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The Birth Of Capitalism…
Posted: Mon, 14 May 2012 21:02:23 +0000
Greg Mankiw refers to this as “Economic Principle Number 5: Trade can make everyone better off”:
Trade is important because, without it, it would be pretty difficult for some of us to survive only consuming what we produce well, especially those of us who haven’t figured out how to eat economics lessons yet. Technically, however, trade only gets us part of the way to what we would consider capitalism, since direct trade (i.e. barter) still requires a double coincidence of wants. The guys in the example above are fortunate in that each wants what the other has (hence double), but this isn’t usually the case, since, as far as I know, I don’t see a plethora of farmers and house builders consuming my economics lessons. (Holler if you’re out there, though.) Therefore, I’m guessing things really started taking off when these guys figured out how to use some of the smaller rocks as money.
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Science Versus The World, Violent Video Games Edition…
Posted: Thu, 10 May 2012 21:41:34 +0000
Hmmm…
My first thought is to wonder if this is the article that the guy read:
EFFECTS OF VIOLENT VIDEO GAMES ON AGGRESSIVE BEHAVIOR, AGGRESSIVE COGNITION, AGGRESSIVE AFFECT, PHYSIOLOGICAL AROUSAL, AND PROSOCIAL BEHAVIOR: A Meta-Analytic Review of the Scientific Literature
Research on exposure to television and movie violence suggests that playing violent video games will increase aggressive behavior. A metaanalytic review of the video-game research literature reveals that violent video games increase aggressive behavior in children and young adults. Experimental and nonexperimental studies with males and females in laboratory and field settings support this conclusion. Analyses also reveal that exposure to violent video games increases physiological arousal and aggression related thoughts and feelings. Playing violent video games also decreases prosocial behavior.
Unfortunately, this doesn’t really answer the underlying policy question- after all, it’s called a “cost-benefit analysis” and not a “cost-analysis” for a reason, so it’s incorrect to come to a conclusion after examining only one side of the cost-benefit puzzle.
Economists Gordon Dahl and Stefano DellaVigna take the analysis to another level even and investigate whether these aggressive behaviors actually manifest themselves in increased incidence of violence. Apparently not only is the answer no, but the effect actually appears to go in the opposite direction:
Laboratory experiments in psychology find that media violence increases aggression in the short run.We analyze whether media violence affects violent crime in the field. We exploit variation in the violence of blockbuster movies from 1995 to 2004, and study the effect on same-day assaults. We find that violent crime decreases on days with larger theater audiences for violent movies. The effect is partly due to voluntary incapacitation: between 6 P.M. and 12 A.M., a one million increase in the audience for violent movies reduces violent crime by 1.1% to 1.3%. After exposure to the movie, between 12 A.M. and 6 A.M., violent crime is reduced by an even larger percent. This finding is explained by the self-selection of violent individuals into violent movie attendance, leading to a substitution away from more volatile activities. In particular, movie attendance appears to reduce alcohol consumption. The results emphasize that media exposure affects behavior not only via content, but also because it changes time spent in alternative activities. The substitution away from more dangerous activities in the field can explain the differences with the laboratory findings. Our estimates suggest that in the short run, violent movies deter almost 1,000 assaults on an average weekend. Although our design does not allow us to estimate long-run effects, we find no evidence of medium-run effects up to three weeks after initial exposure.
I read this as “violent movies make people want to punch other people in the face, but they don’t actually do so because they are busy not drinking and watching movies where people punch other people in the face.” As usual, science FTW. Though I have to wonder who doesn’t just smuggle booze into the movie theater.
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Economics Is The Worst Major, Except For All The Others…
Posted: Mon, 07 May 2012 19:39:10 +0000
To misquote Winston Churchill, “Economics is the worst major, except for all those other majors that have been tried from time to time.” At least some people agree that all majors are pretty terrible:
Hmph. I still think the world needs to understand that not all economists are hand-waving macroeconomists…I mean, does anyone really want to knock the science of conducting randomized policy experiments in Africa, for example?
Unfortunately, I’m not getting much sympathy from my friends on this issue:
me: *seethes mildly*
friend: =P Hey, I’m the physicist whose career redirected to “engineer”…
me: at least it didn’t redirect to finance, which would also have been apt from what I see around me
I also can’t get the Studio 60 “model of a modern network TV show” version of this out of my head now:
I can’t promise anything, but Jarret may have hinted that there will be another musical number in our future.
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When Econ Nerds Write For Music Nerds…
Posted: Fri, 04 May 2012 21:13:05 +0000
I’ve given talks about consumer behavior and the music industry before, and I recently got the opportunity to write my first official article on the subject. I figure if I’m going to be writing about the music industry, the Berklee Music Business Journal is a good place to start, right? You can see the article here, and it explains the behavioral considerations that musicians face when trying to price their products:
In 2010, musician Sufjan Stevens sent a letter to his fans via his record label, Asthmatic Kitty. There, he outlined his concern regarding the possibility that Amazon might sell the digital version of his album, The Age of Adz, at a low price point–as it had done with several other bands such as Arcade Fire, who benefited immensely in terms of promotion and chart placement. Stevens was especially concerned about the effect that a low price would have on consumers’ perceptions of the value of recorded music. For him, an album was “worth more than the cost of a latte” and should have been priced so. At the time, Amazon’s general policy had been to pay the artists and label the full wholesale price of the album and then, as a marketing tactic, sell the product at a loss.
