# Diagnostic expectations

Why do financial crises happen?

That’s hard to answer, but we know that private credit tends to increase before the trouble starts. But why do people take on so much debt in the first place? Is it because of wrong-headed regulation or do people become too confident – for other reasons – about how much they will be able to repay in the future?

Pedro Bordalo, Nicola Gennaioli and Andrei Shleifer propose a model in which households over-interpret streaks of good or bad news and extrapolate these into the future. They show that these psychological swings can help explain credit cycles and might be a source of economic fluctuations.

In the model, states of the world are represented by a random variable $\Omega_t$. The realizations $\omega_t$ determine the share of firms that will be productive – and repay their debts – in period $t$.

The representative household saves by lending to firms and takes into account the probability that some firms will not repay. However, the authors distort the household’s expectation with a psychological bias they refer to as the representativeness heuristic. People tend to take properties that are more likely in one class than another to represent that class. So red hair is representative for the class “Irish”, even when dark hair is much more common in Ireland.

Agents take the change of their expectation of the future state as a sign for things to come. Biased agents judge the representativeness of state $\omega_{t+1}$ by comparing the true conditional distribution of the future state $\omega_{t+1}$ with the probability that a rational agent assigned to that state before the information on the current state $\omega_{t}$ has become available. The authors refer to this way of forming expectations as diagnostic expectations.

If the state of the economy is better than expected, then expectations about future states are revised upwards by more than what is justified by rational expectations. Households become too optimistic about firms’ ability to repay their debts and are happy to lend more. This reduces the interest rate and lets firms invest more. This leads to more production and thus an economic expansion. The effect works vice versa for bad news which makes the household overly pessimistic:

When times are good, households are optimistic about the future state of the economy. The perceived creditworthiness of firms is high, households supply more capital, the interest rate falls, firms issue more debt and invest more, and future output rises. When times turn sour, households cut lending, firms issue less debt and cut investment, and the economy contracts.

They don’t mention welfare, but households are obviously worse off than if they would accurately form expectations.

When we assume $\omega_t$ to follow an autoregressive process we can draw a series and simulate how rational expectations compare with diagnostic expectations:1

Diagnostic expectations overshoot, so they are larger than rational expectations when times are good and below them when times are bad.

When we plot the difference between the two expectations we get:

Where we can clearly see the psychological boom periods (green) and bust periods (orange).

In bad times, households are too pessimistic, so we can expect positive surprises. The same holds in good times: The households expects things to be good again, so he is too optimistic. This results in a negative correlation of forecasts errors with the current state:

In total, this results in:

• endogenous credit cycles and
• larger macroeconomic volatility.

However, the signals that different people in the economy get have to be sufficiently correlated for this to matter in the aggregate. Is that realistic? If there is even a bit of heterogeneous uncertainty about which state $\omega_t$ the world is currently in, then some households might become optimistic and some pessimistic. Could this not lead to some averaging out of these effects?

Also what’s the policy implication here? Do maybe professional forecasters or central banks not make these mistakes and should they therefore inform or regulate the decision-making of households? Because we would actually much prefer if people did not form their beliefs like that. Robert Shiller writes this in his book:

We must consider how to deal with the change in thinking that leads people to think we have entered a new enlightenment, changes that, through their effect on market prices, impinge on all our lives.

We have to consider what we as individuals and as a society should be doing to offset some of the ill effects of this exuberance. (p203, “Irrational Exuberance”)

But he ends on:

Ultimately, in a free society, we cannot protect people from all the consequences of their own errors. (p230, “Irrational Exuberance”)

Also, must we assume that all people form their expectations like this? What if there are some clever investors that don’t have overshooting expectations? They might arbitrage the mispricing in firms’ bond prices away, right?

And who might those arbitrageurs be? People like Cliff Asness:

ASNESS: Second reason is a behavioral story. Someone out there is making a mistake. I gave you two. Underreaction and overreaction are both the behavioral story. They’re both somebody out there making an error, doesn’t mean markets are terrible by any means. I’m a big believer in markets but at the margin, they’re making an error and you take advantage of it.

