Monday, January 30, 2012

revealed preferences to the rescue?

So there's this myth among the American liberal elite that Europe has a higher standard of living despite working less (yes a myth, even moving beyond the purchasing-power-adjusted GDP-per capita numbers, which show most concisely how dominant of a success story the United States is.) The core of this myth is that Europe traded work hours for leisure time and that this leisure time makes up for the loss of income.

But despite the valiant attempt of the above-linked paper, measuring utility meaningfully and broadly is really impossibly hard, and the ideal comparison wouldn't even try to make these accounting adjustments like how-much-American-spending-doesn't-contribute-to-welfare and how-much-more-value-are-Europeans-getting-from-their-government-for-their-extra-taxes and so on. Ideally, we would want revealed preferences to tell us the answer.

This is also really hard because people aren't able to make decisions on the margins relevant to these international comparisons. But what if we limit ourselves to strictly the question of whether four extra weeks of vacation time is worth the drop in income?

Are there median-earning jobs in which hours worked are truly chosen on the margin equating leisure time with work time? I can't think of a good example. Entrepreneurs fix their own work schedule but realistically they have to work all the time to stay afloat. Cab drivers set their own schedules but don't make enough money to be a median earner; likewise for any other flexible-hour job I can think of. A small number of jobs during the last recession instituted a policy change in which people could choose to work less for less pay, but with job security in a tight job market of the utmost concern, I'm guessing that most people who would love that option normally were too afraid of signaling their lesser commitment or their dispensability  or somesuch to actually take it.

Better ideas? Is there a paper that already tries to do this?

If we could find people in the U.S. who make $35,000 (or whatever is median per capita or median per household) and take six weeks of vacation but who could take less vacation and earn $10k more, I would believe that the European model is making people better off on average. I doubt this is true (even though I want it to be true, because it would be true for me, and I would like work norms to line up with my own preferences...)

(Or, we might find an intermediate result, in which the median hourly wage earner prefers 3.5 weeks of vacation, in which case neither the U.S. or Europe is optimizing.)

Friday, January 27, 2012

Unix's PR problem

(I love Linux, and highly recommend it to anyone, now that it's so trouble-free, so don't interpret this in any way to the contrary :)

A friend of mine said this to me and I died laughing, as did several other people at my book club last night, so I thought the broader world might appreciate it too.

redactedomg using unix comp [at school] so horrible
Vera: why?
redactedit popped up command line after i figured out how to log in
redactedand i had no idea of any commands or how to open the internet to look up commands
redactediw as about to text you but we're underground
redactedso i pulled out my "welcome" packet and ended up typing in man -k internet | less
redactedand then it scrolled and a weird message appeared and every button i pressed made the computer beep loudly and do nothing
redactedso in a panic after many minutes i just closed the command window with the little x button
redactedand then i couldnt figure out how to re-open or even how to log off. so i just stared at this blank screened computer
redactedyou could make a movie out of it

Wednesday, January 25, 2012

externalities ⊄ market failures

This non-technical paper has a really great presentation of four ways in which externalities are often corrected without government intervention. (Oftentimes, since externalities mean that the full cost and benefit of a decision is not felt by the decisionmaker, he may make the wrong decision, and that this can lead to market failure, in which society would be better off if in sum if he made a different decision.) Even the jargon is explained along the way, so I highly recommend it to non-economists wanting to understand the topic.* To summarize:

