Tuesday, 31 May 2011

Loss aversion and fundraising for Bletchley Park

I celebrate the good news that Bletchley Park has been saved by my new friend @Dr_Black among others. It's a good story and you should read it if you aren't familiar with the background.

However, is it wise to announce and frame the news in this way? The post suggests an optimistic transition:
I mentioned "Saving Bletchley Park" as part of this conversation and Simon said "...hold on, Bletchley Park is saved, there is no way we are going to shut now with all the support that we have. What we need to talk about now is Building Bletchley Park for the future". I sat there with a big smile on my face...
Bletchley Park is Saved - It is no longer about *Saving* Bletchley Park but about *Building* Bletchley Park.
It sounds great. But surely it is much easier to raise money to "save Bletchley Park" from an impending emergency than to "build Bletchley Park" for an undetermined future? I predict that, unfortunately, donations will fall if the campaign is presented as one of building, rather than saving, the institution. The cognitive effects of loss aversion, hyperbolic discounting and the salience generated by urgency will all contribute to this.

However, it's certainly a more optimistic way of talking about the situation. Maybe it will result in better motivation from volunteers - and maybe it's a more accurate description.

What do you think - if there is a genuine choice of ways to frame a request, is it appropriate for charitable appeals to choose the framing that will raise the most money? Or should it be their responsibility to use the framing that they feel most closely and neutrally represents the situation?

Sunday, 29 May 2011

The economics zeitgeist, 29 May 2011


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.


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.

Friday, 27 May 2011

The hot hand in airline pilots

I read the following quote in an article about the near-crash of a 747 plane in San Francisco:
"In the past months, we have had several operational incidents," airline jargon for close calls, W.J. Carter, chief of United's Honolulu-based pilots, wrote in a Feb. 23 internal memo to his flight crews. "Major accidents historically are preceded by a series of these seemingly unrelated incidents. This disturbing trend is cause for concern"
I was immediately skeptical, because patterns like this are often not real. The "hot hand" effect - often seen in sports, especially basketball - is a kind of momentum effect, where a player who has scored lots of baskets in the last few minutes is thought to be more likely to score again. It intuitively makes sense that someone could be "on a streak" where they are playing at the peak of their ability - those times when every shot you attempt seems to go in. Equally there could be times when you just keep missing and missing.

The only problem is that - according to Gilovich, Vallone & Tversky, who studied the effect - it doesn't exist. They found that statistically, a player who has just made a series of successful shots is no more likely to make the next shot.

Lots of people have researched this area since, and though the results aren't completely conclusive, most psychologists agree that the effect is in the mind of the viewer. We seek to understand the world and this leads us to see patterns in random events, whether in basketball, coin tosses or roulette spins. It may seem natural that a hot hand effect could exist, but it seems that professional sports players know how to operate consistently near the limit of their ability, and any fluctuations from this are random. Most players, close as they are to their peak, are competing against other players also at their peak, so small and unconnected changes in conditions can lead to apparent randomness in outcomes.

Back to the airlines: my assumption was that the pilot quote was seeing patterns where none really exist. When there is a crash, it's easy to look back and see a series of "seemingly unrelated" incidents in recent times - and draw the conclusion that they are related after all.

But in fact it might not be an illusion. The illusion hypothesis is most likely when the events are genuinely random - that is, where there is no real underlying cause which could link them together. This might not be true in the case of pilot error.

The article linked presents a potential explanation of what that cause might be. Pilot training procedures are likely to be correlated across a company. If there is a weakness in these procedures (such as a lack of experience in 747 takeoffs, or training which is not frequent enough) then this could cause multiple incidents which have no obvious connection.

If the issue is specifically related to 747s, then one would expect the incidents to be related to 747s. But if the cause is a more general training failure - for instance people being trained only once a year, with their skills declining during the year - then the pattern would be different, perhaps with incidents showing up near the end of an individual pilot's yearly cycle.

This means there are no instant answers - when we think we see a phenomenon in the world it might be a result of a cognitive bias, or it might be real. Cognitive biases can give us one explanation, but if the effect is important, it's worth checking against real factors too. Statistics is a powerful tool to distinguish between these two possibilities: if we have enough data, and we find correlations in it that are statistically convincing, these can often show us where to look.

This doesn't mean a statistical correlation guarantees that mental factors are not involved. If the correlations seem to be related to the context or manner in which we make the observations, then a cognitive bias remains plausible. If we can observe the data in a different way and the effect still stands, we may then be able to eliminate observation, interpretation and other cognitive factors as a part of the correlation. At that point it's more likely that there may be something real going on underneath.

Monday, 23 May 2011

The Great Stagnation and consumption-biased change

A debate has been going on within economics (and in my head) about how the economy is changing.

