Thursday, October 28, 2010

Should you keep your goals to yourself?

Ian Ayres says no and he lives by that word. Here's what Ayres says in response to Derek Sivers' provocative claim that announcing your plans makes you less motivated to accomplish them.
I’m attracted to provocative claims as much as the next person. But this talk is reckless and at times just plain wrong. Sivers tells us in the talk that his “Keep Your Goals to Yourself” evidence “goes against the conventional wisdom that we should tell our friends our goals right so that they hold it to us, err, hold us to it, yeah.”

His inability to get out the last bit at the end, I think, might be a Freudian slip. You see, the experiments that he is alluding to don’t test whether “telling our friends our goals so that they can hold us to the goals” works or not. In fact, the experiments cited are not about announcing your intentions to your friends, but about whether or not your written intentions are noticed by an experimenter. And most crucially they are not testing whether “announcing so that your friends can hold you to your goals” works. If your friends are going to have any shot of holding you to your goals, they must not only know your goals, but they must know later on whether or not you achieved them. This subsequent feedback is crucial, and it is crucially missing from the experiments upon which he relies.

As I started to read this post, I got the strange feeling that I had seen it before. Then, I remembered that I had already wrote on this (back in July of last year, three times: 1, 2, 3):
Revealing your intentions to a confidant is very different than an experimenter quizzing you to see if you really meant to select the answer you selected. The first is personal and (possibly) confidence-boosting. The second feels like you're being quizzed by Regis Philbin on Who Wants to Be a Millionaire?

People turn to support groups for reinforcement, and there's nothing in these studies that resembles the reinforcement of support groups. If anything, being quizzed about the validity of your answer could shake your confidence. If this is true, these studies compare rattled participants to unfazed participants. Is it surprising that an unfazed participant is more likely to follow through on a goal?
There must be something about debunking this claim that leads to being long winded. Ayres's post is quite long and mine is a three part series.

Tuesday, October 26, 2010

Oh Man(kiw)

In light of this bit of comedic acting, maybe Comedy Central will give him his own show.

If you are unfamiliar with the background on this video, Mankiw is making light of this comedic jab by Stephen Colbert who was responding to Mankiw's excellent column on marginal tax rates.

Monday, October 25, 2010

Pricing, Mechanism Design and Efficiency

In an effort to make it more accessible, Jeff Ely has a nice and concise discussion of the Myerson-Satterthwaite theorem. Here's a key paragraph:
The problem is one of information. If B is going to be induced to sell to A, the price must be high enough to make B willing to part with the good. And the more B values the good, the higher the price it must be. That principle, which is required for market efficiency, creates an incentive problem which makes efficiency impossible. Because now B has an incentive to hold out for a higher price by acting as if he is unwilling to part with the good. And sometimes that price is more than A is willing to pay.
If you prefer reading through slides for a demonstration of this idea, here's the set of slides he used to ground his intuition (and teach his intermediate microeconomics class). If he's trying to make the idea easy to understand, I think it is a success.

Friday, October 22, 2010

On the incentives of jobless benefits

Here's an interesting excerpt from an article on jobless benefits' incentive effects:

After Robert Nasuti was laid off as a technology consultant in March 2009, he spent more than a year looking for work in his field. Although the Myerstown, Pa., resident, was making ends meet on his unemployment benefits, he hated not working.

“The wear and tear of being at home, having nothing to do every day, nowhere to go, that’s what really started to wear on me,” he said. “I like to work.”

That’s how he ended up taking a low-paying temporary job as a bill collector for student loans.

“I thought it would be the responsible thing to do,” he said.

He quit after working just one week. He said he was asked to call grandparents who had co-signed student loans and threaten to withhold Social Security payments if they didn’t pay up, he said.

Quitting left him ineligible for unemployment pay. These days, the 26-year-old is working 20 hours a week, for $8 an hour, at a drugstore. He’s living rent-free at his dad’s house but still barely scrapes by.

He now wishes he’d stayed on unemployment and had never taken the bill collector job.

“I regret it every day. It was like a chance that I took, and I thought it was a good route to take, and it just blew up in my face completely,” he said.

The article is remarkably sophisticated on the issue, pointing out one of the more important costs of turning down low-paying jobs to stay on unemployment:
After watching his wife go through a job loss and difficult job search, and then spending six months looking for work himself, Trimm said he felt he couldn’t risk turning a job down, even if the pay was lower than his benefits.