It’s tempting to dismiss Stevens’ comments as simply being the manifestation of an artist being himself. From an economic and psychological standpoint, however, his view may have academic merit. To evaluate Stevens’ reasoning, in fact, the landscape of pricing research has to be considered as it applies both to recorded music and the music industry in general.
In going through the article, I noticed that a number of editorial changes were made (which I may or may not approve of), so I am posting the original version in its entirety below.
LPs and Lattes: The Challenge of Pricing Recorded Music Pricing strategy is a critical issue for virtually any industry, from automobiles to music, and economists and psychologists have plenty to say about pricing that extends far past what one may have learned in Economics 101. Unfortunately, the evidence doesn’t lead to a clear prediction for recording artists, but understanding the tradeoffs involved in setting a low price versus a high price is crucial to developing a profitable and sustainable business model.
As both an economist and avid music consumer, the motivation for much of my thinking on the subject of pricing comes from a letter that musician Sufjan Stevens sent to his fans via his record label, Asthmatic Kitty, in 2010. In this letter, Stevens outlined his concern regarding the possibility that Amazon might sell the digital version of his new album, The Age of Adz, at a low price point, as it had done with several other bands such as Arcade Fire (who benefited immensely in terms of chart placement due to the promotion). Interestingly, Stevens’ concern was in no way a monetary one, since Amazon’s general policy had been to pay the artists and labels the full wholesale price of the albums and then sell the product at a loss as a marketing tactic. Instead, Stevens was concerned about the effect that the low prices have on consumers’ perceptions of the value of recorded music, even going so far as to lament that an album is “worth more than the cost of a latte” and should be priced as such.
It’s tempting to dismiss Stevens’ comments as simply being the manifestation of an artist being an artist, but, from an economic and psychological standpoint, these sorts of statements regarding pricing may actually have objective merit. In order to evaluate Stevens’ reasoning, let’s look at the landscape of relevant pricing research and consider how the principles apply to recorded music and to the music industry in general.
The Law of Demand and the Mere-Exposure Effect There are a number of potential reasons to set a low price for a product. The first is basic economics- a lower price means that more people are willing and able to buy the product. Depending on how responsive consumers are to changes in price (how elastic demand is, in economic terms), it may be more directly profitable to charge a low price than to charge a high price, especially for digital products that have incremental production costs of virtually zero. For example, it’s more profitable to sell 10,000 digital downloads for $1 each than it is to sell 3,000 digital downloads for $2 each, since each additional download doesn’t cost anything to produce.
In addition, the benefits of increased sales volume potentially extend past direct profit in and of itself. Psychologically, the mere-exposure effect suggests that people simply tend to view things that are familiar more positively than things that are unfamiliar. (Have you ever wondered why you almost involuntarily start to like that song that you are bombarded with over and over on the radio? This is why.) Therefore, musicians benefit indirectly when people buy and listen to their music because, to some degree, those consumers are increasing the familiarity of the music not only for themselves but also for others around them who hear it as well. This familiarity could result in sales of additional products (such as concert tickets) to existing consumers as well as sales to new customers.
The Power of a Zero Price In addition to the potential benefits from setting a low price, there is a specific psychological appeal of a price of zero. The attractiveness of a zero price (or FREE!, as economist Dan Ariely puts it) goes above and beyond objective economic considerations, and free products appear to have an irrationally strong draw on consumers. For example, Kristina Shampanier, Nina Mazar, and Dan Ariely were able to dramatically shift consumer preferences from a more expensive option to a cheaper option simply by reducing the price of the cheaper option from one cent to zero cents. (This effect occurred even when the price of the more expensive option was lowered by one cent as well.) By this logic, if a musician is looking to use musical recordings as a way to gain exposure and to sell other products (and steal market share from other musicians), it may not make sense to set a high price or even a small nominal price, and it may instead be an overall profitable strategy to exploit consumers’ irrational desire for free stuff.
So far, it would appear that there are significant potential benefits to setting a low price or even a zero price for recorded music. Not surprisingly, however, the issue isn’t that simple, and there are a number of potential long-term drawbacks to low prices.
