Choice and reversibility

A fascinating talk by psychologist, Dan Gilbert. Ten years old but worth watching if you haven’t seen it before.

The core point is that people get buyer’s remorse when choices are reversible and become increasingly unhappy with their decision. When choices are irreversible, endowment effects kick in and they become happier with their choice over time. Importantly, most people do not realise that this effect exists.

  • Does this have implications for choice architecture? Would it be beneficial to make some choices irreversible to increase the utility gained from them?
  • If people are unaware of the effect, will they under-utilise commitment mechanisms that make decisions irreversible?

Treasury and the Reserve Bank have words

I am not blogging at the moment – and I’m incredibly sorry about that.  I won’t really be back until I can commit to being back properly – which won’t be until I’ve completed a lot of modeling work related to income inequality in New Zealand.  I am not back today to talk about any literature on inequality though – I realise there are a lot of things I can post about here, and I have views, and those views will come in due course.  But not today.

However, there have been a multitude of developments I should post on regarding an issue I angrily stopped writing on nearly two years ago – the area of financial stability.

Firstly, there is Michael Reddell’s blog.  He is a very good New Zealand economist who would be among the top of my reading list if I was still involved in these sorts of issues.  He recently stated:

The Reserve Bank appears to have taken on itself some responsibility for trying to manage house price fluctuations.  However, the Bank’s involvement appears to be based on a misconception of what is going on, and a misapplication of insights from financial crises abroad, notably that in the United States last decade. There is little or no evidence that financial stability in New Zealand is in any way threatened.  The LVR restrictions –  and others the Bank appears to be contemplating – undermine the efficiency of the financial system.

Eric Crampton has also added the important view about how increased direct regulation threatens actual independence.

However, the big move has been Treasury turning around and criticising the Bank with this gem:

However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ’s mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices.

There are three extreme ways to take this:

  1. The Bank’s communication has been unclear, and this is a push to try to improve the way policy is justified and evaluated
  2. The Bank has been implementing unjustifiable policy due to its own misunderstanding of the issues
  3. Treasury is acting in a politically motivated way, and this illustrates the gradual loss of central bank independence.

I would never come down on any of these explanations as an extreme – but they are useful to consider when we think about how recent events will be interpreted and considered.

And my view on the policies involved – it hasn’t changed since prior to the implementation of LVRs, I’d instead note that views may have changed across organisations relative to 2013.

Sidenote:  There was also this well written bulletin piece by the Bank.  It is well written, but I feel that it missed the critique people actually have – namely the dual concerns of “does risk weighting make any sense when we are talking about systemic risk and externalities stemming from the lender of last resort function” and “is the implied equity ratios for banks really high enough, given how low it is relative to other firms due to the belief by banks and depositors that banks will be bailed out”.  In this case, as in the above case, the RBNZ keeps answering questions people aren’t asking, and missing the questions people are justifiably asking.

Sidenote 2:  This is also not at all related to monetary policy and any perceived failure due to the long period of elevated unemployment NZ has had – this is a relevant issue to discuss, but it is separate and involves a discussion about how we view potential output.  Eg here and here.  If the Bank’s decrease in its view of potential in June 2012 was justifiable and the increase in June 2015 was justifiable then their actions were justifiable – you can use that to defend or to attack the Bank, it is simply a framework.

Graph of the Day: How home batteries might benefit houses without solar

I’m pretty excited about the Tesla Powerwall, the home battery that was announced recently. People mostly think about home batteries as being important for solar.  For residential solar,  most of your generation is during the day when you aren’t home, so it gets sold back into the grid and therefore relies on the whatever the buy back rate set by your retailer is.  These rates are lower than the retail price of electricity so the real benefit is if you can store the “free” electricity you generate in a battery and then use it during peak hours instead of paying for electricity, thus avoiding your variable electricity charge of 20-30 c/kwh.

So the economics of solar depend on whether your savings (avoided retail prices + electricity sold back into the grid) justify the cost of installing solar panels and a battery (typically well over 10k, but costs are falling).