  1. Simple Coasian internalization: Coase's theorem says that if property rights are clearly enough defined, and transaction costs are low enough, externalities will not lead to market failure. That is, if someone wants to do something (like paint their house chartreuse) that has a side-effect on someone else (the homeowners on the block whose property values drop), as long as it's easy enough for homeowners to get together and negotiate, they will either agree to pay off the chartreuse-lover not to paint his home or to pay off the other homeowners to compensate for the loss in property value. Which of these outcomes is chosen is simply which one leads to the greatest total good. It's important to note here that externalities are symmetric: you may be hurt by my smoking, but I would be hurt by your smoking ban. So, whatever the outcome, someone is going to be harmed, and the optimal outcome leads to the person being harmed who least minds it, regardless of how money changes hands in order to get everyone to agree to that outcome (because side payments are zero-sum and therefore irrelevant to the utilitarian policy analyst).
  2. Complex Coasian internalization: But, sometimes it's not so easy for parties to negotiate, or it's not even clear who owns the entities that are being affected by the externality. Lighthouses can't negotiate with passing ships about whether to provide their services, and no one owns coastal safety. Therefore, you might expect a shortage of lighthouses. But, if different groups with different motivations can combine, suddenly it might be privately worthwhile to provide that public good after all because the affected party essentially is the affecting party (and therefore transaction costs don't matter either). For example, if harbor owners also run lighthouses, now they have an incentive to provide the right number of them, because they will be able to charge harbor fees in the amount that reflects how much boats value having a safe place to go.
  3. Informal mechanisms: Basically, even without governments, property rights can be effectively defined and enforced and transactions handled through social institutions and norms. That is, the above conditions for Coase's theorem to hold don't need to come from the government. For example, no one may own the space in a common area, and it may be impossible to negotiate with everyone who uses it, but nonetheless, social norms can dictate that smokers stay in one corner away from the non-smokers, and that trespasses against this norm are punished with evil glares.
  4. The externality just may not exist at the relevant margin: This is a bit of a facetious way to argue that externalities don't always cause market failures, and I almost dismissed it as such, but actually there are plenty of contexts in which its important to remember... Basically, while some actions do cause externalities when those actions are taken at certain levels, that doesn't mean it happens at the relevant levels. It may be true that libraries are things with wonderful positive externalities, but if there were privately run libraries in every city already, it may not be true that the government needs to worry about a library shortage. Additional libraries don't add any extra positive externality on top of what the old libraries already provide. (I think #4 is worth including because of the phenomenon in which voters consider whether things are good at all but not how much of those things are optimal given inevitable tradeoffs...)

*I'm less convinced by the later argument that there doesn't seem to be an unoptimal amount of cybersecurity, and I have more to say about that, but one blog post at a time...

Friday, January 20, 2012

self-fulfilling beliefs

A particular amusing form of self-fulfilling beliefs. (In China, being born in the year of the dragon is considered good luck, and children born in that year are in fact raised better and turn out better. No such difference exists for these cohorts in the U.S. population of course.)

(Stolen from MR.)

(More on self-fulfilling beliefs.)

Wednesday, January 18, 2012

privacy and introversion at work

Read this.

My former job was the worst of both worlds - we worked independently or collaborated over email, but still had to sit in an open-plan office with no privacy (luckily, I was one of two women, so I could hide in the bathroom if I needed to really think...) It drove me so nuts I quit. Apparently this is the case for 70 percent of us now, despite the fact that the internet makes it easier than ever to collaborate without sacrificing privacy. WTF mate?

Monday, January 16, 2012

bite-sized ideas

Something funny happened recently. Tyler Cowen gave a TED talk on a topic that he also covered in a book from over a year ago, Create Your Own Economy, retitled (aptly) The Age of the Infovore when it was released in paperback. The topic was "stories"; you can see it here or read the transcript here; the punchline is that fitting messy data into stories is a misleading way to interpret the world, and one that we're strongly prone to.

The talk itself doesn't matter; the strange thing is that this talk was taken almost directly from the book, yet received vastly more attention in talk form than when the book came out. This is despite the fact that a large fraction of the talk audience would have already been exposed to it directly by having read the book (which isn't long or inaccessible or anything), and a huge majority of the audience would have been exposed to it indirectly if the idea had been recapped in the blogosphere at the time by anyone who had actually read the book.

(By the way, I'm sure this isn't an uncommon phenomenon, but the chances of me reading the book when it comes out, remembering it when some part of it takes off later, noticing it when it takes off later, and the gap in time being large enough to clearly attribute the attention to the later abridged presentation, is pretty slim for any given instance.)

Why did it happen like that? Why didn't an idea that is appealing enough to be talked about extensively now that it's a TED talk take off in its original book form? Am I misestimating the numbers and probabilities involved? If so, where and how?

I suspect, simply, that ideas presented in bite-sized form are easier to consider in a thorough manner, because we devote less attention per page to books than to blogs, because we expect blogs to present information in a denser manner. And (obviously) ideas taken out of the broader context are easier to consider independently of the broader context. And (obviously) ideas that are already in bite-sized form are easier to re-hash in a medium (blogs) that only allows for bite-sized ideas.

There's some obvious related cost-benefit analysis, but I'll let you fill in the blanks; I just wanted to point it out. If true, I'm surprised that it's so hard for the particularly appealing bite-sized chunks of books to filter out to the blogosphere.

Sunday, January 15, 2012

a string of zeroes

Loss aversion is the aspect of prospect theory that gets the most attention. A kink in the value function produces lots of neatly testable implications, so tons of empirical work studies it. And all of this collected wisdom is summarized as "losses matter a lot, but gains don't matter very much."

