…assuming that decision processes are reducible to one-size-fits-all sets of axioms has not and will not produce a descriptively adequate account of human behaviour under risk and uncertainty.

Researchers find that people’s risk preferences are not stable. How risk averse is an individual? That depends on the situation.

Now that might seem entirely random, but hear me out.  Making firms close on Good Friday is a way to ensure that no-one is working, and that everyone is on holiday at the same time.  As a result, having the day off today isn’t just having the day off – it is having the day off while everyone else is having the day off.  It is an enforced holiday for all.  This may be a good thing, if there is a “co-ordination failure” in terms of when people take time off.

How does this work?  Say that you value having the day off more when all your friends, family, and arbitrary other people are also having the day off than having the day off with everyone else still busily working – or at least you like that to occur a few times a year.  However, it is costly and difficult to organise a situation where that happens with people.  If individuals take days off on the basis of specific personal plans, or at random, then we will end up in a situation where people take holidays at different times – and as a result, we end up in a pareto inferior equilibrium.  But if the government, or some overarching institution (the Church) organises a day we can all have off together, then we can do that and all be a bit happier for it.

How is this like bus timetables?  Well, the co-ordination of bus routes is another type of co-ordination game – if you have to catch two buses, you would like the times to line up.  If the first bus is too early, your trip takes longer.  If your first bus is too late, you can’t take trip!  As a result, having bus routes planned help out.

Anyway, I’m done with this.  I’m going to go find a service station so I can buy something to eat!  Happy Easter and all that!

There are some things people like to receive but probably wouldn’t buy if you gave them the cash to do so. Flowers and chocolate come to mind for this category.  I personally, much prefer to receive flowers than to buy them for myself.  I understand that many people enjoy a box of chocolates free of guilt if they were given the chocolates rather than if they bought them for themselves.

Furthermore let us not forget the importance of signalling – gift giving can be a signal, which may have value, or may in itself be waste.  When it comes to gifts the key point that comes out is that “efficiency is a really hard idea”.

successful agglomerations have productivity advantages that not only can allow relatively high-wage centres to thrive, but are also hard to replicate elsewhere. This suggests that an important role for policy is to facilitate, or at least not to obstruct, the growth of these agglomerations.
…
the most promising route to good European jobs in the globalised economy of the 21st century is to provide an environment in which strong cities can flourish.

The question is whether that requires the Government to simply step out of the way and provide the necessary public goods, or whether it is a call for active policy. An article by CEPR researchers hints at an answer.

The existence of gains from agglomeration does not mean that clusters should be subsidised. There are too many good things in the world to subsidise them all.
…
Firms take into account most of those benefits in their location choice. Costly public interventions aimed at increasing the size of clusters is not a policy that is supported by the French evidence. Whether cluster policies can, for a given size of clusters, improve collaboration, the exchange of information and knowledge externalities between firms remains to be tested.

Typically for economists there is something for everyone there. It’s not a topic I know much about so feel free to post up some links to good papers in the comments.

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! When entering into a relationship, make sure that you are a perfect match. There is a reputable dating site that will help you find the right one for you. Visit this website, https://www.perfect12.com/, for more hints about ideal dating.

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?

As individuals we all have an idea about the qualities we are attracted to in a partner – that or we at least get the feeling that we are attracted to certain things.  This is all well and good.  However, when we are out looking around we know that there is currently some set of people available to have a relationship with, and someone in that set embodies a set of qualities that differs from our ideal in some way.

Over time this set changes (of qualities, and the pool of qualities available), and there are direct costs from “searching” for additional people in the population to increase this set of potential partners.  Have a quick peak at search theory and matching theory in Wikipedia.

Now this sounds absolutely awful.  But it would be more than a mistake to stop our view there – after all, what is the point of marriage in this example?

Here our view could get even worse.  When we decide to “stop searching”, marriage creates a contractual relationship that makes it costly to leave!  Is marriage really about trying to restrict the other persons ability to leave in the case where their set of available partners has changed, by increasing the cost of doing so?

Why are you being so mean!

Wait a second here, remember I’m a fan of the concept of marriage.  So I must think that the above description is not telling us the whole story!

Yes marriage makes it more costly for someone to leave a relationship, but it is a cost both partners are willing to take on for a specific reason – relationship specific investment.

