Economists Do It With Models

Warning: “graphic” content…

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Causal Friday: On The Limitations Of Experimental Research…

December 19th, 2014 · 2 Comments
Causal Friday · Just For Fun

Apparently Randall Munroe also has a thing for causal Friday:

On one hand, randomized experiments with a treatment and a control group are a very clean and effective way to determine the effects of a treatment. On the other hand, addressing the logistical caveats necessary in order to get a proper result is not always possible, as shown above. So let’s ruin the joke:

  • Blind trials- trials where the subjects don’t know whether they are receiving the treatment or a sugar pill- are important in order to control for the placebo effect- after all, you wouldn’t want to falsely attribute cardiovascular benefits to sex when they could actually be caused by the belief that you’re having sex!
  • Double-blind trials (now we’re getting fancy)- trials where neither the subjects nor those administering the experiments know whether a subject is receiving the treatment or a sugar pill- are important to control for the possibility that the experimenters inadvertently treat subjects differently based on whether they are receiving the treatment or the placebo. If a trial isn’t double-blind, researchers can’t rule out the possibility that the observed effect is due to the differential treatment on the part of the experiment administrators and not the treatment itself.

Technically, we don’t know whether the experiment in the cartoon is in fact double-blind, since, well, we don’t know whether the experimenters can tell who they are giving lot of sex to and who they are giving a placebo. (So many bad ways to envision this experiment…) There, joke ruined. But I’ll try to make it up to you…

Obviously, not very trial can be double-blind or even blind, but sometimes scientists can be super creepy in order to achieve scientific validity. For example, I bring you…wait for it…placebo surgeries!

A total of 180 patients who had osteoarthritis of the knee were randomly assigned (with their consent) to one of three groups. The first had a standard arthroscopic procedure, and the second had lavage. The third, however, had sham surgery. They had an incision, and a procedure was faked so that they didn’t know that they actually had nothing done. Then the incision was closed.

The results were stunning. Those who had the actual procedures did no better than those who had the sham surgery. They all improved the same amount. The results were all in people’s heads.

I guess I’m in favor of this, though I think that I’d be so pissed if I was in the placebo group…upon further reflection, however, I guess I wouldn’t really know so I wouldn’t have a reason to be mad, so now my brain hurts a little just thinking about it. (Perhaps it was the headache resulting from pondering the placebo surgery philosophy that distracted people from the knee pain!) That said, I definitely don’t want to think about how researchers could make this sort of experiment double-blind.

→ 2 CommentsTags: Causal Friday · Just For Fun

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Economics Can Answer That! Oil Prices Edition…

December 17th, 2014 · 7 Comments
Econ 101 · Markets

To quote from The Consumerist:

You may have noticed prices gradually falling at your neighborhood gas station over the last few months, what you may not know is that the price of oil has been falling even faster than that. Why aren’t station owners passing the savings on to drivers?

The article goes on to explain that gas prices for the end consumer have decreased by about a dollar, whereas the wholesale price of oil has decreased by 40 percent. To put this in a more reasonable context, I checked around in the neighborhood and saw that gas prices were currently around $2.70 per gallon. Applying the information in the article, I can conjecture that gas prices went from $3.70 to $2.70 per gallon- a 27 percent decrease. So yes, while consumers in fact aren’t seeing a proportional price decrease, the spread is not as dire as the article would like to make it seem, especially since oil prices are only one component of the gas stations’ overall costs (and we therefore shouldn’t expect to see a 40 percent price decrease even if all cost decreases were passed on to the consumer.) Besides, doesn’t Econ 101 tell us that cost decreases do in fact get shared between the consumer and producer? Behold:

(In case you forgot, the market is experiencing a supply increase thanks to OPEC, which drives down the input price of the gasoline that the stations sell.) Hopefully it’s clear that A will be bigger than B whenever there are typical upward-sloping supply curves and downward-sloping demand curves. The article goes on…

During that same period, investment bank Goldman Sachs estimates that gas stations’ profit margins are 18.5% higher than they were at the same time last year.

