Report from Lindau: Day 2

Disappointing. This is probably the word that best describes the second day of the Lindau Nobel Meetings, where panel and discussions revolved mostly around two issues, the reasons behind the financial crisis in 2008 and the foundations of economic behavior.

The morning did not start well. In a rather uninspiring lecture, William Sharpe did a very bad service to the profession when he showed a graph depicting the utility of financial traders in his model and said "I do not know whether traders have these utility functions, but does not this graph look really beautiful?". With this he gave more arguments to those who say that economists are completely detached from reality.

Sharpe was followed by John Nash who proved once again that he should not participate in scientific conferences. Sir John Mirrlees raised standards a bit with his talk on poverty and food markets. His most provokative idea was that rising food prices may actually help people in developing food-producing countries to leave poverty rather than actually impoverishing them even more.

After the break, Ed Prescott took the stage to shake the audience once more. He explicitly associated tax cuts and tax increases with booms and recessions respectively. He further argued that the financial crisis of 2008 did not lead to the subsequent economic crisis we are still in, the so-called Great Recession that, he said, after checking the newly revised economic data does not look like a big recession any more. Robert Mundell provided his own explanation to the crisis. For him it was big swing in exchange rates what precipitated the last crisis, as in many other cases in the past. He also argued in favor of a world currency, the eurodollar. This proposal was a big surprise, to say the least, coming from someone who received the Nobel prize for pointing out that single currency areas may not be a very good idea.

The set of lectures finished with Robert Aumann (in the photo), surely the most passionate and enthusiastic of all the laureates who spoke during the day. In his talk, Aumann discussed under which conditions strategic behavior can be analyzed as one-person decisions problems. Unfortunately, the lecture was not well pitched the audience got lost about half way.

Aumann played also an active role in the plenary session in the afternoon, a panel on "behavioral economics", in which he heatedly debated with Reinhard Selten. Aumann argued that the deviations from standard economic predictions uncovered in experiments are due to the unfamiliar nature of the decisions and that these deviations are much less frequent in decisions that are important or often repeated. He mentioned the concept of "rule-based rationality" by which people are not necessarily rational in their decisions but choose to use rules that usually lead them to take rational choices. Selten argued against the existence of such rules or, at least, against the idea that these rules are chosen or adjusted. He even suggested that utility functions not even exist and promised to elaborate more on his lecture in day 3. This comment acted as an ironic echo to Sharpe´s remark on utility functions in his morning lecture.

Unfortunately, apart from this debate, the panel on behavioral economics was rather confusing and basic. The discussions left out many aspects like reciprocity or social preferences. Let´s hope that tomorrow will be better.