I describe the forms of madness and give them learned names, says economist Jakub Steiner

Traditional economics views people as reasonable beings who make their decisions in life based on what they actually want and what’s best for them – disregarding the fact that people are slightly crazy and make mistakes. This is where behavioural economics comes in: it takes this into account and builds its models based on the latest findings on how humans work. Jakub Steiner is one of the stars of this field.

Read the story in the Czech translation here.

He studies and names the ways in which people perceive different types of information and adapt their behaviour. His original take on the matter and his novel ideas won him the prestigious ERC Consolidator Grant and gave him a strong voice in the critical stage of the pandemic.

His career path has been idiosyncratic and far from straightforward. His first destination was theoretical physics. However, he eventually grew tired of orbitals and atoms and took a step sideways as a pioneer outreach worker helping Roma families when community outreach was in its infancy. This experience helped to direct him to his current career as an economist at CERGE-EI. 

He has always kept a toe in international waters. Previously active at The University of Edinburgh in Scotland and Northwestern University in Chicago, he now spends three months of the year at the University of Zurich.

His path and choice of research topics have been influenced by more than just the current global science trends. His research has been inspired by his life experience, including a revolution, his work with the Roma community and a serious illness and death in his immediate family.

Mathematics as a tool and a place to hide

Jakub Steiner was born in Bratislava, in the Slovak part of what was then Czechoslovakia. Although he comes from a family of lawyers, his father did not follow the path of his forebears and left the world of laws for the world of numbers, equations and abstract thinking. “I guess it was a way to be a bit freer during ‘normalisation’,” says Jakub Steiner, referring to the reversal of the political reform process in Czechoslovakia in the 1970s and 80s.

He attended an experimental mathematical class at his primary school in Bratislava, where his teachers were university lecturers who could not find a better position due to political pressures. “They taught us advanced concepts using a playful method: they would let us discover them with riddles and puzzles. That was nice; it created a sound thinking culture,” says Steiner. Some of his classmates went on to become artists and journalists, such as the author Miroslav Hvorecký.

“Mathematics was a hiding place for an interesting group of people. I don’t think I was especially talented, but it came in very useful once I moved to social sciences. Although I don’t study mathematics as such, I use it as a tool,” he explains.

When he turned sixteen, his parents concluded that the future of the newly independent Slovakia under the Prime Minister Vladimír Mečiar did not look particularly bright. Although their decision met with little enthusiasm from the teenage Jakub, the whole family moved to Prague in the Czech Republic. Once Jakub completed secondary school, he enrolled at the Faculty of Mathematics and Physics at Charles University, locally known as “matfyz”. 

“As an introvert, it took me a while to put down roots again. The turning point came when I became friendly with the Roma and the Roma rights activists and students who were organising after-school activities for Roma children. This is where I found friends that I’m still close to,” says Steiner. 

Although he was good at physics, it started to lose its charm as he neared the end of his studies. He looked for a way out and was drawn to the more “human” social sciences. Economics was an obvious choice: it is quite abstract, involves a lot of maths and, surprisingly enough, it is actually inspired by physics. 

Despite appearances to the contrary, this was far from a chance outcome. The Institute of Theoretical Physics spawned several leading Czech economists from among Steiner’s peers, including Steiner’s colleague Filip Matějka, Michal Fabinger – a Harvard graduate who currently works in Tokyo – and Jan Kulveit, an Oxford expert on global risks who, like Steiner and Matějka, lent his expertise to Czechia to help fight the coronavirus pandemic.

“The graduates of this institute are good at using mathematics to study something abstract. And since theoretical physics is very hard and perhaps a little stagnant – it is difficult to come up with new discoveries – people often switch fields and make great progress somewhere else,” explains Steiner. 

Huge experience of a dreamy kid 

His path eventually led to a study programme at CERGE-EI (Center for Economic Research and Graduate Education – Economics Institute), which is an academic institution that provides postgraduate education modelled on US universities and conducts research in theoretical economics and economic policy. But before that, he took what later turned out to be a key break. 

“After ‘matfyz’, I didn’t really know what to do next. I just didn’t want to go work in an office – but at the same time, I wasn’t really drawn back to school at that point. I enjoyed working with Roma families so I talked the non-profit People in Need into accepting me for alternative civilian service,” recounts Steiner. 