Well…duh? First off, I’m pretty sure that, mathematically speaking, profit margins are going to increase whenever price decreases are less than cost decreases. But, to think about producer welfare more generally, let’s go again to the picture:

A few flash backs to Econ 101 tell us the following:

  • As a result of the supply increase, consumer surplus goes from A to A+B+C+D.
  • As a result of the supply increase, producer surplus goes from B+E to E+F+G.

Even though it’s not immediately obvious, I could make a convincing case that producer surplus does in fact go up as a result of the supply increase, which is consistent with the estimate given. (Note that, while profit and producer surplus are not technically the same thing, they do generally move together unless changes in fixed costs are involved.)

My point is that, while the facts in the article are most likely correct and fine, they do not imply that the big bad gas stations are screwing over the poor little consumer. Instead, what is happening is entirely consistent with the forces of supply, demand, and competition, which generally lead to good outcomes for consumers. (Yes, you can technically argue that market forces can still screw people from a fairness perspective and such, but I don’t think that that is what the tone of the article was getting at.)

Behaviorally speaking, there are reasons that gas stations (and other businesses) might not want to decrease prices when they experience a cost decrease- since consumers tend to be more sensitive to price increases than to price decreases, producers have an incentive to keep prices high because it often ends up being better in the long run than decreasing prices and trying to increase them again at a later point in time. (In other words, consumers hate price increases more than they like price decreases, so market actions aren’t perfectly reversible.) In this case, however, it’s not clear that this behavior is present to any significant extent since we’d be seeing what we see in the gas market even if producers weren’t thinking about this aspect of consumer psychology.

→ 7 CommentsTags: Econ 101 · Markets

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The Latest On Surge Pricing, Now With More Digression Into Income Inequality…

December 16th, 2014 · 10 Comments
Econ 101 · Markets

I’m beginning to think that the overlap in the Venn diagram of “Economic Theory” and “Good PR” is an area that my cat couldn’t resist trying to crawl through due to her obsession with small spaces. Case in point (re the economics, not the cat):

Followed swiftly with the usual mea culpa…

On the plus side, Uber has started explaining the rationale behind the price increases. On the down side, people still hate it. On the…maybe up side, it appears that people may have progressed a bit from kidding themselves into thinking that regular prices and enough available supply is an option and are at least considering the relative suckiness of high prices versus a shortage:

To refresh your memory, the two options, in graph form, are the following:

  • Option A: Normal pricing plus shortage
  • Option B: Surge pricing but no shortage (partially due to increased quantity supplied, partially due to some consumers getting priced out of the market)

If the higher price encourages more drivers to get off the couch (and empirical evidence suggests that it does in the case of Uber drivers- perhaps too well, since I always see drivers swarming around me when surge pricing is in effect), then Option B results in more people being able to flee hostage situations in Australia or whatever. Step 1 is to get people to understand this, but, while it’s a necessary step, it’s such a well-worn topic by economists that I find myself bored by even typing this. So let’s move on to step 2…

Step 2 is to think about fairness, which is a bit of a tricky subject because there’s no objective definition of fair. The tweeter above, for example, seems to think that a lottery system to allocate the cars would be more fair than a price system. On the other hand, suppose that, during this shortage, there’s a pregnant lady that needs to get to the hospital (and yes, there are no ambulances, just go with me here). Would everyone see the lottery system as more fair than a system where pregnant lady could convey that the car is more important to her than it is to other people? After all, that is what prices are supposed to do. But…I’m even half bored having this conversation, since prices as a rationing mechanism is also well-worn and often ignored/rejected territory. Why? Usually because of things like this:

“UBER charge, during a snowstorm (to drop one at Bar Mitzvah and one child at a sleepover.) #OMG #neverforget #neveragain #real” –Jessica Seinfeld

Yup, that’s Jerry’s wife. Which brings us to the thing that doesn’t bore me to tears (yet)…the notion that prices direct goods and services to those who value them the most is implicitly predicated on the assumption that an individual’s willingness to pay is a consistent reflection of how useful a good or service is to that individual. In other words, economists assume that, if person A is wiling to pay more for a good than person B, then that good must me more important/useful to person A than to person B. Using this logic, however, we could probably conclude that Bill Gates likes pretty much everything on earth (with the possible exception of women’s shoes, though I will be the first to admit that I don’t know his life) more than I do. Does he actually get more marginal utility from consumption than I do? Probably not, so the impact that income/wealth has on willingness to pay throws a bit of a monkey wrench into the basic economic analysis.