Price and Subsequent Usage A low price will probably get more customers to purchase a product, but a low price may also cause people to not use the product as much. Psychologists Hal Arkes and Catherine Blumer, for example, provide experimental evidence for this “sunk-cost effect” by randomizing the price that consumers pay for a season series of theater tickets. What they find is that, despite the fact that the discounts were given after the purchase decisions were made (thus ruling out the possibility that the consumers who paid higher prices simply valued the tickets more), those consumers who paid a higher price for the tickets had a significantly higher rate of attendance over the course of the season. (This phenomenon can roughly be thought of as people being determined to “get their money’s worth,” even when it’s not rational from an economic standpoint.) Given that a musician’s goal is to get consumers to actually listen to and become familiar with his music (and thus be more likely to purchase additional products, suggest the music to others, etc.), setting a low price may actually be counterproductive to a degree if the low price lowers the amount that the consumer interacts with the product.
Price and Efficacy While economists generally presume that the perceived quality of an item affects the price charged (and paid) for it rather than the other way around, there is evidence that prices can actually affect both the perceived quality and the actual effectiveness of a product as well. For example, economists Baba Shiv, Ziv Carmon, and Dan Ariely conducted a series of experiments to determine the effect of pricing on the perceived and actual efficacy of a popular brand of energy drink. What they found was that the sticker price of the beverage affected not only how well people expected the drink to work, but also how well the drink actually worked to improve cognitive performance. Interestingly, this effect persisted even though subjects in the low-price group were informed of the actual retail price of the drink and told that they simply got the drink at a discount.
If this monetary placebo effect carries over into the music space, it could very well be the case that musicians are hurting their album sales via low prices, since a musician could be inadvertently lowering the perceived quality (and hence sales) of his music simply by offering it to the consumer cheaply. This effect is particularly important to consider if a musician’s goal in selling recorded music is not only to make money from the music itself but also to build a reputation for other products such as concerts, licensing, and merchandise.
Anchoring Psychological anchoring may play a significant role in consumers’ willingness to pay for music, particularly digital music. An anchor, in this context, is simply an (often arbitrary) initial value that imprints on a consumer and biases her future valuations of an item. Experimentally, the anchoring effect has been shown to be both strong and ubiquitous. For example, Daniel Kahneman and Amos Tversky were able to influence people’s perceptions of how many African countries are members of the United Nations by first spinning a wheel of numbers and asking whether the number of countries is greater than or less than the (obviously random) number on the wheel. Similarly, Dan Ariely, George Loewenstein, and Drazen Prelec were able to manipulate consumers’ willingness to pay for a variety of goods by first eliciting the last two digits of their social security numbers and then asking if their valuations of the goods are higher or lower than that anchor. In both cases, subjects ultimately gave higher estimates and valuations when they had first been asked about a high number than when they had been asked about a low number, even though the original number was completely irrelevant to the objective decision-making process.
By this logic, it should be possible to affect consumers’ valuation of music by asking consumers for the last two digits of their social security numbers and then soliciting whether they would be willing to pay that many cents for a musical track. While this strategy may not be directly relevant in a sales context, it’s worth nothing that an entire generation of music consumers has essentially been given an anchor price of zero by various file-sharing services and independent artists. It’s no wonder, then, that these consumers exhibit a lower subsequent willingness to pay for recorded music, and, while a musician can’t directly control the choices of other companies and artists, he can (and should) think carefully about whether setting a specific anchor price of zero for his own music is the right decision for long-term profitability.
Is Sufjan Right? While there are certainly both benefits and costs to setting a low price for recorded music, the points above suggest that Sufjan Stevens’ concerns about price and the perception of value are not entirely off the mark. Based on the available evidence, it’s entirely possible (and likely) that setting what is considered a low price point for an album decreases listening and engagement, lowers the perceived quality of the work, and conditions consumers to not pay what artists would consider a “fair” price for their output. One important thing to keep in mind, however, is that these effects are, to some degree, limited to those people who would have purchased the product at a higher price, so the negative impacts of pricing need to be weighed against the opportunity to offer the product at an attractive price to a larger group of customers.
In summary, pricing is hard. What may seem like a simple choice actually has not only significant direct economic effects but also considerable impact in multiple directions from a consumer psychology perspective. That said, understanding all of the different forces at play in consumers’ minds is an important step in developing a coherent and appropriate business strategy.
References:
Kristina Shampanier, Nina Mazar, and Dan Ariely, “Zero as a Special Price: The True Value of Free Products,” Marketing Science, 2007.
Hal R. Arkes and Catherine Blumer, “The Psychology of Sunk Cost,” Organizational Behavior and Human Decision Processes, 1985.
Baba Shiv, Ziv Carmon, and Dan Ariely, “Placebo Effects of Marketing Actions: Consumers May Get What They Pay For,” Journal of Marketing Research, 2005.
Dan Ariely, George Loewenstein, and Drazen Prelec, “’Coherent Arbitrariness:’ Stable Demand Curves Without Stable Preferences,” The Quarterly Journal of Economics, 2003.
At least now I know that my multitasking served a useful purpose:
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Random Link: When Economists Write Commencement Speeches…
Posted: Mon, 30 Apr 2012 23:25:15 +0000
Ok, so he’s no Steve Jobs, but Charles Wheelan has some pretty good, if not flowery, advice to offer. He even manages to overlap with the sentiment of Mr. Jobs at one point:
Read obituaries. They are just like biographies, only shorter. They remind us that interesting, successful people rarely lead orderly, linear lives.
