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Showing posts from January, 2010

The economics zeitgeist, 31 January 2010

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This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.
The words moving up and down the chart are listed here.
I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.
I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.
If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Are governments more rational than citizens? Well, yes

Here we go again.

Every so often, somebody reads about a policy idea based on behavioural economics and thinks they're so clever to have come up with the following counter:
"Well people may be irrational, but people who work in thegovernment are just as irrational. Therefore their attempts to regulate will be just as flawed as the behaviour they're trying to fix."Now to be fair, Chris Dillow is clever, but he falls into the same trap here. Of course politicians and civil servants make many incorrect judgments, and have the same cognitive biases as any of us.

But this is irrelevant. We don't expect physicists and engineers to be immune from the law of gravity. Yet we still trust them to design planes that can help us transcend our own gravitational problems.

The goal, of course, is to design a limited number of interventions to help achieve agreed-on social goals - designing them carefully, rationally and with sufficient time and thought to avoid as many cognitive …

Is behavioural economics moralising?

A slight misunderstanding here (in my opinion) from datacharmer at the Bluematter blog.
Tim Harford: "...[was too fascinated with] behavioural economics. But the financial system did not fail because of some psychological trait, but because it was riddled with damaging incentives"


In other words, let's get over evil bankers and the belief that moralizing will change the world, and let's focus on incentives.
But behavioural economics is not about moralising, nor is it about blaming individuals for making mistakes in the hope that they won't make them again.

It's about understanding why and how people behave the way they do; so that when we do design incentives, they will work.

Of course people respond to incentives. What else would they respond to? But if you think they respond consistently, transitively, stably, and (in the technical economic definition) rationally*, to incentives, you'll be sorely disappointed.

Even the most famous examples of Nudge-style p…

Science versus Europeans

I loved the, er, fair and balanced tone of this article (via Marginal Revolution):

Obsolete and disproved Marxist and socialist thinking also remained strong within European universities, including in economics departments. Many young economists, scientifically oriented and so recognizing the superiority of free markets, found the climate intellectually stultifying [my emphasis]
What fun.

While the article makes a valid overall point - the centre of gravity of the economics profession really is in the US, and there has been lots of old-fashioned thinking in some European universities - it's subtly undermined by the kind of assertion in bold text above.

I wanted to find out more about who was writing this stuff - after all it has the implied approval of Tyler Cowen - so I clicked on 'About City Journal' in the footer of the article.


City Journal is the nation’s premier urban-policy magazine, “the Bible of the new urbanism,” as London’s Daily Telegraph puts it. During the Giuli…

Cognitive barriers

From Lydia DePillis, via Andrew Sullivan:
It turns out that shoppers are now taking extreme measures to avoid paying that extra nickel—even schlepping groceries in their arms if they didn’t bring a backpack. The fee may drive people crazy, and the Journal may grumble about “bureaucracy,” but it actually seems to work: Stores report giving out half as many bags as they did before they started charging for them. And the reason seems to be rooted in how our brains operate...And this is why micropayments will be really hard to implement.

Big Ideas: The future of news

The Big Ideas talk this month was about The Future of News, presented by Tim Luckhurst - former editor of The Scotsman and now professor of journalism at University of Kent.

Although the discussion wasn't the most enlightening use I've made of an hour and a half in the last month (or even today), it threw up a few intriguing points:
That subset of "citizen journalism" which relies on unpaid, part-time people is unlikely to replace paid journalists in uncovering real stories - or, increasingly, even in the comment-and-opinion world. Indeed, I notice very clearly the differing impact of articles on this blog, between those which I've researched thoroughly and spent real time on, versus those which I dash off in half an hour as summaries of other thoughts. The correlation isn't perfect (this article is my most popular ever) but the ones that people have really commented on, and which have found their way onto places I care about, are mostly the ones I've made…

This blog posting is not a hoax

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If you received a message on an online networking site with the subject line "This letter is not a hoax mail" what would you think?

Especially if it is from someone with the job title "Bank Manager, Amalgamated Bank Ltd"?

Hmm.


The economics zeitgeist, 24 January 2010

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

The words moving up and down the chart are listed here.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Price trickery with T-shirts

Ed Kless at Verasage presents an interesting retail pricing scenario and asks for suggestions. Best to read his post and look at the pictures before continuing, otherwise the following will not quite make sense.

