Money Talks 1: Prof. Sanjit Dhami interviewed
Hello Moneylang-ers! We know every one of you wants to know something about your favorite authors. So we wanted you all to know that we will be having a new topic, wherein we will interview great authors and post it here and let you enjoy reading be inspired!
And to start our new topic, we would like to introduce Professor Sanjit Dhami of The Foundations of Behavioral Economic Analysis book.
Professor Dhami has been so nice to us and was very happy to have this interview and because of that, Professor, thank you very much! We really appreciate your kindness and the time you have given us.
We are excited to let you all read our interview with Professor Sanjit Dhami, so we won’t make this long! Enjoy and be inspired everyone!
Name: Sanjit Dhami
Background: I am a Professor of Economics at the University of Leicester. I have previously taught at the Universities of Toronto, Essex and Newcastle. I did my Masters and PhD degrees in Economics from the University of Toronto and my MPhil degree from the Delhi School of Economics, University of Delhi.
Book: Foundations of behavioral economic analysis
Favorite gadget: I am too old now to be excited with gadgets in the same way as I once used to be, but I have recently inherited my son’s iphone, which seems to be a cool piece of kit that I now find quite useful.
Hobbies: Watching various sports particularly cricket, listening to classical Indian and Western music, and gardening.
What inspired you to write your book?
My graduate training is in modern neoclassical economics, which is still the dominant framework in economics. In this framework, heavily borrowed from physics, humans are modelled as if they were particles in physics; let us call them ECONS. ECONS are also super-rational, possess unlimited cognitive abilities and computational power and act as if they were trained in the latest mathematics and statistics.
Despite several successes, the ECONS model has not been adequately successful in making predictions and in explaining a range of market and non-market phenomena. The reason is that unlike particles in physics, HUMANS have a sense of fairness, they make decisions under emotions, they are more affected by losses than gains, they are more impatient for immediate decisions as compared to more distant decisions, and there are bounds on their rationality, cognitive abilities and computational power.
The most exciting and fastest growing field in economics is behavioral economics. Roughly speaking, it replaces ECONS by ‘real HUMANS’ in economic models. Behavioral economics is interdisciplinary and it draws insights from psychology, biology (particularly sociobiology and evolutionary biology), sociology, anthropology and neuroscience. You can imagine how exciting this is for someone engaged in research in this area.
When I first learnt about behavioral economics, in 2003 from a lecture given by my colleague Prof Ali al-Nowaihi, there were no book length treatment of the entire subject matter. Existing knowledge was scattered in thousands of journal articles although to be sure there were some good survey articles that covered selected aspects of the field. To a newcomer in the field, it was not clear how to piece together this massive jigsaw. The book arose as a result of my efforts to make sense of this vast literature.
My book has just been published (on 3 November 2017 in the UK) by Oxford University Press. The title is “Foundations of behavioral economic analysis”. The book took 12 years to write and at nearly 1800 pages, it is the longest single volume book in economics that has ever been published by Oxford University Press. Just to put things into perspective, my son started primary school when I began the book. The completion of the book coincided with his going to University for an aerospace engineering course.
It is gratifying to see the book receive worldwide attention. Even before it was published, many top Universities had already started to teach it by using an advance copy of the manuscript, obtained with the permission of Oxford University Press. This was an interesting experiment and it allowed more people to read and comment on the manuscript, which invariably improved it further.
If I am an aspiring author, what advice can you give?
There are books and there are books. If you want a book to be your legacy, then don’t write a book unless you have something quite important to say, and you feel rather passionately about the subject matter. A bad book or an insufficiently thought through manuscript can attract much criticism and dent your reputation. Good book writing is a long, committed and arduous process and it is not for everyone.
