One of the things I find important in relation to a 21st century economics education is systems thinking. But when discussing systems thinking with interested others I often find that it is such a huge concept. According to the Waters Center for Systems Thinking, it encompasses fourteen habits, and seven visual tools, which is quite a lot. Moreover, we can distinguish ‘soft’ systems thinking which does not involve modelling, and systems dynamics, or ‘hard’ systems thinking, which involve modelling and simulating models. With so much to consider, the appropriate question is: where to start?
Well, I believe that it does not really matter where we start. The Waters Center habits cards refer to the visual tools and the visual tools refer to systems thinking habits. So this seems to be a bit of a chicken-and-egg discussion. Therefore, I like to take my pick and reflect on how I can use that specific tool or skill in an economics education. Today I picked the ladder of inference.
I did not choose this randomly, but I want to apply the ladder to the market. The ladder of inference is a visual tool that illustrates how perceptions, or mental models, lead to beliefs that lead to actions, which are reinforced over time.These actions do not have to be world-changing or mind-blowing. Every decision to buy something is an action and some of these buying decisions have become particularly ingrained because of the frequency with which they are repeated.
While buying decisions take place on an individual level, all buying decisions sum up to market demand. So, when the outcome of a market is not exactly what we wish for as a society, we could ask ourselves which mental models lie at the base of these outcomes, instead of trying to fine-tune the outcomes. In Thinking in Systems, by Donella Meadows, it is suggested that we should actively work to understand the mental models that exist in a system because it is one of the most impactful places to intervene. But beware: a quote of Albert Einstein on the site of the Waters Center warns us that “To break a mental model is harder than splitting an atom.”
Mental models are personal beliefs, values, and perceptions that control what we see, how we interpret what we see, and the beliefs we develop based on what we see. Mental Models are often buried and hidden from our awareness. They are often accepted without thought. That is the reason why it is so difficult to break them.
The ladder of inference is originally an idea of the organisational psychologist, Chris Argyris, which he devised in 1990. The picture above is a simplified version, a more helpful version for our goal is this:
You can see that most of the rungs on this ladder are taken subconsciously, like going up the ladder blind eyed. This is much in line with Daniel Kahneman’s Thinking, Fast and Slow. When we want to bring the underlying mental model to the surface, we need to go down the ladder, which I would like to illustrate with an example.
Since the periods of extreme heat have prolonged over the last years, I have decided to buy air conditioning. (I have not, but let’s assume I have.) Now let us go down the ladder:
Why have I chosen this action? Well, like I said, I have chosen to buy air conditioning because of the prolonged periods of extreme heat. Moreover, I have solar panels and all the energy I do not use goes into the net without reimbursement. Since I generate a lot of energy during periods of extreme heat, I might as well use it myself.
What belief led to that action?
First of all, I believe that there will be more and longer periods of extreme heat in the future, because of climate change.
Second, I believe that the energy I generate should be reimbursed otherwise it goes to waste.
Why did I draw that conclusion? Is that conclusion sound?
The first conclusion is based on the climate change recorded by the meteorological institute in my country. I believe that is a rather sound conclusion.
The second conclusion is not sound: the energy is not wasted, since somebody else will use it. I do not get reimbursed, that is true, but that could also lead to other beliefs, like I need a way to store the energy I generate for later use.
What am I assuming and why?
I seem to assume that the meteorological institute is in the position to inform me about observed climate change.
I also seem to assume that I generate more energy than I can use in periods of a heat wave. I must admit that I do pay for the electricity that we use on top of the electricity we generate so that does not seem to be completely valid.
Are my assumptions valid?
I believe my assumption about climate change is valid.
My assumption about the excess energy we generate might not be valid. By now I am wondering how I came to that conclusion.
What data have I chosen to use and why? Have I selected data rigorously?
By now I must admit that my assessment of our energy consumption might not be rigorous. I have to repeat my homework on that one.
The climate change argument seems to hold. However, did I select my data rigorously?
For instance, recently I learned that the cooling agents used in air conditioners, HFC’s, are greenhouse gases. HFC’s used as cooling agents in the air conditioning of cars for example, have a greenhouse effect that is 1,300 times larger than CO2. HFC’s are released primarily at the end of the lifespan of air conditioners or refrigerators. The more air conditioners are installed, the more HFC’s are accumulated in these appliances to form an additional risk for climate change. (RIVM.nl)
Air conditioning also pumps out heat straight into the atmosphere. Like a fridge, it takes heat from the inside of a building or car, then transfers it to the warm outside. That extra heat makes cities hotter, raising night-time temperatures by up to 2C, which then encourages people to turn up their air conditioning even higher. (The Guardian, 2016)
But what do I care? I base my decisions on my observations of my environment (increased temperatures and prolonged periods of extreme heat) and the stimuli I receive (how I feel when the temperatures reach past 35 degrees Celsius), and make my decision.
And that is the point I wanted to make: that all these individual decisions lead to market outcomes that we would label ‘market failure’. We are often inclined to ascribe that to ‘imperfect information’. But from the example above and my rather selfish stance we learn that ‘perfect information’ might not change my decision to buy air conditioning, since this information does not impact me directly – the air conditioning does not raise the temperature in my home, but decreases it -, and the consequences – climate change – do not come to pass in the foreseeable future – the average lifespan of an air conditioner is about 15-20 years.
This made me think of a rather famous quote of Adam Smith: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”. It is not my humanity, but my self love that will make me decide to buy air conditioning, and apparently my mental model is such that this is how it should be.
Mental models are the most impactful place to intervene. But how to intervene when a more rigorous assessment of the data only implies a long term effect? How does this translate to my short-term prone mind? More importantly, how to intervene when I hold the firm belief that if everybody put their own self-interest first, the outcome for the society as a whole will be positive? With the story above in mind, this might be something interesting to discuss in the classroom.