If we gave everyone the same amount of money and then conducted an auction for an Uber, I would be pretty confident that the Uber would go to the person who truly valued it the most, and I guess my optimistic step 3 would be to get people to accept that mostly hypothetical principle and stop assuming that price increases always make rich people hoard all of the cool stuff. (Though I do like to picture Warren Buffett going around and buying up all the $20 gas after hurricanes and laughing maniacally while doing so BECAUSE HE CAN.) In return, I will distance myself a bit from Econ 101 and acknowledge that, the more income/wealth equality exists in a market, the less likely the system of rationing via prices is to be either truly efficient or fair. Unfortunately, I don’t know where to go from there, since it’s unclear what a more optimal system would look like- a had a student once who suggested that everyone should write an essay about why they wanted a good so that a social planner could go through and decide which consumers got priority, but the transaction costs of such a system seem likely to outweigh the potential benefits.

→ 10 CommentsTags: Econ 101 · Markets

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Causal Friday: Well That Explains My Student Evaluations…

December 12th, 2014 · 4 Comments
Causal Friday

Well, file this experiment in both the “cool” and “depressing” categories:

What’s in a Name: Exposing Gender Bias in Student Ratings of Teaching

Lillian MacNell, Adam Driscoll, Andrea N. Hunt

Student ratings of teaching play a significant role in career outcomes for higher education instructors. Although instructor gender has been shown to play an important role in influencing student ratings, the extent and nature of that role remains contested. While difficult to separate gender from teaching practices in person, it is possible to disguise an instructor’s gender identity online. In our experiment, assistant instructors in an online class each operated under two different gender identities. Students rated the male identity significantly higher than the female identity, regardless of the instructor’s actual gender, demonstrating gender bias. Given the vital role that student ratings play in academic career trajectories, this finding warrants considerable attention.

I think if you asked a random person what data they would want to see in order to determine whether female instructors are discriminated against (or, equivalently in this case, male instructors are discriminated for), they would ask for statistics related to the average ratings of male instructors and the average ratings of female instructors. Noting that the male average is higher, however, doesn’t really tell us anything about discrimination unless we can rule out the possibility that the male instructors are better teachers. (Unlikely, of course, but a theoretical possibility nonetheless. =P) If we wanted to do better, we could have people trained to objectively rate the instructors and then see whether the differential between the objective ratings and the student ratings is different for male instructors than for female instructors. Of course, this presumes the existence of an objective way to rate instructors and assumes that said trained observers are somehow immune from subconscious discrimination themselves. Ideally, then, we’d want to conceive of some Mrs. Doubtfire-type situation where an instructor could randomize across classes whether or not he or she was wearing an opposite gender disguise. If we did this, we essentially normalize for the teaching quality across classes and can therefore attribute difference in ratings to discrimination on the part of students.

This is basically what the paper did, sadly without the costumes, since the online courses were such that the instructors could just say what gender they were and didn’t have to back it up with visual evidence. (On a half sidenote, one of the reasons that I find this study depressing is that we are in a world where classes can be structured so that we never see the instructors. Technology being what it is certainly means that we can do better than that.) The researchers then did find what appears to be differential treatment for male versus female instructors. From the NC State press office:

To address whether students judge female instructors differently than male instructors, the researchers evaluated a group of 43 students in an online course. The students were divided into four discussion groups of 8 to 12 students each. A female instructor led two of the groups, while a male instructor led the other two.

However, the female instructor told one of her online discussion groups that she was male, while the male instructor told one of his online groups that he was female. Because of the format of the online groups, students never saw or heard their instructor.

At the end of the course, students were asked to rate the discussion group instructors on 12 different traits, covering characteristics related to their effectiveness and interpersonal skills.

