that these rodents were more confident and less anxious than those not fed Lactobacillus.

In another test the animals were made to swim in a container from which they could not escape. Bacteria-fed mice attempted to swim for longer than the others before they gave up and had to be rescued. Such persistence is usually interpreted by students of rodent behaviour as evidence of a more positive mood.

Direct measurements of the animals’ brains supported the behavioural results. Levels of corticosterone, a stress hormone, were markedly lower in the bacteria-fed mice than they were in the control group when both groups were exposed to stressful situations. The number of receptors for gamma-aminobutyric acid, a natural chemical messenger that helps dampen the activity of certain nerve cells, varied in statistically significant ways between the brains of the two groups, with more in some parts of the treated animals’ brains and fewer in others. Most intriguing of all, when Dr Bravo cut the animals’ vagus nerves—which transmit signals between the gut and the brain—the differences between the groups vanished.

The idea that gut-dwelling microbes can affect an animal’s state of mind may strike some people as outlandish, and there are certainly loose ends still to be tied up. Beyond their evidence that the vagus nerve is crucial to the relationship, for example, Dr Bravo and his colleagues do not yet know the precise mechanisms at work. There is also an obvious follow-up question: whether a similar thing is going on in people. A few previous studies have hinted at the possibility. For example, bacterial treatments may help with the mental symptoms of illnesses such as irritable-bowel syndrome.

All this is forcing a reassessment of people’s relationship with the bacteria that live on and in them, which have long been regarded mainly as a potential source of infections. An editorial in this week’s Nature raises the possibility that the widespread prescription of antibiotics—which kill useful bacteria as effectively as hostile ones—might be one factor behind rising rates of asthma, diabetes and irritable-bowel syndrome. If Dr Bravo’s results apply to people, too, then mood disorders may end up being added to this list.

Forensic psychology:Backwards and forwards

A modern approach to interviewing witnesses of crimes may make things worse

Sep 3rd 2011 | from the print edition

Game theory in practice

Computing: Software that models human behaviour can make forecasts, outfox rivals and transform negotiations

Sep 3rd 2011 | from the print edition
FOR a man who claims to lack expertise in the field, Bruce Bueno de Mesquita, an academic at New York University, has made some impressively accurate political forecasts. In May 2010 he predicted that Egypt’s president, Hosni Mubarak, would fall from power within a year. Nine months later Mr Mubarak fled Cairo amid massive street protests. In February 2008 Mr Bueno de Mesquita predicted that Pakistan’s president, Pervez Musharraf, would leave office by the end of summer. He was gone before September. Five years before the death of Iran’s Ayatollah Khomeini in 1989, Mr Bueno de Mesquita correctly named his successor, and, since then, has made hundreds of prescient forecasts as a consultant both to foreign governments and to America’s State Department, Pentagon and intelligence agencies. What is the secret of his success? “I don’t have insights—the game does,” he says.Mr Bueno de Mesquita’s “game” is a computer model he developed that uses a branch of mathematics called game theory, which is often used by economists, to work out how events will unfold as people and organisations act in what they perceive to be their best interests. Numerical values are placed on the goals, motivations and influence of “players”—negotiators, business leaders, political parties and organisations of all stripes, and, in some cases, their officials and supporters. The computer model then considers the options open to the various players, determines their likely course of action, evaluates their ability to influence others and hence predicts the course of events. Mr Mubarak’s influence, for example, waned as cuts in American aid threatened his ability to keep cronies in the army and security forces happy. Underemployed citizens then realised that disgruntled officials would be less willing to use violence to put down street protests against the ailing dictator.Mesquita & Roundell, Mr Bueno de Mesquita’s company, is just one of several consulting outfits that run such computer simulations for law firms, companies and governments. Most decision-making advice is political, in the broadest sense of the word—how best to outfox a trial prosecutor, sway a jury, win support from shareholders or woo alienated voters by shuffling a political coalition and making legislative concessions.

But feeding software with good data on all the players involved is especially tricky for political matters. Reinier van Oosten of Decide, a Dutch firm that models political negotiations and vote-trading in European Union institutions, notes that forecasts go astray when people unexpectedly give in to “non-rational emotions”, such as hatred, rather than pursuing what is apparently in their best interests. Sorting out people’s motivations is much easier, however, when making money is the main object. Accordingly, modelling behaviour using game theory is proving especially useful when applied to economics.

Follow the money

Modelling auctions has proved especially successful, says Robert Aumann, an academic at the Hebrew University of Jerusalem who received a Nobel prize in 2005 for his work in game-theory economics. Bids, being quantified, facilitate analysis, and predicting the right answer can be very lucrative. Consulting firms are popping up to help clients design profitable auctions or win them less expensively. In the run-up to an online auction in 2006 of radio-spectrum licences by America’s Federal Communications Commission, Paul Milgrom, a consultant and Stanford University professor, customised his game-theory software to assist a consortium of bidders. The result was a triumph.

When the auction began, Dr Milgrom’s software tracked competitors’ bids to estimate their budgets for the 1,132 licences on offer. Crucially, the software estimated the secret values bidders placed on specific licences and determined that certain big licences were being overvalued. It directed Dr Milgrom’s clients to obtain a patchwork of smaller, less expensive licences instead. Two of his clients, Time Warner and Comcast, paid about a third less than their competitors for equivalent spectrum, saving almost $1.2 billion.