Hm. Maybe that Family Circus kid had it right all along:
At the very least, his head is in the right place when it comes to incentives.
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On The Downside Of The Division Of Labor…
Posted: Fri, 27 Apr 2012 19:17:28 +0000
Economists are, as a general lot, very much in support of the concepts of division of labor and trade. After all, it’s pretty clear that having people specialize and trade makes sense from an efficiency standpoint- what’s that line about being a jack of all trades and a master of none?
When you consider that people are people and not economic robots, however, the benefits of pure specialization are a bit less clear. Maybe I have ADD or something, but I think I would be more frustrated than productive if I had to do the same narrowly-defined task every day. Apparently Dilbert agrees with me:
Given this, it shouldn’t be too surprising that people who work for startups generally find their jobs to be satisfying even though they are often running around doing the most random of tasks. On that note, I have to go administer a final exam.
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Graphic Content: Why The World Is Glad I’m Not A Consultant Anymore…
Posted: Wed, 25 Apr 2012 21:25:49 +0000
I contend that I am particularly suited to studying the music industry because this is what I think about when hearing song lyrics…
At least I’m not the only one.
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On The Chief Economic Adviser’s Real Job???
Posted: Tue, 24 Apr 2012 18:06:56 +0000
Isn’t this Alan Krueger’s job? From Saturday Morning Breakfast Cereal:
I particularly like the part about embarrassing in front of staff economists, since I quite often amuse myself by picturing the looks on the economic advisers’ faces when they have to listen to a lot of the things that politicians say. I also don’t understand why the unemployment thing is so hard for people- in order to be unemployed, one has to be looking for a job. Otherwise, the unemployment rate would count people who didn’t want to work and politicians would decide that we have a national crisis of stay-at-home moms. (Granted, if you follow politics, you may have noticed that it pretty much seems like we do have that.) You see, when both the numerator and denominator of a fraction increase (as when the labor force gets bigger), the number can get bigg…oh, right, math, now I’m seeing the problem.
Anyway…technically speaking, the “Fix Our Economy Now” bill was passed in 1946 and it was the thing that created the Council of Economic Advisers in the first place. It’s called the Employment Act of 1946, and it pretty explicitly makes the ups and downs of the economy (i.e. business cycles) the government’s problem:
The act begins with a “Declaration of Policy” (section 2), affirming that it is “the continuing policy and responsibility of the Federal Government…to coordinate and utilize all its plans, functions, and resources for the purpose of creating and maintaining…conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.”
You can see more on the act here. I suppose this is at least better than the original Employment Act of 1945, which mandated that the federal government do everything in its power to achieve full employment, despite the fact that it’s unclear exactly what full employment is, whether the government has the power to achieve such a goal, and, even if so, whether the benefits of doing so outweigh the costs. Unfortunately, this bill’s close cousin, the Full Employment and Balanced Growth Act appeared in the 1970’s, and it explicitly mandates that the federal government take action towards to the goals of full employment, growth in production, price stability, and balance of trade and budget. I’m not sure why those who drafted the bill didn’t just add in “ponies for everyone” while they were at it, since they seem to be under the impression that the government has magical powers and doesn’t face tradeoffs. (For example, one way to theoretically get growth in production results in increased inflation, so satisfying some of the goals almost by definition entails not satisfying others.)
It’s things like these that almost make me feel sorry for politicians (as opposed to just sympathizing with the economists hired by the politicians). Almost.
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More On Golden Balls, And The Best Lesson In Game Theory Ever…
Posted: Sat, 21 Apr 2012 21:54:02 +0000
The Prisoners’ Dilemma is a classic problem in economics with a clear theoretical outcome of non-cooperation. In practice, however, people are sometimes “nicer” than economists predict…and apparently this makes the game interesting enough to make a game show about. (Yes, I have been fascinated by this for going on two and a half years now.)
The game show is called Golden Balls (hehe), and the game is called Split or Steal. The setup is pretty simple- there is a pool of money, and each of the two players chooses either split or steal. Furthermore, the two players reveal their strategies at the same time. If both players choose split, then they, not surprisingly, split the pot evenly. If one chooses split and the other chooses steal, the stealer gets the whole pot. If both choose steal, no one gets anything. In other words, this:
This is the classic Prisoners’ Dilemma with one minor twist in that if one player plays steal, it (rationally) doesn’t matter to the other player whether he chooses split or steal, since he gets nothing either way. (This is going to turn out to be quite an interesting feature.) So what would you do in this situation if you could talk to the other player before you choose strategies?
Clearly, your goal is to get the other person to play split, since that is the only way that you are going to get any money. Personally, my initial idea was to convince the other person that I was going to play steal and that he wasn’t going to get anything either way but could come off looking like the good guy if he tried to split.
