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I feel like I’m going crazy- this is backwards, right?
I’m pretty sure I was taught that one of the side effects of strong unions is that they discourage hiring, both because unions tend to lobby for above-market wages and because companies are hesitant to hire employees when they know that said employees will be difficult to get rid of. If you don’t believe me, ask France.
Update: In related news, this exists. Also, if you want to noodle on the pros and cons of “right to work” laws, I suggest you look into how to become a member of the Screen Actors’ Guild.
First off, HAPPY THANKSGIVING! I am very thankful that you all read my online ramblings
Once you get drowsy from eating too much Thanksgiving dinner (and no, it’s not the turkey, that’s mostly an urban legend, unless of course you ate the entire turkey), you should feast on what Dan Ariely has to say about giving:
Also, it’s a bit late for dietary advice, but in case you are curious how behavioral economists think about planning a Thanksgiving meal, this is totally for you. Actually, it should probably be for everyone, given that the average Thanksgiving dinner contains about 4,500 calories, or, for context, the recommended caloric intake for at least two days. If you feel like this excessive smorgasbord of calories has been getting more extreme as of late, it’s likely at least in part because the stuff that goes into making Thanksgiving dinner has gotten much cheaper in real terms over time.
Soooo…you may have noticed that I am writing rather than eating turkey and making awkward small talk with family members on this fine Thanksgiving day…that is largely by design, and the photos of the airports and train stations that have been floating around on the Internet suggest that my strategy is in fact optimal on a number of levels. (I suppose it also helps that I am not alone in choosing this strategy and that restaurants in Boston are more than happy to exchange money for turkey and stuffing…and cocktails.) Even so, I am quite pleased that Massachusetts is one of (I think) three states that has blue laws that prevent most retail establishments from opening on Thanksgiving. (Since Massachusetts is a small state, it’s probably helpful to know that the other two states with such laws are Rhode Island and Maine.)
But wait- shouldn’t I be against seemingly arbitrary regulation? Yes, and I am more than happy to explain myself…but let me give you some more Massachusetts fun facts first:
Until a few years ago, blue laws in Massachusetts stipulated that liquor stores in Massachusetts couldn’t be open on Sunday unless one of two conditions was met- either the store was located within 3 miles of the New Hampshire border (since liquor stores in New Hampshire were open on Sundays and it was easy for customers near the border to take their dollars out of state) or it was between Thanksgiving and New Year’s Day (I have no idea what the reason was for that one). Once discussions about repealing said laws began, many were surprised to find out that many liquor store owners were vehemently opposed to repealing the law. Their (likely correct) reasoning was that people knew that the liquor stores weren’t open on Sunday and, in most cases, planned accordingly, so opening on Sunday wouldn’t add a while lot to overall demand. It would, however, add to the store’s cost, so it would lower the store’s profits. (In other words, the store owners didn’t think that the incremental demand would cover the variable costs associated with being open on Sunday.) Furthermore, it wouldn’t make sense for a single store to refuse to open on Sunday, since customers could easily find one that is open and therefore don’t have an incentive to plan ahead. Overall, repealing the law was probably good for consumers but probably not good for producers.
Most of the same logic holds for stores being open on Thanksgiving, since both scenarios have the characteristics of a prisoners’ dilemma, or, more specifically, an arms race. Each store believes that it has to do what all the other stores are doing (or even more) or their customers will go elsewhere, so we end up in situations where stores are opening on Thanksgiving and trying to get people to shop rather than enjoy their Thanksgiving dinner. Consumers, for their part, see many deals that are either for a limited time or that will run out of stock quickly, so they (perhaps rationally) are compelled to forgo the turkey for the shopping sprees even though most of them would prefer to have a nice meal with family and do the shopping later.
The thing about both the prisoners’ dilemma and the arms race is that all parties are better off if their actions are constrained. In the same vein, Massachusetts is (probably unwittingly) being mostly helpful by constraining the actions of retailers- people can have their Thanksgiving dinner and still make it to the stores when they open, no one is cajoled into working on Thanksgiving (I get that this reduces labor hours, but the general consensus appears to be that retail workers don’t want to work on turkey day), and the stores aren’t likely to see their sales suffer, since it’s unlikely that the Thanksgiving shopping is actually incremental spending. (There’s not even really an incentive to go shop out of state, since customers will have the same deals available in Massachusetts on Friday morning.)