He also worried that the growing gap in his resume would make it harder to get work.
To be sure, there is a tough tradeoff to be made. Should people continue looking as it becomes more difficult to find an adequate job? Or, should they take a pay cut for a job that will certainly leave them with fewer resources than they would have under unemployment insurance? Neither case is ideal, but you can see why some people might prolong unemployment on account of receiving unemployment insurance, even if they like work and think that getting off of unemployment insurance is the responsible thing to do.

What is it like to sell used books for a living?

Tyler Cowen linked to this fascinating article on the life and work of a used-book salesman:
There is competition in the used book game because it is actually possible to make a living doing what I do. I see my adversaries packing their hauls into decent cars, sometimes with the help of family members. A good load of books found all of a sudden might be resalable for many hundreds of dollars. With diligence, someone working alone can make $1,000 per week; with a more insane commitment, or with the help of a wife or child, the business might yield more, especially once a sizable inventory has been built up.
The author of those words works up to 80 hours per week scanning books, but a thousand dollars per week ($52 K / year) is a pretty decent business considering the amount of training someone would need to get into such a job.

On the job, he has picked up some interesting insights. Indeed the whole article is worth a read. Here is my favorite quote:
To increase your odds, it's important to maintain a territory. There are certain stores I go to almost every day. This behavior starts a positive feedback loop: If other buyers find little to their liking, they'll show up less frequently, and I'll get even more.

Thursday, October 21, 2010

YouTube and Governors

It turns out that I have something in common with many of the state governors in the United States. We use YouTube to get our message out: My message is about learning economics. Theirs is political:

YouTube use by governors is a bipartisan activity. Seventeen Republicans, 20 Democrats and one independent — Florida Gov. Charlie Crist— currently have videos posted there, the review shows.

Some, like Minnesota Republican Gov. Tim Pawlenty, are using online videos for their campaigns ads. Others, such as Democrat Jim Doyle in Wisconsin, are using YouTube to broadcast official speeches and events. Two governors, Crist and Democratic West Virginia Gov. Joe Manchin, are using YouTube videos in their U.S. Senate campaigns.

Not all gubernatorial YouTube attempts have been successful:

•Republican Mississippi Gov. Haley Barbour's remembrance of Hurricane Katrina survivor stories captured eight page views the first six weeks it was online.

•Republican Nebraska Gov. Dave Heineman's speech about a new health science center received just eight views in the year it spent online.

•A video uploaded by Democratic Kansas Gov. Mark Parkinson about flu prevention gathered 17 views in the year it was online.

Despite the lack of interest in these extreme circumstances, I like the use of the video sharing technology. As long as the governors have something interesting to say, YouTube can allow them to speak directly to their constituents. On the other hand, if they don't have anything interesting or useful to say, their constituents will find out more quickly. Both are benefits in my opinion.

Tuesday, October 19, 2010

TV as quality entertainment

Here's an interesting comment from Alex Tabarrok on the economics of big and small screen entertainment (and how it leads to quality differences. He's responding to the original post here.):
The movies, however, have become more reliant on large audiences--at least relative to television. Note that even though the movies are not free, a large chunk of the revenue is generated by concessions--thus the movie model is actually closer to a maximizing mouths model than it might first appear (see also my brother's comments on how flat movie pricing makes it difficult for indie films to compete). Finally, the rise of international audiences for movies has fed a lowest common denominator strategy (everyone appreciates when stuffs blows up real good). As a result, the movies have moved down the quality chain and television has moved up.
The graph from Alex's post is an interesting take on what is going on (see below). Basically, he makes the excellent point that maximizing eyeballs might not maximize consumer surplus.

That's one way to draw it, but this assumes that people get more value on average from "character-driven adult programs" than from "when stuffs blows up real good." I'm not sure that I am willing to make that judgment call.

The explanation also ignores the reason to go with the max-eyeballs approach: advertising, concessions and related products like Napoleon Dynamite t-shirts. Viewed from this angle, a show will find it profitable to go with the max-eyeballs approach when people who watch are susceptible to complementary products. If this is true and sophisticated drama lovers scrimp on concessions, the box office will respond by providing fewer movies with sophisticated plots (because those don't bring the same concessions).

Thursday, October 14, 2010

If this is how the world worked....

... there would be a lot more recycling.

And, now for some economics of recycling. Here's Bryan Caplan, reciting the old motto, "Recycling is the philosophy that everything is worth saving except your time."