[…]

COWEN: Let me give you my intuition in favor of why it might be overreaction and you tell me what you think. You receive a signal about the world. It’s to some extent a private signal and you over-interpret that signal and you think it’s a signal about the whole world so you overreact. That leads to some price movement, which is propagated through time. But, at least some people think, past that 12-month time window, momentum ceases, and there’s even a bit of price reversal. Eventually, you learn that you’ve been overreacting by thinking your private information is more general, more systematic than it is and then things snap back a bit. Does that psychological hypothesis explain this mix of price reversal in the longer term and momentum in the shorter term? Do you think that makes sense or not?

[…]

ASNESS: Let me take this another way. I think we are mixing overconfidence with overreaction a little bit. New news, people might be overconfident in how much they understand it, but they don’t seem to incorporate it enough.

Yes, there exist limits to arbitrage for various reasons, but it would be nice if we didn’t have to assume these for the real effects of diagnostic expectations to go through.

I like how the authors relate their mechanism to the literature on “financial shocks”:

When the economy is hit by a series of good news, investors holding diagnostic expectations become excessively optimistic, fueling as in the current model excessive credit expansion. During such a credit expansion households would pay insufficient attention to the possibility of a bust. As fundamentals stabilize, the initial excess optimism unwinds, bringing this possibility to investors’ minds. The economy would appear to be hit by a “financial shock”: a sudden, seemingly unjustified, increase in credit spreads. Agents would appear to have magically become more risk averse: they now take into account the crash risk they previously neglected.

And this bit:

Perhaps as important an advantage of our approach is that expectations are not delinked from news, but rather follow a distorted true process of the data, what we have referred to as the “kernel of truth” hypothesis.

To conclude, the paper provides a theoretical explanation how overshooting expectations due to the representativeness heuristic can cause financial and macroeconomic cycles.

1. The codes for reproducing Figure 2 from the paper are here

I reviewed the book here, but skipped MacAskill’s section on how to choose a career, because it got a bit lengthy already.

Taken literally, however, the idea of following your passion is terrible advice. Finding a career that’s the right “fit” for you is crucial to finding a career, but believing you must find some preordained “passion” and then pursue jobs that match it is all wrong. […] First, and most simply, most people don’t have passions that fit the world of work. […] Second, your interests change. […] This takes us to our third point against passion, which is that the best predictors of job satisfaction are features of the job itself, rather than facts about personal passion.

I think you don’t actually have to optimize for altruistism to find the following good advice:

This means it’s best to take an empirical approach, trying out different types of work and using your track record to predict how well you’ll perform in the future. At the start of your career, be open-minded about where you’ll eventually be able to perform best.

Exploration value provides a reason in favor of working in the for-profit sector for a year or two: you might discover that the opportunities there suit you well. People embarking on their careers often neglect these considerations. People often tend to think of choosing a career as an all-or-nothing proposition: a one-off life decision that you make at age twenty-one and that you can’t change later. A way to combat this mistake is to think of career decisions like an entrepreneur would think about starting a company.

I think he takes his advocacy of thinking through the long-run and general equilibrium effects of one’s career choice a bit to far, though. He discusses the choice of a PPE student at Oxford who’s deciding if she should enter politics. But the amount of assumptions and simplifications that go into that analysis make me doubtful if much is learned and reminds of me fermitizing.

MacAskill has taken this focus on career guidance further with his organization 80,000hours. Among other things they publish career reviews. (Luckily they have a positive take on economics PhDs).

Related posts:

# "What is necessary"

In Gregory David Robert’s novel “Shantaram”, the protagonist Lin comes to India from Australia and is overwhelmed (emphasis added):

Now, long years and many journeys after that first ride on a crowded rural train, I know that the scrambled fighting and courteous deference were both expressions of the one philosophy: the doctrine of necessity. The amount of force and violence necessary to board the train, for example, was no less and no more than the amount of politeness and consideration necessary to ensure that the cramped journey was as pleasant as possible afterwards. What is necessary! That was the unspoken but implied and unavoidable question everywhere in India. When I understood that, a great many of the characteristically perplexing aspects of public life became comprehensible: from the acceptance of sprawling slums by city authorities, to the freedom that cows had to roam at random in the midst of traffic; from the toleration of beggars on the streets, to the concatenate complexity of the bureaucracies; and from the gorgeous, unashamed escapism of Bollywood movies, to the accommodation of hundreds of thousands of refugees from Tibet, Iran, Afghanistan, Africa, and Bangladesh, in a country that was already too crowded with sorrows and needs of its own. The real hypocrisy, I came to realise, was in the eyes and minds and criticisms of those who came from lands of plenty, where noone had to fight for a seat on a train.