Or, in short, both Massholes and the businesses that they frequent should give thanks to their state government for helping to nip a coordination failure in the bud. Regulation that turns out to be useful- looks like a Christmas miracle came early this year. =P
This video reviews how to calculate costs and maximize profit in competitive markets and then discusses how to determine market supply and profit in the short run and how to analyze the transition to the long run. The problem is taken from Principles of Microeconomics, 6th Edition, by N. Gregory Mankiw, and is Ch. 14 problem #12.
You can find more practice problems via the Practice Problem of the Day category archive or by visiting the Econ Classroom page. You can also be notified of new practice problems by subscribing to the YouTube channel.
When deciding whether or not to read something, I tend to focus more on who the author is than on the specific headline. This probably explains how I came across an article by Hoover Institution fellow Paul Gregory and clicked on it without looking closely at what it was about. (As far as I can tell, Gregory isn’t a particularly big name or anything, but he does work on Russian economics, which is interesting to me since my family is Ukrainian. #thingsgregmankiwandIhaveincommon)
In retrospect, the title “Lee Harvey Oswald Was My Friend” probably should have tipped me off to the fact that the article was not actually about economics. In my defense, however, I can totally picture some super conservative economist being politically incorrect and using such a title for an article about how marginal tax rates during the Kennedy administration were too high or something. (While said economists would be correct that marginal tax rates were very high at that time- up to 91%, in fact, it should be noted that Kennedy was on board with lowering them but didn’t have the chance to do so because his plan got rejected by Congress, so the job was left to Lyndon Johnson instead.) Anyway, this article is probably more viscerally fascinating than anything about economics could ever be. No offense to economics, of course, but dude, how many people can say that they inadvertently insulted Lee Harvey Oswald’s writing skills?
Since the 50th anniversary of the Kennedy assassination seems to have brought the conspiracy theorists out of the woodwork, I think it would be totally appropriate for you to tell your boss that you have to leave work early so that you can go home and watch JFK.
I suppose I am a fairly lazy employee, at least in a typical sense, since I do much of my work at home with the television on in the background. At night, this process generally entails reruns of The Big Bang Theory, since by this point I’ve watched the episodes enough that I don’t feel the need to give them my full attention. During the day, on the other hand, I usually have the television tuned to some sort of news channel. Today was no different, especially since I needed something to keep me at least partially entertained while grading exams, except that I found myself getting incredibly distracted by Obama’s presentation of the Presidential Medal of Freedom.
I won’t lie- I think it was either Oprah or Loretta Lynn that first got my attention (if you don’t love Oprah then I am convinced you are dead inside), but after a minute or so I noticed that behavioral economist Dan Kahneman was also on the list…so I started watching and then was late to class because I still had tests to grade. Sigh.
Apparently this award isn’t entirely unheard of for economists- a quick scan of the recipient list turns up Gary Becker, Milton Friedman, John Kenneth Galbraith (twice!), Alan Greenspan, and Friedrich von Hayek, but it’s still pretty neat- especially given that the award was instituted by John F. Kennedy, whose assassination took place 50 years ago almost to the day. (November 22, 1963, in case you are curious.) It was also pretty exciting (I am told I have a strange definition of exciting) to hear the phrase “prospect theory” on national television. Anyway, the 16 recipients in this bunch are a diverse and interesting group, and you can read a bit about each of them here.
From this, I can conclude that President Obama has at least a passing knowledge of prospect theory…which means it’s only a small logical jump to realizing that status-quo bias is a thing. Therefore, I am hoping that there was a conversation between Kahneman and Obama during lunch or cocktail hour or whatever that went like this:
Kahneman: So, Mr. President, I have a fun empirical result that I want to share with you.
Obama: Oh really? Do tell.
Kahneman: A test of status quo bias in a field setting was performed by Hartman, Doane, and Woo using a survey of California electric power consumers. The consumers were asked about their preferences regarding service reliability and rates. They were told that their answers would help determine company policy in the future. The respondents fell into two groups, one with much more reliable service than the other. Each group was asked to state a preference among six combinations of service reliabilities and rates, with one of the combinations designated as the status quo. The results demonstrated a pronounced status quo bias. In the high reliability group, 60.2 percent selected their status quo as their first choice, while only 5.7 percent expressed a preference for the low reliability option currently being experienced by the other group, though it came with a 30 percent reduction in rates. The low reliability group, however, quite liked their status quo, 58.3 percent of them ranking it first. Only 5.8 percent of this group selected the high reliability option at a proposed 30 percent increase in rates.
