Knowing and Making

A fascinating question today on Robert Peston's blog which mixes rationality and game theory. Do shareholders of the merged Lloyds-HBOS want to retain the management (inherited from Lloyds) which got them to where they are today? The strictly rational answer is to look only at the future, and the expected value of retaining versus terminating the managers. Rational agents do not consider the past, as you cannot incentivise for past actions - they have already happened and there is no possibility to change them. In which case, shareholders should make a prediction about these executives' likely future performance. Of course, they do  need to use past actions and performance as data points in estimating future performance. Thus, absorbing HBOS which was probably an error of judgment, should be set against the other (generally smart) actions that they took while managing Lloyds. However, in reality people do consider the past while making these kinds of decisions, as if their cur...

Looks like the UK is just as bad as the US at protectionism. Energy workers are on strike demanding that Total not be allowed to hire Italian workers at one of its plants. Never mind that Total is a French company investing in the UK; never mind that free movement of labour is guaranteed in the EU; never mind that twice as many British people work in the rest of Europe than vice versa. Apparently we are supposed to kick out a supplier with whom Total has freely contracted. Unfortunately this seems to be an example of rational ignorance in the political market. It requires a certain effort to educate oneself about an issue and make sufficient political fuss about it to influence anyone. The typical protectionist policy creates worthwhile benefits for a small consituency (let's say steelworkers) while the costs are spread among a far larger population. It's worth it for the steelworkers to run a campaign (or pay their unions to do so) to grab their $20,000 each; but too much tr...

To maintain an insight into the economic news and a reliable interpretation of it, you can do one of two things: Pick someone (or a few related people) that you trust and read everything they write. Your choice may be Paul Krugman, Mark Thoma and Brad DeLong if you're broadly left-wing; or Greg Mankiw and Arnold Kling if you're rightish. Or shall I replace 'left' and 'right' with 'Neo-Keynesian' and 'Monetarist-Austrian'. This has the advantage of providing a (fairly) consistent viewpoint and lots of additional evidence to confirm that it's true. Read both, try to reconcile the differing viewpoints on the same issues and figure out which one is correct - or even if the truth is somewhere in between or outside of both. Needless to say, the second is more challenging and perhaps leads to more accurate views - but of course there is a much higher cognitive load. And you still have to do some kind of filtering - for example do you also read all t...