This reminds me of people from rich countries talking about the smiling people you they in “mud villages” and how that must mean that development aid is unneccessary or harmful. No, a higher degree of social harmony is just what is necessary.

# Paul Theroux, development and the globalization backlash

I really like Paul Theroux’s travel writing. But his views on development: not so much.

He seems to hold odd views on why some countries are poor and I find his take on foreign aid one-sided. (Anne Lowrey and Chris Blattman concur.)

In the same talk I wrote about before, Theroux also says:

Where are we going? You think – when you see development, you think: “Do places just keep developing and developing and developing and developing?” And it’s straight north and they just keep developing until they become a utopia? Or do things fall apart? I tend to think, if you’ve lived a certain length of time, you say: Eventually things fall apart. It’s not straight north. (link)

Traveling in the south, in the southern USA, there are some roads in the south that were once main roads. […] So they had restaurants, hotels, motels, petrol stations. Highly developed roads. Two-lane highways. […] Now, if you go down there, it looks like doomsday. The restaurants are all closed, the motels are all closed, the petrol stations are closed. There are just a couple of little shops. […] What happened was a different road was build. […] And the towns died. (link)

He does not seem to see benefits from trade and his world is zero-sum: One part can only benefit if the other part is worse off. It’s surprising to me, given how much he has clearly benefited from globalization through being able to safely travel all over the world, living and teaching in Singapore and having a global English-speaking audience that reads his books.

In a different, recent, interview he talks about Chelsea Clinton being called a “humanitarian”:

It’s a pretty good gig, actually, being a humanitarian if your family – I mean you’re that age and you’re a humanitarian. I would say, you know, join the peace corps, spend two years in a village, then you can be – that’s the apprenticeship for a humanitarian. She’s married to a multi-millionaire and lives in a million dollar apartment in New York City. […] It’s telescopic philanthropy. (link)

The interview goes on:

Theroux: The long march of the common man and woman is my mission, actually.

(Applause)

Iyer: Of course the guy who won the Nobel Prize for economics yesterday has a blistering attack on foreign aid.

Theroux: Angus Deaton, that’s right. […] He’s written the definitive book, why aid is harmful. (link)

He argues that the population increase has made people worse off:

In 1950, the population of the United States was 150 million. […] Now it’s 350 million of the United States. There are 7.5 billion people on the planet. Man is an invasive species. Of course the world is getting worse. It’s getting much worse and will continue get worse. (link)

He provides a couple of stories of how you cannot safely cross Africa nowadays and you cannot cross borders easily in the easter Mediterranean. Is that convincing evidence of anything? Many parts of the world are safer now (such as Southeast Asia).

And actually, Angus Deaton spends the first half of his book showing how much better the world has become for many of its inhabitants. A bit of perspective could be obtained here by reading Pinker or browsing Our World in Data.

It’s irritating how critical Theroux can be of people who don’t read novels, but then is so unaware his lack of expertise to pass judgement on a topic like this. And that matters because he’s rightly famous for his books, so people might infer that he also speaks with authority on the subject of how to raise people out of poverty. But he does not.