Obama: Is that from the paper that Richard Thaler keeps trying to slip under my door every time he’s over here nowadays?
Kahneman: It’s probably the same paper, yes, since we are both authors on it.
Obama: Ok- so what exactly is your point?
Kahnmen: Well…do you think we have any reason to believe that this result would change much if I were to replace “electric power” with “health insurance?”
Obama: Probably not, since status-quo bias doesn’t seem to be context-spec…ohhhhh, I see what you did there. Did Clinton put you up to this?
Kahneman: No sir…here’s my card with my contact information on it, and please feel free to hit me up when you are pondering policy choices that may be affected by behavioral biases and you can’t get ahold of Thaler. Also, here’s a copy of my book, in case you have a lot of free time coming up.
Obama: Thanks. *mutters something about the book making a good doorstop if nothing else* Seriously, did Bill put you up to this? At this rate, I am pondering honoring Kennedy’s legacy by instituting a Presidential Medal of Pain in the Ass and giving it to the two of you.
Kahneman: I approve, but only if you retroactively give one to Greenspan as well for that whole deregulation thing, sir.
Obama: That’s not the worst idea I’ve ever herd.
Kahneman: You’re welcome.
This video shows how to determine at what prices a firm will be making an economic profit and at what prices a firm will want to shut down. It also explains at what prices a firm’s supply curve will give positive quantities of production The problem is taken from Principles of Microeconomics by Dirk Mateer and Lee Coppock, and is Ch. 9 problem #5.
You can find more practice problems via the Practice Problem of the Day category archive or by visiting the Econ Classroom page. You can also be notified of new practice problems by subscribing to the YouTube channel.
As a behavioral economist, this is probably the the most exciting thing I will read all week. From the American Economic Association:
Dear AEA member:
The AEA has launched a new site to register randomized control trials (RCTs). The AEA encourages all investigators to register new and existing RCTs. Registration is entirely voluntary and is not currently linked to or required for submission and publication in the AEA journals.
The site is available at https://www.socialscienceregistry.org
On this site, you can register your forthcoming, ongoing, or even completed RCTs, with as little or as many details as you wish. The site will also permit you to store and make publicly-available additional information on your RCTs (reports, articles, data, and code). We believe that this will prove to be a very valuable resource for investigators to share their work and the site will be widely used by those who wish to find out about on-going and completed studies.
The registry is characterized by:
1) Simplicity and flexibility: Registering a trial is straightforward with only a minimal number of required fields. There is considerable flexibility to provide additional material at the time of registration or at any point in the life of the study. Materials can also be hidden from public view until completion of the study, or be made accessible only with the permission of the PI.
2) Adjustability and memory: Any registry entry can be amended by the PI at any point, but the registry keeps track of all versions.
3) Ability to work as a research portal for your RCTs: The registry can serve as an access point for collaborators, other scholars, students, and the general public providing links to data sets, survey instruments, experimental findings, and experimental protocols.
To register a trial, the PI simply needs to enter the following information: PI name, project title, study location, project status, keyword(s), abstract, trial start and end dates, intervention start and end dates, proposed outcome(s), experimental design, whether the treatment is clustered, planned number of clusters, planned number of observations, and IRB information. Optional fields allowing the PI to customize and enhance the information made available include details on sponsors and partners, survey instruments, an analysis plan, and other supporting documents. Help is available if the PI encounters any problem.
The AEA registry system will provide the PI with reminders to update the registration of an RCT at appropriate points in the trial’s lifecycle. For example, the submitted end date will trigger an email asking the PI to enter post-trial information. If the trial has been extended, the PI can update the trial with the new end date.
We encourage you to explore the registry and to register your RCTs.
The committee on the registry for social experiments
Larry Katz (chair)
So why is this important? I think this pretty much sums it up:
I’ve written about this before- in general, a finding is only considered statistically significant if there is less than a 5 percent chance that the observed result would have happened by random chance. (Hence the use of the 0.05 value in the cartoon.) But think this through a bit- if something has a 5 percent chance of happening randomly, then, on average, that result will be observed one time out of 20 even if there is nothing systematic going on. Therefore, it doesn’t mean a whole lot to see one result that has less than a 5 percent probability of occurring by random chance unless you know that there aren’t a whole bunch of studies out there that tried the same thing and didn’t get the observed result.