“We found that the instructor whom students thought was male received higher ratings on all 12 traits, regardless of whether the instructor was actually male or female,” MacNell says. “There was no difference between the ratings of the actual male and female instructors.”

In other words, students who thought they were being taught by women gave lower evaluation scores than students who thought they were being taught by men. It didn’t matter who was actually teaching them.

The instructor that students thought was a man received markedly higher ratings on professionalism, fairness, respectfulness, giving praise, enthusiasm and promptness.

“The difference in the promptness rating is a good example for discussion,” MacNell says. “Classwork was graded and returned to students at the same time by both instructors. But the instructor students thought was male was given a 4.35 rating out of 5. The instructor students thought was female got a 3.55 rating.”

I agree that the promptness category is a good one to point out, since it’s one of the few places where the underlying behavior can be objectively measured. Maybe I’m exaggerating a bit, but I now kind of feel like my students think I have nothing better to do than get their papers returned immediately whereas male instructors have other big and important things to attend to. Anecdotally, I’ve certainly gotten the impression that not everyone is cool with a female instructor, due to the authority figure nature of the situation if nothing else. This sometimes shows up in evaluation comments that are not exactly of an appropriate nature- I think my favorite was “she would make a good wife if only she learned how to cook.” I don’t think the intention was to make me annoyed that the student assumed that I cannot cook, whereas in reality I am quite proficient thankyouverymuch- I’ll have you over for a nice short rib risotto if you don’t believe me.

I found it interesting that, even after reading an article about this experiment, a number of people responded with “but I gave a male/female professor a really low/high ranking that one time!” This observation doesn’t actually run counter to the findings of the study, of course, since the study is examining whether the low/high ranking would have been even lower or higher had the instructor been of the other gender. Some of the comments on the article about the study are also worth reading- not necessarily the ones about the small sample size, since statistical significance takes that into account, but about the lack of what social scientists would call “double-blind” protocols in the study- it’s entirely possible (and, again, depressing) that the instructors actually acted differently when they were presenting as male than when they were presenting as female.

I also have to admit that the line from the article about student evaluations being important “because they’re used to guide higher education decisions related to hiring, promotions and tenure” made me laugh due to its adorable naive nature. =P Perhaps someday we can also have a discussion about the usefulness of student evaluations in the first place, since I can think of a lot of ways to get higher student ratings that don’t actually increase learning. (In fact, there is evidence that lower evaluations correlate with higher performance in subsequent courses, suggesting that student punish instructors in the short run for making them do things that are good for them in the long run. But no, tell me more about the “student as customer” mentality…)

→ 4 CommentsTags: Causal Friday

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You’re Not Wrong, Walter, Consumer Protection Edition…

December 10th, 2014 · 3 Comments

I would like to begin with a few (mostly personal) anecdotes:

I remember one time in NY when my friends and I got in a cab and the driver tried to refuse to take us to Brooklyn. (In case you are not aware, one of the rules for those operating NYC cabs is that they have to take you anywhere in the five boroughs, and people are encouraged to call 311 and report cabs who don’t follow the rules.) He was 100% in the wrong and yet I was somehow the bitch for having the nerve to point it out and make him do his job rather than stand like a sucker on Houston for another 30 minutes at 3am. (My friend gave him a large tip for his “kindness,” and it made me more than a little ragey.)

The other day, I got an email from my apartment building management stating that they are kicking cars out of the garage for two days for cleaning and that we will need to park elsewhere at our own expense. This didn’t strike me as either fair or legal, so i sent a (polite as I could muster) wtf to the building management. Turns out that, because there are two floors to the garage (with one floor getting cleaned per day), they could just have me park on the other floor for one of the days. In fact, they explicitly said that the only reason they tried to kick everyone out for two days was that it was easier for them logistically.

I had a friend in grad school that would put up a web page that linked to all of the textbooks that we used, and he would ask us to buy the books via the links so that he could get the Amazon affiliate commissions. (And, before, you ask, no, I don’t know whether this added up to a reasonable sum of money.)

