Category Archives: behavioral economics

Passover 2013 Edition

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Random thoughts:

1. Passover is the original oppressor-oppressed narrative.

2. Sheryl Sandberg is much in the news with her book arguing that women ought to be more willing to choose to be ambitious and men ought to be more accomodating toward ambitious women. Here is her Ted talk. My takes:

a. I think a lot of the pushback that she gets in fact reinforces one of her points, which is that leadership qualities that are admired in men are resented in women.

b. The main pushback I would give is that I do not think that our goal should be to raise some women’s ambition up the level of that of the most-ambitious men. I think that hyper-ambitious males are a problem. They are a problem in finance, where they take excessive risks with other people’s money. They are a problem in government, where they exercise too much power. I think that ambition requires checks and balances. The market works imperfectly as a check on the ambition of executives. I think that institutional structures and social norms can provide a check on the ambition of politicians, and I regret that in our country both the structures and the norms have deteriorated considerably from that perspective.

c. I think that Sandberg’s thesis would provide a good discussion topic for a seder.

3. On April 3, Russ Roberts and Jared Bernstein will participate in a debate on whether or not to abolish the minimum wage. Tickets are $40. I am not sure what the audience expects at that price, and I expect that the price will affect the outcome. If you pay that much to get in, how can you not feel guilty voting to abolish the minimum wage? Especially so soon after Passover? My thoughts are:

a. The optimum minimum wage is probably closer to 0 than to $22 an hour, which is where Elizabeth Warren claims it might be.

b. The minimum wage issue is high on symbolism and low on substance. Few workers earn the minimum wage. As a practical matter, most workers’ reservation wage is much, much higher, as is demonstrated by the existence of unemployment. And most of the friction in the labor market comes from other factors, such as the payroll tax and employer-provided health insurance.

Two Interesting Interviews

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1. Marlene Zuk.

My objection is to the assumption that what we did before — say, pre-agriculture — was healthier, or even ideal, and then, somehow, we got kicked out of the Garden of Eden, and it’s all been downhill. Diamond talks about the ways in which agriculture was bad, and he is right about those costs. Of course, walking upright is bad for us too, at least in some ways, but that ship has sailed. I think a deeper understanding of evolution helps you better understand the futility of pointing to a moment in time as being the perfect one.

2. Gary Becker.

In terms of understanding the crisis, I do not think that more realistic behavioral assumptions would solve the problem. It has always been difficult in rational choice models to adequately account for the coordination of people’s expectations. To some extent, the crisis involved the coordination of irrational expectations…the theory of rational expectations always said that people make a forecast and could coordinate on a bad forecast. That has always been part of the theory, however there is more attention being paid to that phenomenon now.

He takes some swipes at Austrian economics.

Pointers to both from Jason Collins.

Betting Aversion

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Derek Thompson interviews Daniel McFadden. McFadden says,

If two “rational” people meet and disagree on the probability of an event (e.g., the AFC team wins the super bowl, the price of Google stock goes up), then both can gain by wagering on the event. In the real world, however, wagering is the exception, not the rule. On the one hand, you could say that getting someone to bet on an event, pay attention to the outcome, and finally make the payoff, is too much work. But actually, if you ask people why they don’t bet often with their friends, they will simply say that it would make them uncomfortable to do so.

Thanks to Jason Collins for the pointer.

What accounts for this aversion to wagering? McFadden says that people do not like choices. I do not see how that follows.

I do not like to bet with friends because it can feel like a lose-lose action. I feel bad losing, and I feel bad taking my friend’s money when I win. I stopped playing poker at a very early age, because I realized that for me it was lose-lose in that sense.

Someone like me would be more willing to wager in a blind market, such as the stock market, than to make the same wager against a friend. It is hard to hold all else equal, however. When you wager against a known individual, you have additional information about that individual’s strengths and weaknesses, and that might make you more willing to wager.

In wagers among friends, one is often motivated by bragging rights, ego, and other psychological factors. The monetary stakes are often secondary. The pleasure you get is from “I won a bet against ____,” not “My wealth increased by _____.”

Given all of those considerations, I am not convinced that our propensity to avoid wagering tells us something about an aversion to choices.

The overall interview is about a paper on behavioral economics. Long-time readers will know that I am not a fan of that field. Proponents get excited by “gotchas” that show people making decisions that are arguably not rational. These gotchas strike me as superficial.

I would like to see some deeper philosophical thinking. Do these findings make the doctrine of subjective value untenable? Or should they be viewed instead as casting yet more doubt on the project of assigning objective value? Some researchers think that we should be understood as having multiple selves. What are the implications of that?