This registry is a fantastic development since, if used properly, it will keep track of all of those non-result studies that would otherwise be hidden in researchers’ desk drawers or on their hard drives and therefore be unobservable to someone trying to determine the validity of the research that is actually published. I say “if used properly,” since it’s only helpful to the degree that we can be confident that everyone is actually registering their experiments. Given this, I’m somewhat surprised that the architects of the system didn’t make pre-experiment registration a prerequisite for publishing in an AEA journal, but I’d be willing to bet that that will be coming eventually. Baby steps, I suppose.
If you still want to think more about publication bias and the reliability of the scientific results that you see, check out the following:
(You should know that I spent about 30 minutes figuring out how to disable the annoying autoplay feature. You’re welcome. You can also see the video directly here, especially since I can’t seem to get the sizing to work properly…but consider yourself forewarned about the autoplay issue.) Granted, the conclusions in the video depend heavily on the number used for the proportion of hypotheses that are actually true as well as the assumed rate of false negatives, but the concept is still worth pondering.
This video goes through an example of producing versus shutting down in the short run and shows how to apply the shut-down condition. It also shows how to determine whether a firm would want to exit an industry in the long run The problem is taken from Principles of Microeconomics by Dirk Mateer and Lee Coppock, and is Ch. 9 problem #10.
You can find more practice problems via the Practice Problem of the Day category archive or by visiting the Econ Classroom page. You can also be notified of new practice problems by subscribing to the YouTube channel.
I apparently have the approximate maturity level of a 12-year-old boy, since I cannot stop laughing at this:
I think part of my amusement comes from the fact that Tyler Cowen took up the cause of overthinking Zach’s cartoons, and there are some choice comments on that post. In case you don’t have time to read them all, just know that the best ones focus on the demand for $2 bills by strip club owners and a perfectly reasonable, in my opinion, speculation regarding the degree to which Canadian strippers jingle, and there are plenty of bad puns involving concepts such as “convexity” and “sticky wages.” (In related news, I’m a tad bitter than I didn’t think of the puns first.)
Tyler’s overall point is that strippers may actually prefer inflation:
Let’s say the standard tip is a dollar, and price inflation lowers the real value of that dollar. A lot of customers won’t substitute into stuffing $1.43 into the stripper’s garments. They might do two or three singles, but strippers will be shortchanged at various points going up the price pole. There is something about handing out a single bill that is easier and more transparent, or so it seems.
Say inflation gets high, or runs on for a long time for a large cumulative effect. At some point the customers switch to giving $5 bills.
Does it help strippers if the Fed issues lots of $2 bills? Well, the leap up to the larger tip comes more quickly, but the customers also stay at the $2 tip level a long time before moving up to $5.
At some margins inflation is bad for current strippers, but good for some set of future strippers. If the economy is close to the margin where individuals upgrade from a $1 tip to a $5 tip, then inflation is good for current strippers but bad for future strippers (for a while).
I think now is an excellent time for a discussion on nominal versus real wages. Nominal wages, which are what most of us are used to thinking about, are just the actual nominal-currency-denominated wages that a worker receives. Real wages, on the other hand, are wages that are denominated in terms of the amount of stuff that the worker can buy with the compensation. Put a bit more simply, real wages are inflation-adjusted wages. In order for the situation illustrated above to actually occur (and in order for Tyler’s argument to make sense), the consumers in the stripper market must have an interest in keeping strippers’ effective real wages stable in the face of inflation.