A relationship is not some big ball of matching characteristics.  It is also the result of the investment of time and resources by the individuals involved into the relationship.  Now, investing in a relationship will create gains for both parties – but only if both parties stay in the relationship.   When it is more costly for one of the partners to leave it is less likely they will leave, as a result the expected benefit of investing in relationship specific capital is higher!

To quote the literature:

Marriage acts as a commitment device that fosters cooperation and/or induces partners to make relationship-specific investments

And there is a lovely corollary to this.  By investing in relationship specific capital, capital that is sunk outside of the relationship, you can make a relationship into “the best available to you” at a point in time – as although someone else may embody better characteristics, they would require costly investment in relationship specific capital to get them up to the level of satisfaction you currently enjoy.

We’ve discussed these things before (here, here, and here and in the comments), but it cannot hurt to reiterate how romantic economists really are

He then goes on to discuss a prisoner’s dilemma that exists between government around global warming – implying that organisation that may help individuals co-ordinate in some place (daylight savings) may fail to co-ordinate themselves about broad action (such as global warming).  Concluding he states:

Here we have concentrated on examples where government, and other institutions, can help individuals co-ordinate their actions – helping improve outcomes.

This is a great way to view, and understand, government policy.  However, we always need to keep in mind that individuals are co-ordinating themselves, by making choices given the incentives they face.  Prices, which are determined by the relative supply and demand of products, offer the main device for co-ordination in our society.

To understand the role of government, we need to think about how the use of prices, and co-ordination move generally, may fail – and in what ways government can sensibly recognise this and lend a hand.

The hard thing with global warming is that individual governments do not have an incentive to solve this problem, which was the original justification for the Kyoto Protocol.  With that failing there is a genuinely concerning policy issue here, which the global community does not appear to be able or willing to face.

As Team New Zealand moves close to match point there is already speculation that the next cup series will bring over half a billion dollars in financial gain to the country.

Don’t believe it, says Shane Vuletich of Covec, specialist in economic evaluation of tourism and major events, who warns numbers already being used are far too large.

Vuletich and TVHE’s straight-talking Shamubeel Eaqub—”the economic benefits of a cup regatta in 2017 would be based on ‘over-hyped studies that are proven to be absolute b…….. after the fact.'”—are absolutely right: major events don’t tend to be good financial investments. What surprises me is that this is worth reporting. The only relevant question is whether New Zealanders get enough enjoyment from hosting to cover the expense.

It’s a bit like going on holiday: it’s only a bad use of money if you don’t end up enjoying the break. The financial return is hugely negative but that’s fairly irrelevant when one’s enjoying a hike in the French Alps or lounging on the beach in Mallorca. What we really need to ask is whether the public gets sufficient enjoyment from hosting events like the America’s Cup.

The obvious answer is ‘yes’, nations compete to host events and have done for as long as historical records exist. Hosting is incredibly prestigious and competitive, which suggests that there is no shortage of benefit from hosting. It isn’t as if the legacy of hosting large events is unknown, yet cities and nations continue to bid huge sums for them despite that. After the London Olympics last year, “eight out of ten said it was worth the extraordinary cost, even as cuts to public services began to bite.”

Against that there are the public choice arguments. Perhaps it is the politicians who get to bask in the glory of the events they’ve organised, while taxpayers pick up the bill. If the bill is small enough not to influence voting decisions then it could still be worthwhile for the politician to bid for the event even if it is costly to voters. In addition, the benefits may be highly salient to the public, while the costs are largely hidden within the Government’s Budget plans.

Those considerations militate in favour of providing further information to the public about the costs of hosting. However, as Vuletich points out, misleading estimates of the financial benefit should have very little influence over hosting decisions. So long as people know what they’re paying for the thrill, we shouldn’t worry too much about the money.

Why do I see so many three- or even two-star movies in my recommendations?

Gomez-Uribe: People rate movies like Schindler’s List high, as opposed to one of the silly comedies I watch, like Hot Tub Time Machine. If you give users recommendations that are all four- or five-star videos, that doesn’t mean they’ll actually want to watch that video on a Wednesday night after a long day at work. Viewing behavior is the most important data we have.

Amatriain: We know that many of the ratings are aspirational rather than reflecting your daily activity.

We can’t hide from you.

Gomez-Uribe: A lot of people tell us they often watch foreign movies or documentaries. But in practice, that doesn’t happen very much.

This is why economists focus on revealed preferences almost to the exclusion of stated preferences.

