TVHE

There is an excellent post from Stumbling and Mumbling on this issue, it can be found here.  I love the conclusion:

Now, I don’t want to claim that all of this year’s most popular songs contain howling irrationalities. The mighty Lady Gaga passes muster. But could it be that such irrationalities – as distinct from plain nonsense – are more common now than years ago? If so, isn’t this yet more evidence of the decline of civilization? And what hope is there of people becoming properly educated if they are exposed to such cognitive errors? Will no-one think of the children?

In the comments someone suggests that the lyrics of the Beatles were more rational, and that the rationality of pop singers is declining over time.  However, I’m not convinced that is the case.

For example, in the the “The End” Paul states (and John heartily agreed with) that “the love you take is equal to the love you make”.  Now this is true on average, but I doubt there is any behavioural rule that ensures this occurs for every person.  Such a rule could lead to people “over-investing” in love, in the belief that any they give will be returned to them.

Recently Premier League clubs in the UK have disclosed the amount of money they are spending on football player agents’ fees. These agents act as middle men between players and clubs, facilitating the transfer of players. Some of the more interesting information revealed in the disclosure includes:

• Premier League clubs are paying almost £2 million a week to agents in commission;
• The 20 English top flight clubs disclosed they spent £70.7 million on agents’ fees last season alone;
• Manchester City were by far the biggest spenders, splashing out almost £13 million during dates covering last winter and the recently closed summer transfer window;
• Chelsea paid out about £9.5 million – the second highest – with Liverpool third on £6.7m; and
• Burnley parted with the least amount – less than £500,000.

Agents are typically paid a percentage of a player’s transfer fee. The nature of this payment structure means that agents have an incentive to encourage players to transfer regularly, as they are able to ‘clip the ticket’ each time.

Furthermore, agents have an incentive to encourage ‘high’ transfer fees, as they profit more from such moves. One common tactic from agents to try and push up the price of their players is to link them with big clubs (links which media appear all too happy to report on). Just recently, Spurs’ Russian striker Pavlyuchenko was linked with a move to North London rivals Arsenal, for example. Such ludicrous rumours are designed to wrangle more money off clubs genuinely interested in such a player, such as Zenit St Petersburg and Spartak Moscow.

Sounds like a good line of work if you can get it.

The California Energy Commission, in all their wisdom, have decided that the best way to encourage energy conservation is through imposing compulsory energy efficiency standards on TVs – in other words they are banning what they deem to be ‘energy inefficient’ TVs. They are the first state in the US to implement such a measure.

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).

Events in high demand that have limited capacity sell out. See for example the Wellington Sevens or Toast Martinborough, which sold out in three minutes and thirteen minutes respectively. These events sell out as demand far outstrips supply at the price that the seller sets. In other words, many of those purchasing the tickets would be willing to pay much more than they actually do pay in order to attend said event.

High demand events such as these are the capitalist world’s version of queuing for basic food items in a communist shit-hole. When buyers are unable to adequately express their willingness to pay, due to blunt ‘one-for-all’ pricing and an inability of the seller to price discriminate, shortage ensues.

Enter the scalper. Scalpers are typically demonised by the media in New Zealand. However, scalpers simply allow buyers to reveal their true willingness to pay. When a scalper auctions off a ticket on Trademe, buyers are able to pay exactly what they value their attendance at said event at. What ensues is the efficient allocation of resources – scarce resources are allocated to those that value them highest – an admirable economic goal. Contrast this with the lottery that is the current ‘log-in and hope’ method of ticket allocation. Rather than be vilified, scalpers should be commended for their actions that facilitate the clearing of the market!

Indeed, a commentator at the NBR goes further, calling scalpers “unsung entrepreneurs”. I tend to agree with this sentiment.

Disclaimer: I have both scalped and been scalped. Both experiences were highly pleasurable and I encourage you all to try them.

FIFA have punished Chelsea by banning them from the signing new players in the next two transfer windows after they were found guilty of inducing Gael Kakuta, a France youth international, to breach his contract with Lens in 2007. The decision means that Chelsea will not be able to add to their squad until January 2011.

Fifa’s regulations on the status and transfer of players state in Article 17, paragraph 4: “It shall be presumed, unless established to the contrary, that any club signing a professional who has terminated his contract without just cause has induced that professional to commit a breach. The club shall be banned from registering any new players, either nationally or internationally, for two registration periods.”

How will this ban affect the incentives of current players registered with Chelsea? The club, being unable to sign new players, will be desperate to hold on to what they already have. The current players, knowing that the club cannot look elsewhere to replace them, will be in the driving seat when it comes to contract negotiation as they can effectively ‘hold-up’ the club to meet their demands.

