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Showing posts from March, 2010

Cognitive versus neuro models

This article (from Jonah Lerner at Science Blogs, via Farnam Street) looks quite important at first:
A recent study led by Brian Knutson of Stanford, Drazen Prelec of MIT and George Loewenstein at Carnegie Mellon [LC: a good start - I met Prelec at a seminar last year, very smart guy - and Loewenstein wrote my favourite behavioural economics book]...when subjects were shown pictures of an object they wanted...brain areas associated with anticipated rewards, such as the nucleus accumbens, exhibited a spike in activity...When the experimental subjects were exposed to the cost of the product, their insula and prefrontal cortex were activated. The insula secretes aversive feelings, and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insula excited. Apparently, this includes spending money......this data directly contradicts the rational models of microeconomics. Consumers... don't... perform an explicit…

Beyond obliquity

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John Kay's new book Obliquity: Why our goals are best achieved indirectly (whose launch at the IPA was hosted last night by Rory Sutherland) follows in the tradition of a number of recent books about decision-making and rationality. Indeed, he mentions Predictably Irrational and Blink in the first ten pages. It goes beyond them in a couple of interesting ways, but leaves some questions - perhaps deliberately - unanswered.

One of my favourite books on business is also by John Kay: The Hare and the Tortoise: An Informal Guide to Business Strategy. I'd recommend it to anyone involved in guiding the strategy of their firm. You need only read a few pages to appreciate the wisdom and insight of the author, and so I have been looking forward to reading this new book.

Kay's definition of obliquity can be summarised as:
Aim for diverse goals other than your direct objective. The companies that make the most money are not those whose primary goal is to make money.Accept the limits of…

The narrow banking distraction

Two years later, we're still hearing about narrow banking as the solution to the problem of risky behaviour by financial institutions.

In fact, most of the problems that led to the 2008 bailouts were barely related to investment banking. The primary cause of the financial crisis was a collapse in the value of mortgages extended by deposit-taking institutions.

The sheer volume of mortgage lending was indeed partly enabled by investment banks, helping commercial banks to securitise the loans. But separating those from the deposit-taking banks would not have stopped this.

So is there a way to stop this from happening again? What was it that led banks to take these risks, and why did they pose a problem for the whole financial system? Why did we need to bail them out?

The size of banks is a potential risk factor. And the Volcker plan to impose a tax on wholesale borrowing and a cap on the size of individual banks would help with this. But if, instead of ten huge institutions lending t…

The economics zeitgeist, 28 March 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.

Economists and their doubles

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Easy people to confuse:


Casey Mulligan Carey Mulligan
One is a talented young ingenue who has received lots of media coverage recently and can look forward to a prominent Wall Street role...and the other is an actress.

Forced to close!

According to this article, a pub in Plymouth has been "forced to close". How terrible! What kind of totalitarian regime must they have there which forces pubs to close?

Well, er...it's not quite like that:
The pub, the third oldest in Plymouth, was losing £4,500 a month, according to landlords Clive and Gillian Philpott."People were still coming in but they weren't drinking as much," said Clive, who sacrificed £200,000 of his own money to try to keep the business afloat."We used to take around £1,800 to £2,000 on a Friday or Saturday night. Saturday just gone we took about £75," said Clive.And after a dismal trade on Mothering Sunday which saw the business take just £300 in food and drink combined, the couple decided to cut their losses. "We kept believing it would pick up but it didn't," said Clive.Perhaps "pub forced to close" is not the right phrase after all. How about "pub owners are unable to attract customers and…

Unsolicited graphic art

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Niklas Blanchard seems to have a sideline as a graphic artist alongside his prolific blogging. He's been working on a series of unauthorised logos for blogs, covers for Scott Sumner's book and similar bits of miscellany.

I was flattered to discover that I'm one of his targets beneficiaries, with this galactic tribute to my liquidity-trap-believing, Krugman-sympathising, physics-quoting bleeding-heart liberal blogging habits. It's very nice if a bit twisted! Click through and have a look.

Certainly more appealing than my previous surprise compliment.

Update: Now with official permission to embed the image:

A testimonial for my vole-like features

I am sure this is intended to be flattering...right?
"plain leigh caldwell vole like econ con scruff-fidget"I love it. I have no idea, nor desire to find out, what a scruff-fidget is. But I love it.