Loss aversion is very important: when comparing losses and gains, losses do indeed dominate individuals' decisions. But reference dependence itself is also very important, and overlooked, since an important consequence of it is a negative (lack-of) outcome: our minute-by-minute experiential utility is mostly a long string of zeroes.

We're really good at predicting what will happen to us. We plan and execute, leading to intended predictable results, and we have plenty of experience with random chance and external factors to not be so surprised by those either. How frequently are we significantly surprised? Not often. And that's how often our utility functions differ from zero.

This implies that, actually, both losses and gains are VERY important. That meshes with experience. It's true that, if I am expecting to sit in a middle seat and get moved to the window on a flight, the bump in utility is smaller than if I've been counting on a window seat and get moved to the middle. But either of those experiences has an enormous effect on my short-term happiness*, and either one is much more likely than a direct comparison between losses and gains such as is the focus of the prospect theory literature.

[Let me be more precise. There are two technical details that can interfere with this interpretation. First of all, it matters what the reference point is, and second of all, it matters whether the gain-loss value function is the same thing as the utility function (or is there is a separate standard consumption utility component.)

As to the first question, I'll jump on board with the Koszegi-Rabin version of prospect theory, which endogenizes the reference point as recent expectations. (I suppose that sounds like I'm choosing that variety in order to support my conclusion, but actually the way I'm thinking about it is that the conclusion is self-evident and that this supports their particular reference point theory.)

As to the second question, this is why I qualify the original statement with "minute-by-minute experiential". I'd rather be a millionaire (who earned their wealth in a deliberate, predictable method, never experiencing gain-loss utility in the process) who never wins anything than a homeless person who sometimes surprisedly picks up ten dollar bills on the sidewalk, but the short-term experiential utility of both the millionaire and the homeless person is dictated not by bank account balance but by small surprises.)]

*I recently had a flight in which I was assigned a middle seat, and tried to change it, but was told I couldn't. When the plane had completely finished boarding, the window seat next to me was still open. It made me so happy that I'm still excited to write about it a week later...

Wednesday, January 11, 2012

trust in government

Apparently only 10% of Americans trust the federal government to do the right thing most of the time.

David Brooks interprets this as widespread disillusionment with government and claims that this is why the label 'liberal' is broadly shunned. Karl Smith doesn't agree and provides an alternative interpretation, which rings mostly true, but doesn't address why Brooks is wrong, which is what I want to do.*

The conundrum is, why are many liberal concerns and programs are so well-loved, when they depend on big federal government, which isn't trusted?

Americans don't trust the current set of politicians in the federal government to do the right thing most of the time. But they think we just have to elect better people to make better decisions. They look to government as the only entity that has the power to enact the change they desire, and they love that this powerful tool exists. They love having a clear target to look to for help and to blame for problems. Rather than "of the people, by the people, and for the people", they see government as a parental authority who can step in when things are getting chaotic and make things right.

They just think the wrong people are running it.

I, obviously, think they just don't want to face the logical conclusion. Government attracts politicians rather than people who want to do the most good and are most competent at doing so, and then incentivizes those politicians in a plethora of profoundly distorted ways. Sometimes power accomplishes wonderful things, but mostly, it just corrupts. Electing different people won't change that. The only thing to do is to try hard to get the incentives right, be humble about the efficacy of government, be conservative about what we undertake using the tool of government, and try hard to find alternative solutions whenever possible.

*Yeah, you read that right, I definitely disagree on occasion with my favorite journalist...

Tuesday, January 10, 2012

Occupy AEA

To my immense amusement, there was an Occupy AEA (American Economic Association, which just had its annual conference in Chicago) protest. It's like watching victims of a plane crash protesting a physicists' convention.

I understand your frustration (sort of), but your anger is profoundly misdirected. There are a hundred better places to place blame than on the eggheads who are just trying to figure out how the system works in the first place.

(It's unfortunate that academic economists and policymakers are one and the same in the public's eye.)

Sunday, January 8, 2012

economics journalism

So true:
“If you laid all the economists in the world end to end, they still wouldn’t reach a conclusion.” This old joke still works because it reflects a common belief that economists can’t agree on anything important. ... 
We think there are two main reasons for the distortions. The first is the conventions of journalism itself: Although there are notable exceptions, most journalists have limited training in economics, and those who edit the articles often have even less. Hence, out of an understandable but misguided sense of fair play, there is a bias toward wanting to show both sides of an issue. When, for example, an economist tells a journalist the equivalent of 1+1=2, the writer, in an effort to provide “balance,” will often include a quote from someone who says that 1+1=3. 
Second, editorial boards don’t want wishy-washy, hedged opinions. As a result, op-ed pages are more likely to publish someone advocating an unequivocal position than someone who offers a more nuanced argument. This favors fringe views. A position that sounds new, yet is completely untested, is all the more enticing to editors, so long as it appears to challenge mainstream views.
Economics is almost definable as the study of trade-offs, and as a result the conclusions always lie in gray areas. But they lay decidedly in the gray area; there's not some confusion or disagreement about whether it's actually black or white. Insisting on a 'balanced' "some say white, others say black" view is just wrong, and insisting on a clear answer to the question "is it white or black?" is also just wrong.

