Knowing and Making

This New Yorker article about why so many Americans are single reminded me of the debate about unemployment prompted by Casey Mulligan . Here’s why: From the New Yorker: "...do people live alone because they want to or because they have to?" Paraphrasing Mulligan and his critics: “Are workers choosing to be unemployed or are they forced to be?” [actual quotes from Mulligan: " there are sensible people ...who will recognize that 2009 is not the time for them to...commute a long distance to work...[unemployment insurance has] dramatically reduced the costs to them of making this the year they coach junior's baseball team, or do some work on their house, or spend time with an ailing parent" " the market tends to create and allocate jobs for those people who are most interested in working " and " my research has been to examine...changes in the willingness and availability of people to work " versus Dean Baker's " this does not m...

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 ...

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 enter...

No, it's not a Matt Damon film... Richard Wiseman has an interesting experiment over at his blog this week. Have a look at it before you read on - or if you do read my post first, please don't participate in his experiment in case you bias the results. Back now? The experiment combines two really interesting cognitive principles. It's an example of the ultimatum game , a game theory experiment which measures our attitude to fairness. In a rational world, the person making the split should offer their partner just £1 (or even £0) and the partner would have no reason to refuse. In the real world, people do tend to refuse offers less than about £3, and knowing this, the offerer tends to offer an average of about £4.40, with a strong peak on the even split, £5. One thing that interests me is that many of the commenters - even though they are on the blog of a leading popular psychologist - have evidently never heard of the ultimatum game, which is one of the most famo...

David Karp comments on the Hamilton city government's policy for swine flu vaccines ( also here ): I think part of the problem trying to figure out how to allocate vaccines is figuring out what our policy goal is. Is it to cut down on externalities? Giving preference for emergency workers and child care workers makes sense in that regard, because most people in society benefit from these people being healthy enough to work during a pandemic. Is it about fairness? If so, is it really fair that some people are considered more worthy of a vaccine than other people simply because of their age, how they caught the flu, or the type of work they do? Is it about using the vaccine available to cure as many people as possible? In that case, the fifth criteria -- giving the vaccine to those most likely to survive a particular strain -- seems like the best to use. Or should the criteria be economic efficiency: those who have the highest maximum willingness to pay for the vaccine get it? Actua...

This story , from the Washington Post via Free Exchange, is a perfect example of the challenge for behavioural economics. For weeks after he was laid off, Clinton Cole would rise at the usual time, shower, shave, don one of his Jos. A. Bank suits and head out the door of his Vienna home -- to a job that no longer existed. It's easy to look at this and say "he's not behaving rationally. How amusing - people are a bit nuts sometimes". It's much harder to look at it, work out a plausible model for why he behaves that way, find an abstract description of the model, extrapolate it to other situations which appear different on the surface, and test your theory against experiment or data. But that's what behavioural economics - or cognitive economics, or the study of decision-making - has to do. I've just finished Vernon Smith's memoir Discovery , about which I may write more later - but here's a very perceptive couple of quotes: ...the cognitive psychol...

Mark Thoma reports Robert Shiller's article on the psychology of the asset bubble and bust , and asks " how to implement this forecasting technique - one based upon a theory of the mind ". I have been working in this area for some time and can suggest the following as a possible framework. I don't know if Shiller has something like this in mind - I suspect not - but I do think it will be a step in the direction that he calls for. Note that this is not yet a fully developed model, but a proposal for how such a model might look. While standard economic theory deals with a set of goods , I propose instead that there are a set of concepts  in the world. We can imagine some of these as corresponding directly to traditional goods - for example the concept of a loaf of bread  or an economics PhD . These concepts are mental constructs and not physical ones; they represent the relationship of a person in this model to the ideas  of bread or PhDs. Next, let us define concepts w...

Stephanie Flanders (and earlier, Tim Harford ) raise an interesting question today. As they point out, changes in individual circumstances tend to dominate the macroeconomic aggregates - increases and decreases in individual income are usually much greater than the 3% increase or decrease in the output of the whole economy. Of course, a 3% decline in GDP means that a few more incomes have fallen than risen - but on the face of it, this is a minor effect. So what explanations could there be for the fact that we worry so much about recessions? First, some of the effects are very visible. Lots of people lose their jobs - and a million more people out of work will always create some high-profile news stories. Second and related, the media (and the public) select stories which confirm their overall narrative. Any newspaper whose main focus of the last two weeks was on the 9,000 new jobs at KFC rather than the 850 job losses at Mini would not look credible - its narrative would be out of st...

More on bailouts: Paul Greenberg in the New York Times says we should bail out writers. Of course, he doesn't analyse the economics properly - but what should we expect - he's a writer. No doubt it would be useful to reduce the oversupply in the writing market; but should we also then be paying bloggers not to post? Is this how farm subsidies got started? And Richard Posner follows up an earlier article about the US automotive bailout arguing that the three big US car companies are fundamentally insolvent but it is better to support them another couple of years and then  let them go bust. I sympathised initially with this view but the comments on that posting - mostly taking the opposing view - are actually quite persuasive. If the companies are going to go bust anyway, maybe now is the time to get the bad news out of the way; rather than wait till a fragile confidence is taking hold and then shatter it again. Posner's argument is (I think rightly) psychological; but so i...

This article is from October, but germane to my discussion of fiscal salesmanship. Cass Sunstein: Wall Street's Lemmings : Why policymakers need to understand psychology as much as economics to solve the financial crisis. A couple of comments below the article point out that psychology is not the only  cause of the financial crisis, but Sunstein is not claiming that. Undoubtedly it makes a big contribution and turning it around (he uses the example of Roosevelt, maybe the best fiscal salesman ever) is within the powers of politicians - Barack Obama of course being the one most capable of it, for many reasons.

Another interesting blog from Robert Peston...London Scottish, a small bank, has had its deposits fully guaranteed because of the risk of contagion if it were allowed to fail. It is too small to matter systemically in itself, but it is felt that the message it would send is too dangerous and would result in lots of other small banks having funds withdrawn to the point where many of them would collapse too. It's a barely avoidable decision, the way Peston tells it. But there's a big question here. Where does it stop? First, all major (too-large-to-fail) bank deposits were implicitly guaranteed. Now, all small banks are guaranteed. You might think bank deposits are privileged. But what about deposits in credit unions or Christmas hamper schemes? They are quite like banks. Now what if I have put money into some other kind of scheme - say a cash ISA. If that's not guaranteed, will people take all their money out of those? What about other types of investment fund? Life insuran...