A "positive effect on crime levels"

According to Q Radio this morning, "honey-trap" houses - set up with hidden cameras to lure burglars - are having "a positive effect on crime levels".

Are we quite sure that's a good thing?

More from Middle England

Chris Dillow has been cataloguing examples of the "Middle England" error. Often committed by journalists, this consists of mistaking a rich person's unusually high income for normality. Chris Blackhurst, the City Editor of the Evening Standard has another egregious example today, in a bitter complaint about the rise in stamp duty:
Alistair Darling...is taking from the rich...and I'm the rich. [LC: this is meant to be sarcastic]There are a lot of people like me...185,000 homes in England and Wales with seven-figure price tags.That is not "a lot". There are 25 million homes in the UK, of which about 18 million are owner-occupied. Therefore just one per cent of homeowners are affected by this policy. Is it unreasonable to describe the top one per cent of homeowners as rich?

Here's Blackhurst's justification for why he isn't rich:
The reality today is that £1 million does not buy you a palace, not in the South-East.But it's still a million pounds!…

EVERYTHING is Gordon Brown's fault

This slightly sordid but predictable story about the collapse of an airline covers the alleged overspending of the chief executive, the financing of yesterday's bills from today's revenue, and the likely explanation: ultimately, this company collapsed as a knock-on effect from some other airlines, which failed while owing it money.

It's unfortunate for the creditors and those who had bought tickets, but these things happen.

The first comment on the BBC story?
There has to be something inherently wrong and deficient about Gordon Brown's handling of the UK's financial landscape."Prudence"????...I don't suppose the Company bought tables at Labour Party dinners - or did it?"Prudence" or "Darling Pridence" - Would you trust them to look after a bag of sweeties?The guy just can't get a break.

Another short BBC interview on inflation

Another month, another inflation figure, and another short BBC interview. This time I managed to capture the video for your entertainment - sorry about the low quality. I will figure out how to improve it for next time. Assuming there is inflation again next month...

The economics zeitgeist, 21 March 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.

Rory Sutherland: friend or enemy of science?

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From Rory Sutherland, current president of the Institute of Practioners in Advertising:
"We need to broaden the definition of what we do to reflect the new reality of the market place because if we don't create a new model based on human understanding, then we are in danger of using 1950's packaged goods persuasive techniques to solve today's communications problems! With behavioural economics we can align ourselves to a recognizable science..."I'm a great supporter of Rory's campaign to bring science into the marketing world - the field today is too driven by gut feeling, and treats creativity as an end instead of a means. Science lets us clearly understand the business problem, create a solution and demonstrate that it will work.

I disagree with him on one point in particular, but we'll come back to that. In the meantime, I've been reading Sam Delaney's book Get Smashed, a history of the British advertising industry from the 1940s onwards. In…

Healthcare reform: passed?

Mixed news coming in from Washington - in the 14th minute of a 15 minute vote.

On the radio (BBC World Service): 9 votes still needed - 207 yes votes so far cast.

On CNN: voting has started.

On the NYT: House is voting on the Senate bill. Other votes still to happen.

On some random spam site: "Health care reform passes - live video". Only notable because it has successfully gamed Google News and comes up at the top of the search results.

On Yahoo: 'White House Press Secretary Robert Gibbs just tweeted: "About 40 staff in Roosevelt Room with VP to watch the vote - President walked into the room to sustained applause."'

On the radio: applause is being heard...

And, it seems: a historic moment, with 219 votes to 210 (some sources reporting 212), the healthcare reform bill has passed.

Speculation on the BBC that the Republicans are nailing their campaign flag to the anti-reform mast because they believe the voters don't want this bill. My suspicion instead …

Tragedy of the commons - a problem and a solution

While watching the latest news on the passage of the health reform bill, I am having a conversation about a traveller community in southwest England. Some of the stories are about personalities, others about the institutional "structures" that have grown up - without the recognition of specific rules or laws, but simply the emergence of ways of doing things that are "enforced" by social norms.