It wasn’t a complete step into the unknown for him; he drew on his experience from his student years when he and his friends would organise activities for the Roma children in the Prague neighbourhood of Smíchov. They would teach them to swim and ride bikes and run summer camps for them. “We got to know those families better and we knew that the problems the children had to deal with did not stop at poor school performance,” says Steiner.

His civilian service took place around 2000 when the development of community outreach services was, as he calls it, in a 'prehistoric' stage. Having workers see people in their homes and visit marginalised communities was a brand-new concept. 

“These days, they have a large professional team; back then, we were a small group of people, mostly Romas, led by the musician Vojta Lavička (editor’s note – a member of the band Gipsy.cz) who were trying to figure out how to provide this service. I visited Smíchov families living in ex-council flats that had been sold by the local council to a private owner under suspicious circumstances. It was expected that the new owner would evict the families,” says Steiner and, for the sake of fairness, adds that many of the families did not pay their rent, so it was not an entirely clear-cut case of “the good guys and the bad guys”. 

“Be that as it may, the families needed help and they had a myriad of problems to deal with. They discussed them with me, and I helped them seek legal assistance through People in Need. The eviction process became a bit more civilised, and we helped some of the families find new homes. Many of those stories had a relatively happy ending,” says Steiner modestly. 

He also helped several thousand elderly Roma people get compensation (in the tens of thousands of Czech crowns) that they were eligible for as people ethnically discriminated against by the regimes linked to Nazi Germany. The compensation was paid by the Czech-German Fund for the Future, mostly to forced labourers. 

At that time, nobody really knew how to handle and process that. “So we started helping the elderly Roma to file the compensation applications. People in Need then took my idea and began to run a small programme that worked with the Fund. They reached out to the elderly and found ways to prove their suffering during the wartime,” says Steiner about the success he achieved at the turn of the century. It is clear to see that it still makes him happy. 

“For me, it was something huge: there I was, a somewhat dreamy twenty-three-year-old kid, and I created something that helped many people who genuinely felt wronged by the war events. Most of them were very poor as well so the money was major economic help for them,” concludes Steiner, who regards this period in his life as short but extremely valuable. 

Why did it end? “I decided to quit, based on what I think was rather sound reasoning. The way I did social work back then – intuitively and with no training whatsoever – was emotionally draining. It was crystal clear that I couldn’t go on like this for very long,” admits Steiner. 

Steiner was also put off by the general tone of any public debate about the Roma people. “You can shrug your shoulders about the abundance of racism in the average Czech pub discussion but even the expert voices failed to raise the tone much higher. There were various intellectual currents but little critical thinking. Each current held a strong view on the matter: that the segregation of the Roma was a purely social problem, or that it was purely a matter of discrimination; some argued for complete assimilation of the Roma while others wanted to start a Roma national revival. Instead of enriching each other’s point of view, the various factions barked at each other in a useless quarrel,” he says. While he admits that all the different points of view were important, he found the general tone of the discussion so frustrating that he decided to leave it. 

And he concludes: “The families I got to know back then, whether at the children’s camps or as a social worker, have remained in friendly contact with me and that has made my life richer.” 

Predictions and equilibriums 

For Steiner, the year he spent in the frontlines of social work confirmed that social sciences were the way to go. He never went back to physics; instead, he enrolled at CERGE-EI, which was looking for people with experience in other disciplines. His experience as an outreach worker also gave him a lot of food for thought. “The organisation of Roma families and the expectations they have from their members are often different than in non-Roma families. For a young inexperienced person like me who knew nothing beyond his own social environment, it was thought-provoking and shocking to see the level of social diversity that exists within the same legal system and indeed the same town. Once I enrolled at CERGE-EI, the game theory became a means of thinking about this,” says Steiner as we talk in the courtyard of the elegant historical building of the institute in the centre of Prague. 

The Velvet Revolution of 1989, which put an end to the communist regime and unexpectedly prompted a complete reorganisation of society, was a similarly inspiring experience for Steiner. “The game theory is a mathematical model of human interactions with defined ‘equilibria’. An equilibrium is a situation in which everyone makes the best decision for themselves in view of what others are doing, and each decision-making process is in line with the equilibrium,” says Steiner and adds that in both of the situations he just mentioned – in the Roma families and during a revolution – you can observe that a society can very quickly move from one equilibrium to another. 