In the end, a commenter asks him about the critique of his New York Times piece. Theroux answers that he thinks that some of the letters were quite reasonable and he cites Deaton again:

This is what Angus Deaton, whom we alluded to earlier - you can’t determine poverty by the per capita income. You should do it in terms of self-sufficiency. A “poor” person in Africa may live in a mud hut, but a mud hut is preferable to a cement house in many places. A thatch roof is more effective than a tin roof in many places. […] You look at mud village and you say, “Gosh, it’s a mud village.” People are living there as they’ve lived there for many years and they sustain life in a viable way. They may not have education, they may not have a cell phone, but they can feed themselves in a way that people can’t in other places. Urban Africa is different. […] But I don’t think that because someone is earning a dollar a day that necessarily they are poor in the same way that someone in Hollandale, Mississippi, is poor. The person in Hollandale, Mississippi, doesn’t have a garden. They are living precariously. They once had a job. […] The people who wrote, “There are poor in China”. I don’t see the correlation. I think the poor in America are comparable to the poor anywhere in the world. (link)

He probably does have a point that the people one meets in poor countries often seem quite happy. But I don’t agree with his view on “self-sufficiency”. People in “mud villages” might well prefer to buy their food in a supermarket and be educated or have a smartphone. It’s our perspective of being able to have these things that we can look back and romanticize how nice it must be without them.

Also, looking happy is not the same as living good lives. If you sit in the tube in London, many people will look stressed and unhappy. But that’s just because they can. They don’t have to look happy all the time and they’ll reserve that for the friends they’re about to meet or their children they’ll pick up from school. In developing countries there’s a greater need for constant social harmony.

Maybe his views are even an explanation for the rise of Donald Trump and Bernie Sanders. If even a cosmopolitan, educated, wealthy liberal is against trade, then I think we’re in for a globalization backlash:

The piece is really about: The contradiction of people who become billionaires by outsourcing. So there’s a factory in Arkansas, Mississippi, making furniture or shoes. And they say, “You know, what we want is, we want bigger profits”. So they move the shoe factory to Vietnam. Then they become billionaires. Then they say: “We want to lift people out of poverty.” […] It’s shameful. (link)

Related posts:

# Central banks and financial bubbles

Should central banks change the money supply to try to deflate bubbles in asset markets, such as the markets for bonds or houses?

Loretta Mester, the president of the Cleveland Fed, says “No”, because:

• the central bank should focus on price stability and employment and
• there are other tools for improving the financial system.

This reminds me of the debate about the impact of monetary policy on economic inequality. Does printing money make some people better or worse off? Obviously yes. In the extreme case, if the central bank caused high inflation, then people holding real assets like land, houses, factories or stocks (which adjust when firms raise prices and dividends) would benefit. But people holding nominal claims like bonds would suffer. But monetary policy that acts in smaller steps likely also has distributive effects through more subtle channels.

But I think the main reason to care about these effects is that they might change the transmission of monetary policy on the real economy. For everything else, such as questions of social fairness and the redistribution of income and wealth, we have a much better tool: taxes.

Jens Weidman, the president of the German Bundesbank, recently spoke about financial stability:

In hindsight, it looks as if, for a while, confidence had turned into complacency. But the financial crisis has reconnected everybody with the reality that the success of monetary policy depends on conditions it cannot create on its own. In particular, it is dependent on a stable financial system.

[…]

The crisis has reminded us that financial exuberance, too, is potentially a harbinger of unstable consumer prices.

And the following relates to the argument that monetary policy might not be the right tool to address financial stability (or inequality):

Tinbergen’s timeless insight continues to apply: to reach each policy goal reliably, at least one separate instrument is needed for each policy area. The crisis has therefore spawned a whole new set of instruments – macroprudential policies – designed to target specific sectors of the financial system.

Related posts:

# Paul Theroux: "See things as they are"

When the travel bug gnaws on me, I usually find solace in the books by travel writer Paul Theroux. He gave a talk at the Singapore Writers Festival in 2014 and I like his thoughts on why it is that we travel:

When I first came to Singapore, I was 27 years old. […] And I was looking for I role – I suppose – to play in life. (link)

I didn’t really know, at that point, what my subject was. (link)

So the interesting thing that Erikson is different from Freud is that even in old age – you know, my age – I think, “What am I doing? Am I giving anything to anyone? […] Have I made my life count? […] What I’m trying to explain to you is: Why would a person travel? Why would you leave home? (link)

You don’t develop, you don’t find anything about yourself, unless you leave home. When you leave home, when you go away and you’re on your own, you find out, who you are and you find out things about yourself that you can’t find out when you’re at home. (link)