A few years ago, he said, he realized that the billable hour was undercutting his value—it was his profession’s commodity, suggesting to clients that he and his colleagues were interchangeable containers of finite, measurable units that could be traded for money. Perhaps the biggest problem, though, was that billing by the hour incentivized long, boring projects rather than those that required specialized, valuable insight that couldn’t (and shouldn’t) be measured in time. Paradoxically, the billable hour encouraged Blumer and his colleagues to spend more time than necessary on routine work rather than on the more nuanced jobs.

I look at this from two perspectives: billing within the firm and billing to clients. When billing to clients you want to bill close to the value that they place on your work. Any less means you’re leaving money on the table. Of course there needs to be value in it for the client, too, but the basic idea is to get most of the value of your work paid to you. That doesn’t work so well with billable hours. Many times it might only take an expert a few hours to find the solution that generates tens of thousands of pounds of value for a client. Most people would balk at paying £10,000 for five hours work but they’d be happy to pay it for something that generated them £30,000 of extra business. The framing of billable hours doesn’t help the service provider here and just gives the client a way to bargain down the price: “You can’t possibly be wanted to charge me £2,000/hour!” From the perspective of charging out, then, the ideaa of moving away from billing hours to billing for value makes a lot of sense for professional services.

However, from the inside of a firm what the management are worried about is the opportunity cost of their employees’ time. By measuring billable hours and the value per hour they get a sense of the efficiency of the firm. Without being able to measure inputs and outputs that’s pretty hard to do, and the main input for a professional services firm is labour. So, from an accounting perspective, it makes a lot of sense for firms to measure the number of billable hours that their employees rack up. However valuable the insight, there is something else that could be done with the time.

Reconciling these two ideas is pretty straightforward: charge out at value and measure hours against that project internally. Each project then has an implicit billing rate that reflects the value of the insights that the professional provided. In this way the firm can measure the quality and quantity of services provided while ensuring that it charges clients appropriately. Blumer’s solution throws the baby out with the bathwater: as usual, there’s a reason why things evolve to be the way they are and it’s rarely stupid.

After all, why do we have such a problem with it.  If elite athletes decide to take drugs and do really cool stuff that we can watch in our own homes isn’t this all good.

People say stuff like “it isn’t in the spirt of the game” or “they are supposed to be role models for kids” but this sounds like a bunch of blah – we want our elite athletes fighting in cages with robot body parts and hyped up on all sorts of drugs right!

Well let’s assume we do – just for fun.  Even in this case there is a clear reason why we may want to try banning drugs – the prisoner’s dilemma faced by athletes.

Assume there is some inherent ranking of athletes, but that the difference in ability from bottom to top in some set is 20%.  Then assume there is a drug that will boost performance by 21%.  Then the “worst” athlete could take the drug and be the winner!  Of course, all the athletes up to the “second-best” know they can improve their position by taking the drug – and they know, as does the “top” athlete, that if someone else is taking the drug the only way to maintain their position is to take the drug also.  As a result, even though the drug taking has a cost (shorter life) it is a dominant strategy.

This is a bit loose, as it is not actually a dominant strategy for the worst athlete – as if everyone else is taking the drug it doesn’t change his position, he just has lower health, so won’t bother with it.  But then we have the potential for a mixed strategy equilibrium with the second-to-worst athlete (as if the bottom athlete doesn’t SWA won’t want to, but if SWA doesn’t the worst athlete will want to, so they will both take drugs with some positive probablity less than 1) – and in the end we aren’t going to worry about this too much

So say this prisoner’s dilemma holds – we can ensure that the same “outcome” in terms of ranking takes place, and that the athletes have better health than they would get taking drugs, if we just ban drugs and enforce it well.  Drugs in this case are banned from the Olympics because we care about the health of athletes, isn’t that nice!  This illustrates the useful role of regulators and government in the face of issues to do with co-ordination or prisoner’s dilemma types games!

Update:  Now I’ve woken up, this story is dumb.  Better game to get my point across – take two equal athletes that both have a 50% chance of winning.  Taking a drug can make this 100% if the other person is not taking it, or 50% if the other person is, but there is some positive cost to taking it.  In that case both athletes take the drug – both end up in the same position as not taking – and both have worse health than not taking.  Why didn’t I just say that?

However, the idea that drug taking for the best athlete is a strategic complement (when someone else takes it increases the incentive for them to take), but for the worst it is a strategic substitute (when someone else takes it decreases the incentive for them to take), is pretty cool – that makes for a neat game to think about!