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Showing posts from November, 2010

Sex and happiness

Despite Chris's warning, I went to Tim Worstall's book launch today. I even bought a copy which I will review on here when I have read it (on the bus tomorrow).

But before that, I learned something nice from his answer to an audience question.

Apparently, there's a clear relationship between GDP per head and population growth. We already know that people in poorer countries have more children, and the population of those countries grows faster. It seems that there's a measurable cut-off point: at $16,000 per head of GDP, fertility drops to around replacement rate (just over two children per mother) and the population stabilises.

Which reminded me of another statistic I read recently: national happiness grows with GDP until a certain point, at which it levels off and people stop getting happier. That level? $17,000 per head*.

Now perhaps there's something important in that $1,000 difference, but the two figures are within the margin of error for cross-country macroe…

Unexpected revelations from wikileaks

Of course we are all just waiting for something really exciting to come out of wikileaks. Everything so far is either predictable (Prince Andrew criticising the Serious Fraud Office investigation of British Aerospace) or predictable (the Saudi royal family don't like Iran).

But in the meantime you can get some cute insights by reading between the lines. Here's my favourite of the day:
IRANIAN SOURCE NAMES "U.K.-REGISTERED" COMPANY [INSULTEC] AS IRAN SANCTIONS-BUSTER4. (S) Note: A quick google check revealed several companies with the name INSULTEC in the title - these may or not be affiliated. Based on the information provided by source (currently in Iran, where he frequently travels), one possible candidate could be "INSULTEC Chitral Ltd."I'm not sure if Google is the only authorised resource for US diplomats to find information, but "INSULTEC Chitral" returns nothing on Google apart from links to this wikileaks document.

The surprising disc…

Fair pricing and its effect on brand positioning

I'd guess that most of us are relatively happy to pay more to fly on or around a holiday than at other times. I'm sure those who flew home for Thanksgiving or are planning to do so at Christmas did not expect to get the same price as they would for a Wednesday afternoon in October.

Which makes this story (FT, may need subscription) slightly surprising:
India’s government has warned domestic airlines that it intends to crack down on “predatory pricing” after carriers sharply increased fares on popular routes during a recent festival, as overall passenger traffic surges.Indian travellers were outraged during the recent festival of Diwali – Hinduism’s biggest gift-giving holiday – when some carriers charged about Rs25,000 ($550) for a last-minute Delhi-Bombay round trip ticket, a route on which fares usually range from Rs10,000-Rs15,000.The price lift here is substantial (60-100%) but reasonably typical of the uplift on flights or train tickets in the UK market.

Is it a sign of a …

Why are bund yields rising? Because the ECB is doing something right

Rising German bond yields over the week since the Irish bailout have been interpreted (here and here) as an increase in default risk to the German government.

But surely there is another "risk" much more likely to explain this increase. And that is the simple risk of inflation.

The Irish bailout must make inflation more likely - through one of two routes.


One: ECB liquidity support, i.e. lending to Irish and other banks, might not be repaid - which will result in an effective increase in money supply unless the ECB then tightens monetary policy to reduce it, which would be politically quite difficult. The ECB lending is secured on bank assets, but we know that those assets might not be worth 100% of their nominal value. So in the case of a bank default, the ECB has printed a billion euros to buy an asset which repays less than a billion euros of principal.

Two: monetary policy may be deliberately loosened, either to help reduce the pressure on sovereign borrowers or simply to …

The economics zeitgeist, 28 November 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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 (this link may be temporarily down due to a server move - should be back within a couple of days).
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 m…

The price of Amazon Prime

An article in BusinessWeek about the success of Amazon Prime contains this interesting revelation:
One challenge was selecting the annual fee for the service; there were no clear financial models because no one knew how many customers would join or how it would affect their purchasing habits. The team ultimately went with $79 mainly because it's a prime number.We see this problem a lot with our clients - new product or service launches are one of the main occasions when people hire us for pricing advice. But I have never yet seen anyone argue for a price level because of whether it factorises!

Other interesting points: Amazon Prime in the UK costs £49 (not a prime number) and is one of the few items that is cheaper in the UK than the US. It also provides next-working-day delivery in most cases, rather than the two-day US service. But then, the UK is a smaller place and perhaps delivery services are cheaper in general here.

Finally, a funny quote from, of all people, a professor of …

Security theatre versus terror TV

Bruce Schneier (via Farnam Street) makes the by-now-unoriginal observation* that:
...we pick a defense, and then the terrorists look at our defense and pick an attack designed to get around it. Our security measures only work if we happen to guess the plot correctly. If we get it wrong, we’ve wasted our money. This isn’t security; it’s security theater.Probably true. But then, terrorism isn't exactly "real" either: by design, it's a theatrical exercise too. Or perhaps a reality TV show.