So, what do these stories have in common? Well…in the first two cases, I felt like I was on the wrong side of a coordination failure, namely that these stories represent cases where it’s not necessarily utility maximizing for one person to raise a stink, but the harm in the aggregate is substantial enough that the lack of protest results in an inefficient outcome (read, bullying by the cab driver and management company with the expectation that people will be too passive or lazy to complain). Not surprisingly, in both scenarios it became pretty clear that I was outside the norm in voicing a complaint, even though I know full well that many people had a reason to complain. (I may have surveyed the parking garage to see how many people didn’t typically move their cars during the day, for example.) Granted, I did ultimately get my way in both scenarios, but having to argue to get what has already been dictated as the proper outcome imposes a psychological cost, especially when one is called a bitch in the process. (Furthermore, it’s not like my complaining kept the non-complainers from getting screwed.) In other words, my dream is to one day live in a world where people internalize the positive externalities of enforcing the rules of markets so that my frequency of raising a fuss can be minimized.

In related news, the third anecdote is about a grad-school classmate of mine named Ben Edelman. You know, this guy:

Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.

Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.

If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.

(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)

In this particular instance, I think my friend summed up the situation nicely with one of my all-time favorite movie quotes, located at around the 0:24 mark:

(In case you’re wondering, the Amazon anecdote is in no way relevant, I just thought it was funny and totally something that an economist would do.)

Not surprisingly, the Internet is none too happy with Edelman right now, and that actually worries me quite a bit. Hear me out- yes, Ben could have been more reasonable in his interactions (demanding treble damages in a non-courtroom environment when intent hasn’t been proven is more than a bit much, for example), and, even if he was concerned about the restaurant not pulling the same move on others, a demand to update the online menu would have likely been a better request than the $12 refund. My concern is that non-thoughtful people have a tendency to equate assholery with being wrong, which is a problem if it’s mostly the “asshole” demographic that raises a fuss on principle. By criticizing the what rather than the how, people are sending a message that it’s not okay to protest when the rules of the marketplace get broken, which in turn virtually guarantees that more rules will get broken.

Economists are quick to point out that well-functioning markets are very dependent on property rights, rule of law, symmetric information, and the like, and it’s just as important to be mindful of the fact that such features don’t just appear magically, they often persist because market participants police the behavior of other market participants. (The logistics of a value-added tax are even designed such that firms have incentives to enforce payment among themselves.) Think about it this way- we know that financial markets, to a large degree at least, are kept in check because there are market participants looking to profit off of market inefficiencies and, by doing so, they make the inefficiency disappear. In a similar fashion, markets are kept in check by market participants calling out bad behavior and thus mitigating the bad behavior, but the difference is that such enforcers don’t always have the personal profit incentives for doing so. Therefore, I propose two simple rules for continued market functionality:

1. If you come upon an individual who calls out a rule breaker so that you don’t have to, say thank you. Maybe buy them a cookie to help internalize the externality.

2. If you are going to call out a rule breaker, at least start by being polite. You can always escalate to assholery when you learn that the rule is being broken on purpose and/or the other party is unwilling to fix the error. I believe that’s what economists refer to as “option value.”

P.S. To those pointing out that the overcharge isn’t a problem because Ben can afford it, do you really want to live in a world where it’s ok to screw people as long as it doesn’t bankrupt them? As I’m writing this, I’m forced to confront the reality that it’s entirely possible that many people do. I’m going to go hide under the bed with the cat now.

→ 3 CommentsTags: Markets

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A Nobel Lecture From Your Latest Nobel Prize Winner…

December 8th, 2014 · No Comments

Don’t ever say I don’t bring you interesting things in a timely manner…(ok fine, you can say that, mainly because it’s often true- sorry about that) Here’s Jean Tirole’s Nobel Prize lecture, delivered today (time zone changes between here and Sweden are a bitch, apparently, but if you get to it quick you can still watch the end live):

The talk, entitled Market Failures and Public Policy, gets at the fact that Tirole studies various forms of imperfect competition, which, since they give firms market power, are suboptimal for society and therefore fit under the heading of market failures. Tirole’s introduction is also a nice reminder that one doesn’t get a Nobel Prize for writing textbooks. =P

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