Knowing and Making

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...

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. Equiva...

As promised, a more detailed to Chris Dillow's posting Is behavioural economics wrong? Analysed in comparison with Age and time discounting from the Geary behavioural blog. The key factor to note in the research Chris posts (by Laurie Pounder ) is that it is based on a very different age cohort from most behavioural experiments. The subjects were aged between 53 and 73 because the author wanted to better understand the behaviour of those who contribute the majority of savings in the US economy - which happens to be that age group. As Chris mentions, the results show that people over -save compared to the theoretical prediction of the permanent income hypothesis (PIH). This hypothesis predicts that rational people will smooth their consumption over time according to their expected lifetime income - borrowing if their income is lower than the lifetime average, or saving if it's higher. The results, however, indicate that people save more and consume less than the theory predic...

Most economists agree that some of the effect of fiscal (and monetary) expansion arises from expectations. There are arguments about how strong the effect is, but expectations of future policy almost certainly have some effect on current decisions on both investment and consumption. I believe that a hyperbolic discounting effect occurs here, and thus expectations of the next couple of years are disproportionately more powerful than expectations of the years following. This is one reason why the theory of Ricardian equivalence does not work. Mostly the supposed future tax increases are far enough in the future - and also uncertain enough - that they are almost completely discounted by most decision makers. So it's interesting to see the competition that Stephanie Flanders highlights between Gordon Brown, Andrew Lansley and the NHS Confederation. Lansley is at pains to stress that the Tories will cut spending, while Brown is keen to point out that Labour will not. Of course as Steph...

Is it true that people get more rational when they have more time to make decisions? Intuitively this would make sense. And if so, it partly explains Fred Goodwin's willingness to pay back the £2.7 million lump sum he's received from his pension pot, in return for bumping his annual pension income back up from £555,000 to £703,000. This is a rational decision on the face of it, because it equates to an annuity rate of about 5.5% - which, although it's a level which should be available in the marketplace, is better than the 4.4% he is getting on the whole pension. In which case, why did he take the cash in the first place? This is the phenomenon of hyperbolic discounting  - where people overweight the value of cash or other benefits now, compared with the future. Time discounts, of course, are perfectly rational in themselves - but people discount more sharply in the current year than if they are pre-committing themselves for future years. Possible explanations for this phe...

Stephanie Flanders expresses an opinion which seems to reflect the conversation throughout most economics blogs, as well as - she suggests - in the City. That is, we are either due for severe deflation or high inflation - nothing in between. Interestingly, the deflation story mainly comes from the authors of the blogs, while the runaway inflation opinion is mostly in the comments. You might say that shows which opinion reflects economic orthodoxy, but not necessarily which one is more likely to be accurate. The most likely scenario may in fact be "both" rather than "either". Deflation in the short term, which we hope will be arrested by the immense monetary and slightly-less-immense fiscal stimuli coming out of most rich-country governments. Followed by inflation in a couple of years, which central banks will try to contain by mopping up excess money supply - with no consensus on their likelihood of success. Most economists would say that the inflation is a price w...