One reason that consumers might make strippers’ wages keep up with inflation is because they are worried that there will be fewer (or lower quality) strippers if real wages decrease. Of course, this line of reasoning requires the employment choices of strippers to be based on real as opposed to nominal wages. I have no data on whether strippers are more or less rational than the average person, but I do know that people are generally subject to money illusion, which causes their decisions to be biased by nominal as opposed to real values. For example, consider the following experiment:
(I couldn’t easily find an electronic version of the paper, so you get a photo of the hard copy, complete with my chicken scratch from when I was studying for my qualifying exams. Forgive my comment for being slightly idiotic in retrospect.) People seem to understand real versus nominal wages to some degree when specifically asked about them, but they aren’t good at using the real quantities when thinking about happiness or choices. This is, in part, why economists sometimes claim that a society can inflate its way out of a recession- if nominal wages don’t change and inflation is present, real wages decrease…but, if nominal wages don’t decrease, people likely won’t stop working. If businesses are better at thinking in real terms (not entirely convinced that they would be, since companies are made up of people, but go with me here), then they will be more willing to hire and produce more when inflation is present because real wages are lower and the price of the firm’s output is increasing. (The context of this discussion gives a whole new connotation to inflation having a stimulative effect.) By this logic, strippers likely should be wary of inflation, not for the reason illustrated above but due to the fact that it may instead lower their real wages. On the up side for some, however, lower real wages generally mean that will be more employment opportunities for strippers.*
In related news, the Consumerist proposes a savings strategy that is likely to be problematic for strippers…until Tyler’s hypothesized effect of inflation transpire at least.
* Technically, strippers are usually independent contractors who pay a commission to the club for use of the stage. And yes, this probably means that your favorite stripper knows more about business than you do.
This video explains how to think about the slope of the production function and its meaning. The problem is taken from Economics by Dean Karlan and Jonathan Morduch, and is Ch. 12 problem #9.
This is a conversation that I had yesterday with a friend:
Friend: documentary on ESPN right now that’s all you
Me: I only see SportsCenter…what am I missing?
Friend: ESPN 2
high school coach
agh you just missed it
Me: um, I was writing about that 5 minutes ago
Friend: someday i’ll tell you something you don’t know
but not today
Friend: until then
go *redacted* y’self
I never know whether to pretend that I haven’t seen things before, since I do worry that people will stop sending interesting things my way if they think I already know everything. (Far from it, in reality, so keep the links coming just in case.) It is nice to know, though, that my yelling at the television just about whenever a team punts on fourth down hasn’t gone unnoticed. (In case it’s not immediately obvious that I’m talking about football, there is a fairly nerdy description of the relevant rules in the appendix to the paper referenced below. Also, I recommend getting out more- even Sheldon Cooper knows the basic rules of football.) Why do I do such a thing, you may ask? Because of this:
This paper examines a single, narrow decision—the choice on fourth down in the National Football League between kicking and trying for a first down—as a case study of the standard view that competition in the goods, capital, and labor markets leads firms to make maximizing choices. Play-by-play data and dynamic programming are used to estimate the average payoffs to kicking and trying for a first down under different circumstances. Examination of teams’ actual decisions shows systematic, clear-cut, and overwhelmingly statistically significant departures from the decisions that would maximize teams’ chances of winning. Possible reasons for the departures are considered.
Who knew that David Romer did things that are cooler than writing graduate macroeconomics textbooks? (In fairness, I suppose that marrying Christina Romer is also cooler than writing a graduate macro textbook.) Anyway, the normal person translation of the above abstract is something along the lines of “football teams punt on fourth down far more than they should if their objective is to win football games.”
Recent history has shown that other sports (talking to you, baseball) have embraced the notion of using data analysis to guide decision making, so why haven’t Romer’s findings caught on? Do football coaches know something that he doesn’t? What would happen if Romer’s findings were to be put into practice?
(You can read more on the subject here.) Hey, who would’ve thought that numbers don’t always lie and can actually tell us useful things and help us make better decisions? Given this, why do so many teams blindly punt on fourth down? (Post hoc ergo propter hoc fallacy not withstanding, I find it of particular note that the coach stopped punting in 2005, the same year as the date on the Romer paper.) Interestingly enough, the explanation is almost virtually identical to that for herding behavior among mutual fund managers- namely, that people (probably correctly) think they are less likely to get fired if they make mistakes that everyone else makes than they are if they make their own mistakes:
Coaches are afraid. No one wants to be the guy who gets fired because he stopped punting. And the same fans and analysts who clamor for innovation are actually fueling that fear. The mob nearly tarred and feathered Falcons coach Mike Smith when he went for it on fourth-and-inches in overtime against the Saints in 2011. Bill Belichick almost lost his hoodie-wearing privileges after going for it on fourth-and-2 from his own 28 against the Colts in 2009. San Diego State coach Rocky Long announced before the 2012 season that he might stop punting, then had to field so many questions about it on a weekly basis that he began refusing to discuss his fourth-down plays with the media.
