Economists Do It With Models

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On Economists Giving Thanks, And The Avoidance Of Arms Races…

November 28th, 2013 · 2 Comments
Behavioral Econ · Buyer Beware · Game Theory · Policy

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

→ 2 CommentsTags: Behavioral Econ · Buyer Beware · Game Theory · Policy

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Practice Problem of the Day, 11/24/2013

November 24th, 2013 · 1 Comment
Practice Problem of the Day

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.

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When Economists Write About Presidents And Assassins, Lee Harvey Oswald Edition…

November 22nd, 2013 · 1 Comment
Economic History · Uncategorizable

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.

Update: My hypothetical lack of surprise regarding economists making light of the JFK assassination was not without merit, in retrospect.

→ 1 CommentTags: Economic History · Uncategorizable

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Presidential Medals of Freedom and Hypothetical Conversations of Awkwardness, Kahneman Edition…

November 20th, 2013 · No Comments
Behavioral Econ · Books · Policy

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.

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Practice Problem of the Day, 11/20/2013

November 20th, 2013 · No Comments
Practice Problem of the Day

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.

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Small Steps In The War Against Publication Bias…

November 19th, 2013 · 2 Comments
Behavioral Econ · Fun With Data

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)
Esther Duflo
Pinelopi Goldberg
Duncan Thomas

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.

→ 2 CommentsTags: Behavioral Econ · Fun With Data