“Later on, as a PhD student, I tried to crack the problem of self-fulfilling prophecies. How can two human communities facing the same conditions achieve vastly different social structures just because their expectations are different? This is a good topic for game theory. You can look at a self-fulfilling prophecy as a Nash equilibrium and the games that are played in a society can have more than one equilibrium that the society can move between. 

The next logical question is, what makes a society move from one equilibrium to another? This was the topic of part of Steiner’s PhD thesis and then a several years long research project that he worked on under Professor Avner Shaked from the University of Bonn, a visiting professor at CERGE-EI. 

What were his conclusions? “The trouble in the existing literature is that when there are too many equilibriums that society can move between, the model has too many degrees of freedom and it doesn’t really tell you what makes the society switch to a different equilibrium and what doesn’t. The class of models that I studied gives us the following advantage: we don’t all have all the information about what is going on around us; each of us only knows a part of what is there to know. When you enhance the model with this information, it will start to give much better predictions,” says Steiner. 

To give a practical application: one of the things the model can predict is what happens when a bank provides a deposit guarantee to its clients. Will it help prevent a bank run in the event of a crisis?

“Models can predict the impact that various incentive systems can have on the likelihood of remaining in a given equilibrium,” says Steiner who starts listing potential practical applications: “You can apply this ability to various problems, such as how to set up the banking system to make it stable, or how to look at the financial markets to make sure currencies are stable.” Political scientists can use the findings to predict the fall of dictatorial regimes.

In enhancing this class of models, Steiner created a new tool for economists, which is already being used to model the stability of bitcoin: this is because it can predict situations when different members of society react to different incentives. 

Career development in the face of tragedy 

Yet another life-changing moment for Jakub Steiner came over ten years ago when a close family member fell seriously ill. Burdened by the disease, the person began to behave irrationally and did not use the available information the way they would before the diagnosis, which led to mistakes. 

This close encounter with the debilitating consequences of a disease eventually made Steiner switch to behavioural economics, a field that he had always found attractive because it went against traditional economics, where human choices are always taken seriously. Contrary to that, behavioural economists recognise that the decisions people make are often weird, inconsistent or simply wrong. 

Steiner gives an example: “A good one-liner explaining this is that if you see somebody at the petrol station pouring fuel down their throat, they are probably not doing that simply because they want to. You might want to consider other explanations: maybe they made a mistake or are under pressure.”

The situation in his family made Steiner leave the US, where was employed at one of the top departments in the country at Northwestern University in Chicago, and return to Prague. As he admits: “From a career perspective, it was a step back: from an excellent US department that I had been miraculously pulled into, I retreated to CERGE-EI, which wasn’t doing that great back then. It was an involuntary return.” 

He decided to play the hand that had been dealt – and since it was not exactly the best, it made sense to take risks; there was nothing to lose. “There was a significant drop in pressure, which was immense in the US, where even people with excellent results couldn’t be sure of their post. In Prague, I had a reasonable salary, a decent network of international co-authors and the research routines I developed abroad. I re-started my research with more freedom – and somehow my career trajectory took an upward turn.”

His more audacious and speculative papers won the praise of his colleagues. “I discovered that my comparative advantage is not in expanding an existing model and making it more complex but rather in trying to come up with a model that allows us to study something new. It’s just more fun,” says Steiner about his evolution as an economist. 

And so he made behavioural economics his territory. When describing what he does, he compares his job to that of early naturalists: “It is similar to the early days of natural history: it describes various forms of madness and gives them learned names. I try to integrate these deviations from rational economic models in abstract models that describe the more general principles of these colourful findings of behavioural history,” says Steiner.

Confirmation bias and nudging

A typical example of a deviation from rationality is confirmation bias, which is when you approach a problem with a formed opinion and subconsciously focus on the types of information that confirm and add to what you already assume is true. 

Naturally, you also ignore any information that could sway you. As Steiner explains: “For a classical economist, this is a mystery. Economics views information as something useful for the decision-making process – but in that case, you would be interested in all information, including information that disagrees with your formed opinion, because you might learn something new. We can see that that’s not happening.” This could be one of the reasons behind the increasingly polarised society, which is also why Steiner was attracted to the topic. 