Tyler Cowen thinks there is a "Great Stagnation": all the low-hanging technological fruit (trains, planes, automobiles) has been harvested; we've grown for the last thirty years by getting some efficiencies out of existing processes, but that has limits; and there's no new major new invention on the horizon which will transform living standards further in the coming century.

Umair Haque says something similar in more provocative language: the old models are bankrupt, we need a new mode of life - moving away from consumption and towards eudaimonia. A bigger TV doesn't provide any more satisfaction, just a shallow, temporary endorphin hit and a status upgrade relative to some of your friends. [Update: Umair comments on twitter that "my definition of eudaimonia is economic, not just psychological"]

But the default position of economists - including me - until recently has been: things are always getting better, even if it isn't obvious. Economic growth continues; on average, we are twice as rich as we were in 1985, and four times as rich as in 1965. We might not feel that much richer - because we spend the money on new things, and because some of the wealth has gone to China, India or Dubai - and above all because we quickly acclimatise to any change in circumstances. Regardless, things are indisputably better.

The second part of this argument is that we are still creating new inventions - most of them on the Internet - but that much of this production is not captured in GDP figures, because people don't pay directly for a lot of the value they receive.

Who's right? Haque would argue that the default position is complacent, indeed wilfully blind to what's really happening. Cowen would argue, I think, that we have just about managed to squeeze some growth out of the last fifteen years but its lack of productive foundations has caught up with us and shown up in the financial crisis and recession; and there's not much hope for the future. Other regions of the world might still have some catch-up growth to sustain them for a while, but the West does not.

Bryan Caplan looks at this in an interesting way. He suggests that we have experienced "consumption-biased technical change":
Firms are figuring out ways for small numbers of workers to create tons of value - then give it away to consumers for pennies or less. And as far as I can tell, the CPI totally ignores these benefits. CPI bias: Now worse than ever. Quality of life: Now better than ever.
So we may have all the consumption goods we could possibly want - many of them being informational goods like Twitter feeds or TV shows rather than physical ones. But the production of these goods might be concentrated in the hands of an ever-smaller group of people.

If this is true, it raises a couple of important questions. Take this insight to its logical conclusion: imagine that in 30 years time we have a world in which everything we need is produced by 5% of the population, and the other 95% is happily consuming the costless electronic outputs of those 5%.
  1. Do we get satisfaction from production as well as consumption? Surely we do. This was the main insight of Will Hutton's mid-90s work The State We're In. If so, then just being able to consume without producing will not make us happy.
  2. What will society - and its power relationships - look like in this world? If 5% of people can produce everything, what will they demand from the other 95 in return?
The classical answer to the second question is that demand for goods and services is limitless, so the 5% will still want something that the 95% can provide: whether it's more convenient takeaway food deliveries at all times of the night, or ever more massages and haircuts. In plain economic terms, that's fine; but the work may not be at all satisfying.
    I still tend to be optimistic - I think both individuals and societies are good at finding solutions that work for them - but put in these terms, I can more clearly see what the problem is.

    What might the solutions look like? It would be a bit contradictory to suggest that I can deliver the answer to a problem which by its nature needs decentralised answers; but here are some ideas that might contribute:
    1. Production will become more competitive; on twitter, production and consumption are closely intermingled and it's hard to clearly distinguish the two. This might help to spread both the satisfaction of being productive, and the material rewards for it, to a wider group.
    2. Production and consumption might become more specialised into groups. Some production will certainly be carried out at a global scale (Hollywood movies or Justin Bieber's twitter account); but others will be country-wide (Downton Abbey, Stephen Fry's twitter account) and others specialised to individual groups like economists (the Keynes-Hayek rap, Tim Harford's twitter account) and even smaller, overlapping groups (random economics lectures on YouTube, or my twitter account). The global scale, as you'd expect, is ahead of the local on these measures. So it currently appears that we have asymmetric rewards, with only the global producers picking up the attention (and money). But perhaps a new middle class will emerge, composed of all those who sit at nodes in a worldwide network producing anything with an audience of more than a few dozen.
    3. Competition might drive up standards of production - so that blog posts, tweets, YouTube videos - even Daily Mail columns - need to have a high quality of research and production behind them in order to get any attention. This would provide more people with a role in producing them. (The same argument applies to sandwiches and cars, by the way, not just virtual products)
    4. Investment in education may increase, so that more people are capable of competing for the attractive production roles (and in turn, more production roles are created to absorb them). This is likely to be required anyway if any of the first three outcomes are to occur.
    5. I'm not a fan of this one, but I know some people believe in it: local production may return. Organic farms, local microbreweries and community-based tailors or housebuilders could become important to the economy again. However, I think the appetite for being involved in productive work is not sufficient to outweigh the low efficiency of this kind of economic model.
    The insight that might help close the gap is this: while there is probably a limit to the quantity of what we can enjoyable consume, there is no limit to its quality. Quality can be in the traditional sense of better-made and better-performing objects; or funnier, more cleverly written TV shows; or most fundamentally, objects that are more tailored to their audience.

