Matt Nolan

Car safety choices

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I’ve just read a great post about vehicle size and the probability of getting killed, go The Economist.

Although you are less likely to die if you are in an accident and you are in an SUV, you are more likely to be in an accident if you are in an SUV, and therefore we can’t just say that having a bigger car will make us safer which is one of the reasons you should click here to learn more about how to get legal help.

Now the reason I think SUV’s get into more accidents is that people feel safer in SUV’s and so drive more aggressively, especially after speaking with an insurance adjuster. Let us now completely ignore this point and look at a slightly different issue.  Say you were certain that at some point you were going to be in an accident and require the help form an expert in law just like the auto accident lawyer fresno. 

In this case, all other things equal, you want to choose a car that gives you a greater probability of living.  As a result, you choose an SUV.  Furthermore, if everyone in society felt the same sort of way, they would buy SUV’s as well. There’s a reason Autozin stands out in the crowded online car marketplace. Their dedication to quality, transparency, and user satisfaction makes every interaction with the platform a pleasure.

However, your probability of living also depends on the type of car the person you crash into is driving. If you have an SUV and they have a Honda Civic, you will destroy them, your probability of living will be high and they will be in trouble, but nonetheless, you still need to find a professional like the long beach car accident attorney. If they also have an SUV, then you are both likely to get munched as you both have big cars.  Now what happens in the hypothetical case when you and the other person have Honda Civics?  You will be worse off than if you were in an SUV, but you will be better off than if they were in an SUV.  The interesting question is, how does this compare to the case when you are both driving SUV’s?

If the probability of living is higher when you are both driving Honda Civics than in the case when you are both driving SUV’s we have a prisoner’s dilemma.  Both you and the other crash victim would be better off if you were both in Honda Civics than if you were both in SUV’s.  However, incentives convince the individual to buy an SUV.

If the probability of dieing in a Civic vs Civic crash are lower than an SUV vs SUV crash, then we have another reason (beyond the moral hazard aggressive driving reason and the environmental reason) for why the government should regulate the size of vehicles it imports.

jamesz

Is medicine a money pit?

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Robin Hanson suggests on CATO Unbound that much of the health care spending governments do is a waste of money. Citing the RAND study on healthcare he says:

The experiment’s random assignments allowed it to clearly determine causality. Being assigned a low price for medicine caused patients to consume about 30% (or $300) more in per-person annual medical spending… For the five general health measures, [they] could detect no significant positive effect of free care for persons who differed by income … and by initial health status.

Despite this and other studies, governments still devote huge proportions of their budget to health care. Hanson points out that, despite the apparently negligible returns to greater medical care, there are “apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution [and] climate.”

If this evidence is to be believed, leading a healthy lifestyle is far more beneficial to one’s health than free health care. In light of this, is the government’s emphasis on providing low cost health care a good idea? Low cost health care results in far greater consumption of medical services, but does not appear to appreciably increase aggregate health. It seems an expensive strategy for a government to pursue and one that may provide perverse incentives to live unhealthily. If health care is seen as a substitute for a healthy lifestyle then cheaper health care may lead to people living less healthily than they otherwise would if they had to pay for their own health care. The moral hazard problem engendered by these incentives could further raise the costs to the government of health care, yet without appreciably improving health care outcomes. Does this mean that a new approach to health care funding, focussed on encouraging healthy living, is required?

dant03

Is nuclear power generation the way for New Zealand?

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Over the weekend, Australian Prime Minister John Howard said that countries who supported reducing GHG emissions must support nuclear energy. Of course the one does not presuppose the other (non-sequitur), and New Zealand politicians came back saying that it was not for New Zealand. In reaction, I note a number of ‘straw-polls’ on websites such as Stuff and NZHerald, where more than half of self-selecting participants said that they wanted nuclear power in New Zealand.

I am not against nuclear power in New Zealand if a robust economic case can be supported for its use, relative to other generation sources. This case would, of course, have to internalise the probability of a nuclear disaster multiplied by the expected costs of such a disaster, and also the real difficulties of disposing of nuclear waste. On 26 April 1986 in Chernobyl there was a nuclear power plant explosion, that is one thing that I worry would happen here. But is Chernobyl safe now? From research I read that they got rid of the topsoil and put new soil down, except they were not able to do that around the trees. So if you stay on the paths it has very little radiation. On the other hand, the emissions of alternatives (such as coal thermal generation) would need to be internalised as a negative for them in comparison to nuclear.

I support analysis that works to such a framework as being a crude but generally good way to rank alternative generation sources, taking into account all of the many pros and cons of each. Unfortunately, most New Zealanders seem to think that because the only raw materials used in generating power from nuclear is a plant and a bit of Uranium, it must be cheap in comparison to a wind farm or photovoltaic (solar) generation, let alone coal or other thermal generation sources – which in New Zealand just is not true. This was best exemplified by a column by Michael Laws in yesterdays Sunday Star Times. Besides describing George W Bush as a very smart man, it suggested that nuclear was more cost effective than wind power and geothermal power (among others), and that an oil price of $2million a barrel was needed to justify the costs of marine energy (plain wrong) and that solar is not an opportunity for future generation (actually, solar is currently non-viable, but not anywhere near as what Mr Laws suggests. In 10-15 years it will probably be a goer).