But if you don’t have solar, home batteries could have another use: storing cheaper power generated during off-peak and using it during peak when prices are high.  This of course only works if you have variable electricity pricing, which isn’t super common in New Zealand.  But if you are have day/night rates, or are on Flick Electric like me, then you might be able to exploit the difference between peak and off-peak prices and save some money.   See, for example, the below graph of my electricity use and prices from last Tuesday.

power graphI have drawn some lines indicating the “overnight price”, the “morning peak” and the “evening peak”.  Note that I didn’t use a lot of power that evening (we usually do so this is non-representative), but did use a fair amount in the morning, which is unavoidable.  I also ran my dishwasher on delay that night to take advantage of lower prices later in the evening. If I could store power at the “overnight rate” of 10 c/kwh, there are times when I could halve my variable cost of electricity (i.e. those times during peak when I can’t change my behavior).

Whether or not buying a battery to take advantage of variable pricing stacks up financially depends on:

  • how much the battery costs
  • how much it can store
  • how much power you use that you can’t shift  to off-peak (i.e. by setting the dishwasher on delay); and
  • what the price is at those times.

Hopefully someone does proper modelling of it, or maybe Flick will team up with Vector who have a “special” relationship with Tesla.  You could get some pretty complicated/cool software if you integrated this type of logic with Solar. I.e. buying power over night when the forecast is for rain the next day.

Do old people hurt growth?

A new paper (PDF) claims that ageing populations will hinder growth by both dis-saving and dragging down innovation, thus reducing productivity. Using a VAR model, they relate the age structure to measures of growth, saving, investment, and other macroeconomic variables over the 1990-2007 period. They use those coefficients to predict the effect of demographic change on growth rates in the current decade. The results are dramatic, predicting that an ageing population will knock over a percentage point off some countries’ growth rates.

In a ray of light, this morning’s FT (£) reported a study of over 15,000 German employees that examined the relationship between ageing and productivity. One of the authors is quoted saying:

As workforces age, employers are concerned that productivity will decrease. That is not so. What matters is not chronological age but subjective age.

The research suggests that older people are systematically excluded from training activities, and are relegated to less creative and meaningful work, which renders them less productive. As the workforce ages, that may begin to change. As it changes, the relationship between growth and age structures is likely to weaken.

Dole bludger army?

I see that some Australian TV show host said that New Zealand has the “dole bludger army” for support in the cricket.  Now something about intimate relationships with sheep or cows, or something about little country syndrome, or something about Lord of the Rings, would have been fine – banter is acceptable.  But his statement doesn’t make any sense, and feeds into a stereotype of New Zealanders in Australia that leads to real discrimination.

So why doesn’t the stereotype hold up?  Well for one, Kiwis can’t get the unemployment benefit in Australia – they could pre-2000 but then things changed.  Just check it here.  It is common to see Australian media (and people I run into) complaining both that Kiwi’s are “stealing their jobs” and “stealing their benefits”.  In truth Kiwis are heading over there, without a security net, to work hard to make something of themselves in a larger country – they can’t get the benefits, and the idea of a zero sum set of jobs is just straight incorrect.

Secondly, within both countries there are proportionately fewer people on the dole in New Zealand than in Australia.  New Zealand produces these numbers directly, but I couldn’t find matching Aussie data.  As a result, we can just look at the unemployment rates (given they use matching definitions of what constitutes unemployment):


Sure unemployment went a bit higher recently, due to the deeper recession in NZ – but on average a lower proportion of NZers are unemployed than Aussies are.

And this has occurred with much higher employment rates (% of people over 15 in work) in NZ than in Aussie.


So, out of the population, a larger proportion of NZers are actually working relative to those in Aussie.

So not only was it a stupid, racist, and bigoted call – the data doesn’t even support the TV hosts prejudices.

Note:  The term dole bludger is insulting and degrading in the first place – irrespective of the relative unemployment rate.  Even if NZers could get benefits, and the UR was higher in NZ, this type of attitude towards benefits is pretty dirty.