So why would this work? First off, trying to convince the other person that you’re going to split should be a non starter, for two reasons. First, the steal strategy (weakly) dominates the split strategy- if you think the other player is going to split, it’s clearly better to steal, and if you think the other player is going to steal, stealing is just as good as splitting. This means that convincing the other person that you are going to split is an uphill battle because the other person can see that splitting isn’t in your best interest. Second, even if you can convince the other player to split, all that does is give the other player a greater incentive to steal.
Given this, the only reasonable options are to either not promise anything or to convince the other person that you are going to steal. It shouldn’t be hard to convince the other person that you are going to steal, since stealing is in your best interest. (I would probably explain to the other guy why stealing was in my best interest in order to build credibility.) If he is convinced that you are going to steal, the other person should be (rationally) indifferent between splitting and stealing, since he doesn’t get any money either way. (Yes, I get that there might be a psychological incentive to punish, but that isn’t “rational” from an economic perspective.) Therefore, all you should have to do is provide some incentive to tip the scale towards split for the other guy. What’s interesting is that the other person doesn’t have to fully trust you for it to work, they just have to believe that there is some positive probably the the incentive will come to fruition.
So what actually happened?
As an economist, I don’t think this is weird at all, and I am both shocked and not shocked that this doesn’t happen more often. Perhaps somebody should hire this guy into an economics department.
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Economic Principle #4: People Respond To Incentives, Taliban Edition…
Posted: Tue, 17 Apr 2012 13:54:48 +0000
Headline of the week: “Taliban commander turns self in… for reward on ‘Wanted’ poster”
Mohammad Ashan, a mid-level Taliban commander in Paktika province, strolled toward a police checkpoint in the district of Sar Howza with a wanted poster bearing his own face. He demanded the finder’s fee referenced on the poster: $100.
I can’t help but think that this is a fairly good argument against purchasing power parity, since I would like to believe that it would take at least a four-figure sum to elicit this behavior in an American criminal.
Seriously though, this reminds me of an old interview with the Pakistani Ambassador to the U.S. that I wrote about like a million years ago. When Jon Stewart asked Mr. Haqqani why it was so hard to prevent people from joining the Taliban, he basically said that the Taliban has the resources to take care of them financially more than the governments of Pakistan and Afghanistan can, and people are in large part responding to economic incentives:
Dear Pakistan and Afghanistan: I hear these guys can be bought off pretty cheap. You should get on that.
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Want Some Free Stickers That Aren’t From Yours Truly??
Posted: Tue, 10 Apr 2012 14:47:26 +0000
If you are an economics educator (or probably even tangentially related to such a thing), you can get your hands on one of these bad boys courtesy of Cengage Learning. (Cengage is the company that publishes popular principles textbooks by the likes of Greg Mankiw and John Taylor, and a number of years ago it acquired the online learning company Aplia.) The form to order one is here (at the bottom right of the page), and I suppose I can ignore the fact that Cengage is totally copying my schtick.
In related news, I am going to go read chapter 3 of Dan Ariely’s Predictably Irrational, entitled “The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing.”
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I Don’t Think This Is What Keynes Meant By Depression Spending…
Posted: Fri, 06 Apr 2012 14:28:53 +0000
So this showed up on my Facebook wall the other day. I’m guessing that reader JD made it himself, since I couldn’t seem to find it anywhere else online. (Does that mean that this counts as an exclusive?)
Love. See, it’s funny because it’s true- part of Keynes’ theory was that governments can stimulate the economy by spending, since spending employs people, and those employed people then buy stuff, which employs other people, who then have more money to buy stuff, etc. This is why I decide that I am doing my part to get our nation out of recession each time I go shopping.
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Welcome To My Soapbox, Birth Control Edition…
Posted: Thu, 05 Apr 2012 00:54:33 +0000
From my soapbox:
Dear ladies: I really couldn’t care less whether you use birth control or not. In addition, I couldn’t care less whether either I or my employer subsidizes your birth control via insurance premiums. (For those of you who aren’t aware, that’s one part of the debate that people almost have right, as cross-subsidy is how insurance works. Also, for the record, I am, in fact, a woman.) What I do care about is women acting as victims rather than combatants in the supposed “war on women.”
You can read the full article here. An astute colleague asked if one market outcome would consist of employers trying to specifically attract non-breeders. I am not sure of the answer to this, except to say that I think we have anti-discrimination laws in part because there are incentives for firms to hire non-breeders anyway. (For example, subsidizing my health insurance is cheaper for an employer than subsidizing the health insurance of a woman with three kids.) I recall that Stephen Colbert had a brilliant bit on this a while back where he talked about how firms should hire ugly people because then the firms wouldn’t have to worry about insurance coverage for spouses or kids. Unfortunately, I can’t seem to locate the clip, so if any of you know what I’m talking about, I would be very grateful for a source.