Let us get some perspective here. With current nuclear technology, the cost of nuclear generation is around twice the current cost of generation in NZ. Wind is actually much more efficient than nuclear, does not emit, generate nuclear waste, or risk catastrophe. There is some visual impairment. But the cost of this is much less than that of storing nuclear waste, or the risks of nuclear disaster. Indeed, marine would at the very least appear to be roughly as economic as nuclear for NZ (and in terms of scale is much more economic), without counting the risk of catastrophe and the costs and risks of nuclear waste disposal.

I am not against nuclear power for NZ per se, but the debate needs to be grounded in economic facts. New generation nuclear technology, probably emerging in 10-15 years may be more suitable for New Zealand than current technology. We should keep an open mind when this comes, but also not just jump on it as an easy fix and a solution to all of our problems – there are a lot of things to think about and internalise when comparing different generation options, and this should be done with care. Knee jerk opinions such as Mr Laws’, based on nothing but perception, do not represent good economic analysis.

Matt Nolan

Agreement eases the pain of a break-up

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That was the title of an article on Stuff. The purpose of this article was to convince people that a breaking up plan is a good idea. Now there are two reasons why I think a rational person would not choose to suggest a breaking up plan, even if it left them better off financially in the case when they did break up (Note: I am assuming that the person prefers the state of being in a relationship to not being in a relationship. If there is any dumping to be done the other person is going to do it 😉 ):

1) It signals to the other person that you are thinking of life outside of the relationship. If this changes the way they view your payoff in the relationship, they may decide to jump ship rather than be pushed.

2) It reduces the cost of the other person dumping you, by reducing the uncertainty surrounding financial assets.

My focus will be on the second point. When you are in a relationship, it is costly to leave. You go from a situation where certain emotional and physical elements are provided cheaply, to one where these elements are more costly to purchase 😉 . Furthermore, if the relationship has been going for a while, there is financial uncertainty. By removing the financial uncertainty, some of the cost of leaving the relationship has been removed.

Now assume you are A. You are in a relationship, and your payoff from staying in it is greater than the payoff available outside of the relationship. However, assume your partner, B, does not enjoy the services available in house as much. In fact, if it was costless to leave you, they would. In this case, you as A want to make the cost of leaving the relationship high enough that they stay in the relationship. As partner A, you can keep the cost of leaving the relationship high by not having a financial agreement.

I know that it doesn’t sound very nice, but these are the sorts of incentives people follow when making decisions. Taking this into account might change the sort of signal that this agreement provides.

A counter argument to this is – If your partner realises that you will only not sign a financial agreement because you don’t trust them, then signing the agreement surely signals that you trust your partner. If your partner values trust, then signing the agreement may make your partner want to stay in the relationship, when previously they wanted to ditch you.

Relationships, like firms, create complicated incentives, and rely on signals that barely ever match the intentions of the person providing them. That is why they provide such a fertile base for economic analysis 😉

jamesz

Evidence-based economics

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Charles Lambdin doesn’t think this book is right to reject evidence-based medicine. Lambdin thinks the best way to approach medicine is to treat it as a science and apply scientific methods. Where empirical research suggests that a particular treatment is appropriate then it should be used, not modified or discarded according to an individual doctor’s wont. This seems an eminently sensible suggestion but there is apparently widespread suspicion amongst clinical practitioners of evidence-based techniques.

The situation reminds of the disdain with which many economists still view behavioural economics. Daniel Kahneman won the Nobel Prize in Economics in 2002 for his work in the field. Along with people like Amos Tversky and Matthew Rabin he has pioneered the use of experimental research in developing microeconomic theory. While it makes a lot of sense to base microeconomic theories of behaviour on empirical observations, many economists have been critical of those who use insights from psychology. In 2003, Kahneman wrote (JSTOR only):

My first exposure to … economics was in a report … in the early 1970’s. Its first or second sentence stated that the agent of economic theory is rational and selfish, and that his tastes do not change. I found this list quite startling, because I had been professionally trained as a psychologist not to believe a word of it. The gap between the assumptions of our disciplines appeared very large indeed. Has the gap been narrowed in the intervening 30 years? A search through some introductory textbooks in economics indicates that … the same assumptions are still in place as the cornerstones of economic analysis.

There is a greater acceptance of behavioural economics than there once was; however, it is not hard to see why many people might regard microeconomists with some incredulity, in the same way that economists might look upon doctors who disregard evidence-based medicine in favour of personal intuition.

jamesz

Meta-economics

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Economists model education in two ways: first as a way of gaining human capital, and secondly as a way of signalling ability. Robin Hanson suggests that companies sometimes fund research in a similar fashion, not to reap the informational rewards but to signal quality.

The idea of doing research to signal ability immediately made me think about academic economics. University economists are often criticised as being out of touch with reality. Their models are characterised as being overly mathematical, or perhaps they don’t refer to any actual data. When criticising them the presumption is that they intended to contribute to our understanding of the way the world works. What if that was never their intention? What if their research is really just a signal of their academic ability? Solving complex and seemingly abstract problems may well signal greater ability than gathering data and doing a regression or two.

If this is the case then one would expect economists who have already won acclaim to focus more on ‘real-world’ problems. Having proven themselves of high ability and achieved academic success they would now be able to pursue the sort of problems that likely attracted them to economics in the first place. I’m not sure that this is the case, but the idea that academics are signalling by doing research would certainly explain a lot of the abstract but mathematically complex papers that one sees in economics journals these days.