Thoughts on economics and liberty

Stupidity rules the world

This blog post is perhaps going to take many years to complete. It is a place for me to keep a record of things I come across that reflect human stupidity: i.e. things we do that do not advance our life and liberty. Indeed, some of the things we do directly oppose life and lifberty (and success in life). This concept of stupidity has many overlaps with bounded rationality and neuro-economics (behavioral economics), that lead to dysfunctional or sub-optimal outcomes.

It would seem that we are not really rational, being prone to repeated bouts of stupidity. Economics can explain some of this (i.e. shortcuts we take to minimise transaction costs, which means it may not really be a form of stupidity but efficiency; and negative externalities where we benefit personally but harm others, and so it may be individually rational to do so), but where that is the case, it points to another problem: that we don't understand the costs and benefits of our actions. This particularly happens when we ignore the costs of actions that yield small benefits.

I'm going to start this blog post (13 December 2009) by listing a few things and will build this post over time. I hope to cluster these things into appropriate categories and find out what, if anything, can be done to minimise human stupidity. We need mitigating strategies.

Note that I'm not in any way claiming exemption from stupidity, which seems to be an inevitable human condition.

Jumping red lights and driving recklessly
It is typical for at least someone to jump red lights on a given day. While most times no harm is caused, just today I saw how one cyclist was almost killed when he had started off (on a green signal) but a car rushed past, having jumped the red light. Clearly the driver was being stupid. I would estimate that after a 100 near misses, at least one major incident is sure to occur. A detaild calculation of costs and benefits to the stupid drivers is awaited.

Spread of disease through stupidity
– Doctors have known for nearly 200 years now that not washing their hands spreads disease (see discussion in SuperFreakonomics), yet they continue to not wash their hands. Education is only a partial fix to stupidity. They know about the dangers of not washing their hands, but that doesn't help solve the problem.

– People know that preventing the spread of mosquitos is often as simple as making sure that all vessels (e.g. pots) that are lying in the open in their backyard are turned upside down to prevent water from stagnating in these vessels. But they don't care for such things. As a result of this short-cut, mosquitoes lives a happy life in the midst of cities, making it impossible to eliminate malaria.

– We know that computer keyboards and mouse are a heavy source of bacteria, yet how many of us clean these things regularly?

– We know that overeating causes significant harm including death by heart attack; drinking alcohol in excess causes brain damage and cirrhosis of the liver; smoking causes lung cancer. Yet how many people over-eat, over-drink, and smoke!

– Surely sexually promiscuous know that there are significant health consequences, including STDs, HIV and AIDS; yet there seems to be no end to promiscuity.

– A good number of uneducated women in rural India don't give fluids to infants who are suffering dysentery: thus effectively killing them. (Of course, for this one, education may be a fix).

Public servants

From my extensive experience in the public services I can confirm one fact that there is nothing more guaranteed to make an ass out of otherwise intelligent people, than public service. The public service gives you innumerable opportunities to ply your pet ideas without evidence (there is always some fool Minister willing to listen to your freakish ideas), that you no longer feel the need to robustly challenge your own assumptions. Invariably public servants are more interested in useless things like politics, status, and what 'the Minister wants' than in the truth. The worst profession to get in, if you ever want to be a student of the truth.


– Political and religious leaders constantly display great arrogance, as if merely by holding a particular high position, all knowledge lands on their head. Thus the church forced Galileo to 'recant' and long refused to accept evolution. Today, without as much as a clue about the climate, politicians are running about trying to fix the 'problem'. This will cause significant harm, with no mitigating benefits.

– For thousands of years, men were arrogant enough to think that women could not know much, hence did not educate them. Today also, at least parts of the Islamic world and in many parts of rural India, the girl child is not highly regarded and hence is not educated. The reality is that it is the men (indeed, entire societies) who lost out in this process. How stupid were these men!

– Central planners of all sorts suffer from the disease (of paternalism: being disguised arrogance). Statist solutions which are invariably sub-optimal come easily to the minds of such central planners. The divine right of kings was one way to empower people who would then impose their ridiculous ideas on others (e.g. Tuglak and his Tughlakabad).

– Most wars are entered into through such arrogance.

– Islamic terrorists know that they will likely die as a result of their stupid fascination with spreading Islam through violence; yet they do it, thus destroying the only guaranteed life they are going to get (the rest is imaginary with absolutely no empirical proof available to us of its existence).

Blind hatred
– Mega-criminals seem to get to powerful positions in human society very quickly. People like Hitler manage to spread the message of hate and thousands of people follow them like sheep.

Inability to share
– There are those who somehow manage to get a lot of wealth in their life, but are unable to open their heart to others. Neither does there seem to be an end to their personal quest for wealth nor any purpose to their life beyond making money for themselves.