    When a continually growing production efficiency from one direction, meets a growing and diversifying market for tailored goods and services from the other, a new balance will emerge: a more personalised life where your production and consumption are integrated, in which you are a member of several audiences, smaller and more intimate than the mass market you participate in today.

    Sunday, 22 May 2011

    The economics zeitgeist, 22 May 2011


    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.

    Thursday, 19 May 2011

    Behavioural economics is not economics (yet)

    Economics is useful not when it makes broad, one-sided assertions (markets are good; externalities are bad) but when it uses a model to give a firm, quantitative answer to a specific question.

    What difference will it make to the price in the milk market if one new supplier enters, producing 3 million litres a year? If I buy this piece of land and build a gas station, will I make a profit? What's the optimal price for me to sell my consulting services if I value my free time at £40/hour?

    Standard economics gives us models which - if we can find the right data to calibrate them - will answer all these questions for us.

    Behavioural economics does not.

    It can show us the existence of certain phenomena: hyperbolic discounting, framing and priming biases, misperception of risk, anchoring.

    But can it answer questions like these?

    • How high a price should I post in my shop window to maximise the benefits of anchoring and minimise the number of customers who are put off from entering the shop in the first place? Or more precisely, to maximise my profits when these two factors are considered.
    • What win probability should I offer on a lottery to get the highest profit?
    • What will be the effect on productivity of my staff if I replace their individual performance bonuses with a team-level bonus?
    At the moment, it can't. This is the direction in which the discipline needs to travel. Until it can - until the quantitative models are developed and empirically tested to allow quantitative predictions to be made - behavioural economics will remain a branch of psychology, not a branch of economics.

    Tuesday, 17 May 2011

    Questions about economists' favourite economists

    Davis, Figgins, Hedengren and Klein have put together an interesting survey of American economics professors - asking about their favourite economists, alive and dead, and about the journals and blogs they read.

    I downloaded the data behind the paper in the vain hope that this blog might be among the long tail of responses not reported in the main paper (it wasn't). But the data does provide lots to think about.

    An intriguing point (from a survey design point of view, at least) is raised by one of the questions. The survey asked people to choose their most respected/admired economists from two groups: over 60 years old and under 60. I don't know about you, but I'm not sure I'd know the age of many of the economists I admire.

    I speculate that the respondents might have subconsciously chosen economists who are much older, or much younger, than 60 years of age, in order to answer these questions with greater certainty. Even if aware of this potential bias, I might find those who are clearly very young or old more easily leaping to mind - the availability bias - when I attempt to answer. Are there perhaps a bunch of under-represented economists who are close to 60 years old? To take a random example, I perceive Richard Thaler to be around that age (in fact he's 65), and he is mentioned by just two people despite his prominence in recent years. Maybe that does reflect his true influence, but still...

    The paper does address the question of misclassification of age - Paul Romer, for example, is under 60 but was named by three times as many people in the over-60 category - so was moved into that group for data analysis purposes. But it doesn't mention this potential bias towards extreme ages. It's perhaps an unusual kind of bias - people are more commonly biased away from extremes. But in this case, I suppose age 60 is the extremum of each question, so it does fit the general pattern of extremeness aversion.

    The results in any case are very interesting and I'm particularly intrigued to see what happens when you strip out the economists who are selected by a politically biased sub-sample of the respondents (Becker or Hayek on the right, Krugman or Galbraith on the left). While this doesn't imply their contributions are any less important, the answers are likely to be partly influenced by political agreement.

    This leaves a smaller number of highly-rated economists who display no strong bias either based on party affiliation or on the authors' measure of "liberalism". The top-ranked "neutrals" then are:
    • 20th century economists: Tobin and Schumpeter.
    • Over-60s: Heckman, Akerlof, Nash and Paul Romer.
    • Under-60s: Acemoglu, Bernanke, Gruber and perhaps Rabin.
    I'm surprised Rabin doesn't show more of a leftward bias but with only four mentions, it's hard to draw any firm conclusions.

    The blogs are noticeably politically polarised - every blog in the top 15 has a party ratio that is either 1.2 or lower (strongly to the right) or 3.6 or higher (strongly left). Only James Hamilton has a party ratio in between these two extremes - and even that may be because he shares a blog with Menzie Chinn. Do people only follow blogs which reinforce their political position? Or are these simply the blogs which have become well-known? Anyone even a little familiar with the economics blogosphere knows the implicit biases in nearly all of the popular blogs, and I guess economics professors are no more immune to this than any other reader.