It seemed to me, what I needed to do – and I suppose the insight that I had in Singapore was that – I needed to see things as they are. […] I decided that, my mission – as a writer – was to see things as they are, to describe things as they are; not as I wanted them to be; not as people told me that they were, but I needed to see things as they are. And that would make me free, and would also – telling the truth, writing about what I saw – would be enough of a mission in life. (link)

A lot of people in fiction describe things as they wish they were or as they want them to be. (link)

It was an assertion. […] But it was a way of asserting what I was doing, who I was and what I was doing. And I was asserting my view of things. And, I suppose, it was my way of “seeing things as they were”, was my way of disagreement. That instead of seeing the world the way the authority figures wanted me to see it. […] It’s a very liberating thing. (link)

It’s a mode of inquiry – I guess you could say – travel is. Writing fiction you sit at home and you ponder. It’s like a kind of prayer. (link)

People go to England and they look for Charles Dickens’ England, or Henry James’ England, or Jane Austen’s Bath, or whatever. They look for elements of the past. That’s a kind of nostalgia. […] But Dickens’ London doesn’t exist. What exists in London in much different place from the one that you read about in books. Much more interesting and complex. (link)

I think that gets at one of the fundamental issues of travel. We have certain clichés in mind of what we expect places to be like. And when we then travel there, we actively try to confirm these prejudices.

That exotic market in Myanmar shows you how mystical Asia is and women in colorful saris in India must prove the cheerfulness of Indians.

And we don’t start to really engage with people and places until we’ve fulfilled that longing. Listening to live music in Bangkok is probably more fun than eating insects there. But it’s unexpected and so we might opt for the thing that yields the better picture to post on Facebook.

We try to tick certain boxes and until we’ve ticked them our conversations with other travelers often revert back to that one topic: “What? You haven’t been to the Taj Mahal, yet?”

I’ve never found a satisfying way of escaping that urge. But I these points help me to deal with that lust for the expected exotic:

• Tick the boxes at the beginning of the journey. First thing in India, visit the Taj Mahal. When I was there, I traveled through to Amritsar, Kashmir and Ladakh during the first month. But in the back of my mind was, “I haven’t seen the Taj Mahal, yet.” How unnecessary! The time in the mountains was much more impressive than visiting the Taj.

• Many clichés are true. So don’t feel guilty to enjoy ticking your boxes. Everybody likes clichés that are fulfilled. Japanese tourists will enjoy to see people dressed in Lederhosen eating Schweinshaxe in the Hofbräuhaus, just as I enjoy to see Russians drink Vodka on the Trans-Siberian Railway. When you see clichés fulfilled, be happy and then move on and find the things you didn’t expect to see.

Theroux then goes on:

I’m not interested in architecture. I’m not interested in – I go to museums, I go to churches, events, and so forth – but I don’t write about them. I write about people and I try to find out, what people’s stories are like. (link)

This reminds me of how William Zinsser recommends travel writers to restrain themselves:

The dismal truth is that it’s very hard. It must be hard, because it’s in this area [travel writing] that most writers – professional and amateur – produce not only their worst work but work that is just plain terrible. […] Nobody turns to so quickly into a bore as a traveler home from his travels. He enjoyed his trip so much that he wants to tell us all about it – and “all” is what we don’t want to hear. We only want to hear some. (p117, “On Writing Well”)

1. Terence Tao: How to visualize random numbers online. [source]

2. Noah Smith debates wealth swings vs. debt as a catalysts during financial crises:

If wealth effects are the big culprit, then taming asset bubbles becomes the central task for recession prevention. If it’s debt that does it, the key is to stop households from borrowing so much.

3. Seveneves is a good read. It’s a nice follow-up to the The Martian, though a bit less “hard” and more “epic” science fiction. [source]

4. While North American PhDs tend to work with more than three different researchers within six years after graduation, PhDs of the German-speaking area work with barely a single collaborator. We find positive and significant correlation of the number of distinct coauthors with research quality.

5. An essay (in German) by Martin Hellwig [source]:

Wir sind geprägt vom naturwissenschaftlichen Verständnis von Theorie als etwas Allgemeingültigem und machen uns zu wenig klar, dass Modelle nicht Theorien sind, sondern Sprachspiele zum logischen Verständnis von Zusammenhängen.