Then there is nudging: presenting people with choices in a way that is meant to sway them towards the option that you think is best. “Organ donation is a prime example. How do you express your consent for organ donation in case you die in a tragic accident? In some countries, you have the choice to opt in to be registered as an organ donor; in others, you have to opt out. Retirement plans are another such area: in the US, your employer presents you with a list of choices, but they are organised so that the pension funds that the company considers a good fit for your particular scenario are on top. Essentially, you are trying to influence other people’s decisions while preserving their freedom to choose whatever they want,” says Jakub Steiner about one of the concepts of behavioural economics. 

He calls this approach “minimalist paternalism”: policies that try to make changes to people’s lives without taking away their freedom of choice. “I feel like this is missing from the current debate about nudging: that nudging means treading on eggshells between strict libertarianism and paternalist interventions. I think that this is currently one of the major topics within behavioural economics,” adds Steiner.

82 types of madness 

The research gamble paid off: four years ago, it brought Jakub Steiner the prestigious European Research Council (ERC) Consolidator Grant aimed at established researchers whose career is well underway. He was awarded over 25 million Czech crowns to study and design models of imperfect decision-making. 

As he recalls, “When I presented my research proposal in Brussels, I had seven minutes to prove that what I do deserved attention. I actually found the grilling quite funny. The venue was a tall glass skyscraper and there were about fifteen forty-somethings in my category who had already proven their worth – and yet people in the air-conditioned room were sweating buckets like schoolchildren on exam day. 

To hold the panel’s attention, he put a funny picture in the corner of each presentation slide – designed to keep the panel members from falling asleep – and compiled a list of all the behavioural deviations from rational thinking, or cognitive biases, that were known at the time. 

“And the list on Wikipedia really goes on and on! Back then, it contained 82 items. Some of them are quite general, such as confirmation bias or optimism, where you select the information that confirms your pleasant expectations but can lead to serious errors in decision-making. But some are very specific – the one I thought was funniest was a phenomenon whose scientific name was ‘Ikea bias’. It has been observed that people place a higher value on things they have put together themselves,” says Jakub Steiner with a laugh.

His presentation achieved the desired goal: the panel agreed that we need to consolidate the information on 82 distinct types of madness into models that can account for the likelihood of each type and predict the chances that it will come into play in a specific situation or environment. 

One of the factors that won Steiner the grant were his publications in the “top five” most respected journals in the field. “Economics is quite snobbish in this regard: it places a lot of value on a very select group of journals. Essentially, half the work was done before I even applied,” says Steiner, who nevertheless took great care to prepare his research proposal. “Instead of working on existing ideas, I spent several months coming up with new ones – and those were the ones that made it into the final proposal,” he says about his strategy to win the grant. 

Whoever can snag more attention wins 

Perhaps his most successful papers were published in Econometrica – the first was published the year he won the grant and the second this August. “In the 2017 paper, we examined how people form their habits. We used the mathematical tools from information theory, which is an engineering field that was originally applied to the study of modems and data transmission. However, its mathematical framework is very elegant, and economists now like to use it to study the human mind,” says Steiner about the surprising connection. 

On the other hand, the most recent notch in his belt examines the manipulation of human attention, advertising and marketing tricks – which is still uncharted territory for economics. “Rather embarrassingly, the effects of marketing are an area where economics still fumbles around in the dark. It understands the kind of advertising that tells you about a Rolling Stones concert – thanks to the ad, you learn about the concert and buy the tickets. But it’s a bit puzzled as to why my washing powder purchase should be influenced by seeing a TV ad in between two films, although it contains no useful information,” says Steiner. 

It’s generally known that grabbing the attention of the buyer sells the product, but as Steiner explains: “Yes, we know that a yoghurt that sits on a shelf at eye level sells better than the one sitting at the bottom shelf – but we don’t really know why.” 

This is why he decided to look into the mechanisms by which attention manipulation influences our decisions: as long as they remain unknown, we cannot be sure whether such manipulation should be regulated. “Our research model contains features used in psychology and neuroscience and offers a speculative answer,” explains Steiner.

