The America’s Cup is not about the money

The America’s Cup might be returning to NZ and local newspapers are already weighing in on what it means for the economy:

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. Read more

Everybody lies

Netflix makes a lot of money from understanding your viewing preferences and one thing they’ve learned is that ratings don’t matter, only viewing behaviour is predictive:

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.

Billing by the hour

There’s an interesting article on the NYT about an accountant who has stopped billing by the hour:

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. Read more

The Olympic drugs prisoner’s dilemma

I woke up this morning with a headache, and the only thing I could think about was Olympic athletes taking drugs.

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!

Men solve the lifecycle consumption problem

Why is it that consumption expenditure falls off so dramatically at retirement? Some people say it’s because the lifecycle consumption model is silly and people just don’t save enough for retirement. Spanish researchers now suggest it might be because men finally lend a hand around the house, which saves a pile of cash!

Detailed panel expenditure data from Spain reveals little evidence of a retirement consumption puzzle in 1985–2004. However, there is a drop in food at home expenditure in the later years of the sample along with evidence of households paying lower prices for the food they purchase after retirement. Our findings are consistent with a model that allows for home production as long as one accounts for the greater participation in housework by men after retirement coinciding with this latter period. Our work adds to the evidence from several countries and helps in reconciling the retirement consumption puzzle with life-cycle models.

Is education really an investment?

Education, particularly at the tertiary level, is usually viewed as an investment by economists. It’s a voluntary cost that you pay to get skills and qualifications that will increase your future wealth and prosperity. That metaphor is reflected in the wealth of research into the ‘rate of return’ on university study and the discussions of externalities from the accrual of skills.

Nonetheless, it is a controversial view since the investment metaphor is not a natural choice for most people. Indeed, most people refer to the fun they had at university, the people they met, and the parties they attended. These are the ‘consumption’ elements of university education in the language of economists; the parts that you would pay to enjoy then and there with no expectation of future benefits. Now, via Economic Logic, I see a paper that asks prospective students how they view tertiary education and finds that

…most students do appear to value college consumption amenities, including spending on student activities, sports, and dormitories. While this taste for amenities is broad-based, the taste for academic quality is confined to high-achieving students.

As summarised by the Economic Logician, “except for the top students, high school graduates do not care about academics at all. All they want is excellent “college consumption amenities.” And this likely explains why they learn so little while in college. Their focus is on the university as a consumption good, not an investment good.” The policy-maker’s view of the value of university and the student’s view are very different.

What does this mean for policy, then? Well, if the private value of university is largely in the consumption value then the total value is far higher than most estimates suggest since they are usually based entirely on investment value. That has implications for the level of the subsidy we want to provide to tertiary students. In addition to the efficiency questions we also need to ask whether,as a society, we want to heavily subsidise most students’ on an extended holiday?