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The list of Summers’ gaffes is long. A key early entry occurred when he was the Chief Economist at the World Bank. In a memo, it was suggested:
The measurements of the costs of health impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.
(It turns out that the memo was written by an underling and Summers just signed it.)
This policy prescription is being followed illegally in Europe. Recycling laws impose high costs of disposable in Europe and it is cheaper to export the waste to China, India and elsewhere. The old memo made a point based on efficiency. If transactions costs are low, the efficient solution is also the solution to decentralized voluntary trade (the Coase Theorem). Ships arriving in Europe or the U.S. with goods from China have to go somewhere afterwards anyway. Why not send them back full of waste? Transactions costs are low and the solution the World Bank identified gives firms the incentive to transfer the waste, sometimes illegally. Sometimes the dismal science’s dismal predictions turn out to be right. Now, we have to think of whether we can design a better solution. I’m going to look at Jeff’s intermediate micro notes to see if I can come up with something. Don’t hold your breath.
Kennebunkport ME
In Chicago, I love Semiramis and Nazareth Sweets. The falafel special sandwich and the baklava form the basis of an initially healthy but finally indulgent meal. While delicious, the options are generic. Our main food discoveries in Boston have been Middle Eastern (broadly defined!). The Armenian takeout we had a friend’s house had the usual hummus and babaganoush. The dish that was spectacular and totally new to me was a pomegranate, chili and walnut mush (I think it is called mouhamara).
And then last night, we went to Oleana. What a revelation. Greek, Turkish, Lebanese…etc. etc. All represented and modified till the cuisine achieved a different level. Everything was good. The whipped feta with peppers, zucchini pancakes (I could have done with less haloumi) and finally the fideos – I’d never had them in a restaurant, have tried to cook them (the Zuni cookbook has a recipe I tried) and never knew how they should be. Now I know. Not sure if I will reach Oleana’s heights on this dish but at least I know what to aim at. My wife enjoyed her lamb and eggplant dumplings and sausage. We didn’t have room for desert. Can’t wait to go back.
The most important development in the way we interact on the web will come when a system of micropayments is in place. The big difficulties are coordination problems and security. The strongest incentive to build and control a massive social network is that it will enable Facebook to host a micropayments economy within its closed environment, solving both the coordination problem and a big part of the security problem.
Here’s the future of Facebook. You will subscribe to your friends. A subscription costs you a flow of micropayments. Your friends will include the likes of Tyler Cowen, The Wall Street Journal, gmail, Jay-Z, Harry Potter and the Deathly Hallows, etc.
Remember that the next time you hear somebody say that there is no way to monetize Facebook or Twitter.
Wired reports that the Soviet Union actually had a doomsday device and kept it a secret.
“The whole point of the doomsday machine is lost if you keep it a secret!” cries Dr. Strangelove. “Why didn’t you tell the world?” After all, such a device works as a deterrent only if the enemy is aware of its existence. In the movie, the Soviet ambassador can only lamely respond, “It was to be announced at the party congress on Monday.”
So why was the US not informed about Perimeter? Kremlinologists have long noted the Soviet military’s extreme penchant for secrecy, but surely that couldn’t fully explain what appears to be a self-defeating strategic error of extraordinary magnitude.
The silence can be attributed partly to fears that the US would figure out how to disable the system. But the principal reason is more complicated and surprising. According to both Yarynich and Zheleznyakov, Perimeter was never meant as a traditional doomsday machine. The Soviets had taken game theory one step further than Kubrick, Szilard, and everyone else: They built a system to deter themselves.
By guaranteeing that Moscow could hit back, Perimeter was actually designed to keep an overeager Soviet military or civilian leader from launching prematurely during a crisis. The point, Zheleznyakov says, was “to cool down all these hotheads and extremists. No matter what was going to happen, there still would be revenge. Those who attack us will be punished.”
The logic is a tad fishy. But it is not obvious that you should reveal a doomsday device if you have one. It is impossible to prove that you have one so if it really had a deterrent effect you would announce you have one even if you don’t. So it can’t have a deterrent effect. And therefore you will always turn it off.
