Tag: Behavioral Economics

Musing on one’s intellectual responsibilities…

Posted on by Brad DeLong

Live from Evans Hall: Musing on One’s Intellectual Duties: Apropos of David Romer’s teaching Gabriel Chodorow-Reich and other things this morning…

Those who state that they are worried about zero interest-rate policy and financial stability are not worried about the excessive new risky lending. New risky lending is far from excessive–and boosting it is, in fact, one of the principal aims of low interest rate policy. We want there to be more of.

What they might be worried about is a model in which there are two groups of investors: those who can assess risks and those who cannot. The second group are easily phished. And zero interest-rate policy induces them to “reach for yield”. The complaint is not that there is too much new risky lending, but that the wrong people are undertaking risky lending, and financial instability may result when the tide goes out and they see how phoolish they have been.

The problem with the previous “what they might be worried about…” paragraph is that those who claim to be worried about zero interest-rate policy and financial stability do not make this “phishing for phools” argument, and do not present any evidence that zero interest rate policy materially adds to the problem of phools who are easily phished.

As a matter of dialogue and debate and the advancement of knowledge, how much work should I be doing not just to acknowledge and express the strongest wrong arguments I think are being made, but to go one step further and develop even stronger arguments then are currently being made if those stronger arguments are along lines that I think of as fundamentally wrong?

Must-Read: Ben Thompson: Digital Dopamine

Posted on by Brad DeLong

Must-Read: Ben Thompson: Digital Dopamine: “Consider the one app category that continues to succeed wildly on the App Store…

…free-to-play games like Candy Crush or Clash of Clans. Critics complain that they are manipulative, extracting money from culpable players in exchange for a worthless digital good that delivers little more than a sense of accomplishment to the buyer — a shot of dopamine, basically. But, if I may put on my contrarian hat, so what? Is said shot of dopamine any different than that obtained by any number of other means, many of which cost money? If differentiation is more about how something makes you feel and less about features then why the special bias simply because one particular something happens to be created in software? And, I’d add, digital dopamine results in a far more equitable business model for the developer: the more a user plays the more money a developer earns…

Must-Read: Noah Smith: Unlearning Economics

Posted on by Brad DeLong

Must-Read: Noah Smith is pushing me towards thinking that Econ 1 needs to teach a lot more than supply-and-demand plus macroeconomic externalities that can be dealt with by stabilizing monetary and maybe fiscal policy…

Noah Smith: Unlearning Economics: “Right now we’re in the middle of an empirical revolution in econ, and…

…unsurprisingly–a ton of standard, common theories are just not matching reality very well. For example: 1…. Minimum wages should harm employment in the short term. But the data shows that they probably don’t. 2…. A big influx of immigrants should depress the wages of native-born workers of comparable skill. But the data shows… the effect is very small.  3…. Welfare programs barely reduce observable work effort. 4…. Social norms (or morals, broadly conceived) matter to people…. The stuff… [of] Econ 101… are being smacked down by the heavy hand of new data. We’re slowly unlearning economics…. Econ 101 courses around the country probably need an overhaul…. Teachers should still teach the simple, classic theories that the new facts are beginning to kill… but mainly as a way to show how data can tell us when we’re wrong.

Must-Read: John Authers: Number-Crunchers Lift Lid on Investor Choice

Posted on by Brad DeLong

Must-Read: This is what Akerlof and Shiller’s Phishing for Phools is about…

John Authers: Number-Crunchers Lift Lid on Investor Choice: “Retail investors…fatally drawn to chasing performance…

…buying high, selling low… heighten[ing] the peaks and lower[ing] the troughs…. In aggregate, all the money attracted by funds in that era went to funds that could show the strongest ratings (which are largely a function of performance)…. Past performance does not predict future performance. But it utterly controls what the consumer will ultimately buy….

Given a choice between two otherwise identical funds, Americans will take the cheaper one. Europeans will not…. In the US, investment advisers tend to be paid by fee, rather than commission, and have no incentive to advise otherwise…. But Americans are not as smart as all that. High turnover… is a bad idea…. Yet funds with a high turnover in the US tend to attract more than 0.5 per cent more in inflows each month…. Most counter-intuitively, and alarmingly… older than average funds… suffer outflows at a rate of 2.77 per cent of their assets each month….

Ultimately, funds are sold the same way as other branded goods. Marketers spot where the demand is moving, and launch something new that can be hyped. All the interest and selling action focuses on recent launches, while older products are gradually neglected, and watch money ebb out over time. It is not a great way to allocate capital…

Must-Read: Daniel Kahneman: Thinking, Fast and Slow

Posted on by Brad DeLong

Must-Read: Daniel Kahneman (2012): Thinking, Fast and Slow: “As interpreted by the important Chicago school of economics…

faith in human rationality is closely linked to an ideology in which it is unnecessary and even immoral to protect people against their choices. Rational people should be free, and they should be responsible for taking care of themselves The assumption that agents are rational provides the intellectual foundation for the libertarian approach to public policy: do not interfere with the individual’s right to choose, unless the choices harm others.… I once heard Gary Becker [argue] that we should consider the possibility of explaining the so-called obesity epidemic by people’s belief that a cure for diabetes will soon become available…

Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economist favors a state that will force its citizens to eat a balanced diet and to watch only television programs that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them.

The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge.