Knowing and Making

Markets and economies generally work because people have incentives to find welfare-enhancing trades. If you can keep the profit you make from a trade and spend it on something nice, you are more likely to make the trade. The same applies to working an extra few hours, or selling your car to someone who needs it more than you do. This is why incentives are important. And it is the basis of the major objection to high taxes and redistribution - it is meant to dilute incentives and discourage people from achieving maximum economic productivity. So what if the tax is a complete surprise? If a government creates a straight one-off windfall tax, it cannot affect economic behaviour before the windfall, because it is unforeseeable. It should not, in theory, affect economic behaviour after the windfall, because it is a one-off tax and therefore there is no reason to expect it will happen again. So why don't governments finance all their operations by a series one-off windfall taxes? Beca...

The Geary behavioural blog explores some research from Garth Brooks into time discounting and uncertain preferences. Who knew he had a second career in economics? But he evidently does: Garth has proved his credentials as a behavioural economist by not writing down an actual model for his theories; instead, he just tells an anecdote and we're meant to make our own inferences. He'd fit in just fine in J.Econ.Psych. Multitaskers are bad at... multitasking, according to the BBC . In my own model of the mind, this is one of the key factors that accounts for much of the behaviour we see in experiments. In complex situations, to rationally optimise for the ideal outcome requires us to near-simultaneously adjust and monitor several different variables. In reality cognitive limits prevent us from doing this, so we either miss opportunities to optimise, or we use heuristics which combine multiple variables into one (and that can only be an approximation). In this context, heuristics m...