This is very reminiscent of Elinor Ostrom's Nobel-winning work on the emergence of self-managing rules and structures within communities. These rules are most obvious in the management of common-pool resources such as fish stocks - where it's hard to establish, enforce or even design the classical economic solution of property rights. Without them, the tragedy of the commons soon destroys the fish stocks permanently. Communities in practice are surprisingly successful at establishing such norms for themselves.

But ironically, there's another level of tragedy of th…

Zeitgeist delayed

I can't currently reach the server which generates the economics zeitgeist blog cloud, but will run it tomorrow instead.

Hay-on-Wye is sunny and beautiful, so I may be inspired to write something else today to keep the blog ticking over.

A bookshop economy

Today I'm in Hay-on-Wye, a small town buried miles from anywhere on the Welsh-English border, with the highest number of bookshops per inhabitant of anywhere in Britain and probably the world.

Can this possibly be an economically stable situation?

Today, a mild springtime Saturday, there are plenty of visitors - and I'm sure they will all spend some money in several shops. But is this really enough to make a living?

There are several characteristics which probably make this local economy more sustainable than one would expect:

Books, especially second-hand books, are not commodities - for most books here, there's probably just a single copy in one shop. This reduces the competition between shops and allows them to maintain greater margins.There's an annual festival where 80,000 people come here and the bookshops - and everyone else in town - makes an absolute fortune. The existence of the bookshops the rest of the year strengthens the credibility of the festival.People …

Barter and echoes of money

I went to a very interesting speech by Frances Dickens of Astus on Wednesday. She runs a company which acts as a barter exchange between other firms.

She started out describing the business model (eliding a few intriguing things which we were obviously meant to know already - such as the fact that the barter is always backed by spare media space, usually TV inventory).

By the end I felt like I'd been listening to a monetary economist talking about the founding of a new central bank.

So many of the issues confronting them are exactly like the issues faced by a currency issuer (which, after all, they are, kind of):

Is the currency backed by anything? Previous barter companies have failed because they issued promises with no capital behind them, and the promises were quickly devaluedNetwork effects - now that they are the market leader and the majority of companies use their "currency" by default, they have a hugely defensible positionReputation and credibility - the backing…

Michael Jackson in Body Worlds shock

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This can't be right, can it?

An FT article about Sony's record-breaking $250 million settlement with Michael Jackson's estate says:
Unlike other headline-grabbing deals with artists from Madonna to Robbie Williams, it will not offer Sony any future revenues, such as those generated from merchandising and touring.I had not expected Michael Jackson to be doing any more touring in the circumstances.

But - unless the cadaver is to be carried around Europe like some kind of medieval saint's relics - there is an explanation. And that explanation can only be this:

Jackson donated his body, before he died, to Gunther von Hagens' Body Worlds (Körperwelten) exhibition.

You want more evidence? Remember the famous O2 Centre concerts Jackson was about to perform when his death was announced? In July and August 2009? Just look at this little snippet.


"The Mirror of Time" indeed...

Ten books that influenced me most

Tyler Cowen was prompted by a reader question to offer his ten most influential books. He challenged other bloggers to do the same, so here are mine (as for Tyler, this is my "gut list" though informed by a pleasant half hour looking through my bookshelves to prompt my memory). It surprises me how few economics books are here - but then I didn't do much formal economics study at the time of life that one chooses influential books:
Easily at the top of the list is Douglas Hofstadter, Gödel, Escher, Bach - An Eternal Golden Braid. The first book that started me exploring the mysteries of cognition and consciousness - and a book of such beauty, grace and depth that my life's work would be complete if I could write anything like it. Most of his other books are excellent too.Christopher Alexander, A Pattern Language. Gives another insight into where abstract patterns can be found in the world - this time in the architecture of cities, buildings and rooms.Steve McConnell, C…

Another SXSW award for Six to Start

They keep on doing it! Our friends (and now clients) at Six to Start have won another South by Southwest award - this year it's Best Game.

The prize is for Smokescreen, "a cutting-edge game about life online", developed with Channel 4. The credits are about four pages long, but congratulations particularly to those I know personally: Adrian Hon, Dan Hon, Claire Bateman, Margaret Robertson, Lisa Long, Dave Aldhouse, Heather Tyrrell and Alex Chapman. One prize might  be regarded as fortune...to win two looks like carefulness.

