Matt Nolan

Bigger than meets the eye

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Bryan Caplan has another great post up on Econlog.  In it he mentions his rule of thumb that “Human heterogeneity is bigger than you think“.

I completely agree, and often when we look at other people, or when economists analyse decision making, we rely on the fact that other people share certain attributes with us – an assumption that can be folly.

Furthermore, I found his description about the debates around imagination in the 19th century to be eye opening.

However, I also believe a second rule of thumb “Human homogeneity is bigger than you think“.

On the face of it this seems to be contradictory – I appear to be saying that people are more different than we give them credit for AND more similar than we are willing to admit.  However, I would state that this is not contradictory at all, and that by accepting both of these rules we reach a fuller understanding of what we do when we go to analyse choice and other individuals.

Fundamentally, we view others as “less” in terms of their thought processes than we view ourselves.

Think about your own thought process.  Think about all the issues, expectations, rules of thumb, social construction, and concerns that drive your decision making on a daily basis – think of the depth of all your experience.

Then consider that the people around you have the same depth of experience and thought – no matter how hard you think about it, it is impossible to really view someone with the same level of detail that you do yourself.  You do not have the information, and you do not have the interest.

In this context, merely focusing on the fact that humans do not understand the heterogeneity of experience between individuals would give you a biased picture of any underlying cognitive biases – in truth, the lesson is that humans (and economists) create a caricature of individuals in order to help them make decisions.  That caricature doesn’t just strip out heterogeneity, it also strips out elements where individuals are similar, and helps to reinforce the importance of issues like signalling for the outcome of individual decision making.

Matt Nolan

When looking at NZ growth today …

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I suggest sticking the September and December quarters together – and talking about the second half of 2011, including the RWC.

A lot of the “upside” surprise in September and the “downside” surprise in December was due to significant variability in stocks – part of which was due to the Rugby World Cup.  Adding the quarters together to smooth this out will give you a better idea of the more fundamental changes in activity that occurred.

Matt Nolan

New data series: Monthly comparative price levels

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In my constant hunt for new data sources, I made my way to the OECD data portal – a great resource.  I wanted to check up on some PPP’s for a project I’m doing and I noticed a new series sitting around called “monthly comparative price levels”.

It allows you to compare how much you have to spend in your own currency to buy a certain amount of goods in another country – effectively for a New Zealander it shows how much you would spend in NZ$ to buy a bundle of goods in another country, where this bundle of goods cost $100NZ in New Zealand.

The series only appears to have shown up on March 8, and there is a single month – January 2012.  However, as this series builds up it is going to be very interesting.  Even the data for the single month was very very interesting.

For example, it currently takes $100NZ to buy $100NZ worth of stuff in the United Kingdom … so relative price levels in NZ and the UK are bang in line.  Not a result I expected at all.

It also shows that things are all very expensive in Aussie, and very cheap in the USA – very much in line with current thinking.

The PPP’s used in this series are consumption PPPs (rather than GDP PPPs), which means that these relative price levels are very much set up to help us compare consumption bundles (in the same way that growth in CPI is meant to allow us to understand growth in the underlying price of consumer goods).

No-one else may care, but I figured I’d note this down here so I can remember to come back to it later 😉

jamesz

Private prisons

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The government has decided to commission a new, privately run prison. As Eric has previously discussed, there is a fairly canonical paper on the topic by some Harvard economists, which concludes that:

…a plausible theoretical case can be made against prison privatization. This case is weakened if competition for inmates can be made effective, but strengthened by the relevance of political activism by private contractors. One instance in which the case against prison privatization is stronger is maximum security prisons, where the prevention of violence by prisoners against guards and other prisoners is a crucial goal. In many cases, the principal strategy for preventing such violence is the threat of the use of force by the guards. We have shown that it is diffcult to delineate contractually the permissible circumstances for the use of such force. Moreover, hiring less educated guards and undertraining them–which private prisons have a strong incentive to do–can encourage the unwarranted use of force by the guards. As a result, our arguments suggest that maximum security prisons should not be privatized so long as limiting the use of force against prisoners is an important public objective.

Basically, the case for privatisation is that incentives to hit performance targets encourage innovation. The case against them is that there are plenty of things (like inappropriate violence) that you can’t measure, yet help to make the performance targets you can measure. So the important question isn’t ‘what are the performance measures’, but ‘what can’t you measure’? If you can’t measure important aspects of performance and you give strong incentives to meet targets then there are likely to be unintended, and potentially unsavoury, consequences. That’s not an argument against privatisation but simply a caution that high-powered performance targets should be used with great care. It is particularly salient when we are talking about a contract that affects the physical and mental welfare of so many people.

The Hand

Is Getting an Advanced Degree a Good Idea in this Economy?

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This is a guest post by Kate Manning, an independent writer.  Her bio is at the end of the piece.

As a note, this post is focused exclusively on the situation in the United States – the trends in other countries (such as New Zealand) have been significantly different.

Read more

Matt Nolan

My suggestion for Facebook

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A long time ago my university friends and myself used to use this thing called Myspace as a social network site – before it effectively became a music site.  Facebook turned up, and it destroyed Myspace – leading us to crawl over and make Facebook accounts.

My guess is this happened because Myspace pages were so clunky, busy, and confusing – you would go to write something to a friend and you would get your eyes molested by a set of animated gifs and your ears ripped open by whatever terrible music they liked.  There was also another feature Myspace had that would wind people up – top friends.

In Myspace you would choose your “top friends” for everyone to see.  People would constantly change these, knocking people off the list to upset them, or switching people around following any sort of conversation.  It is all a bit childish – but I think Facebook could introduce something similar in order to increase revenue.

Myspace friends ....

Simply put, Facebook could introduce their own top friends feature – however, have it based on the amount of interaction between people on Facebook.  By doing this, people who care about being on top friends lists will use Facebook more, increasing hours and pushing up advertising revenue.

If there is anything Myspace showed me, its that there was a group of people who took the idea of being a “top friend” seriously – lets not try to understand why.  Given these people are now on Facebook, it is undeniable that they would make a concerted effort to get up their friends top friends list – thereby triggering more ad revenue for Facebook as an organisation.  Do you think this would work – and what do you think the downsides are?