Another astute lawyer friend of mine asserted that the decision to not cover contraceptives must be a moral one since it costs an employer money to not provide such coverage:
Moreover, a 2000 study by the National Business Group on Health, a membership group for large employers to address their health policy concerns, estimated that it costs employers 15–17% more to not provide contraceptive coverage in their health plans than to provide such coverage, after accounting for both the direct medical costs of pregnancy and indirect costs such as employee absence and reduced productivity. Mercer, the employee benefits consulting firm, reached a similar conclusion. And a more recent National Business Group on Health report, drawing on actuarial estimates by PricewaterhouseCoopers, concluded that even if contraception were exempted from cost-sharing, the savings from its coverage would exceed the costs.
Well then…I think friend has a point, but I don’t entirely overlook the possibility that employers could just be ignorant of costs in some cases. Either way, it doesn’t affect the overall argument that, if women vote with their feet, employers have an incentive to provide contraceptive coverage in the form of a larger employee pool. If employers are willing to hurt their bottom lines in order to exert some ethical control over their employees, then…I really don’t know, since I’m really not in the business of deciding whether it’s the government’s job to regulate ethics.
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Read Before Buying Those Lotto Tickets…
Posted: Fri, 30 Mar 2012 17:29:06 +0000
First, a tweet from my mother:
Sigh. So, despite the 50 percent idiot tax* on the lotto, I bought a ticket for the current $640 million Mega Millions jackpot, if for no other reason than appeasing my mother is easily worth a dollar. So is this my potential ticket to a lifetime of happiness? Let’s turn to the economic evidence:
Apouey, Benedicte; Clark, Andrew E., “Winning Big but Feeling no Better? The Effect of Lottery Prizes on Physical and Mental Health”
We use British panel data to explore the exogenous impact of income on a number of individual health outcomes: general health status, mental health, physical health problems, and health behaviours (drinking and smoking). Lottery winnings allow us to make causal statements regarding the effect of income on health, as the amount won is largely exogenous. These positive income shocks have no significant effect on general health, but a large positive effect on mental health. This result seems paradoxical on two levels. First, there is a well-known status gradient in health in cross-section data, and, second, general health should partly reflect mental health, so that we may expect both variables to move in the same direction. We propose a solution to the first apparent paradox by underlining the endogeneity of income. For the second, we show that exogenous income is associated with greater risky health behaviours: lottery winners smoke more and engage in more social drinking. General health will pick up both mental health and the effect of these behaviours, and so may not improve following a positive income shock. This paper presents the first microeconomic analogue of previous work which has highlighted the negative health consequences of good macroeconomic conditions.
Soooo…I’m going to be less depressed but feel like crap. Nice. Moving on…
Larsson, Bengt, “Becoming a Winner but Staying the Same: Identities and Consumption of Lottery Winners”
This article discusses how large lottery winnings are experienced and used by the winners. The study draws on a survey of 420 Swedish winners, which is analyzed against the background of previous research from the USA and Europe. The analyses show that winners are cautious about realizing any dreams of becoming someone else somewhere else. This result contradicts theories suggesting that identities are being liquefied by the commercially driven consumer culture in affluent Western societies. In contrast, the article concludes that winners generally try to stay much the same, but on a somewhat higher level of consumption. The critical situation that large winnings produce is generally met by an attempt to hold on to one’s identity and social relations. In addition, the article shows that lump sum winners tend to save and invest large parts of their winnings, compared with winners of monthly installments who are more likely to spend on leisure and consumption. These results indicate that “wild” lump sums make winners “tame” their winnings more firmly, whereas “domesticated” monthly instalments can be spent more thoughtlessly without changing identity or becoming an unfortunate winner.
So I’m still going to be me but with better toys. Excellent.
Hankins, Scott; Hoekstra, Mark; Skiba, Paige Marta, “The Ticket to Easy Street? The Financial Consequences of Winning the Lottery”
This paper examines whether giving large cash transfers to financially distressed people causes them to avoid bankruptcy. A comparison of Florida Lottery winners who randomly received $50,000 to $150,000 to small winners indicates that such transfers only postpone bankruptcy rather than prevent it, a result inconsistent with the negative shock model of bankruptcy. Furthermore, the large winners who subsequently filed for bankruptcy had similar net assets and unsecured debt as small winners. Thus, our findings suggest that skepticism regarding the long-term impact of cash transfers may be warranted.
One would hope that a payout of some $600 million would postpone bankruptcy for a good long time, no? Last but not least is my personal favorite, on the subject of the hedonic treadmill:
Brickman, Philip; Coates, Dan; Janoff-Bulman, Ronnie, “Lottery winners and accident victims: Is happiness relative?”
Adaptation level theory suggests that both contrast and habituation will operate to prevent the winning of a fortune from elevating happiness as much as might be expected. Contrast with the peak experience of winning should lessen the impact of ordinary pleasures, while habituation should eventually reduce the value of new pleasures made possible by winning. Study 1 compared a sample of 22 major lottery winners with 22 controls and also with a group of 29 paralyzed accident victims who had been previously interviewed. As predicted, lottery winners were not happier than controls and took significantly less pleasure from a series of mundane events. Study 2, using 86 Ss who lived close to past lottery winners, indicated that these effects were not due to preexisting differences between people who buy or do not buy lottery tickets or between interviews that made or did not make the lottery salient. Paraplegics also demonstrated a contrast effect, not by enhancing minor pleasures but by idealizing their past, which did not help their present happiness.
