Showing posts from 2011

Clearing my tabs for 2012

During 2011 I have probably spent about four days waiting for my browser to respond, due to the number of tabs I habitually keep open. Between the four computers I use, I probably have 200 blog posts in tabs waiting for me to comment. Here are a few of them (in no particular order), so my Chrome may enjoy a faster 2012. A note from Paul Krugman on what makes economics economics . Not a rhetorical discipline but one based on mathematical models. (However, see also Deirdre McCloskey's Knowledge and Persuasion in Economics , which puts forth a persuasive case that it is both. Also, I believe that rhetoric, culture and all forms of speech will one day themselves be modelled within economics - a tantalising prospect).   Talking of persuasion, here is Steve Randy Waldman on market monetarism , and whether we can fix recessions by simply persuading people to change their economic expectations, or whether there are real constraints that can't be solved just by monetary easing. I co

What is "playing"?

In between work on some more serious posts (not to mention the day job), let me post a brief comment on Margaret Robertson's article on gamification, " Can't play, won't play ". It was written a year ago, so I'm not expecting to provoke an intense debate, but the same argument could easily be made today and it's worth responding to. In short, Margaret claims: gamification isn’t gamification at all. What we’re currently terming gamification is in fact the process of taking the thing that is least essential to games and representing it as the core of the experience. Points and badges have no closer a relationship to games than they do to websites and fitness apps and loyalty cards. Her preferred vision of games is: Games manage to produce [rich cognitive, emotional and social] drivers by being complex, responsive mechanisms. Games set their players goals and then make attaining those goals interestingly hard. My involvement and interest in games is much

A thought experiment: why the ECB should print money...

...and why the Bank of England and Fed are right to have done so already. I'm not talking about whether the European Central Bank should directly buy eurozone government bonds. This causes a moral hazard problem - it might encourage governments to be profligate and reduce incentives for structural reform. It's, at the very least, debatable. I'm talking about a more general question: why should central banks print money in a recession? This post won't have much new to say to macroeconomists, but it attempts to address a concern of many non-economists - won't printing money just cause more inflation? First, let's run a thought experiment. Imagine that your national government has decided that profligate use of fossil fuels is a problem. Probably because of the risk of climate change. Instead of using a carbon tax, the government decides to restrict the supply of oil coming into the country. It could allow more oil in if necessary - in fact it has a large res

Does Nudge require regulators to be "more rational" than consumers?

A couple of times recently - notably in Bill Easterly's otherwise very positive review of Daniel Kahneman's new book - I've seen the following common critique of Nudge-style approaches: "But if people are irrational, regulators are irrational too - so how can they make rules to counter citizens' irrationality?" Easterly says: But [the case for libertarian paternalism] is much too sweeping, because it overlooks everything the rest of the book says about how the experts are as prone to cognitive biases as the rest of us. Those at the top will be overly confident in their ability to predict the system-wide effects of paternalistic policy-making... While it's right for regulators to be humble about their degree of knowledge about the world, and to be cautious in creating new regulations, there are several reasons why this particular criticism is wrong. First, we are not comparing like with like. There is no claim that a regulator, when placed in the same

Prompted Pareto improvements

I'm going to attempt to introduce a new concept here. It is a bit technical, but I'll try to provide background for non-economists first. I may indulge in some modelling to help me understand it better, so if that's not your thing, feel free to skip the equations and just read the words. I'm also struggling for the name of this concept. The title of the post, "Prompted Pareto improvements" is a name I'm reasonably happy with, but catchier suggestions are welcome. I'll start by explaining the idea of Pareto efficiency and a Pareto improvement. There's lots of information at the Wikipedia page if you'd like to know more. Pareto efficiency is one of the standards that is often used in economic theory as something we should aspire to, because it is a standard almost nobody can disagree with. It means that we should consider any transaction, or change in an economic allocation, to be a good thing if it makes at least one person better off an

Please vote for us and help a charity

My company Inon, which applies behavioural economics to help our clients set the right pricing strategy, has been nominated for the Smarta 100 - the top innovative businesses in London. If we win, our £10,000 prize will be donated to charity - please leave a comment if you would like to nominate your preferred charity as one of the recipients. If you'd like to support us and your chosen charity, please click here and vote for us . You'll need to register but it only takes a few seconds. Thanks for your support - we have reached 20th in the rankings and it seems like we might have a chance if you can help spread the word.

