In defence of economists

I see that the Listener (ht Agnitio) has picked up on this piece on psychology today (ht Andrew F), which claims that an education in economics inherently changes our behaviour making economists worse citizens.

At first brush I would like to note that we have a psychology lecturer suggesting that this implies more people should study psychology – it might be the economist in me talking but this sounds a bit like these recommendations are a touch self-interested themselves 😉

But this would be a digression.  While I don’t disagree that economists do need to be humble about the conditional nature of their knowledge (a point that holds equally for other social, and physical, sciences mind you!) I stick by my general conclusion that:

Saying “we shouldn’t look at trade-offs because then we lose our sense of community” sounds strangely like “we shouldn’t study the natural world or we will lose our sense of faith” don’t you think

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Our competitive nature is not natural

The heart of economics is an understanding of human choice. Our theories are almost all constructed on a utilitarian model of preferences and choice so understanding how we can improve that model is crucial to progress. Plenty of work has been done by behavioural empiricists on the heuristics that guide our behaviour and the anomalies in our choices. Now a paper by Leibbrandt, Gneezy, and List demonstrates that preferences also change over time in a predictable way. Read more

Marriage, investment, and sunk costs

At the moment, many of my friends are getting married.  At the same time some of my other friends who are not married are telling me they don’t understand why people get married.

While I am not married, I think the idea of marriage is grand.  I think it is a great way of dealing with a social issue that involves both search and relationship specific investment!

Now, you may think I’m being too romantic here by bringing up terms like “relationship specific investment” – but let us not forget the awesome power of economics for dealing with these ideas.  The question is, given marriage as an institution what specific type of co-ordination failure did marriage turn up to solve?

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Side effects of 9/11

Humans are boundedly rational and use heuristics to make decisions, rather than optimise at every turn. It doesn’t always serve us well:

In the months after the 2001 terror attacks, passenger miles on the main US airlines fell by between 12% and 20%, while road use jumped.

Professor Gerd Gigerenzer, a German academic specialising in risk, has estimated that an extra 1,595 Americans died in car accidents in the year after the attacks – indirect victims of the tragedy.

Gigerenzer ascribed the extra deaths to people’s poor understanding of danger. “People jump from the frying pan into the fire,” he said.

“We have an evolutionary tendency to fear situations in which many people die at one time. This is likely a hold-over from when we lived in small groups, where the death of a small part of the group could place the lives of everyone else in jeopardy.

“That’s no longer the case, but it is very difficult to elicit the same fear for the same number of deaths spaced over a year.”

Remember, we can “overlabel”

Following the unfortunate death of a woman from drinking far too much Coke, there have been calls to label Coke.  I’m all for information, and that often makes me pro-labeling, but in this case I’m not … it is important to recognise that we are targeting providing information, and so we can “overlabel”.

A label gives information as an abstract concept, but it is costly to interpret and so the existence of a label is often taken as a signal, and used as a rule of thumb.  As a result, too much labeling of things could reduce the true information content – leading to people making more poorly informed decisions.

The solution?  There is a trade-off for the amount we label a given piece of food etc – and we need to accept that.  However, we can also make more detailed information and standards a necessary requirement to be on some sort of central website – so people who do want to take into account greater information can do so at a low cost.  I would also note that people that design easier to interpret labels which don’t sacrifice information are “shifting out the information curve” – this is a real productivity improvement, and these people are cool as a result.

The overall goal of the regulation is to “maximise information” so that people can take costs and benefits into account when they do something.  That should be the guiding principal – not saying people should have one thing or another.

Note:  Look, no need for me to go on about personal responsibility, or insult the woman about her life choice to get this result – which I’ve seen a bunch of.  We don’t know her life, preferences, or situation – so we shouldn’t suddenly decide that since it is a choice we wouldn’t make we should either ban the product or attack the choice.  I’ve noticed a lot of both, and its generally a bit disrespectful, which is also why I delayed this post until people stopped being rude.

Cigarette prices and subjective well-being

We’ve written a lot previously about cigarette taxes as a precommitment device that can increase welfare. However, while those models fit the stylised facts, it’s hard to know for sure if people are better off. For that you’d need to make a prediction about their increase in subjective wellbeing and test it. Now a couple of European researchers have done just that and the results are ‘mixed’. By which I mean that the evidence contradicts the theory!

They conclude:

…we find that smoking bans, on average, neither increase nor decrease people’s subjective well-being to a sizable and statistically significant degree. Higher cigarette prices are related to overall lower reported levels of satisfaction with life, ceteris paribus. The partial correlation is, however, measured with a large standard error. Still, the effect is economically meaningful (and corroborated by our differential analysis for people with different smoking propensities). For a fifty percent price increase, we estimate a reduction in average life satisfaction of 0.02 points (on a four point scale). This is about one tenth of the effect of being unemployed rather than employed or equivalent to the effect of a 2.4 percentage points higher rate of unemployment on the population at large. This finding does not lend support to the effectiveness of cigarette taxes as an internalization strategy. Higher cigarette prices at least have overall negative short-term effects.

Additionally, smoking bans turn out to be beneficial to smokers who would like to stop smoking (or not start again). For those smokers who are most likely to find themselves in a situation where they have recently tried to give up smoking but have relapsed, life satisfaction increases between 0.03 to 0.08 points with smoking bans (depending on the specification). This is evidence that supports the idea that smoking bans can serve as a self-control device. Interestingly, the same group of people does not benefit from higher cigarette prices. Rather to the contrary, these people seem to suffer to the same extend as other smokers do who have not recently tried to stop in response to higher prices. The negative effect of higher cigarette prices on smokers, particularly those who are likely to have self-control problems, runs counter to the prominent finding by Gruber and Mullainathan (2005) for the United States where positive effects of higher cigarette taxes on the well-being of smokers are identified.

Update: Eric comments.