Advances in game theory have “picked up dramatically” in recent years as it has become apparent that failing to do a proper analysis can be costly, says Sergiu Hart, a colleague of Dr Aumann’s at Hebrew University. For example, a few years ago Israel’s government added a novel twist to an auction of oil-refinery facilities. To encourage more and higher bids, the government offered a $12m prize to the second-highest bidder. It was an expensive mistake. Without the incentive, the highest bid would have been about $12m higher, an analysis showed—participants bid low because the loser would strike it rich. Combine that sum with the prize payout, and the government’s loss amounted to roughly $24m. The conclusion, then, is “don’t presume you know what the solution is” without help from modelling software, says Brad Miller, senior modeller at Charles River Associates, a consultancy in Boston. It designs game-theory software to model industrial auctions and the plotting of corporate mergers and acquisitions.

Software is not always needed. A student at Hebrew University, for example, demonstrated the Israeli government’s $24m loss using pen and paper. It took him about two days, however, according to a professor there. Software, naturally, is far faster. But gathering and handling the necessary data can require expensive expertise or training. Decide, the Dutch consultancy, usually charges €20,000-70,000 ($28,000-100,000) to solve a problem using its software, called DCSim, because it must first conduct lengthy interviews with experts. Its clients include government bodies in the Netherlands and abroad, and big companies including IBM, a computer giant, and ABN AMRO, a Dutch bank.

PA Consulting, a British firm, designs bespoke models to help its clients solve specific problems in areas as diverse as pharmaceuticals, fossil-fuel energy and the production of television shows. British government agencies have asked PA Consulting to build models to test regulatory schemes and zoning rules. To give a simple example: if two shrewd, competing ice-cream sellers share a long beach, they will set up stalls back-to-back in the middle and stay put, explains Stephen Black, a modeller in the firm’s London headquarters. Unfortunately for potential customers at the far ends of the beach, each seller prevents the other from relocating—no other spot would be closer to more people. Introduce a third seller, however, and the stifling equilibrium is broken as a series of market-energising relocations and pricing changes kick in. The use of modelling makes business clients more inclined to adopt longer-term strategies, Dr Black says.

But game-theory software can also work well outside the sphere of economics. In 2007 America’s military provided Mr Bueno de Mesquita with classified information to enable him to model the political impact of moving an aircraft carrier close to North Korea (he will not reveal the findings). Game-theory software can even help locate a terrorist’s hideout. To run simulations, Guillermo Owen of the Naval Postgraduate School in Monterey, California, uses intelligence data from the US Air Force to estimate on a 100-point scale the importance a wanted man attaches to his likes (fishing, say) and priorities (remaining hidden or, at greater risk of discovery, recruiting suicide-bombers). Such factors determine where and how terrorists decide to live. Game-theory software played an important role in finding Osama bin Laden’s hideout in Abbottabad, Pakistan, says Mr Owen.

Where is all this heading? Alongside the arms race of increasingly elaborate modelling software, there are also efforts to develop software that can assist in negotiation and mediation. Two decades ago Clara Ponsatí, a Spanish academic, came up with a clever idea while pondering the arduous Israeli-Palestinian peace process. As negotiators everywhere know, the first side to disclose all that it is willing to sacrifice (or pay) loses considerable bargaining power. Bereft of leverage, it can be pushed back to its bottom line by a clever opponent. But if neither side reveals the concessions it is prepared to make, negotiations can stall or collapse. In a paper published in 1992, Dr Ponsatí described how software could be designed to break the impasse.

Difficult negotiations can often be nudged along by neutral mediators, especially if they are entrusted with the secret bottom lines of all parties. Dr Ponsatí’s idea was that if a human mediator was not trusted, affordable or available, a computer could do the job instead. Negotiating parties would give the software confidential information on their bargaining positions after each round of talks. Once positions on both sides were no longer mutually exclusive, the software would split the difference and propose an agreement. Dr Ponsatí, now head of the Institute of Economic Analysis at the Autonomous University of Barcelona, says such “mediation machines” could lubricate negotiations by unlocking information that would otherwise be withheld from an opponent or human mediator.

Such software is now emerging. Barry O’Neill, a game theorist at the University of California, Los Angeles, describes how it can facilitate divorce settlements. A husband and wife are each given a number of points which they secretly allocate to household assets they desire. The wife may inform the software that her valuation of the family car is, say, 15 points. If the husband puts the car’s value at 10 points, he cannot later claim that he deserves more compensation for not getting the car than she would be entitled to.

Predicting an end to conflict

Participants need to be sure that such mediation technology is fully neutral. For large deals, audit firms closely monitor the development and use of such software to ensure that no party secretly obtains information about another’s bargaining positions, says Benny Moldovanu, a game theorist at the University of Bonn. He advises firms that design negotiation software for privatisation schemes and wholesale-electricity markets. This approach will spread to other utility markets, such as water, he believes.

Could software-based mediation spread from divorce settlements and utility pricing to resolving political and military disputes? Game theorists, who consider all these to be variations of the same kind of problem, have developed an intriguing conceptual model of war. The “principle of convergence”, as it is known, holds that armed conflict is, in essence, an information-gathering exercise. Belligerents fight to determine the military strength and political resolve of their opponents; when all sides have “converged” on accurate and identical assessments, a surrender or peace deal can be hammered out. Each belligerent has a strong motivation to hit the enemy hard to show that it values victory very highly. Such a model might be said to reflect poorly on human nature. But some game theorists believe that the model could be harnessed to make diplomatic negotiations a more viable substitute for armed conflict.

Today’s game-theory software is not yet sufficiently advanced to mediate between warring countries. But one day opponents on the brink of war might be tempted to use it to exchange information without having to kill and die for it. They could learn how a war would turn out, skip the fighting and strike a deal, Mr Bueno de Mesquita suggests. Over-optimistic, perhaps—but he does have rather an impressive track record when it comes to predicting the future.