Human attention, in general, is often studied in controlled experiments, such as eye tracking where the participants watch a screen while a laser records the motion of their eyes. The subject might be asked to choose between two chocolate bars while the researchers deliberately attract their attention to one of them. It turns out that the one you examine first is more likely to be your final choice. 

“Neuroscience, on the other hand, utilizes decision-making models where your brain aggregates pieces of information that arrive from its sensors; these are usually the eyes. Some of the information supports option A, some supports option B, and your brain is taking stock of it all. Essentially, neuroscientists imagine that there are two centres in the brain: one collects arguments for option A and the other for option B. Once the neural activity in one of the centres reaches a trigger level, you pick that option.” 

Steiner and his colleagues integrated these features into their model, which examines a situation in which a decision-maker is presented with a set of options. While they are looking at each option, the cognitive process in their brain is collecting supporting arguments for choosing that particular item. “When you switch to another item, the first process is paused while another one starts running – collecting arguments for the second option. Now we speculate that the reason why grabbing your attention increases the chance of you selecting that particular item is that the process of accumulating information for that option reaches a trigger level sooner. If I attract your attention to option A, there is a greater chance that the accumulation process for that option will reach a trigger level and you will select that option, simply because you will select it before you have the chance to choose something else,” says Steiner about the competition of selection processes. “In a nutshell, by attracting your attention to a given option, I give that process a head start on the competition.” 

It is interesting to note that this observation was made ‘behind the desk’; it is an intellectual economic concept that remains to be verified. “There are a series of experiments confirming that such manipulations work; it’s just that so far, we have been lacking good theoretical explanations for why they work. We took it as a challenge and messed around with models until we found an elegant solution. Economics has been known for treating such elegant speculative – and unfounded – explanations as interesting food for thought. It remains a science that is open to good old-fashioned armchair theorising: you listen to all the empirical research data as presented to you and then speculate on ways to arrange it so that it fits nicely together.” 

Czech science only looks inwards

Although the number of Czech researchers that have been awarded an ERC grant is slowly increasing, the overall statistics on Czech research are still nothing to write home about. Why is that? Jakub Steiner suggests that it is too Czech for its own good. 

“There are large sections of Czech research that are very inward-looking. The goals that pave your way to success are sometimes also local. A professorship is conferred by a panel of Czech researchers who have their own understanding and benchmarks for their small field of interest – and they are not always the same as the international benchmarks.” 

This focus on local goals can lead Steiner’s peers away from the “game played in international research”, which can sometimes make Czech research appear isolated from other countries. “Research is a dialogue, and the European Research Council is looking for researchers who are familiar with the current international debate in their field and have a new idea that fits in with this debate. If it doesn’t, it can be hard to win the grant,” says Steiner.

His own story shows that beyond confirming the attractive and promising nature of their research, the ERC grant seal of approval also opens doors to researchers. For Jakub Steiner, the door that opened led to the University of Zurich. 

“Before that, I had a part-time position at The University of Edinburgh, which is a good university, but Zurich is closer to my research. They had their eyes on me before, but the grant confirmed that I was a choice worth considering so they took the plunge and offered me a half-time position,” says Steiner happily. His new contract allows him to live in the Czech Republic while being part of a department whose research focus aligns with his own. 

In addition, the grant won him an invitation to the group of researchers who helped formulate the coronavirus crisis plan. “Early on in the crisis, the Charles University Vice-Rector Jan Konvalinka invited me to join the testing initiative of the group of biochemists who were developing the PCR tests. I guess he chose me because he knew that my ideas on information had been ‘approved’ by an ERC grant. I became part of the network of people who worked on the Covid response and got a chance to have my say in the matter. I knew where the bottlenecks were,” recalls Steiner.

His DVTV interview last September was like a wake-up call after the relatively peaceful summer. Steiner, who shuns interviews and prefers to exercise his intellect away from the spotlight, calmly painted a grimly prophetic picture of what could happen unless the politicians slammed on the brakes to try and take the edge off the next Covid wave. The interview earned him a place in the expert team involved in the Covid response. 

Despite all the government missteps and its overall failure to successfully tackle the pandemic, Jakub Steiner says he felt determined rather than frustrated. In the end, he even found reasons for satisfaction: “I was interested and happy to see that the abstract thought models that I study and help create are useful in a crisis.”

The author is an editor of Deník N.

Translated by Jana Doleželová.