Should you be in the happy state of satisfying the criteria mentioned above, then I would say go for it. You will probably get a lot of advice, as I did, from well-meaning colleagues and friends, who have never written a book. One piece of advice that I got was to get a publisher early. I did just the opposite. The claims I was making for the scope and the quality of book were strong, so I reasoned that I unless I have most of the manuscript, I am not going to impress a publisher. For this reason, I approached the leading University Presses at a very advanced stage of my book, which made it easy for the publisher and the reviewers to judge if my claims of writing the “definitive text in the area of behavioral economics” were sound or not.
It is probably a cliché to say that the author should know his/her audience and pitch it just right for them. This is easier said than done. In my case, I got lots of representative audience members (PhD students and University faculty) to read drafts of my manuscript, which facilitated the process of pitching it at the right level.
Lastly, if you are writing a major book, you will need all the support you can get from your family. Writing the book may involve massive sacrifices on their part (and yours), which might not be acceptable to all potential authors.
If there’s one chapter in your book people should have read, which one should it be, and why?
In my case, this has to be the introductory chapter in the book; this is a substantial stand-alone chapter that is 79 pages long. My writing style evolved during the writing of the book that took 12 years—in fact it got better as time went on. The introductory chapter allowed me to let my hair down and write in a more relaxed and witty style. The problem I had in writing the introduction was to motivate an 1800 page book and convince the reader that learning behavioral economics was extremely important. I have so far received excellent feedback on this chapter. Somehow the introductory chapter turned out, just as I had planned, although I am seldom fully satisfied with my work.
If you could give one piece of financial advice to our readers, what would it be?
Behavioral finance, which is a branch of behavioral economics deals with issues of finance and is covered in Chapter 21 in my book.
My advice is to invest wisely, be cautious, question all your assumptions, and if you are not very experienced, get a professional investor to help you. Here is why you should do this. Empirical evidence shows that the stock picking skills of private investors are generally poor. They often pick stocks that do worse subsequently and sell stocks that do better subsequently. There appears to be only a small fraction of private investors whose stock picking skills consistently beat the market. By contrast, the stock picking skills of professional investors are better, although in both cases, luck plays a big role in success.
Individuals are also often quite overconfident and more than 90% of us rate our IQ and our driving abilities to be better than those of the median individual. Individuals often trade far more than they ideally should in stock markets. Excessive trading is correlated with gender (males trade relatively more than females) and to lower returns.
When it comes to pension plans, we are influenced excessively by the default option, which is good if the default is chosen wisely but bad otherwise. We also invest far too much in our company equity relative to what we ideally should. Some evidence shows that we use a simple heuristic in investing, the 1/n heuristic, in which among a set of n possible assets in our portfolio of potential pension assets, we simply choose them equally. This can give rise to lopsided pension plans with a predominance of equity.
As an author, what are some of the books that made the most impact on you?
Several books have made an important impact on me and helped me to define and hone my own style of writing books. My subject matter is technical and involves extensive use of mathematics and statistics, so it is important to achieve just the right degree of simplification but also not lose too much rigor. In this sense, many of the books that inspired are quite technical for the readership here. For instance, Jean Tirole (1989) Industrial Organization. MIT Press; Oliver Blanchard and Stanley Fischer (1989) Lectures on Macroeconomics. MIT Press; Mas-Colell et al. (1995) Microeconomic Theory. Oxford University Press.
Some of the relatively non-technical books that the readership of this blog can perhaps read (except No. 4 below) and that inspired me in behavioral economics are:
- Daniel Kahneman (2011) – Thinking, fast and slow.
- Richard Thaler (2015) Misbehaving: The making of behavioral economics.
- Edward O. Wilson (2012) The social conquest of earth.
- Herbert Gintis (2009) The bounds of reason: Game theory and the unification of the social sciences
- Colin F. Camerer (2003) Behavioral game theory: Experiments in strategic interaction
- Daniel Kahneman and Amos Tversky (2000) Choices, values and frames.
- Richard Thaler and Cass Sunstein (2009) Nudge: Improving decisions about health, wealth, and happiness.
What would you like to ask the next author being interviewed?
Depends on what kind of book the author has written. But asking the same or similar questions as above might also be enlightening.