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Showing posts from December, 2010

Things to do in Denver when you're Greg

Sorry, I couldn't resist the title. If you'd like to meet Greg Mankiw in person, just head over to the ASSA (Allied Social Science Associations) meeting next week and sign up for his discussion on economic policy.

More to the point, the American Economics Association conference is also taking place at the same time. You can get an interesting insight into the concerns and priorities of the discipline by running some keyword searches on the preliminary programme, which is available here.

Some topics of interest to me:

cognitive: appears 12 times, though mostly related to cognitive and noncognitive skills, particularly with relevance to the labour market. There is one mention of cognitive biases and one of cognitive economics - which highlights a study called CogEcon of which I wasn't aware. Again though, it appears to mainly focus on a cognitive skills measure for Americans over 50, rather than a more general exploration of how cognition affects economic behaviour and modell…

Links: Cities, inequality and the ghost of Keynes

Some recent interesting articles:

A Physicist Turns the City Into an Equation is a description of an ambitious project by Luis Bettencourt and Geoffrey West at the Santa Fe Institute to develop mathematical models of the behaviour of cities (and earlier, of the physiology of living organisms). They claim to have found some strong correlations in both cases. For instance, a city that doubles in size increases its productivity and economic activity per capita by 15%. And animals that grow larger become more efficient users of energy. However, it's not clear whether they have a real model which explains these phenomena, or just some statistical correlations.

Paul Mason went to the LSE and conducted a whimsical interview with the ghost of John Maynard Keynes. As fits someone who changes his mind with the facts, he has grown out of Keynesianism and is seeking a new model which can handle fiat currencies and global finance. An excellent challenge.

Another challenge comes from Tyler Cowen,…

Banks and moral hazard: not all risks are bad

Some interesting research on banks, public guarantees and risk-taking (via the Alea blog). The researchers use a natural experiment on German banks (some of whom lost the state guarantee on their deposits due to a court ruling in 2001).

The research finds that these banks reduced the riskiness of their lending after the change (compared with a control group of other banks who didn't have a guarantee in the first place). This is what you would expect from conventional theory.

But I wonder whether their conclusion is correct:
"The results suggest that public guarantees may be associated with substantial moral hazard effects."An alternative view: perhaps banks without guarantees take less risk than is socially optimal, and public guarantees partly correct for this effect. There are several reasons why this might be the case:

Information asymmetry - the "market for lemons" argument. Businesses (and consumers) borrowing money have much more information about their own…

The economics zeitgeist, 26 December 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.

The economics zeitgeist, 19 December 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.

The psychology of bank bonuses

The FSA is expected over the next few days to publish published yesterday its new rules on bank bonuses, broadly in line with the guidelines announced by CEBS, the pan-European committee of regulators. It's likely that, fFrom 1 January, banks will only be allowed to pay a third 40% of bonuses in cash, with the rest paid as deferred claims of one kind or another - debt, preference shares or equity - which can be drawn down over three to five years.

This is meant to reduce the incentive for bankers to take risks: with a high proportion of their wealth tied up in the company they work for, they will want to ensure its survival. However, there are two questions it leaves open, as I just managed to squeeze in on Radio 5 this afternoon before they decided the 6 o'clock news was more important.

The first question is: do banks - and bankers - actually know whether their actions are risky? It certainly didn't seem that way in 2008. Investments in property that they thought were inc…

Behavioural law and economics symposium

A very strong article here (by Claire Hill, law professor at University of Minnesota) focusing on two principles: how people see the world, and how they value things. Perhaps I like the article because these two points align closely with my model of beliefs and values. The article is one of a number of contributions to Truth on the Market's behavioural economics symposium, but most of the others are entirely different in character to Hill's. The symposium is dominated by strong skepticism about behavioural economics and particularly its application by governments.

It's interesting to see the strong feelings that this subject arouses. Among the various contributors there's a mix between resistance to regulation in general, dislike of the assumption of irrationality, insistence that regulators are just as irrational as citizens, and the assertion that people know their own preferences better than any well-meaning nanny-state regulator possibly could.

Richard Thaler has w…

Microfoundations of Macro: One Direction

[Apologies to X-Factor fans: this article is about "one direction" towards a new model of macroeconomics, not about the band. But do feel free to stick around and join in the discussion.]