The clue is in the name - terrorism isn't designed to kill people, it's designed to make them scared. Thus, if we design this game for terrorists to play, they can win it just by smuggling a bomb through the security measures, regardless of whether it goes off.

Notice that all the recently-discovered terrorist plots - the shoe bomber, the underpants bomber, the soft-drinks bomber, the printer-ink bomber - have failed? If the goal is simply to make us worry, make us remember th…

Biases about economic facts

Those who defend rational expectations have some explaining to do, in the face of data like this:
...six in ten Americans think most of the money spent to rescue banks will be lost forever. Six in ten think the economy shrunk over the past year. One in two think federal income taxes have gone up in the past two years.Wrong. Wrong. And wrong.In theory, it would still be possible for rich, sophisticated arbitrageurs to bet against the public in all these areas, and thus bring the overall path of markets back in line with the predictions of any given model. But most of the wealth of the economy is (directly or indirectly) under the control of the people who have these wrong impressions; so I think it unlikely that rational expectations can effectively operate. Especially since the errors are not random, but systematic; Derek Thompson in the article above has five explanations for why this might be.

David Laibson gave a fascinating talk on this topic at the Geary Institute on Tuesday; he in…

The dreaded Could of the economist

Robert Peston inadvertently highlights a common journalistic trap today - a trap laid for them by a frequent and annoying habit of economists.

David Walker, author of last year's Walker Review on bank governancehas written in the FT that:
"[A]ny attempt to require banded disclosure for UK banks in isolation would be commercially sensitive vis à vis their non-disclosing competitors elsewhere. It could also stimulate higher executive turnover, and (as a perverse unintended consequence) lead to higher remuneration as a defensive retention measure." [emphasis mine]What exactly do "could" and "would" mean in this context? They have a very specific meaning in economist rhetoric.

Would means: is guaranteed to have the following effect on an unobservable variable. Note that Walker can confidently state that this is "commercially sensitive" because there's no way to measure, confirm or deny whether that is the case.

Could means: creates an incenti…

The economics zeitgeist, 21 November 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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.

SJDM posts

DraftFCB's Institute of Decision Making is at the SJDM conference too, and tweeting on tag #SJDM if you want to keep up with some of the interesting research results in real time.

Today's highlights for me were:

Martin Hilbert of USC has built an information processing model which can potentially explain seven different cognitive biases. In the model, external signals are stored in memory; and then retrieved again when required to make a decision. Assume that the channels into and out of memory are subject to random noise, and then place the following two constraints on the noise: first, that there is less noise than signal (i.e. our beliefs are more likely to be close to reality than not) and second, that the noise is symmetrically distributed (unbiased). From these assumptions, we can derive Bayesian likelihood, placement bias, subadditivity, hard-easy, overconfidence and conservatism effects. Martin also predicts a seventh bias which has not yet been observed, which he calls…

Sarah Lichtenstein tribute

In St Louis for the SJDM conference and the first event is a very interesting 2-hour precis of the career, contribution and personality of Sarah Lichtenstein.

I hadn't realised she (and her long-term collaborator Paul Slovic) had such a critical influence on the development of the Judgment and Decision-Making field. I've come across her work before, of course - if you have read much in this field you are unlikely to have avoided her. But I often read and remember a result without taking note of who was responsible for it, and I've noted many of the key experiments and theories that she and Slovic carried out, without realising they all came from the same team.

I'm not sure whether the tribute was due to some particular occasion or anniversary, but you'll be pleased to hear she is still alive and well, as is Slovic and the several other pivotal researchers who spoke about her work. Slovic, John Payne, Chris Hsee, Eric Johnson, Elke Weber, Robin Gregory, Ellen Peters…

Was Britain really better in the 1940s?

Andrew Sullivan approvingly quotes Barry Eichengreen on Britain:
[Britain] failed to develop a coherent policy response to the financial crisis of the 1930’s. Its political parties, rather than working together to address pressing economic problems, remained at each other’s throats. The country turned inward. Its politics grew fractious, its policies erratic, and its finances increasingly unstable.In short, Britain’s was a political, not an economic, failure. And that history, unfortunately, is all too pertinent to America’s fate.Now there's no doubt that Britain's political parties (once they got over six years of intensive cooperation during the war) did engage in a debate about how to run the country. Partly about its role in the world, but more importantly the nature and extent of the welfare state, the kind of industrial policy to follow, and how the education system and the country's infrastructure should be built. Its most important decision about its "role in t…

New York, Wednesday-Friday this week

I'm attending the SJDM conference in St Louis this weekend; and will be in New York from Wednesday afternoon until Friday afternoon. I would quite enjoy meeting and chatting with any US-based readers, either in NYC or at the conference. If you fancy meeting up, post a comment here or email me.