The precedent for such bans being enforced is not strong, however, with Roma having their ban reduced to one summer transfer window (arguably the less important transfer window in a season) and Swiss club Sion currently appealing their two window ban.

NZIER has released an “Insight” on internalities – specifically stating that this is one way we could justify some of the costs in the BERL alcohol report as being policy relevant.  Eric Crampton discussed the release here.

What are internalities?  Internalities is the name for the cost associated with not being able to “commit” to the best set of actions over time (time inconsistency).  For example, on a Friday morning you might think about your weekend and decide it would be best if you only drank 2 beers that night.  However, once you started drinking you suddenly decided to have more – something you undoubtably regret the next day.  In this case, the inability to commit to the “optimal plan” has costs – costs that are not external but ARE policy relevant (contrary to my slogan here).

Now, both the people from BERL and NZIER that raised the internality issue are correct, and both sets of economists have far more experience and knowledge in the area of time inconsistency (I am only a macroeconomist after all).  However, there is one important point for me here – internalities matter because of commitment, and so mechanisms to aid commitment can be solutions.

Why is this so important?  Well when we look at the impact of a persons action on themselves it is often easier to develop mechanisms to solve this than in the case of “externalities” (where someones action influences an unrelated party).

In the case of alcohol there are a number of “pre-commitment mechanisms” avaliable to improve outcomes.  If we can figure out what the private cost of establishing these mechanisms is, and we see people not use these mechanisms, then we have an upper bound on the relevant “internality” associated with commitment issue!!!

So lets ask ourselves – how costly is it to commit to not drinking too much?  Some mechanisms are:

• Leaving your wallet at home and only bringing in a limited amount of cash (when going to town).
• Buying smaller portions of alcohol (when staying home).
• Dressing badly (when going into town).
• Committing to do something the next day which sufficiently increases the cost of drinking during the “temptation” period.

I have seen all these mechanisms in action.  They are costly, but not that costly.  As a result, my impression is that the policy relevant loss associated with the “internality” will be quite small.

Both Tyler Cowen and Andrew Sullivan have turned on the attack against the “dating game”, specifically the “neg“.

Now any attack on moral grounds could be justifiable (as could any defence), it is just about personal value judgments. But both authours mention that they see the neg as a suboptimal strategy. On these theoretical grounds I do not think they are quite right.

Read more…

The owner of Montana Wines and New Zealand’s largest wine company, Pernod Ricard, is set to cull its contracts with wine growers in the Gisborne region.

This action is in response to falling demand for chardonnay and sparkling pinot noir wine, both domestically and internationally. Chardonnay exports reportedly fell 12-14% last year alone. The culprit? Chardonnay’s fairer sister, sauvignon blanc. Apparently we are seeing a significant supply-side ‘correction’, as producers respond to a structural demand shock – consumers’ changing tastes and preferences. Indeed, last year sauvignon blanc overtook chardonnay as New Zealand’s most consumed white wine.

Try as they might, Pernod Ricard have not been able to sway the mighty consumer to stick with the product they have contracted for, despite “new product development, innovative packaging, capital investment and changes in wine style”.

I know at least one TVHE author that might be a little disappointed seeing his favourite varietal taking such a pounding. As for me, well I’ll stick with my reds thanks.

I have a question on loss aversion, as I am confused.  I keep seeing loss aversion defined like this:

our tendency to feel sadder about losing, say, $1,000 than feeling happy about gaining that same amount

But this sounds like diminishing marginal utility to me.  I mean, the $1,000 dollars I’m losing provides me with a greater level of satisfaction than an addition $1,000 would provide me with.

My feeling was that loss aversion was a situation where my satisfaction would be lower in a situation where I lost $10,000 and ended up with $40,000 than it would be in a situation where I gained $10,000 and ended up with $40,000 – even though in both situations my endowment was the same.

I thought loss aversion was about an additional payoff relevant factor (namely that the direction of the change in my outcomes is also payoff relevant, as well as the strict outcomes) not an arbitrary way of framing diminishing marginal utility.

If someone could explain where I am making a mistake it would be much appreciated

Strict neo-classical economists need to realise that there ARE systematic deviations from tightly defined rationality and as economists we should try to understand these deviations (although preferably deviations can still be incorporated into a more general version of our framework).

Behavioural economists should realise that these deviations are far less common than they believe, and even if they do exist they aren’t necessarily policy relevant.

Example for both sides, the conjunction fallacy.