If you read nothing but Rajiv Sethi's and Interfluidity's blogs, and developed all the consequences of what they said, you'd get a spectacular career in economic research out of it.

Fortunately, Mark Thoma reads them - as well as hundreds of others - and has a good commentary on a recent post of Rajiv's. I won't quote the whole thing, but here is the key message. Without the assumption of a representative agent - the idea that everyone in the economy behaves identically - current macroeconomic models can't work. But this assumption misses some of the key dynamics in the economy - the fact that some people borrow and others save; the fact that different people have different beliefs and preferences - which are fundamental to both why and how economic activity occurs. …

The economics zeitgeist, 12 December 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 week, some interesting news: for the first time ever, tax is at the top of the rankings. This is especially notable as it outranks both of the common words "one" and "new" which invariably show up there. This has never happened before, with only "free" and "oil" reaching position 2 in November 2009 and June 2010 respectively.

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 RS…

Some cognitive/behavioural/neuro links

Me, very briefly, on BBC Radio 4's Moneybox (http://www.bbc.co.uk/programmes/b006qjnv). My bit is around 16:20, but do listen to the whole report by Ruth Alexander from 13:10 or so. The subject: the psychology of pound shops...I hadn't seen the Neurokuz blog before - Marginal Revolution links to a summary of an experiment on extrinsic versus intrinsic rewards. I'm rarely convinced that there's much to learn from neuroeconomic experiments, but this does show that by focusing purely on the single dimension of reward (presumably dopamine?) we can make cognitive or mind-level distinctions between people who outwardly behave the same.What does the price of a pint say about a pub?

Does capitalism "create" demand?

You may have heard this one before. At the end of an interesting BBC programme this evening (The Foods That Make Billions) a commentator suggested that the problem with modern capitalism is that it sustains itself by creating desires in consumers, instead of simply satisfying desires they already have.

Is this true, and if so is it a bad thing?

Certainly our preferences are not simple, static attributes, waiting in the back of our heads to be satisfied by the products we buy. Preferences - insofar as they even exist - are formed dynamically, influenced by biology, cognition, the environment and the social groups we are in. Would it be surprising if they were also influenced by people who sell products?

To understand if that's a good thing, let's think through some of the things that happen in a consumer's mind. Not the rational consumer which generates stable continuous utility from consumption, but a real consumer with the cognitive patterns we see in actual people. The k…

Why do new ideas fail?

Paul Krugman in "Bourbon Economics" (and his commenter Peter von zur Muehlen) complain that we've had new ideas for decades in macroeconomics, but they don't take hold.
By 1988, it was already obvious that equilibrium business cycle theory had failed. Shiller had already circulated his devastating demonstration that asset prices were much too volatile to be explained by fundamentals...nothing happened. Real business cycle theory continued to prosper, developing an increasing stranglehold over the professional journals. Behavioral finance stayed on the margins. The equilibrium guys had learned nothing and forgotten nothing...Our problem, in short, isn’t lack of nifty new ideas; it’s the refusal of too many economists to face up to the fact that some of their preferred theories don’t workI sympathise - as an adherent and practitioner of behavioural finance, I could hardly not. But it's too easy to blame this on the establishment for not listening. And really, if Kru…

The economics zeitgeist, 5 December 2010

Image
This week's (inadvertently Declaration of Independence themed) 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 i…

Nudging for health

The BBC covers the potential for behaviour change projects to improve public health. The article mixes up a few different kinds of interventions, though:
Classic nudge-style policies: changing defaults, trying to influence social norms.Incentive-based policies: shopping vouchers for dieters.Full-blown regulation: banning branded cigarette packages.The oddest thing about this confusion is the last sentence of the article:
The mandatory wearing of seat belts and the introduction of the ban on smoking in public places are two examples where legislation fundamentally altered, and some would say restricted, the choices of individuals.Some would say???

The last couple of months seem to have seen a surge in mainstream interest in behavioural economics, which is good news - but also quite a few misunderstandings about what it is.

Some people understand it better, though - for example the OFT, which has carried out some behavioural experiments and released an interesting report today about the p…