Knowing and Making

The Economist's underrated Free Exchange blog asks: Can behavioural economics save newspapers ? Of course the Economist itself is famous for designing a multi-product framing approach (see the first chapter of Dan Ariely's Predictably Irrational for details) which successfully biases customers to switch to a higher priced subscription. The phenomenon they describe is either a good example of price discrimination (a commenter suggests environmental benefits), or a clear instance of cognitive bias. Perhaps it's both. While you're visiting Free Exchange, they also link to Alex Tabarrok discussing QALYs . I went to a lecture by Tony Atkinson at the RSA last week which discussed this issue. The conversation there was about how to value health outcomes as a component of GDP (and by extension, government services in general - which in the US are valued at cost, but in Europe are valued by an output measure which is meant to estimate their value). One approach is to attempt t...

I was sceptical of a claim on Free Exchange today: "...if there is no winner the prize is carried over to the following week. A smaller participant pool can then result in infrequent, higher jackpots." This struck me intuitively as unlikely. So I thought I would work it out. Probability theory has been unpopular among economists this year - everyone quotes Nicholas Taleb and slowly, loudly explains to us how the financial markets don't behave like a normal distribution after all, and we don't have enough historical data to give us a predictable distribution for the future. Insufferable. Fortunately lottery draws do  obey standard probabilities and we do  have enough data (and enough theory) to predict how they will behave. So we can use some standard results. Assume that a lottery has 10 million participants each paying $1, with a 50% payback. The prize fund in a typical week is $5 million. Let's say the odds of getting the right numbers are 1 in 14 million; then...