[…]

In den meisten Fällen reichen die Daten, die man bekommen kann, nicht für statistische Analysen aus.

[…]

Ob ich das jeweils “richtig” gemacht habe, weiß ich nicht. Aber das ist genau mein Punkt: Wir haben kein Rezept und kein professionelles Ritual dafür, wie man so etwas “richtig” macht. Wir haben oft noch nicht einmal das Bewusstsein, dass es da ein Problem gibt. Wir brauchen dieses Bewusstsein.

# Effective Altruism: "Doing Good Better", by William MacAskill

How should we act, if our goal is to do the most good we can?

William MacAskill, a recent PhD graduate in philosophy from Oxford, adresses this question in his book “Doing Good Better”. (His dissertation on the same topic can be found here.)

He advocates a rational approach to giving in which one reflects on how to help most effectively. He argues that altruism does not need to arise spontaneously from personal experiences:

We very often fail to think as carefully about helping others as we could, mistakenly believing that applying data and rationality to a charitable endeavor robs the act of virtue. (pos 246-7)

He also compares donating to investment and points out that:

One difference between investing in a company and donating to a charity is that the charity world often lacks appropriate feedback mechanisms. (pos 259-260)

Instead, he proposes a strategy he calls “Effective Altruism”:

Effective altruism is about asking, “How can I make the biggest difference I can?” and using evidence and careful reasoning to try to find an answer. (pos 270-272)

As the phrase suggests, effective altruism has two parts, and I want to be clear on what each part means. As I use the term, altruism simply means improving the lives of others. Many people believe that altruism should denote sacrifice, but if you can do good while maintaining a comfortable life for yourself, that’s a bonus, and I’m very happy to call that altruism. The second part is effectiveness, by which I mean doing the most good with whatever resources you have. (pos 274-278)

Many economists will find MacAskill’s thinking and his proposals quite natural. He explains how absurd some parts of charity giving are. You first decide how much to give and then choose who to give it to. With everything else, you would first compare the options and then consider how much each is worth to you.

In economics, we have trouble comparing utility across people. But sometimes we have to, as when deciding who to tax or if policies are worth it that make some people better and some people worse off. For this, MacAskill proposes to use “quality adjusted life years” (QALYs) to measure the impact of one’s charitable actions. QALYs sound to me a lot like the present value of life-time utility (though without discounting). The clever thing is to normalize it to the value of expected normal life quality which makes them comparable across people. And he’s honest about the inherent problems in comparing suffering across people:

However, there are many harder cases: If you can prevent the death of a five-year-old or a twenty-year-old, which should you do? (pos 507-508)

The difficulty of comparing different sorts of altruistic activity is therefore ultimately due to a lack of knowledge about what will happen as a result of that activity, or a lack of knowledge about how different activities translate into improvements to people’s lives. It’s not that different sorts of benefits are in principle incomparable. (pos 580-583)

He argues against giving to causes that one knows personally:

If I were to give to the Fistula Foundation rather than to the charities I thought were most effective, I would be privileging the needs of some people over others merely because I happened to know them. (pos 609-610)

Well, but people are exactly like that. It’s honorable if he isn’t, but for most people that’s probably a good rule of thumb to follow.

What matters is not who does good but whether good is done; and the measure of how much good you achieve is the difference between what happens as a result of your actions and what would have happened anyway. (pos 976-978)

Where I think MacAskill goes wrong is by not taking into account people’s preferences and limitations. It’s ok to have a weighting function about other people’s suffering. The suffering of people close to you is probably more important to you than to that of a person in the next town or a person on another continent.

I also don’t think that he can explain why people act altruistically through expected utility. He writes that the reason people go to vote is not because they expect their vote to matter, but because you weigh everybody else’s benefits as well and decide that the potential costs and benefits are huge.

I disagree.

He cites Steven Levitt as saying that people vote because it’s fun and their wife will love them more for it. I don’t think so either. I think it’s because people have a sense of duty. Voting in important general elections is just what you damn well do. And yes, there’s the bit of kidding yourself to believe that you make a difference, and there’s the bit of wanting to seem like an honorable person to the people around you. But I do think that many people have a sense of civic duty. And in particular for the things MacAskill discusses – elections, political rallies, choosing what to eat – these kind of feelings of duty matter even more.