I'm sure many of you will enjoy the project we're doing with Six to Start if it does go into production. I'd love to tell you about it but then I'd have to...send you to this xkcd cartoon.

When is CSR justified?

Tatsiana Parkhimchyk outlines an argument against CSR which I think is mostly right: businesses are here to make an economic profit, not to contribute to social causes:
...the business of business is business.CSR includes: community health, safety, education...and so on an so forth. My question in this case is quite obvious: aren't all these spheres and activities the primarily concerns of the government? And shouldn't the government take care of their citizens to prevent crime, save the environment and satisfy the basic human needs and desires rather than business?In principle, yes. The incentives for companies are not to maximise social good - any more than are the incentives for individuals. This is why we appoint governments on our behalf - as a coordination mechanism, to solve the problem that competing individual incentives are sometimes destructive of social benefit. Simplistically put, government's job is to solve the tragedy of the commons and the prisoner's di…

Is free ice cream better than free money?

I can't post on Felix Salmon's blog, so here's a comment I wanted to write on this amusing post about free ice cream:
The answer to 65% of all thought experiments on economics blogs: selection effect.The "you" to whom Dan's question is addressed is a different set of people to the "they" who'd turn up for a free cash offer.Though of course, there is a bit of a framing effect too.The question of demographic effects in behavioural experiments is underinvestigated (though there are a few papers about cultural differences, especially in the ultimatum game).

Coincidence or trend? Daily Mail watch

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Two independent observations of a new trend today. First on twitter:


Then on Marginal Revolution:

Kate is very well-versed in the British newspaper industry (I used to adore her TV listings in the FT), but I had no idea that the Mail's reputation had spread even to Tyler Cowen's parish.

The economics zeitgeist, 14 March 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.

Gender norms in the gym

I went on a day pass to a new gym today. One of those gyms where the lockers are secured with the members' own padlocks instead of with built-in locks.

As expected, the men's changing rooms were full of padlocked lockers. It didn't occur to me that there could be any other way.

Turns out, as I discovered later, the women's lockers are not secured at all. Perhaps one locker in the whole room had a padlock. The rest just live on trust.

Are men more likely to steal things? Or do men just not trust one another? Who's being irrational here? Readers who attend a gym are invited to report back the results from their own establishment. Just in case, probably best not to say which gym you're in.

iPerbolic discounting

Imagine you have saved up £550 and you're ordering a new iPhone. The supplier is short of stock, so you'll have to wait a while. It is going to be despatched by post in 30 days and will arrive with you the next day: a 31 day delay. Then, at the checkout screen, the site offers you an express delivery option. For an extra £20, they can deliver it by courier so you'll get it on the 30th day. Would you pay £20 to have it one day earlier?

Now imagine you're ordering it from a different store and they have plenty of stock. It's going to be dispatched this afternoon and will arrive tomorrow. You see the £20 courier option: Is it worth £20 for courier delivery to get it in your hands in one hour? Alternatively, if you could travel to the shop and pick it up right now (which will take an hour or two out of your afternoon), would you do it?

I haven't done the experiment, but I'd bet you a lot more people would say yes in the second scenario than the first. Equivalen…

Game theory: not nonsense any more

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Game theory has always been one of the most stylised, theoretical - and unrealistic - disciplines within economics.

Its assumptions are much too strong for the real world: pure rationality, perfect mutual knowledge of the rules of the game and the payoffs for each player. Game theory does certainly provide insight into many realistic phenomena - the prisoner's dilemma is the classic example, variants of which can be seen all over the economic world. But I have never been especially inspired by the exercise of working out Nash equilibria, because they usually illuminate only the stylised game that has been written down, and not the world that it is meant to model.

However, two relatively new variations on game theory are making the field more interesting.

The first is the idea of learning. For example, Fudenberg and Levine's book, The Theory of Learning in Games, sets out ideas of how real people playing games can come close to rational behaviour by trial and error, paying atte…

An insightful comment on modern investment

From a commenter on Chris Dillow's recent posting:
I do wonder how good the data on investment is, and whether as the service sector grows it is systematically underestimating investment. How well is investment that essentially takes the form of hiring labour to work on intangible assets, or simply to constitute an accumulated hired factor production (human capital), accounted for in all this data that tells us investment has been falling?Posted by: Luis Enrique | March 11, 2010 at 05:24 PMThis seems a pretty reasonable hypothesis. Any idea how it could be tested? The last thing that those service businesses want is for their intangible work to count as capital investment - they'll have to pay corporation tax on it until they can write it off in four years. So some firms may not want to report investment figures to the government.