If you're reading offline, here is his summary of three racks in a clothes shop:
The first offered two tee-shirts for $30 or $19.50 each.
The second, right next to it offered two tee-shirts for $30, but no mention of individual price and the third rack had individual tee-shirts for $15 each.
My thoughts:

I've noticed recently that a few places which charge "$N for two" will happily sell you a single one for $N/2. If there's no price for the single item then I imagine this would be the default policy.

I'd suggest that the existence of these two apparently redundant offers is metered price discrimination - capturing people with a higher willingness-to-pay by selling them an extra product rather than charging a higher unit price.

The $30 vs $19.50 just seem…

Music, love and numbers from Marginal Revolution

Happy birthday to Tyler Cowen, prime mover behind the Marginal Revolution blog (sorry Alex, but you just don't post as often).

In honour of Tyler and MR, clearly the emperor of economics blogs, here are a few recent pages which I discovered via his targeted link-collecting.

Unlike Tyler I think this research gets to the heart of exactly why music works psychologically. I don't know the UCL or Goldsmiths people involved, but will try and find out if they work with my friends from the Judgment and Decision Making seminar.

He also links to an interesting post from okcupid, a site I am (ahem) familiar with.

And this fascinating if tenuous link about number sounds, from the Barking Up the Wrong Tree blog which I hadn't seen before, also comes via him.

Finally, you can't go far wrong by picking and reading a random article from MR and thinking through the conclusions (though Tyler has usually done that for you too, which is a pretty efficient use of scarce cognitive resource…

Wolf's wisdom and the appeal of authority

In a difficult moral situation, we like to have someone to tell us what to do. The hard work of weighing up factors and working through the consequences of our choices is confronting - not least when the conclusions risk conflicting with some existing assumptions about the world or ourselves.

This is where I find myself with respect to the Icelandic banking crisis.

I generally think the UK government - especially the civil service - is pretty sensible, well-intentioned and respectful of markets and the rule of law. Thus, the idea that they might have attempted to extort money out of an innocent little third-world country like Iceland raises my cognitive dissonance hackles.

The Icelandic government has done what most governments would have done in their situation - put a hold on everything while they try to sort it out and decide how much of their banks' liabilities they will stand behind. The UK's reaction - invoking anti-terrorism legislation to freeze several billion pounds …

Most popular blogger in the world

Do you know who the most popular blogger in the world is?

No, not me (thanks for asking).

Not Paul Krugman, Dave Winer, Perez Hilton or Cory Doctorow. In fact, I had never heard of him, and I suspect most of my readers won't have either.

His name's Han Han and his blog in China has accumulated 306 million visits. Oh, and that's just one of his careers. He's also a racing driver. And he gets away with (literally) giving the finger to senior Communist Party officials.

This FT article has some further amazing facts about him. It seems that he is so popular the Party would find it difficult to close him down. In turn, he doesn't step too far out of line. But the whole story is very revealing of the evolving dynamic of speech in China.

Quotations that are impossible to believe

I saw this somewhere:
"We cannot live in a world that is not our own, in a world that is interpreted for us by others. An interpreted world is not a home. Part of the terror is to take back our own listening, to use our own voice, to see our own light." - Hildegard of Bingen (1098-1179)
The ridiculousness of this almost makes me angry. How could this possibly have been said in the 12th century? It's just not remotely credible. At best it's a highly distorted translation of something in Old High German via Heidegger, Simone de Beauvoir and any number of new age Californians.

But this is hardly unusual. The idea that Einstein said "The definition of insanity is doing the same thing over and over and expecting different results." is insulting to Einstein, as well as to insane people. And if Mark Twain said everything that Mark Twain said, he'd never have had time to write any of his books (let alone all those short letters).

It's very convenient to adopt…

The economics zeitgeist, 17 January 2010

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

The words moving up and down the chart are listed here.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Cognitive/behavioural links

A few links today:

Eric Fairfield, whom I met over at the Environmental Economics blog, is working on some ideas that are resonant with mine - local rationality, cross-disciplinary influences from physics, computer science and economics, and cognitive agent modelling. Not much detail on his blog yet, but some tantalising hints. We'll be speaking soon and if there's anything more I can say publicly, I will.