Saturday, January 7, 2012

speaking of gender

I've noticed, here at the AEA convention, that in the seminars in which enough women are in attendance to actually ascertain a seating distribution, they sit disproportionately towards the back. And, since these are usually the same seminars that are full, this is not the same seating distribution as for men.

I was surprised by this since it counters my sexist prior that women tend to be more diligent goody-goodies and therefore more often prefer to sit at the front*. Is this no longer true among women who have selected into the profession of economics? Is it no longer true after a certain age? Why the switch, rather than simply a convergence in seating preference across genders? Is it just because they arrived earlier and took the rear seats, preferred by all? (I doubt that, since the emptier seminars I attended were not fuller at the back at all.) Is it just a fluke?

*which contributes to my typically contrary desire to sit at the back (in addition to the much stronger factor of wanting to fly under the radar in general...)

Friday, January 6, 2012

social norms and social image

(or 'Vera sees a nail and gleefully pulls out her hammer.')

I've never been so happy that feminism exists - the Committee on the Status of Women in the Economics Profession has the only free diet coke at this convention. Plus, it's a nice quiet room to sit and work during this two-hour lunch break.

I just feel bad for the men who furtively pop in and out for coffee while the women sit around loungingly.

It's not that you have to be female to use the hospitality room; indeed, signs advertising it as open to all are all over the place. And it's not that men are sexistly hesitant to associate themselves with a women's association; several are sitting here working or reading (just not drinking the coffee).

But there's an unspoken norm that, when partaking in a service provided by an organization, one should reciprocate at least with interest in that organization. A man may or may not be interested in promoting gender equality, but even if he is, he can't signal his interest silently (or loudly, very credibly). A woman may or may not be interested in promoting gender equality, but whether she wants to or not, she signals her likely interest simply by being female.

And so the women stay, comfortable in their plausible deniability of having violated a norm.

Tuesday, January 3, 2012

"fewer jobs are precisely the point"

Read these two posts by Alex Tabarrok; the second in particular. With "jobs" so important in national debate right now, it's important to understand this.

A key aspect of economic development is the destruction of jobs: An economy can't produce more and more value per person if everyone continues to do the same jobs; the potential gains in efficiency are very quickly exhausted. True growth comes from transitioning to entirely new modes of production or entirely new industries. In an extremely poor country such as India, fewer jobs in agriculture and small-scale retail and such things is exactly what you'd want if you want to see them transition into a richer modern society.

I caveat that sentence with "In an extremely poor country..." despite the fact that it's true for any country regardless of wealth. I just also think it's reasonable to transition from prioritizing economic development to prioritizing low-risk subsistence for the greatest fraction of the population, once you've grown "enough", whatever you decide enough is (India clearly has not). Economic development means job destruction, and job destruction means that some people lose out hard for the sake of the greater good when their job is suddenly outsourced or automated, and in a country as wealthy as the United States, I'm perfectly fine with providing a basic safety net for those people.

I'm NOT ok with sacrificing growth and economic dynamism in order to artificially preserve those jobs. Provide basic safety nets, but get rid of subsidies and tariffs and stop bailing out dead businesses just because you can't imagine a world without Detroit. The government can temporarily save jobs but only by preventing the market from creating new and better ones. Ultimately, it's a losing battle that they're making only more painful by pretending that they have the power to stop progress and encouraging everyone whose lives are at stake believe it too.*

*The high rate of unemployment now actually makes me optimistic about the eventual recovery of the American economy. It means that the government failed to halt progress and that reemployment will eventually come from true innovation and progress and reallocating labor resources more efficiently among industries. That's a much more solid foundation for the future economy than, say, a bailed-out Detroit...

Monday, January 2, 2012


If you don't like "behavioral economist" (and there are good reasons not to; all of economics is a study of behavior after all), be a "psychonomist"!

I don't know why I never thought of this, having thought "psychological economics" would be a lot better than "Psych and Econ" many times. Many thanks to Tim Anderson for setting me straight.

Happy New Year!