Lack of consideration for others
– this can be as simple as lack of consideration for others' time. Businesses don't seem to care for customers, although one would imagine that they would do so, because customers keep them in business!

– within a marriage, people behave stupidly towards their partners, knowing full well that if only they behaved better, their marriage would grow stronger and durable.

Tendency to panic
– Humans are prone to social panic – entire groups undertake suicide under the guidance of cult 'leaders'.

– Humans panicked in the 1970s about the potential onset of the ice age; now they are panicked about the earth melting. It is important that the 'precautionary principle' is not used as a rationalisation for really bad policies just because we have stopped using our head and have started panicking.

Leaving cash on the table
– There is an endless list of potential public policies which are designed sub-optimally, i.e. which do not optimise the benefits society could obtain from the policy. Billions of dollars are therefore 'sitting on the table' but no one picks them up.

Bills left on the sidewalk
-cf. Mancur Olson's famous (1996) paper: "Big Bills left on the Sidewalk: Why Some Nations are Rich and Others Poor", a paper which showed that poor nations can readily solve their problems if they want to, but they don't seem to want to. Is that not plain stupidity?

Stupid predictions by eminent people
– E.g. 'The Population Bomb' by Paul Ehrlich (see Julian Simon's 'The Ultimate Resource' for a number of other stupid predictions by others (not by Simon – one wise man!)). The thing is that these eminent people seem to get hung up about their predictions and stop thinking: they refuse to consider alterna
tive arguments and block their mind to all data that may contradict them.

– the surfeit of thick-headed economists who keep coming out with new predictions in newspapers/TV (most predictions being wrong!) about how the economy, house prices, foreign exchange rate, interest rate, etc., is going to behave in the future.

The Black Swan phenomenon whereby people simply don't anticipate random shocks, which are far more common than they think they are.

"Neem Hakim Khatra Jaan" (being half-trained is worse than being untrained)
– Robert Frank reports that those who learn basic economics can end up worse off (in terms of common sense) than those who did not learn economics: "exposure to introductory economics instruction was strikingly counterproductive. Among those who had taken a course in economics, only 7.4 percent answered correctly, compared with 17.2 percent of those who had never taken one." (see Robert's paper in NY Times, September 1, 2005).

Overestimating one's skills/personality traits
– More than 90 per cent of all drivers feel sure they are better than average (cited at p.929 of

Robert H. Frank, ‘Why is Cost-Benefit Analysis so Controversial?’, The Journal of Legal Studies, Vol. 29, No. 2, Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives (Jun., 2000))
– More than 99 per cent of high-school students think they are above average in terms of their ability to get along with others. (ibid)

And so on… Will add to this list as time permits and ideas come to mind.

Please help me add to this list by sending examples of human stupidity. You can write to me at sabhlok AT yahoo DOT com.

It is time to jot down a few thoughts on the causes of stupidity.

– Ignorance
Perhaps more than half of what we think we 'know' is wrong. This includes false deductions, false assumptions, superstitions, etc.

– Forgetfulness
Robert Frank shows in one of his articles how even PhDs in economics forget the concept of opportunity cost. Such forgetfulness of learned knowledge can lead to bad (stupid) decisions.

– Arrogance
This is self-explanatory.

– Rush to judgement
We tend to rush to conclusions without waiting to assess all the relevant facts.

– Lack of time to think through things
This can happen where there are high transaction costs involved in studying and understanding something in detail, so we take shortcuts (rules of thumb).

– Emotional fascination
We may get emotionally involved in something, which will invariably skew our rational thinking.

– Absent mindedness
I find this happens to me when I'm thinking too many thoughts at the same time. Certain unintended actions can then occur.

– Herd instinct
In 'The Return of the Economic Naturalist' (p.156) Robert Frank shows how we can go very wrong, following the herd (particularly if it is a setup).

– Imagined immunity
We imagine that bad things won't happen to us, or that the odds don't work across the board.

– Imagined superiority of some
It is easily possible to grossly over-estimate the value provided by others. For instance, there is very little difference between someone with an IQ of 130 and 170 in terms of real-life performance. Indeed, estimates of IQs of many influential people put them in the zone of 120 to 140 which is generally superior enough to perform in any profession with significant competence. Most doctors, for instance, perform the same. However, small differences among them (such as who was able to gain admission to a more prestigious course) can lead to dramatic differences in lifetime earnings because their clients mis-judge their competence based on their university. The truth about performance is that except for perhaps one or two exceptional individuals, the rest are all very similar. Yet the winner-takes-all mentality denies those from lesser universities a suitable place in life. The fact that we value a degree from Harvard much higher than a degree from, say, a top-50 university, is basically a stupid decision.

– Our imagined superiority about ourselves
This is not about arrogance, but simply over-estimating our abilities relative to others. Thus, apparently, 90 per cent of workers consider themselves more productive than their colleague/s (Robert Frank – return of economic naturalist, p.167).


"X-rays will prove to be a hoax." Lord Kelvin



Sunstein notes,

Poor judgments, by individuals and societies, can result from certain heuristics, from informational and reputational cascades, from thinking processes in which benefits are "on screen" but costs are not, from ignoring systemic effects of one-shot interventions, from seeing cases in isolation, and from intense emotional reactions. Cost-benefit analysis serves as a corrective to these cognitive problems. … Cost-benefit analysis should be understood as a method for putting "on screen" important social facts that might otherwise escape private and public attention.[1]

Cognitive psychology and behavioural economics tell us about the biases and shortcuts that humans often take.

  • Availability heuristic: We tend to think that events are more probable if we can recall a particular case or incident of its occurrence. More publicised events appear to us to have occurred more frequently even though when data is collated and compared, many significant risks are found to have been ignored by the media (i.e. real risks not easily perceptible) while others that are easily perceived by infrequent, are grossly exaggerated. The standardisation of all risks is crucial in helping arrive at a good policy.
  • Informational (social) cascade: Group think is another typical bias. In this case, a signal by someone in some position of authority, initially, sets off a social cascade as “as hundreds, thousands, or millions of people come to accept a certain belief simply because of what they think other people believe”[2]. This is the phenomenon underpinning fashions and fads. Fads can occur in all spheres, including policy. But just because someone in a position in authority believes in something doesn’t make it true.
  • Reputational cascade: “If many people are alarmed about some risk, you may not voice your doubts about whether the alarm is merited, simply in order not to seem obtuse, cruel, or indifferent. And if many people believe that a certain risk is trivial, you may not disagree through words or deeds, lest you appear cowardly or confused. The result of these forces can be cascade effects, mediated by the availability heuristic. Such effects can produce a public demand for regulation even though the relevant risks are trivial.”[3]
  • Loss aversion: Because we are loss averse, “any newly introduced risk, or any aggravation of existing risks, is seen as a serious problem, even if the accompanying benefits … are considerable.”[4] This can only be clarified through a CBA.
  • Difficulty in assessing systematic effects. “[M]ost [people] … do not see the complex, system wide effects of particular interventions.”[5] It thus takes considerable expertise and care to understand the system-wide effects, including unintended consequences, of regulatory interventions.
  • Alarmist bias: “[R]isk-related concerns are often based on feelings rather than judgments. Thus risk- related objections can be a product not so much of thinking as of intense emotions, often produced by extremely vivid images of what might go wrong.”[6] It appears that the “mere existence of discussions of new risks can aggravate concern, even when the discussions take the form of assurances that the risk level is relatively low”.
  • Distortions by taking problems in isolation: A well designedCBA “operates as a built-in corrective to some of the distortions that come from taking problems in isolation”[7]. That is because “people's answers to questions taken in isolation are very different from their answer to questions when they are asked to engage in cross-category comparisons”[8].

[1]Cass R. Sunstein, “Cognition and Cost-Benefit Analysis”, The Journal of Legal Studies, Vol. 29, No. 2, Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives (Jun., 2000), p.1059-60.

[2]Sunstein, p.1066.

[3]Sunstein, p.1067.

[4]Sunstein, p.106

[5]Sunstein, p.1069.

[6]Sunstein, p.1070.

[7]Sunstein, p.1072.

[8]Sunstein, p.1071.

ADDENDUM  (Consumers are suckers for “special” deals that are costlier than they first appear – Economist, May 27th 2010)

This article discusses one example of bad science: There are thousands of others.

In 1876, William Preece, chief engineer of the British Post Office, said: ''The Americans have need of the telephone, but we do not. We have plenty of messenger boys''; and in 1943, the chairman of IBM famously said: ''I think there is a world market for maybe five computers.''

Mix up of babies and mothers.



Strange as it may seem to us, 18th-century physicians believed that one of the best methods of reviving the unconscious or the nearly dead was to blow tobacco smoke up their bottoms. Warmth and stimulation, it was argued, were needed to bring them back to life and tobacco was thought to be a particularly useful source of both. Tobacco resuscitator kits were built by the leading makers of scientific and medical instruments of the day. The principal part of the kit was a kind of bellows to blow the smoke up the patient’s rectum. In the 770s, boxed tobacco resuscitators were stationed at points along the River Thames in London to assist in reviving people pulled from the river after nearly drowning. [Source]

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