What you should worry about is announcing you have a doomsday device to an enemy who previously was not aware that there was such a thing. It still won’t have any deterrent effect but it will surely escalate the conflict. (via free exchange via Mallesh Pai.)
Put aside the question of why customers give tips. That’s certainly a huge mystery but the fact is that many diners give tips and the level of tip depends on the quality of service.
In this article (via foodwire), a restauranteur explains why he decided against a switch to the European system of a fixed service charge.
We looked very hard at this [servis compris] policy fifteen years ago. We were going to call it “hospitality included.” We felt people who worked in the dining room were apologizing for being hospitality professional. I felt there was a resulting shame or lack of pride in their work. My assumption was that it was fueled by the tipping system, and I was troubled by the sense that the that tipping system takes a big part of the compensation decision out of the employer’s hands. So we brought up the “hospitality included” idea to our people. To our surprise, it turned out the staff actually enjoyed working for tips.
The tipping system encourages servers to put more weight on the diner’s welfare than the restauranteur would like, at least at the margin. You can think of the waiter as selling you extra bread, more wine in your glass, and more attention at the expense of less generous (-looking) diners. The restauranteur incurs the cost but the server earns the tip.
On the other hand, a fixed service charge provides too little incentive to take care of the customers. You can think of a tipping system as outsourcing to the diner the job of monitoring the server.
(I once had a conversation on this topic with Toomas Hinnosaar and I am probably unconsciously plagiarising him.)
You spend too much on your credit card and/or forget to pay off your bill on time and get hit with late fees. To commit to better behavior, you chop up your credit card and move to a debit card. You avoid late fees by definition and it should help you commit to less spending as your bank balance acts as a natural upper bound on expenditure.
Dream on – the banks and credit card companies are too smart to give away profits like this.
They do two things. First, you get “overdraft protection” meaning you can go over your bank balance at the cost of incurring fees of around $30/charge. They make it very hard to turn down overdraft protection so you get a “service” you don’t really want. In fact, it removes the commitment device you hoped to acquire by getting a debit card. Second, as a I learned from watching this video, on a given day they debit your account in the order that maximizes the number of overdraft charges you incur (i.e they charge your account with bigger debits before smaller debits whatever the chronological order of the charges).
There is another effect: the debit card selects for precisely those people who have the funds to pay their bills but lack the self-control to pay on time. This is why they switch from a credit card to the debit card. Credit cards are also used by people living beyond their means who might default. These people do not get a debit card as they can’t afford the fees and they do not get the large credit line they need to spend like crazy. This means a debit card is potentially more profitable to a bank than a credit card. Banks have a great instrument for extracting surplus from sloppy consumers while avoiding bad risks. So, confused consumers are still exploited, getting overdraft protection they don’t want and incurring fees that are unnecessary.
I’m typing this on my MacBook Pro, I walked to work listening to music on my iPhone but I have been shaken to my core by the videoclip in the middle of this page.
We talked a lot before about designing a scoring system for sports like tennis. There is some non-fanciful economics based on such questions. Suppose you have two candidates for promotion and you want to promote the candidate who is most talented. You can observe their output but output is a noisy signal that depends not just on talent, but also effort both of which you cannot observe directly. (Think of them as associates in a law firm. You see how much they bill but you cannot disentangle hard work from talent. You must promote one to partner where hard work matters less and talent matters more.)
How do you decide whom to promote? The question is the same as how to design a scoring system in tennis to maximize the probability that the winner is the one who is most talented.
One aspect of the optimal contest seems clear. You should let them set the rules. If a candidate knows he has high ability he should be given the option to offer a handicap to his rival. Only a truly talented candidate would be willing to offer a handicap. So if you see that candidate A is willing to offer a higher handicap than candidate B, then you should reward A.
The rub is that you have to reward A, but give B a handicap. Is it possible to do both?
The centerpiece of Greg Mankiw’s column in the New York Times is this paragraph about the little white pill he takes every day:
Not long ago, I read that a physician estimated that statins cost $150,000 for each year of life saved. That approximate figure reflects not only the dollars patients and insurance companies spend on the treatment but also — and just as important — an estimate of how effective it is in prolonging life. (That number is for men. Women have a lower risk of heart disease.)