Has the nature of investment in the economy changed?

I may have more to say about this in the next few weeks, but this New York Times article about industrial policy reminds me of a question I asked on twitter the other day: ...hedge funds and venture capitalists are geared toward investing in financial instruments and software companies. In such endeavors, even modest investments can yield extraordinarily quick and large returns. Financing brick-and-mortar factories, by contrast, is expensive and painstaking and offers far less potential for speedy returns. This might not just be a change in investors' preferences. (Although if they have decided they prefer fast returns over slow ones, I don't know that I'd criticise them for that.) What if something deeper has happened. In the late 1940s and early 50s, macroeconomic trends were fairly clear: Europe was on the verge of a major recovery, and American growth was likely to continue. In conjunction with this, we could predict with some confidence what people would want to

Why Obama should propose a Balanced Budget Amendment

It's the one simplest thing President Obama could do to seize control of the economic agenda. It's counterintuitive - but done right, it could be the tonic both for the economy and for a divided political scene. Don't click on your back button yet - I haven't gone crazy. Obama should propose a Balanced Budget Amendment with the following key features: The balance must be achieved over ten years, not one It should include   automatic (not discretionary) investment programmes when unemployment is high, which are scaled down when the economy is doing well It should commit to share the proceeds of future growth between deficit reduction/debt repayment, tax cuts and investment This policy would provide countercyclical intervention - exactly as a responsible government should. Right now, the US economy could use five to ten million more jobs (that's about $500 billion a year, by the way). Five years ago it didn't need anything like that - there was plenty of

The cost of making a hit single

I've been listening to NPR's Planet Money podcast, and one of the recent episodes  [mp3 link] is about how much it costs to make - and promote - a hit single. Or more accurately: to attempt to make a hit single. A friend in the music industry asked me to write down their figures with so he doesn't have to listen to the whole podcast. So here they are. The record in question is Rihanna's "Man Down", which her record company Def Jam was hoping would be one of the anthems of the summer. The costs break down like this: Initial demos made at a "writing camp": $18,000 (it costs around $200,000 to hire 10 studios for a couple of weeks and make 50-100 demos for Rihanna to choose between; this cost is apportioned over the 11 tracks on the album) Fee to lyricist: $15,000 Fee to producer/composer: $20,000 Fee to vocal coach/producer: $10-15,000 Cost of other studios and recording costs: $10,000 Total production cost: around $78,000 And then the marke

Two challenges for behavioural economics - one real, one fictional

It seems that some people from outside behavioural economics are, like me, getting frustrated with the lack of progress within the field. Eric Falkenstein says here : I read Kahneman, Tversky and Slovic's Judgement under Uncertainty in the 80's (published 1982), which mainly discussed a series of papers published in the 1970s, and found it fascinating, but now it's now 30 year old stuff and pretty boring. There's a couple hundred academically based confirmed biases which are all kinda true, but not very profound This part of the posting is quite right. A commenter at the bottom sums up the problem with state-of-the-art behavioural "economics": Behavioral economics is not economics but psychology. It focuses on individuals instead of exchanges and markets. Economics makes assumptions about actors to make market predictions. BE makes predictions of actor choices just like psychologists. The question BE must address is how do biases create market conditions.

Notes from banking fragility talk

Here are my unedited notes from David Miles' talk on monetary policy and banking fragility tonight. This may not be of much sense or interest to everyone, so feel free to skip it if you're not into this topic. [ Here is the somewhat more coherent post I wrote before the talk] Miles – recently wrote a paper about the benefits (and costs) of higher bank capital. LSE is intellectual home of MPC in many ways. Links between monetary policy and financial stability: strong and significant Compared to pre-recession trend in 2007, this recession is almost as bad as 1929, and on current projections will be WORSE from 2012 onwards. Changes in banking sector since previous eras – more gross debt (now being reduced), more fiscal compensation (mostly automatic stabilisers), much higher bank leverage. There would have had to be a rebalancing of some kind, but the rebalancing is now happening in the context of a financial crisis. One challenge: policy compensations for imbalances (VA