Category Archives: behavioral economics

Obesophobia

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Apparently, Jonathan Gruber says yes. But at Cato Unbound, Christopher Snowdon says no. In response, Russell Saunders says yes. Pointer to the Cato Unbound issue from Jason Collins.

I have not yet read the essays. We decided to take a break from winter and drive down to Florida. As we went through Virginia, the Carolinas, and Georgia, the population did seem to get older and more obese. I know that many of my progressive friends would be disgusted by the obesity, but that does not make it a public policy problem. You can complain about paying for obese people’s health care, but why not just let insurance companies determine the charge for that, rather than treating it as a tax issue?

People have strong tastes about their associations. San Franciscans have a revealed preference for segregated schools (link from Tyler Cowen).

In Florida, my casual observation is that the buildings with the guards are in affluent neighborhoods in communities that are miles from any urban diversity, and the buildings in the urban diverse neighborhoods have less security. I attribute that to selection bias–people who are comfortable with diversity are less xenophobic.

I can imagine that if it were conservatives rather than progressives who were offended by obesity, then the term obesophobia would be in widespread use in the liberal media.

Something’s Rotten in Happiness Research

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From a book review:

Those sky-high happiness surveys, it turns out, are mostly bunk. Asking people “Are you happy?” means different things in different cultures. In Japan, for instance, answering “yes” seems like boasting, Booth points out. Whereas in Denmark, it’s considered “shameful to be unhappy,” newspaper editor Anne Knudsen says in the book.

When you ask me to report my happiness, what do I report?

1. How I feel compared to one minute ago.
2. How I feel compared to yesterday.
3. How I have been feeling on average this week with how I remember feeling some time in the past.
4. How I feel about my life as a whole compared to other people’s livs.
5. How I think other people think I am feeling.
6. How I think other people expect me to feel.

…

The one thing I know about my happiness is that it is reduced when people produce charts that are derived from data that lacks reliability. It is hard to get less reliable than a survey that asks a question that does not have a precise interpretation.

Raj Chetty on Empiricism Without Theory

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The talk is here. Pointer from Tyler Cowen.

Broadly speaking, Chetty makes two points. One is that behavioral economics has inspired empirical analysis that can be useful for policy. The other is that we do not have to care about theory. Although theory might guide us to try certain empirical studies and might explain why a policy will work, all we need is the empiricism to know that a policy will work.

I found this view at best shallow and at worst not persuasive. Take one of his examples, in which a study guided by the theory of Loss Aversion found that classroom results improve more when incentives are framed in terms of what teachers will lose if results are bad than in terms of bonuses they will earn if results are good. My thoughts:

1. Given that the Null Hypothesis tends to be more robust than studies that purport to show significant effects from educational interventions, one ought to be pretty cautious about this.

2. A non-empirical a priorist of a Misesian bent, without knowing any behavioral economics, would recommend a market-provided school over a government-provided school. Among other advantages, the market will tend to punish poor performance, as markets tend to do. So in this example, without doing any empirical work at all, one can arrive at a recommendation that would be at least as effective as anything that Chetty might propose. While I am no Misesian, I do find the generic arguments against central planning more compelling than just about any empirical finding suggesting nudging opportunities.

3. I think that those who advocate behavioral economics would do well to also acknowledge behavioral politics. If Chetty understood how teachers unions operate where I live, he might be feel less a bit less excited about the opportunities for reform using his findings.

Related: Noah Smith on how the profession has been moving left.

Economics has become much more empirical, and that has made it much harder to wave away the possibility of market inefficiencies.

Pointer from Mark Thoma.

Attitudes Toward Risk and Growth

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Michael Hanlon writes,

Could it be that the missing part of the jigsaw is our attitude towards risk? Nothing ventured, nothing gained, as the saying goes. Many of the achievements of the Golden Quarter just wouldn’t be attempted now. The assault on smallpox, spearheaded by a worldwide vaccination campaign, probably killed several thousand people, though it saved tens of millions more. In the 1960s, new medicines were rushed to market. Not all of them worked and a few (thalidomide) had disastrous consequences. But the overall result was a medical boom that brought huge benefits to millions. Today, this is impossible.

Pointer from Tyler Cowen.

I think that the problem goes beyond rational risk aversion. One of the findings in behavioral economics is that people exhibit loss aversion. That is, they will avoid rational risks because they regret losses much more than they enjoy gains. It seems probably to me that government agencies exhibit at least as much loss aversion as do individuals.

Annuities

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Timothy Taylor writes,

Annuities may turn out to be one of those products that people don’t like to buy, but after they have taken the plunge, they are glad that they brought. One can imagine an option where some degree of annuitization of wealth could be built into 401(k) and IRA accounts. For example, it might be that the default option is that 30% of what goes into your 401(k) or IRA goes to a regular annuity that kicks in when you retire, another 20% goes to a longevity annuity that kicks in at age 80, and the other 50% is treated like a current retirement account, where you can access the money pretty much as you desire after retirement. If you wanted to alter those defaults, you could do so. But experience teaches that many people would stick with the default options, just out of sheer inertia–and that many of them would be glad to have some additional annuity income after retirement.

The theory of an annuity is that you insure against the risk of outliving your money. Economists tend to be big fans of annuities, and they view the reluctance of people to buy annuities as a behavioral economics puzzle.