If you have some time to kill, read this more expansive look at the economics of recycling by Daniel K. Benjamin. Here's an excerpt from the conclusion to whet your appetite for the 33 pages of analysis that precede it:
Recycling is a long-practiced, productive, indeed essential, element of the market system. Informed, voluntary recycling conserves resources and raises our wealth, enabling us to achieve valued ends that would otherwise be impossible. In sharp contrast, however, mandatory recycling programs, in which people are compelled to do what they will not do voluntarily, routinely make society worse off. Such programs force people to squander valuable resources in a quixotic quest to save what they would sensibly discard. On balance, mandatory recycling programs lower our wealth.

Misinformation about the costs and benefits of recycling is as destructive as mandatory recycling programs, for it induces people to engage in wasteful activity.
If my typing weren't slowed by this darn plastic bottle stuck to my right hand, I would probably read the entire article. If you aren't so constrained, you should give it a read.

Wednesday, October 13, 2010

Mankiw elaborates on his marginal tax rate

Yesterday, Greg Mankiw posted a reply to questions/criticism that others gave him in response to a recent New York Times column in which he said this:
Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.

Here's my favorite part of his response to queries:

Aren't you motivated by more than money? Of course. I have never suggested that money is my, or anyone's, sole motivation in choosing a lifestyle. In economic models, we often simplify things by assuming that there are only two activities: work and leisure. Work has a pecuniary benefit, whereas leisure has a non-pecuniary benefit. Reality is more complicated. I face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits. Absent taxes, I would choose an optimal mix of these activities. When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits. Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work." Blogging, for instance, or writing op-eds that particularly inflame the left-wing blogosphere.

His response is an interesting comment on the economics (and incentives) of taxation. Whether or not you agree with his perspective on taxation, it is a worthwhile read.

Tuesday, October 12, 2010

The Google Price Index

Tyler Cowen points to this article on Google Chief Economist Hal Varian's attempt at constructing a new price index based on web prices:
On typing ‘pepper grinder’ into Google Shopping, Mr Varian was struck by the list of prices. “What’s the first thing you want to do if you’re an economist? You want to construct a price index,” Mr Varian said.
I'd like to see this happen. The Google Price Index (GPI) would be an interesting indicator of real-time prices. Especially with Google's prowess in presenting data, such an index would -- at the very least -- be fun.

Monday, October 11, 2010

Campaign finance and fungibility

Yesterday, there was an interesting article in the New York Times about campaign finance, quoting President Obama on Republican political advertisements:

“You don’t know,” he said here. “It could be the oil industry, it could be the insurance industry, it could even be foreign-owned corporations. You don’t know because they don’t have to disclose. Now that’s not just a threat to Democrats, that’s a threat to our democracy.”

According to Democrats, this campaign finance issue is a matter of accounting:

The Democratic committee’s spokesman, Hari Sevugan, likewise offered no evidence and suggested it was up to the chamber to disprove the assertions. “Serious questions have been raised,” he said in an e-mail. “If they want to clear this up, they can open up their books.”

The chamber is hardly the only organization playing a role in the campaign that has international affiliations and gets money from foreign institutions. Among others are groups on the political left like the A.F.L.-C.I.O. and the Sierra Club. The law requires them to isolate foreign money from any domestic political activity.

I don't know what to think about the likelihood of foreign money being behind Republican (or Democrat) campaign advertisements, but there is an important economics lesson missing here. That is, it isn't clear that this law is going to be effective at all in keeping foreign influence out of American campaign advertisements, even if everyone abides by the letter of the law.

To see why, consider an example:

Suppose that the Sierra Club needs funds to place two advertisements: One raising awareness about endangered species and the other slandering a Republican candidate for Senate. If the Sierra Club can only pay for one ad, it prefers the endangered species one. Each ad costs $1000 to run.

Now, suppose that there are two donors. A foreign special interest that wants to influence American politics, and a domestic environmentalist that will donate to the Sierra Club regardless of how the funds will be used (because the environmentalist appreciates the Sierra Club's message). Both are willing to give the Sierra Club $1000, but the foreign special interest will only do so if it will lead to the damaging advertisement.

Without this law that keeps foreign and domestic funds separate, it is clear that both will donate and the foreign special interest will buy the damaging advertisement.

What happens with the law? Given the assumptions in the story, the same thing! Even while keeping the foreign funds out of the financing of political ads, the Sierra Club can redirect the foreign funds to pay to raise awareness, freeing up the domestic funds for political slander. It will look like domestic donors are sponsoring the damaging foreign advertisements, but effectively, the foreign funds allowed the Sierra Club to pay for the political ad.