Maybe this taking into account our effect on other people’s wellbeing is what people should do, not what they actually do. And that is also the limitation of MacAskill’s book: He can prescribe us how to act given however altruistic we are, but he cannot describe how large groups of people actually act.

And in this way he’s diametrically opposed from how economists usually try to argue. This could be the contribution of moral philosophy in a book that else reads mostly like economics.

Effective Altruism is an argument for strict rationality in your giving. But I think it’s ok to strike a balance between rationality and personal involvement. And that is because we are at once altruistic and we also derive utility from our giving. And giving to causes I’ve seen first hand, I get a lot more utility from.

People also probably have an intrinsic preference for balancing highly abstract, rational altruism and very concrete, routine, human-interaction-based, contextual altruism. You might work for a central bank and think, “My work helps mitigate recessions and avoid the next financial crisis; and through that my country will be richer and be able to help more poor people.” And you might well be right about that. But many people might still do something concrete on the side, whether that is volunteering for a homeless shelter, working with refugees or having an “adopted” child in Africa. And maybe the fact that people do the second kind distracts them from the first kind. But I think people enjoy the second, more direct, altruism more. And I think that’s ok. MacAskill is right to point out that we should compare alternatives and be rational about it. But everybody strikes their own compromise.

In the end, it’s about being compassionate without feeling guilty. When I traveled in India, I was overwhelmed. I saw begging children and skinny men drove me around in bicycle rikshas for very little money. A good recommendation I’ve heard is to give little everyday. Don’t always hold back and then give 50 euros to that begging girl with the pretty green eyes or the man with little children who tells you his sad story. Instead, I set myself a budget (a good tip a I got here) and then I gave that out in little chunks.

MacAskill response might be that both of these strategies are wrong and instead I should have given to the most effective charity (such as Give Directly). To which I have no good response apart from that it’s really hard not to help people whose suffering you see before you.

People have an inner wish for altruism. To encourage this is the goal of much of childhood education, religion and cultural ceremonies. But that’s not what MacAskill has any arguments for. He needs to take this as given and cannot tell us how altruistic we should be.

I also read this book as an endorsement of randomized control trials and development aid to poor nations in general. And given that these are two things that Angus Deaton disagrees with, I read it as an opposition to Angus Deaton’s views.

I really like this bit (added emphasis):

Because cash transfers is such a simple program, and because the evidence in favor of them is so robust, we could think about them as like the “index fund” of giving. (pos 1604-1605)

“Earning to give” is an interesting concept. But this line of thinking can easily be made extreme. Why not rob a bank and spend all of that on malaria bed nets? Or kidnap a politician and ask for 100 million to be spend on deworming.1

Similarly with his good discussion on the effects of choosing to be a vegetarian. Again, he shows a real economist’s skills by discussion the general equilibrium effects and shows estimates for how much supply falls when we reduce demand. But this position, too, if taken to its extreme is easy to lead ad absurdum. If we really just optimize over the one thing “Eating as few animals as possible”, then why not go on a killing spree and reduce the number of humans eating animals?

Instead I think our morality is and should be more complex and multi-faceted. We’re walking in a certain space and time and face constraints. You probably want to work somewhere, because it gives you purpose. And you want to do good both abstractly and directly. And people differ in how altruistic they are.

As economists we’re trained to describe how groups of people behave and we only rarely prescribe how they should behave. But that is what MacAskill does. His preferred way of how people should act is a poor explanation for how people actually do behave. Why do people over or underestimate risks, smoke, buy the wrong kind of insurance, buy stocks when they’re too expensive, take on too much debt and why do they act altruistically? He cannot explain any of this and it’s not his goal. Instead he does something that economists rarely offer: He shows how a rational person should behave morally given their preference for altruism.

My strongest criticism of the book is the following: Altruism is – and should be – just one part of many in a well-rounded person’s life goals. Yes, it’s a particularly important one that we should encourage in our children. But there are many, many other things to our life and maximizing over only one thing – altruism – seems dangerous to me.