However, at least one form of non-tangible investment - scientific R&D - brings tax benefits in some countries, and companies do have an incentiv…

High taxes as an incentive to work

Just a hypothesis here, suggested by Chris Dillow's reference to Baran and Sweezy:
...tends to generate ever more surplus, yet it fails to provide the consumption and investment outlets required for the absorption of a rising surplus and hence for the smooth working of the system. Since surplus which cannot be absorbed will not be produced, it follows that the normal state of the monopoly capitalist economy is stagnation (p108).The essence of the market is that surplus goes to those who produce it: this is a stable situation because it gives the producer an incentive to produce more surplus. But perhaps modern economies of scale and scope lead naturally to ownership, or at least control, being concentrated in the hands of a small number of people: control can't be spread more broadly because of the rational ignorance of the crowd. Sharing a growing amount of wealth among a smaller number of people means that - as Baran and Sweezy suggest - those in control are no longer signifi…

Comment moderation turned on, unfortunately

Due to a spammer attacking the site today, I have turned comment moderation on for a while.

I'd hoped that using Blogger's built-in captcha facility would be enough, but apparently this is being done by a real person (with a Google account) so I have had to turn on moderation.

I hope to be able to switch this off again soon, as I have had lots of value from comments (including anonymous ones) and would prefer not to put any barriers in the way. Apologies to regular posters - I will usually approve comments within an hour or two at most, except in the middle of the night UK time.

Osborne's new economic model?

The Conservatives apparently think a "new economic model" is needed to restore the strength of the British economy.

I wonder what they mean.

I assume they aren't talking about a model in the way an economist would think of it: a simplified representation of the operations of the economy. Probably they mean "we need to run the economy in a different way". This is how businesses use the word "model" when they talk about choosing a business model, or a revenue model. So maybe he just wants to use a different set of rules for taxes, employment or general economic incentives. This speech gives some clues - it's tricky to read through the rhetoric to find any common underlying model, but what he seems to want is to set three "priorities" for government economic policy.

But taking him literally reveals a more interesting way to think about the question. What if he really does want to change the descriptive model that we use to think about the e…

How tiny is the blogosphere?

This question is prompted by a few things.

First, seeing the same commenters pop up on obscure and unrelated blogs as appear on famous and prominent ones (hello Min, dearieme, Don, to pick three at random).

Second, meeting the author of one of my regular blogs at a show written by another, and finding they collaborated on the show I was at.

Third, realising that although my readership is still relatively small (one day, Krugman, one day...), it includes a surprisingly high proportion of other bloggers whom I respect, and whose occasional links to me are flattering and pleasing.

My first thought, then, is to wonder whether the blogosphere (at least the economics blogs) is populated by a few hundred people who just spend all their time reading each other's postings, and a few hundred more who comment on them.

My second thought was, if it is, then that's not so bad. Mostly, the people with blogs are the ones you want to read your work - the thoughtful, intelligent ones who are wi…

Irrationality at the pub

A scenario from the pub tonight:
My friend ordered a Paulaner. The waitress brought a Staropramen by mistake. She was about to take it away and replace it, when he offered to pay half-price for it to save the cost of throwing it away.What decision should she make? Accept the offer and avoid the wastage, or bring a new beer and charge full price?

The considerations are surprisingly complex.

 A simple one is the cost of the beer. If gross margins are low - that is, if beer costs the pub more than half of what it charges the client - it is more profitable to sell the Staropramen at half price and at least get some revenue than to throw it away. On the other hand if beer is very cheap then it's more profitable to chuck the old one and charge full price for the new glass. Note that the consideration here is the wholesale price of the Paulaner which would need to be poured, not the Staropramen which would be thrown away - that has already been poured and is a sunk cost.Assuming that it wo…

The economics zeitgeist, 7 March 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.