In other words, football doesn’t have a Billy Beane who is basically forced to do something unconventional due to a lack of other options. (Think about it- would we be talking about “moneyball” strategies if the Oakland A’s weren’t cash poor?) Good thing David Romer is a macroeconomist, since that way at least he’s used to organizations not taking his policy advice. =P
This video explains how to think about the difference between accounting profit and economic profit and shows how to calculate each. The problem is taken from Economics by Dean Karlan and Jonathan Morduch, and is Ch. 12 problem #8.
Whenever I give give a talk about behavioral economics or behavioral finance, one of the questions that inevitably comes up is whether learning about the cognitive biases that people exhibit make the biases go away. The answer to this question is probably less satisfying than my audiences would like, since the most correct response I can give is “sometimes.” As I’ve been asked this more and more, however, I figured I should put a bit more structure to my answer. Here’s what I’ve come up with so far, albeit based on mostly anecdotal evidence:
Unfortunately, I don’t have a complete taxonomy for determining which biases fall into which category (though this is an interesting area for further research!), but there is evidence that at least some people believe that biases can be coached away. From the NYT:
To cater to this demand, a whole new cottage industry has cropped up in which statisticians track performance data, and coaches and psychiatrists work to help hedge fund managers make smarter decisions by getting them to talk about their personal histories and biases. The thinking goes that if an athlete can use coaches, why not traders?
Two decades on, aided by the growing popularity of literature on the behavioral science of decision making, the idea that self-awareness can lead to better decisions in business and finance is beginning to be accepted on Wall Street. Borrowing from books like Daniel Kahneman’s “Thinking, Fast and Slow,” trading coaches talk about the systemic, recurrent and predictable mistakes to which humans are prone.
The article goes on to mention that there are over 50 behavioral biases that people are susceptible to…hmph- according to my Twitter contacts, they are missing quite a few:
— Mark Egan (@Makeuya) November 12, 2013
(You can also find more info at the Sterling Behavioural Science Blog.)
So I took a look at this self-proclaimed “Nudge Database,” and it’s pretty great- it’s got overviews, it’s got charts, it’s got citations, it’s basically got most of what a behavioral nerd could possibly want. (It’s also causing me to see any semblance of free time I may have had slip-sliding away.) In case you’re still not convinced, here’s an example of how the information is presented:
Fun, right? On one hand, I was going to say “you’re welcome” for providing this information, since it’s possible that knowledge leads to less biased behavior. On the other hand (there are no one-handed behavioral economists either), I’m not entirely convinced that being immune to nudges makes one better off, since the nudges help people overcome other suboptimal or biased behaviors. So…wellry? Sorrcome? I will have to think about this further.
This video shows how to analyze the market impact of a legally-mandated maximum quantity in a market. The problem is taken from Economics, 4th Edition, by R. Glenn Hubbard and Anthony Patrick O’Brien, and is Ch. 4 problem #3.11.
My behavioral economics students are taking an exam as we speak. On said exam is a question about whether people are good at predicting what their preferences are going to look like in the future. (Spoiler alert: they aren’t.) In class, we’ve gone through examples of this inability to predict future tastes that range from the reasonably mundane (people don’t appear to anticipate the endowment effect) to the socially important but awkward to talk about in class (people seem unaware that they will start liking a bunch of kinky shit once they are sexually aroused). This line of research began, like a lot of behavioral economics topics, in the psychology world, where researchers have found, for example, that people overestimate how much happier winning the lottery will make them.
The reason for the latter type of misprediction is that people are generally unaware that they are subject to the concept of the hedonic treadmill, which states that people’s expectations and tastes adapt such that people tend to revert to a baseline level of happiness after major positive or negative events. The corollary to the hedonic treadmill, not surprisingly, is that permanent increases in happiness require increasingly nicer toys as time goes on. In other words, this:
(Unfortunately, unlike Zach, I am less convinced that people have control over their hedonic treadmills, but I’m doing my part to educate just in case.)