I actually think that it is perfectly rational to shun annuities. My reasons:

1. You are charged more than the actuarially fair premium. Part of that is overhead and profit, and maybe part of that is adverse selection–the insurance company has good reason to fear that you are in better health than someone else your age. In any event, the result is that an annuity reduces your consumption possibilities by as much as would be the case if you over-estimated your lifespan by several years and budgeted accordingly.

2. Taylor notes that

people fear that they might need to make a large expense in the future, perhaps for health care or to help a family member, and if they have annuitized a large share of their retirement wealth they would lose that flexibility.

This is a very reasonable fear. An annuity is risk-reducing if the only risk you face is additional longevity. In fact, other risks may be more serious. You could easily find yourself needing to take out a loan if your savings are tied up in an annuity and your spouse requires a home health aide. (Speaking of which, long-term care insurance is something that I think does make sense, but you should buy it to get through age 75 and then self-insure thereafter).

3. It is reasonable to think in terms of declining consumer expenditures as you age. Will I really spend as much at age 90 as I spend at age 60? Medicare will cover many health expenses, and if I need to spend more of my own money on health care it is likely that I will have much less interest in vacation travel or buying a new car.

4. It is possible to substitute inter-generational insurance. If my mother-in-law had outlived her money, we could have supported her. From our family’s perspective, self-insuring in this way was cheaper than buying an annuity.

Must-read Sentences

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Jason Collins writes,

As I have said many times before, giving a bias a name is not theory.

He refers to a new paper by Owen Jones, from which Collins quotes

[S]aying that the endowment effect is caused by Loss Aversion, as a function of Prospect Theory, is like saying that human sexual behavior is caused by Abstinence Aversion, as a function of Lust Theory. The latter provides no intellectual or analytic purchase, none, on why sexual behavior exists. Similarly, Prospect Theory and Loss Aversion – as valuable as they may be in describing the endowment effect phenomena and their interrelationship to one another – provide no intellectual or analytic purchase, none at all, on why the endowment effect exists.

Read the whole thing.

Rhetorical Questions About Education, Grades 7-12

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Responding to stories about police and student discipline, how hard it is to sit in class all day, and how many high-school graduates are unprepared for college.

1. How much would somebody have to pay you to be a teacher in the middle school that you attended?

2. How well do you think that evolution trained the human adolescent to sit in a desk and pay attention?

3. When you were aged 13-18, how easy was it for a teacher to gain your respect?

4. When you were aged 13-18, did you only take rational risks?

5. When you were aged 13-18, did you want your friends to shut up so that you could listen to the teacher?

6. When you were aged 13-18, did you do what you would advise an adolescent to do today?

Research Findings Support Change-the-Gender

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Therese Huston writes in the NYT,

Neuroscientists have uncovered evidence suggesting that, when the pressure is on, women bring unique strengths to decision making.

…the closer the women got to the stressful event, the better their decision making became. Stressed women tended to make more advantageous decisions, looking for smaller, surer successes. Not so for the stressed men. The closer the timer got to zero, the more questionable the men’s decision making became, risking a lot for the slim chance of a big achievement.

Pointer from Jason Collins.

An evolutionary psychologist would have a great just-so story to explain this. Women are gatherers, looking for smaller, surer successes in finding food. Men are hunters, risking a lot for a slim chance of bringing back meat.

As you know, I have frequently suggested that if I had the job of regulating risk in the financial industry, I would change the gender of the CEO’s at big banks. (Some people wonder if that means I would order sex-change operations. No, I would also give the CEO the option of stepping down to allow a woman to be appointed.) I came to this point of view on the basis of casual observation of the different propensities of men and women as executives.

But now we have experimental evidence. Trust the science!

Just to be clear, these findings come from a methodology of which I am deeply skeptical. It just happens that in this case that the results line up with my own preconceptions.

About a Common Probability Error

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John Pinkerton writes (on Facebook),

I always interpreted the bank teller probability as “If I were to tell you that Linda is a bank teller and is active in the feminist movement, how likely would you think I was correct?” For this meaning, if you describe someone in greater detail, it’s more likely you know them well and thus describe them accurately.

This is a plausible explanation. However, I have seen students wrestle with such problems when they are presented as a question of whether the sequence of coin flips HHT has higher probability than the sequence HHTT. Pinkerton’s comment is on Steven Poole’s article. About the bank teller example, Poole writes

Tellingly, the psychologists Ralph Hertwig and Gerd Gigerenzer reported in 1999 that when you give people the same puzzle and ask them to guess about relative frequencies instead of what is more ‘probable’, they give the mathematically correct answer much more often. One might add that, if we are talking plausibility, the notion that Linda is a bank teller and an active feminist fits the whole story better. Arguably, therefore, it is a perfectly rational inference: all the available information is now consistent.

The entire article is recommended.

Sentences that I Might Have Written, Continued

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Then there are those whom Sunstein refers to as “we.” We know this, we know that, and we know better about the way ordinary people make their choices. We are the law professors and the behavioral economists who (a) understand human choosing and its foibles much better than members of the first group and (b) are in a position to design and manipulate the architecture of the choices that face ordinary folk. In other words, the members of this second group are endowed with a happy combination of power and expertise.

That is Jeremy Waldron, and I recommend the entire essay.