Mankiw used the word cost but I would be that what he is referring to is price. With monopolized drugs and dysfunctional health care insurance there is a huge difference between price and cost. And with this in mind, Mankiw’s column completely misses the real economic problem exemplified by his pills.
That seems to be the thesis of this paper by neurobiologist Jerome Siegel:
Sleep can be seen as an adaptive state that benefits animals by increasing the efficiency of their activity. It does this by suppressing activity at times that have maximal predator risk and minimal opportunity for efficiently meeting vital needs, and by permitting activity at times of maximal food and prey availability and minimal predator risk.
I read this as arguing that if an animal is not sleeping it will do things that are not in its interest. So sleep stops it from doing those things. Of course natural selection could instead have simply taught the animal not to do what’s against its self interest but instead, under this theory, sleep acts like a commitment device to blunt a self-control problem.
Via neuroskeptic.
Start when he is 13 months old:
(sorry for the low quality. two years ago = ancient technology.) Yes at that age a child can be taught to float. In fact almost no teaching is required. You place the child on his back, he floats. He cries too, it turns out. A lot. That’s why its not me there teaching him to float. Instead it is a highly trained swimming teacher and one of the most inspirational people I have ever known. That year was our kids’ first year of swimming lessons with him and we have been spending the summer in La Jolla, CA every year since primarily because of him and these swimming lessons. 10 minute lessons, daily for four weeks.
Here is what he learned last year when he was 2. (rss readers probably need to click through to the blog to see the video.)
A 2 year, 2month old child can learn to kick with his face in the water, roll over onto his back when he needs to breathe, and then continue on. And at this early age he learns something which is subtle but which is central to swimming at every level: looking at the floor to point the top of your head in the direction you are swimming and getting a breath by rotating on that axis. The hardest thing to teach the child is not to look where he is going. Looking where you are going means tilting your head up and that pushes your body down and makes you sink. For a two-year-old that is a deal-breaker, but even among adults head orientation is what distinguishes good swimmers from the best swimmers.
Here is how you teach a two-year-old to look at the floor.
Many repetitions of placing the child in the water, putting your hand deep under water and tell him to swim and grab the hand. He has to look down to find your hand. The typical swimming teacher hold out his hands near the surface of the water which instead trains the child to look up, a disaster. This tiny difference has an enourmous impact on how smoothly the child can learn to swim.
It also teaches the child to go slow. Another subtlety with swimming is that moving your arms and legs faster usually makes you go slower. Slowing down all of the movements teaches him how to move more efficiently through the water.
This summer, at age 3 years 2 months he reached the stage where he could swim by himself without an adult in the pool with him, keeping himself going with the swim-float-swim sequence. Then he began to learn to swim with his arms.
Next summer: how to tech a four-year-old to snorkel.
Short weekend trips from Evanston lead to the Chicago Botanic Garden. It can be quite beautiful despite the drone of cars from the freeway running next to the garden. There are houses and malls all around and it is hard to escape the feeling that the garden is an artificial green oasis plonked into suburbia.
Just some the reasons why Drumlin Farm, just forty minutes away from our present abode in Boston, was such a big hit. The garden aspect we enjoy in Chicago is replaced by a spectacular working farm. There are many short trails and vegetables and eggs for sale, not just for display. Plus sledding in the winter. We joined the Audubon society as we expect many visits during the year.
- The unbundled economy.
- Not a placebo.
- A man’s salute to Patrick Swayze. (consider yourself warned.)
We all work for google now. Previous posts on reCAPTCHA here and here. beanie bow: lance fortnow.
I wrote
If I am of average ability then the things I see people say and do should, on average, be within my capabilities. But most of the things I see people say and do are far beyond my capabilities. Therefore I am below average.