Apparently this concept even holds between generations as Louis CK has pointed out on several occasions. This isn’t surprising, since later generations have norms and expectations of a higher level of technology, standard of living, etc. right from the start. (Luckily we haven’t seen any major decreases in technology or standard of living over time in order to see if the effect works in the opposite direction!) In a strictly economic sense, the failure of individuals to anticipate the hedonic treadmill implies that we tend to overestimate the utility (or disutility) that future consumption will bring. As I’ve pointed out before, this is certainly something to consider when deciding whether to purchase that new big-screen TV.
Good advice, just in time for the holiday season. =P
This video explains how to think about the tradeoff between externality cost reduction and the deadweight loss of taxation. It also discusses whether producers or consumers should pay corrective taxes. The problem is taken from Principles of Microeconomics, 6th Edition, by N. Gregory Mankiw, and is Ch. 10 problem #2.
This Halloween, I did what any sane economist would do on this fine day- I drove to New Haven to experiment on trick-or-treaters with Dean Karlan. When I explained this to my students, I mentioned that back when I was little parents were super afraid of people putting razor blades and other unsafe objects into kids’ candy (Dear Mom: This was apparently an overblown concern), whereas now it seems like one of the biggest things that parents have to watch out for is this:
Yes, that is Dan Ariely in a bee costume. You’re welcome. And it’s particularly thematically relevant, in fact, since Ariely conducted one of the experiments that I describe below. Anyway, it’s pretty typical when conducting research to write up a literature review that summarizes previous work related to the question your research is trying to answer. In addition, sometimes a literature review also touches on previous work that has been done using similar empirical methods, even if the topic of that work doesn’t perfectly match with the current research question. Therefore, I took it upon myself to find out what existing economic research has been done on trick-or-treaters. Obviously. (This is actually somewhat difficult to do, since if I search EconLit for “Halloween” I only get papers about the Halloween effect in stock returns.)
Study 1: Daniel Read and George Loewenstein (1995), “Diversification Bias: Explaining the Discrepancy in Variety Seeking Between Combined and Separated Choices”
Overall, this paper investigates whether people exhibit a diversification bias (i.e. choose more variety for the sake of variety) when they are asked to choose ahead of time what they want to consume in several future time periods compared to when they are asked sequentially at each point of consumption. In order to test whether differences in choice bracketing drives the difference in preferences, the researchers have one group of trick or treaters choose two candies (from a large selection of 3 Musketeers and Milky Ways I think) at one house and another group choose one candy at one house at one candy at a second house. Even though the difference in framing is trivial, since both candies go into the pillowcase or plastic pumpkin for later consumption, all of the children who were asked to pick two candies at once chose one of each kind, whereas only about half of those were were asked to make two separate choices did so.
Study 2: Kristina Shampanier, Nina Mazur, and Dan Ariely (2007), “Zero as a Special Price: The True Value of Free Products”
In this paper, Ariely (of the aforementioned bee costume) and his coauthors examine whether making a product “free” in an explicit sense (but not in an opportunity cost sense) biases consumers towards consumption of the free product, even when they have to pass up a better deal in order to get the free item. To answer the question, children were presented with three Hershey’s kisses and then asked whether they want to trade the kisses for a fun size or a regular size Snickers. In one condition, children were told that the fun size Snickers is free (FREE!) whereas they would have to trade in a kiss for the regular Snickers. In a second condition, children were told that they could either trade one kiss for a fun size Snickers or two kisses for a regular Snickers. Even though, in each case, the question to consider is whether it’s worth it to give up one more kiss in order to get the regular Snickers (and I think we can all agree the the regular Snickers is the better deal), far more children opted for the fun size Snickers when it was FREE!
Study 3: Santosh Anagol, Sheree Bennett, Gharad Bryan, Tiffany Davenport, Nancy Hite, Dean Karlan, Paul Lagunes, and Margaret McConnell (2008), “There’s Something About Ambiguity”
This study shows the correlation between ambiguity aversion (being biased against gambles where the relevant odds are not salient) and a child’s choice of costume. In this study, the researchers find that children who won’t take an ambiguous gamble over a clear one (as measured by a quick choice experiment) are more likely to have chosen costumes that are more conventional and commonplace.
Actually, this last one is but the first in a series of fun Halloween experiments that Dean Karlan has done, all of which are helpfully cataloged here. My personal favorite is the one that shows how kids’ preferences for fruit over candy can be strengthened by showing them a picture of Michelle Obama.