So even if won the lottery I would be roughly as cranky as I am now…good thing the ticket is for my mother I suppose.
* Mathematically speaking, it’s possible for a lotto to have a positive expected value if the jackpot held over from the last period is large relative to the number of new tickets sold. For example, consider a case where the previous jackpot was $500 million and 100 million new tickets were sold. Since the odds of winning are one in a hundred and some odd million, the expected number of winners is approximately one, which implies an expected payout of $550 million with a greater than 1 in 550 million chance of winning, or an expected value of greater than a dollar. In other words, given that I already bought a ticket, don’t you dare go and do the same.
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The Most Interesting Law Of Demand?
Posted: Tue, 20 Mar 2012 16:19:54 +0000
Guess who learned how to use a meme generator and knows that demand curves slope downwards…
Actually, that one was from the Cengage Learning Facebook page, but I’m apparently one to take an idea and run with it (or beat a dead horse, depending on your perspective). We all know that there are plenty of determinants of demand other than price, so I made a few more graphics.
Income is an important determinant of demand, and we can have normal goods…
…or inferior goods:
Prices of related goods are also relevant factors for demand, and we can think about substitutes…
…and complements:
In fairness, tastes and expectations are also determinants of demand, but I couldn’t decide what the Most Interesting Man in the World would have to say on those topics.
I’m also trying to picture him saying ceteris paribus here, since technically he should be giving the “all else being equal” caveat…but I still can’t decide how ceteris paribus should be pronounced, so my visualization is a bit of a non-starter.
If you prefer, you can review the determinants of demand in video form:
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Now You Too Can Get Your Learn On With The Federal Reserve…
Posted: Mon, 19 Mar 2012 18:03:15 +0000
Save the dates: March 20, 22, 27, and 29 at 12:45pm (Eastern time). Those lucky kids at George Washington University get to see the Ben-Bernank in person (I think), but the rest of us get to play along with the home version. Starting tomorrow, Federal Reserve Chairman Ben Bernanke will give a series of lectures entitled “The Federal Reserve and the Financial Crisis,” and the talks will be available both live via Ustream and in recorded format here. You can also tune in below to watch live:
Live video for mobile from UstreamWhen possible, I will be live tweeting the most interesting parts of the talks here. I also recommend that you read an overview of what the Federal Reserve does to refresh your memory before the talks.
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How To Put My Online Videos To Shame, Game Theory Edition…
Posted: Tue, 13 Mar 2012 15:43:37 +0000
In today’s “better than a Groupon” news, two professors at Stanford University are offering a game theory course online for free. The course starts on Monday, March 19th, so you’d better get a move on. From what I can tell, the course provides modular online lectures as well as problem sets and exams and such, and I am personally interested enough to give it a go. (Sorry, part of the terms of service is that I can’t give you the answers. =P) I figure that, if Gizmo can do it, the rest of you should have no trouble.
I am a big supporter of this model, if for no other reason than it blows the University of Phoenix out of the water on a number of levels and shows, to some degree, that moving the classroom online doesn’t have to be coupled with a loss of legitimacy or quality. I hope that, at the very least, these sorts of programs really make people think about the purpose of education and the drivers of the education costs that people like talking about so much. (To put it less tactfully, these programs totally highlight the “you pay for a degree, not for an education” concept.)
Or you could just watch my videos and just call it a day, but I’m pretty sure that this will be better.
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On Behavioral Economics, Loss Aversion, And My Hatred Of Daylight Savings Time…
Posted: Sun, 11 Mar 2012 23:38:27 +0000
In case you weren’t already aware, I am a behavioral economist. One of the seminal papers in this field describes a concept called prospect theory and argues that it’s a better model of how people make choices over risky outcomes and interpret pleasure and pain than the traditional models of risk aversion.
Prospect theory postulates that people code outcomes as either gains or losses compared to a neutral reference point (as opposed to considering only the final outcomes themselves). Furthermore, prospect theory suggests that people dislike losses more than they like equivalent gains. Specifically, people dislike losses about twice as much as they like gains. Put graphically, the value function of possible outcomes looks something like this:
While it isn’t necessarily the case that people acclimate to a new reference point after each gain or loss is realized, it’s most likely the case that, over time, the status quo becomes the neutral reference point.
This, in a nutshell, is why I hate Daylight Savings Time. Think about it- prospect theory, as well as my own experience, tells me that I hate springing forward more than I like falling back, if for no other reason than springing forward is coded as a loss of an hour and falling back is coded as the gain of an hour. Since these events are spaced months apart, my brain probably doesn’t bracket these changes in a way that makes them cancel out and instead acclimates to a new reference point before each subsequent change. It them follows that each fall back/spring forward pair (and not the other way around, since I was born in September) makes me progressively more and more unhappy.
