Economists Do It With Models

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Economists: Nature Or Nurture?

December 28th, 2011 · 8 Comments
Behavioral Econ · Decision Making · Incentives

It’s not like I can’t relate, but I would have thought that this kid would have a bright future in finance rather than economics…the only question is whether she should be a trader or work for a hedge fund, since she has clearly figured out the concept of arbitrage:

I feel like there should be a final panel where another kid outbids the girl. Now that’s how a real economist thinks, right? I mean, I see no reason why this chick should have monopsony power in the book report market.

Kidding aside, the cartoon inadvertently brings up a rather interesting question- how much of the differences in outcomes that we see in people are due to differences in the way that they perceive and respond to incentives rather than differences in ability or intrinsic motivation and such? Economists generally model an individual’s response to incentives as her weighing the benefit of the incentive against the “cost” of effort, but behavioral economists and sociologists have plenty of evidence that people’s decision-making processes are not that simple.

I smell a research topic…who’s with me?

Tags: Behavioral Econ · Decision Making · Incentives

8 responses so far ↓

  • 1 Russ Nelson // Dec 28, 2011 at 9:12 pm

    Wait … you were kidding??

  • 2 Randy Boring // Dec 28, 2011 at 9:27 pm

    ‘Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes [without me] getting some surprise that pushes my limit a little farther.’ Charlie Munger, Berkshire Hathaway Vice-Chairman

    He’s been harping on the power of incentives since at least 1995, and still finding them key to understanding why people do what they do.

    Remember when Dilbert’s boss promised a bonus for every bug fixed? His co-worked Wally smiled and says, “I’m gonna write me a new minivan this afternoon!”

  • 3 Brendon // Dec 28, 2011 at 9:37 pm

    As a traders, this is this is hilarious! Lol.

  • 4 Jake Lopata // Dec 29, 2011 at 12:57 pm

    I too am fascinated with behavioral economics. I tend to think more about why people do the things they do; for example: Traffic Jerks

    http://jakelopata.blogspot.com/2011/12/irrational-expectations-traffic-jerks.html

    An area where the application of incentives seems to bee murky, is education. Incentives to do well in school, whether it be money or some other types of compensation for teachers and/or students, seems to be unclear what works.

    Lots of great material on this out there.

  • 5 Tom E. Snyder // Jan 17, 2012 at 12:44 am

    I had a similar situation at a government job I once had. Once a year we would do a survey of the work climate. If the supervisors didn’t like the results they would call a meeting. The question: “How can we get the numbers up?” rather than “How can we improve the work climate?”

  • 6 Meh Whoever // Jan 19, 2012 at 1:45 pm

    OK, two thoughts:
    1) Hey! Finance IS Economics!

    2) To whom would this second kid sell the reports? The first kid’s parents? Why would they buy some other kid’s book reports? Seems like it’s the parents with monopsony power.

    And by two thoughts, I guess I meant three…
    3) “Monopsony” is not in your blog comment spell checker thingy. And neither is “blog.” Or “thingy.”

    @DontPanicOKDo

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