The economics zeitgeist, 14 November 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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.

What have the Normans ever done to us?

I thought I'd seen it all.

But no. Commenter "zadok" on Robert Peston's blog has discovered the real culprits behind Britain's economic malaise.

From comment 5 on "Can the UK close massive deficit with China?":
The english ( anglo saxons ) are the most inventive people in the world but unfortunately,like everything,the normans highjacked their flair and trashed it.(Punctuation and spelling in the original)

I have seen the Americans blamed; the Labour government; the Tory government; the Chinese; the rich; the middle class; the unemployed; the banks; the EU, the IMF, the World Bank, the capitalists, the socialists, the communists, and even the behavioural economists.

But it never occurred to me that it could have been...the Normans.

The dangers of selective reporting

The Wall Street Journal's RTE blog (via Paul Krugman) has been spluttering about being misrepresented by Sarah Palin.

RTE criticised her for saying "everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so". In fact, RTE pointed out, inflation in food prices has been at a record low this year, of just 0.6%. General inflation is also low, at 1.1%.

Palin - and I have to give her credit for this - responded quite cleverly to RTE by citing the Wall Street Journal itself, which said in an article last week:
"an inflationary tide is beginning to ripple through America’s supermarkets and restaurants…Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months"RTE correctly points out the facts of the matter: beef is up, but bananas are cheaper; producer prices are up but retailers have not yet passed them on; the catering industry is increasing quality and offering premi…

The economics of getting off a train

A surprising article on the BBC today, explaining How to get off a busy train. I guess the BBC does have an educational mission.

But however obvious getting off a train might be, reading the article prompted a few ideas. The article is mainly about how passengers should behave, but acknowledges the role of the train's design in influencing that behaviour. And some of those design choices are very reminiscent of the "choice architecture" discipline we know from books like Nudge.

But this is a problem we wouldn't normally associate with economics at all. It's a product design - or even an architecture - question. So is the domain of Nudge really economics? Or is it in fact design, ergonomics or something else?

The stuff of economics is normally about how we allocate our wealth and material resources; about how we respond to incentives; how we trade and deploy limited amounts of capital and labour to produce maximum utility.

Design problems, on the other hand, are a…

How are beliefs about growth formed?

Two articles this evening lead me to ask the question: how do we predict GDP growth?

Before reading on, why not ask yourself this question: what do you expect next quarter's GDP growth figures to be? How about the next 12 months? And why? I'd be interested to see some of your answers in the comments to this post - please also say which particular GDP figures you're predicting (personally I'm most familiar with the UK and US figures, but would be interested in comments from the eurozone and other regions too)*.

I'm not going to test you on the accuracy of your forecasts: I'm more interested in the prediction itself, and your reasoning, than whether it turns out to be right.

My prompts for thinking about this are:
a paper Roger Farmer sent me this evening, introducing the concept of a belief function describing what people expect next year's growth and inflation figures to beDavid Smith's blog excerpt of his Sunday Times column today, in which he discusses…

The economics zeitgeist, 7 November 2010

Image
This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the 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.

UK economics blog rankings

With the imminent release of an 'Economy' category on the Wikio blog ranking site, it may be time for me to update my list of UK economics blogs. I hadn't even heard of a few of Wikio's top 20 (though as Richard Murphy points out at that link, some of them aren't really about economics).

I'm pleased to be on the list and especially flattered by Paul Mason's comment here. Paul is perhaps the black sheep of the BBC's three main economics bloggers and all the more interesting for it, so I'm very pleased to hear he is a reader.

The most surprising omission for me is Stumbling and Mumbling - Chris is one of the best economics analysts in the UK blog scene. And I'd have expected to see Tim Worstall on there, for his traffic levels and profile at least. They both seem to be listed under Politics instead.

Congratulations to everyone on the list and I look forward to some friendly rivalry with you all in moving up the rankings.

Update: By my count, I'…

Moral posturing versus QE2

I've had a go at Allister Heath in this blog before. Looking back, I realise that it was on the same subject as today's post: quantitative easing.
As I read his column in City AM today, I wondered: when I disagree with someone this much, and yet he is so sure of himself, should I question my beliefs? So I questioned them, and read the column again, and realised: no, 90% of macroeconomists are right, and Allister Heath is wrong.
Heath argues with conviction that the Federal Reserve's "hubris" will cause inflation without helping the economic recovery. It's a version of the Austrian story: the economy must undergo a necessary recalculation, restructuring, reallocation of resources, before a recovery can happen. Stimulus will just paper over the cracks and maintain the distortions in the economy.
There are reasonable arguments that this may be true of fiscal stimulus (though on balance, I don't agree with them). But monetary stimulus (including QE) can hardly b…