Anyway, I feel like I don’t need to write a whole lot about this year’s experiment, since a reporter for the LA Times wrote more than enough about it here. That said, you may have noticed that the article was published on Halloween, so there are no experimental results to be found. In other words, we hadn’t done this yet:
Empirically, here’s what Maria (my RA, pictured above) and I have got so far:
It’s probably not surprising that trying to elicit coherent and accurate responses from young children is pretty challenging, but I think the following photo underscores how much the Halloween element adds to the difficulty:
Yep, that’s a Yale undergraduate trying to get answers from a kid in a box. Research ain’t always glamorous, people.
This video shows how to work through the math of why corrective taxes to internalize an externality increase the value that markets create for society. The problem is taken from Principles of Microeconomics, 6th Edition, by N. Gregory Mankiw, and is Ch. 10 problem #7.
I first learned about the Monty Hall problem my sophomore year of college, and then, for some reason that I can’t even begin to remember, it was also discussed at the beginning of my graduate micro theory course. In other words, I’ve been annoyed by this problem for a good long while now.
The problem itself is pretty simple and based off of one of the games in the Let’s Make a Deal Game show, originally hosted by Monty Hall and now starring the guy who plays Barney’s cute gay brother on How I Met Your Mother. Anyway, the basic idea is that the contestant is presented with three doors, one of which has a car or something behind it and two of which have goats behind them. The contestant is told to pick one and then a door with a goat is opened, at which point the contestant can either stay with his original choice or switch to the other unopened door.
The math behind the problem isn’t what annoys me- it’s pretty simple to see that switching doors is a better strategy to get the car. Think about it- if you switch, the only way you lose if you had originally picked the right door, which would happen with probability 1/3. This leaves you with a 2/3 probability of getting the car. On the other hand, if you don’t switch, you only win the car if you originally picked the door with the car, which happens with probability 1/3. Instead, my beef with the problem is that it never considers the possibility that someone would actually prefer one of the goats:
Hear me out- preferring the goat isn’t nearly as absurd as it might initially seem. First of all, I currently own a perfectly usable car (except for that stupid check engine light) but have zero goats. Therefore, the principle of diminishing marginal utility suggests that, even though cars are generally more useful that goats on average, it’s entirely possible that a first goat might bring me more utility than a second car. I mean, where would I park a second car? (Please, asking where I would park a first goat is just silly.) Furthermore, I would have to pay taxes on much of the value of the “free” duplicate car, but I somehow doubt that the IRS would really try to argue that a goat would put me over the gift allowance. Lastly, I mean, COME ON…
To be fair, I don’t think that the game show uses pygmy goats, but I would argue that this would make the game more interesting, if for no other reason than it would add a layer of uncertainty regarding what the contestant was aiming to win. (Or, more realistically, maybe the contestants on the show don’t have the same utility function than I do, but at least the pygmy goats would make the show cuter.) Of course, we can’t ignore the obvious follow-up question: What strategy would maximize the goat-winning probability in the game?
To figure this out, we can use reasoning very similar to the logic employed above. If one doesn’t switch, then he will win whatever he initially chose, which will be a goat 2/3 of the time. If one does switch, the only way switching will result in a goat is if the person had originally chosen the car, which will happen 1/3 of the time. Therefore, staying with one’s original choice is the optimal goat-acquisition strategy. (It shouldn’t be surprising that the optimal goat strategy is the opposite of the optimal car strategy, but it’s nice to have the numbers to think about.)
It’s worth noting that the above analysis was conducted under the assumption that the contestant doesn’t care which goat he wins. Assuming that the contestant is shown the winnable items ahead of time, it seems reasonable that the contestant would have a preference for one goat over the other. Is it possible to incorporate this preference into the contestant’s strategy?
Unfortunately not- since a door with a goat is always opened following the contestant’s initial choice, the contestant knows that he is from that stage forward playing for either the car or other other goat, and he doesn’t have enough information to control which goat is initially exposed. That said, there is some opportunity for strategizing if the contestant preferred one of the goats to the car but preferred the car to the other goat.
In related news, I fail to understand why I have never successfully gotten through a game-show audition process. (Fun fact: A friend hooked me up with an invite to audition for Deal or No Deal a while back, and my “this is the only game show where being smart doesn’t help” schtick was working pretty well until they asked what I would do with the money. Pro tip: answers to this question that invoke the permanent income hypothesis tend not to be deemed television friendly.)