    Finally, the authors give three reasons for the low response rate to their survey (15% - which I don't think is that bad). Here are their suggestions:
    (1) The survey was six pages and involved complex philosophical questions; (2) it asked about policy views and voting; (3) economists are growing tired of responding to surveys
    In the spirit of the libertarian economics espoused by at least one of the authors - and with tongue slightly in cheek - might I propose a fourth reason for the low response rate: (4) incentives! What rational economist would spend 20 minutes answering a survey which can only help boost the career prospects of four of their competitors, with only the tiny benefit that they will slightly boost the already-high reputation of someone within whose school of thought they might work.

    Lots of interesting questions raised, and I look forward to the planned future publication of more results from this survey.

    Sunday, 15 May 2011

    The economics zeitgeist, 15 May 2011

    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.

    Sunday, 8 May 2011

    The economics zeitgeist, 8 May 2011


    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 (new entry "Osama" is only at number 413! Update: "Laden" is a new entry at 165 and "bin" up 558 places to 97, so I'm no long as surprised as I was)

    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.

    Saturday, 7 May 2011

    The economics of Sugar (Lord Sugar, that is)

    Alan Sugar has belatedly discovered an important economic concept: the idea of incidence.

    The star of The Apprentice and former owner of Tottenham Hotspur has just realised that when new income pours into a competitive industry which relies on scarce resources, incumbent companies don't get to keep the money.

    The standard example of this in economics is farm subsidies. Although one might think farm subsidies are good for farmers, that is not really true. Because there's a fixed supply of farmland, whose price is determined by how much money a farmer can generate from it, all of the extra money is - eventually - captured by landlords in higher rents. Farmers might benefit in the short term, as this paper suggests, but when their leases are up for renewal the rent will go up.

    Football is no different - there's a limited number of talented players, and all the clubs want to buy them. So now that the Premier League makes £2 billion a year (twelve times the amount of 20 years ago) the extra money passes straight through to players' wages, and clubs don't make any more profit.

    The picture isn't quite as simple as for farmland, because clubs have a share of "property rights" in a player through their long-term contracts. This is why they are able to sell players to other clubs for such high transfer fees. But they also have to pay transfer fees to other teams - so the net effect is zero (except for small clubs which luck into signing a talented player and sell them to a bigger team). In fact, players and their agents tend to take a percentage of transfer fees, meaning that they are a net drain on clubs.

    Of course, football players aren't as limited a resource as farmland. At the lower end, there are lots of substitutes (literally). But the top players are irreplaceable, and the top teams have little choice but to hire a whole team of top players. The limited number of players per team prevents innovation in squad formation - for instance putting 13 cheap players up against 11 expensive ones. And the idea of outsourcing your team to an Indian call centre is more or less off the table (though the Scottish Premier League is reportedly considering it).

    In the US, some sports have imposed a salary cap in order to try to retain more profits for the team owners. However, they've had to get a special exemption from cartel law in order to do so; and this would certainly be illegal in Europe. Part of this situation arose because Belgian player Jean-Marc Bosman took a team to court to be allowed to sell his services to the highest bidder after his contract ended. European law is generally pro-free-market (something that may surprise my American readers) and it's unlikely the teams will be able to easily change this state of affairs. UEFA are trying to limit the ability of rich owners to subsidise their clubs, and this will make some difference, but won't change the basic competitive process that's going on.

    So while football has fixed size teams and a highly competitive structure, and takes place mainly in the EU, it's likely that players will continue to capture most of the revenues. At West Ham, for example, player salaries were 90% of revenue - an impressively high figure.

    There's one way that teams can hang onto more of the money. That's by adding their own value, which is embedded in the intellectual property of the clubs and not built just on the backs of naturally talented players. Three teams are good at this: two of them are Manchester United and Liverpool, which have historically strong brands that can generate tons of money, regardless of short-term performance on field. Those clubs both make good money.

    And the other is Arsenal. Arsenal's success (albeit recently comprising more second and third places than wins) is not primarily a function of buying and paying expensive players, but comes from building a genuine asset that the club itself possesses: a superb team strategy. The club and its manager succeed as a unit, and they rarely buy famous players for pure natural talent. This is a regular source of frustration for many of their fans, but it shows up in the business results of the club. They are highly profitable and the money does not all flow down to the players - because so much the value is added by the whole team.

    Lord Sugar is broadcasting his theory on a TV show tomorrow night. It is probably pre-recorded. But if there's a sequel, he might think of travelling across north London for some advice on profitable football from his greatest rivals.

    Sunday, 1 May 2011

    The economics zeitgeist, 1 May 2011


    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.