This is the idea of fungibility, and this comes up whenever a significant part of someone's budget is unconditional (this also applies to companies and government entities). As long as there is a "general fund," one part of the budget is easily substitutable for another part of the budget. In this case, it isn't clear that regulating the spending (or designating earmarks) will accomplish anything aside from keeping the accountants at the Sierra Club busy with technical accounting exercises.

Thursday, October 7, 2010

The Economics of Trading Randy Moss

This is one of the biggest sports stories this week, but even if you're not into sports, there are some interesting economic concepts involved.

The New England Patriots traded Randy Moss (an elite star wide receiver) to the Minnesota Vikings for a third round draft pick next year (not very much). They made the trade in the middle of the season and without much time left before the trade deadline.

Mid-season trades are unusual in the NFL because there is important specific knowledge associated with being on an NFL team. Success in the NFL is about having the right timing with your teammates, especially the timing between a quarterback and a wide receiver. As this timing gets built up over the season, a mid-season trade means that the traded player has to rebuild this knowledge to get the expected level of performance. In economic lingo, we call this specific human capital (the type of knowledge that makes an individual more productive in completing a specific task, or working in a specific industry or working for a specific company).

In the absence of other factors, this specific knowledge reduces the value of Moss to Minnesota (it will take some adjustment for Moss to be at full capacity) and it increases the value of Moss to New England (they already have a scheme in place, and Moss is familiar with this scheme). Both of these effects make a trade less likely. Yet, Moss was traded. Other factors must have been at play.

It is easy to see why the Vikings wanted Moss. Minnesota was desperately in need of a talented wide receiver, and Moss fills that gap, but why would the Patriots want to unload of Moss at such a low price if they had any specific human capital invested in him? There is some economics to this side of the story as well.

Earlier in the season, Moss announced that this is likely his last season in New England, even though he planned to continue playing in the NFL. Knowing this, the Patriots knew that Moss was not motivated to impress general management for a long-term contract, and Moss has a history of being extrinsically motivated.

At New England, Moss would only have an interest in playing hard to put up big enough numbers to catch the eye of another team. The Patriots have an interest in winning. It is possible that these two interests align, but Moss would put little weight on winning if it means that he has to sacrifice better statistics (which sometimes it does). That's not so if he is playing for the prospect of a long-term contract with the Patriots. This misalignment in incentives reduced the Patriots' valuation of Moss enough that they wanted to trade him.

Now that he is in Minnesota, Moss has an incentive to help his team win because that gives him a better chance of receiving a long-term contract. Minnesota won't be impressed with big numbers if it costs them wins. Hence, Moss will want to help produce wins. On account of these better incentives, the Moss trade makes sense.

Monday, October 4, 2010

Preferences and Economics Nobel Rankings

Jeff Ely has some excellent (and mathy/axiomatic) thoughts on how the Nobel selection committee values economists' contributions.
The Bottom Line: There is clear advice here for those hoping to win the prize this year, and those who actually do. If you do win the prize, for your acceptance speech you should start by doing pushups to prove how virile you are. This signals to the world that you were not given the award because of an impending expiration date but that in fact there was still plenty of time left but the committee still saw fit to act now. And if you fear you will never win the prize, the sooner you expire the more willing will the public be to believe that you would have won if only you had stuck around.
That was just the conclusion. If you appreciate economics, the rest of the article is definitely worth a read. He uses a very simple rule to rank many of the economics Nobel Prize winners. The approach reminds me of my first day in consumer theory when we covered the minimal assumptions that economists make on an individual's preferences over bundles of goods. I love it.

For a taste of the first day of consumer theory, see this video:

Type "A" versus Type "B"

Robin Hanson has an interesting description of two types of people, saying:
I’m about to describe two types of people, A vs. B. While reading their descriptions I want you to think about which people around you are more like type A or B. Also ask yourself: which type do you respect more? Which would you rather be?
I found myself identifying with each type of person, seeing both "types of people" in myself and my loved ones. For example, I think it is a good attribute to be polite (Type B attribute), but it is also important speak your mind (Type A attribute). Another example, being less envious can be good (Type B attribute), but so can being open-minded about different viewpoints and lifestyles (Type A attribute).

I'm not sure it is a clean split between different types of people, but it is an interesting split between different modes of thought. Regardless of which type of person you are, it's worth clicking through to ponder the post for a bit.