Text-message donations to the Red Cross in the US have raised $8 million for Haiti relief in 3 days. Consumerology thinks this is a lot, but I'm not sure that it is. Compare to (say) the 2004 tsunami - after which the Red Cross raised $1.4 billion in a month or the equivalent of about $135 million in 3 days. Admittedly this is a worldwide figure - but the US number would probably have far exceeded $8 million.

There's a more interesting story here than just whether text messages make it easier to donate - the effects of booms and recessions on donations, disaster fatigu…

Will banking be more stable? Is that a good thing?

In an intriguing example of pricing an externality, Barack Obama has announced a plan to tax American banks based on their reliance on the wholesale finance markets.

On a related subject, Nick Rowe has a neat analysis of finance as magic - the magic of borrowing short and lending long, sharing risk and creating liquidity.

To make this magic work in a more stable fashion, it's understandable that governments would want to encourage banks to move from wholesale to deposit finance. Assuming it works, what are the effects of this move likely to be?
The coordination game between multiple owners of capital will work better, for two reasons. First, because no individual will have as much power as they do now. Second, because the more finance is provided by millions of depositors (instead of a few hundred managers of wholesale capital) the more statistically predictable their behaviour is likely to be. Even when there are herd changes in depositor behaviour, the movement of a larger, more …

Inflation as a cognitive forcing mechanism

Something just struck me when reading Scott Sumner's latest (this often happens - if you're genuinely interested in macroeconomics and not subscribed to Scott's blog yet, you should be).
For instance, if wages are sticky it may lead to suboptimal real wage movements.
The reason why we think inflation is good for solving recessions is we believe it helps to overcome wage stickiness (NGDP, Scott's preferred target, does the same but also has a useful extra effect on the incentives for, and risks of, investment).

In other words, recessions sometimes happen when people are in jobs which are no longer as productive as they used to be (or making products that people don't want so much). In a completely efficient market, their wages would fall, product prices could fall too, some people would move to other jobs and supply and demand would balance at the point of highest output. But in reality it's hard to reduce wages - because of both employment contracts and habit or …

Left, right and wrong economists

A comment from Joshua Corning on this Environmental Economics post says:
Also it should be noted that many economists are politically neutral and are simply painted by the left. The idea that there are libertarian, conservative and leftist economists is false dichotomy (trichotomy?). The reality is that there are economists and there are left wing economists, with the left wing economists trying to paint everyone who produces work that conflicts with their ideology as being right wing.
This comment is hilarious on its merits - just replace "left" with "right" and vice versa to see an equivalently absurd statement that would be equally happily accepted by a different group of people.

But it raises a sort-of valid question: what does it mean to be a left-wing or a right-wing economist? In two conversations recently I've felt the need to make excuses-in-advance for an economist whose work I was recommending, but who is well to the right (in the libertarian sense) of…

Subsubsubclauses of the day

Paul Krugman is a great writer. And a pretty good economist. But just as as good economists can occasionally say silly things, good writers sometimes lapse too.

How long does it take you to figure out this sentence outside of its context:

Still, I think it’s important that just because I think Europe does better than Americans imagine doesn’t mean that it does everything right.
Can you count the nested subclauses on less than two hands?

The economics zeitgeist, 10 January 2010

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

The words moving up and down the chart are listed here.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

More on Amazon pricing

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You might remember a previous discussion of Amazon's pricing policy. I came across a further thread about it on...Amazon's own website! I hope that guy with the last comment is doing it for research purposes and not because he thinks it will save money.

Some theories from that discussion: currency fluctuation (which is plausible); stock position of different suppliers (not so much); testing of the demand curve via small price adjustments (quite an interesting hypothesis and certainly possible); and adjustments to changing demand (if true, would reveal a surprisingly detailed understanding of demand for individual books - but you never know).

Another possibility: it could be driven by competition - but as the market leader, it's less likely that Amazon adjusts its price to competitors than vice versa. Maybe then they deliberately make frequent pricing changes to stop competitors from finely undercutting them. Anyone know whether competitors can use Amazon's API to get r…

What's a generalised devaluation?

Interesting but depressing Paul Krugman interviewInteresting but depressing Economist cover storyI was going to write about bubbles, but an almost throwaway point from the Krugman interview led me into thinking about devaluations instead. He suggests that Spain might need to (as Estonia has already done) reduce wages and prices across its economy to regain competitiveness, because they can't take the shortcut of devaluing their currency. And this, as he points out, is going to be difficult.