Luckily for Daylight Savings Time, I will never be able to show this outcome empirically because there are too many confounding factors that also make me progressively more cranky over time. Maybe I’ll move to Hawaii- I hear it’s nice there. And time-consistent.
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S**t Happens, Even In Economics…
Posted: Mon, 05 Mar 2012 20:23:46 +0000
Yoram Bauman, the Stand-Up Economist, strikes again…this time it was at the annual meeting of the American Economic Association, held in Chicago back in January. I thought this bit was brilliant (in case you’re curious, the chick in the front row with the ponytail is me trying to get the live stream of the session to work properly), and I’m very glad that Yoram decided to put it online.
I am obviously a big fan of economic comedy (who isn’t, really?), but I do recognize that it has a pretty significant downside in that the audience for it is pretty limited, whereas the potential audience for Dane Cook and fart jokes really knows no bounds. This bit in particular requires a decent amount of background knowledge in order to get the jokes, so I’ve taken the liberty of providing some links and commentary below the video as proof that education can be found in the most unlikely of places. (It’s actually quite impressive that this bit can generate a pretty good overview of what economics is all about.)
0:47 - Microeconomics vs. Macroeconomics: Yep, that sounds about right, especially given the perceived performance of macroeconomics during the financial crisis and such. (See here for a refresher, though I think it really should be titled “How Did Macroeconomists Get It So Wrong,” since microeconomists are generally the people who think macroeconomics is bunk.
)1:10 - Classical macro: “Perhaps the central idea behind it is on the ability of the market to be self-correcting as well as being the most superior institution in allocating resources.” In other words, shit such as price and wage stickiness or other market imperfections doesn’t happen.
1:15 - Keynesian macro: In this school of thought, animal spirits “is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe emotions which influence human behavior and can be measured in terms of consumer confidence.”
1:20 - Neo-Keynesian macro: “In particular, New Keynesians assume that there is Imperfect competition in price and wage setting to help explain why prices and wages can become “sticky”, which means they do not adjust instantaneously to changes in economic conditions.”
1:25 - Neoclassical Synthesis: The Neoclassical Synthesis is an attempt to reconcile the ideas of Keynes and neoclassical economists, and, technically, what Yoram is referring to here is referred to as the New Neoclassical Synthesis, which posits that wages and prices are sticky in the short run but such market imperfections don’t affect the long run levels of output and unemployment.
1:34 - Econometrics: Lagged food consumption is just food consumption one period earlier, which is clearly correlated with, well, shit in the current period. Therefore, it has potential to be a valid instrumental variable.
1:52 - Environmental Economics: Environmental economists look at a lot of externalities, or market side effects, and one principle of economics is that taxing markets where negative externalities are present actually raises the level of well-being for society. (I suppose it’s not hard to make the argument that shit produces negative externalities.)
1:55 - Supply-side economics: “Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation.” (Note: There are a lot of critics of supply-side economics within academia.)
2:00 - Behavioral Economics: I think “this shit is irrational” pretty much sums it up.
2:04 - Austrian School: If you listen to Ron Paul enough, this statement should sound familiar. More specifically, “In contrast to most mainstream theories on business cycles, Austrians focus on the credit cycle as the primary cause of most business cycles.”
2:20 - Pareto Improvement: A Pareto improvement is a change that makes some people better off without making anyone else worse off.
2:36 - Martin Weitzman: “In 2005, Weitzman was arrested on misdemeanor charges based on a local farmer’s allegation that Weitzman had stolen several truckloads of manure. Weitzman claimed that he had received permission, but he agreed to pay the farmer $600 in order to have the charges dismissed.” It’s like the jokes write themselves sometimes.
2:54 - Robert Lucas: Lucas is well-known for his work on the implications of rational expectations. The theory of rational expectations essentially states that people are not systematically wrong in their expectations regarding the future.
2:58 - Reinhart and Rogoff: “Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. Each time, the experts have chimed, “this time is different”–claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes–from medieval currency debasements to today’s subprime catastrophe.”
3:04 - Greg Mankiw: Again, sometimes the jokes just write themselves.
3:15 - Paul Krugman: A reasonable inference, since I suppose you don’t title your blog “The Conscious of a Liberal” unless you think that shit happens because of the Republicans.
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Dismal Science Jokes Just Never Get Old…
Posted: Mon, 05 Mar 2012 00:42:11 +0000
Yes, yes, economics is the “dismal science”, we get it:
The popular belief is that Carlyle started using the phrase in response to the “dismal” prediction of 19th-century reverend and scholar Thomas Malthus, who forecasted that the rate of growth in the food supply as compared to the rate of the growth in population would result in mass starvation. (Luckily for us, Malthus’ assumptions regarding technological progress were overly, well, dismal, and such mass starvation never transpired.)
Turns out that the popular belief is an urban legend to some degree (and you can read the rest of the article to learn the real story), but I can’t help but think that item 4 here qualifies as an economics joke anyway:
(From the Improper Bostonian)
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