Devaluations were a concept that used to fascinate me as a teenager (OK, maybe I was an odd teenager - but in my defence this was before I had a girlfriend). The topic hasn't been as prominent recently, except in the debate on the Chinese-US exchange rate.

But Krugman's comment started me wondering just why it should be so hard to achieve a cut in prices these days. After all, wages and prices are just nominal values; yes, there are costs to changing them but they're not that high w…

A joke so obvious I feel wrong to even mention it

Politicians called Mrs Robinson should know better than to have toy boys.

That is all.

Cognitive economics

I have hinted here that what is often called behavioural economics would be more fruitfully examined in conjunction with cognitive economics, the study of thoughts, beliefs and decisions, and their economic effects.

Recently at Inon we've been developing a model for cognitive economics. It integrates the preference-based approach of conventional economics and a model of beliefs or awareness which we call the attention function. This model promises to offer explanations for a number of cognitive and behavioural phenomena which don't fit into the neoclassical model, and should also be abstract enough to be generalised to higher level economic structures.

Today I've found someone else who agrees with the cognitive/behavioural distinction: Marco Novarese. The link is a page about developments in cognitive economics (mostly in the last ten years). This paper is a good outline of some of the issues in the field - though the paper itself proposes no cognitive theory that is gener…

John Prescott's related videos

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Yesterday's blog was delayed by snow and is still stuck on the A3.

Today I was watching a video of John Prescott (which was not very exciting, but feel free to have a look). At the end, however, something much more interesting happened. The "Related videos" list showed me some rather surprising results:



What has John Prescott done to deserve this? Is there a secret striptease video of him on Youtube? I think we should be told.

Economic etymology and the AEA

In a WSJ article about how economists are cheapskates at the AEA conference, the following unusual error appears:
Think of the person who orders the most expensive entr[eacute]e at a restaurant, knowing that the check will be shared equally among companions.
I find myself trying to pronounce the typo. Is this where the word 'entrecote' comes from?

More seriously, and yet somehow also less:
Cornell University economist Robert Frank, working with a pair of psychologists, mailed questionnaires to college professors asking them to report the annual amount they gave to charity. Their 1993 paper reported that 9.1% of the economists gave no money at all -- more than twice as many holdouts as in any other field.
Note that twice as many reported holdouts is not the same as twice as many holdouts. Many economists, I have no doubt, are proud of their lack of charitable giving and much happier to admit it in a survey than others might be.

And one more piece of odd speculation:
Given their unde…

The economics zeitgeist, 3 January 2010

Image
This week's word cloud - the first of 2010 - from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

The words moving up and down the chart are listed here.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Is the Ponzi game over?

Does this story sound familiar?
Debt rose to unsustainable levels in 2007Imbalances in the world economy reached unprecedented levels - the Chinese trade surplus approaching $1 trillion, American public deficits around half a trillion dollars...Oil and other commodities soared to historic highsThe financial system became overleveraged on the assumption that a permanent era of stable growth had been reached; removing the margin of error for slowdownsThe whole system reached a high-water mark and fell back; banks and the rest of the financial industry were unable to cope with the failure of a few highly leveraged firms; and we ended up in an 18-month recession.

But is it true?

Why do we think that household debt at 150% of GDP, or oil at $150 a barrel, or US public debt of $10 trillion, is unsustainable?

I'm quite prepared to believe that enough people were worried about debt to stop accumulating more of it; and that this was a contributing factor to a slowing of monetary velocity wh…

An Austrian review

I’ve spent some time over Christmas reading a comprehensive review by Mario Rizzo of recent work in Austrian economic theory. Regular readers might have noticed that, though this is a school I broadly disagree with, I have given it a lot of attention. It does seem to hold a fascination for me.

I think the reason for this is that the founding thinkers of the Austrian school picked some really important issues to think about, and I instinctively agree with their choice of territory. Here is the list of topics Rizzo identifies:
“(1) the subjective, yet socially embedded, quality of human decision making; (2) the individual’s perception of the passage of time (‘real time’); (3) the radical uncertainty of expectations; (4) the decentralization of explicit and tacit knowledge in society; (5) the dynamic market processes generated by individual action, especially entrepreneurship; (6) the function of the price system in transmitting knowledge; (7) the supplementary role of cultural norms and …