I am illustrating a fallacy of course, but it is one that I suspect is very common because it follows immediately from a fallacy that is known to be common. People don’t take into account selection effects. The people who get your attention are not average people. Who they are and what they say and do are subject to selection at many levels. First of all they were able to get your attention. Second, they are doing what they are best at which is typically not what you are best at. Also, they are almost always imitating or echoing somebody else who is even more talented and specialized so as to have gotten their attention.
Its healthy to recognize that you can be the world leader at being you even if you suck at everything else.
WordPress give statistics on keyword searches that led users to Cheap Talk. I am amused and intrigued by many of the leaders:
#1 cheap talk
#2 tv
?? About 20 times a day somebody googles tv, they are offered up a link to our blog and they click through. The clicking through part I can understand but why a search on tv hits us is beyond me (when I try it I go through several pages of google hits and do not find a cheap talk link.) And who googles “tv” ?
#8 hefty smurf
That one is my favorite. I get a daily chuckle out of that one.
#9 flatfish
~#20 Wynne Godley
~#30 talking robots
~#33 model men
nice!
~#50 men and their mothers
oops.
~#60 Guinness serving temperature
I am pleased to be the go-to authority on the proper serving temperature of this important beverage.
If I am of average ability then the things I see people say and do should, on average, be within my capabilities. But most of the things I see people say and do are far beyond my capabilities. Therefore I am below average.
X-inefficiency at output q is the difference between the realized cost of production at q and the minimum cost of producing q.
If firms are maximizing profits, the difference is zero. But there are many reasons why they might differ. One is lack of competition. The rough argument is that a monopoly has less incentive to minimize costs because it can absorb X-inefficiency in the form of reduced profits without going bankrupt. Here is a video of X-inefficiency:
Let’s say you read a big book about recycling because you want to make an informed decision about whether it really makes sense to recycle. The book is loaded with facts: some pro, some con. You read it all, weigh the pluses and minuses and come away strongly convinced that recycling is a good thing.
But you are human and you can only remember so many facts. You are also a good manager so you optimally allow yourself to forget all of the facts and just remember the bottom line that you were quite convinced that you should recycle.
This is a stylized version of how we set personal policies. We have experiences, collect data, engage in debate and then come to conclusions. We remember the conclusions but not always the reasons. In most cases this is perfectly rational. The details matter only insofar as they lead us to the conclusions so as long as we remember the conclusions, we can forget about the reasons.
It has consequences however. How do you incorporate new arguments? When your spouse presents arguments against recycling, the only response you have available is “yes, that’s true but still I know recycling is the right thing to do.” And you are not just being stubborn. You are optimally responding to your limited memory of the reasons you considered carefully in the past.
In fact, we are probably built with a heuristic that hard-wires this optimal memory management. Call it cognitive-dissonance, confirmatory-bias, whatever. It is an optimal response to memory constraints to set policies and then stubbornly stick to them.
China is threatening to cut off imports of American chicken, but poultry experts have at least one reason to suspect it may be an empty threat: Many Chinese consumers would miss the scrumptious chicken feet they get from this country.
“We have these jumbo, juicy paws the Chinese really love,” said Paul W. Aho, a poultry economist and consultant, “so I don’t think they are going to cut us off.”
The story is in the New York Times.
Tyler Cowen blegs for ideas on the economics of randomized trials. There is a simple and robust insight economic theory has to offer the design of randomized trials: controlling incentives in order to reduce ambiguity in the measurement of effectiveness.
Suppose you are testing a new drug that must be taken on a daily basis. A typical problem is that some patients stop taking the drug but for various reasons do not inform the experimenters. The problem is not the attrition per se because if the attrition rate were known, this could be used to identify the take-up rate and thereby the effectiveness of the drug.
The problem is that without knowing the attrition rate in advance there is no way to independently identify it: the uncertainty about the attrition rate becomes entangled with the uncertainty about the drug’s effectiveness. The experimenters could assume some baseline attrition rate, but when the effectiveness results come out on the high side, there is always the possibility that this is just because the attrition rate for this particular experiment was lower than usual.
The simple way to solve this problem is to use selective trials rather than randomized trials: require patients in the study to pay a price to remain in the study and continue to receive the drug. If the price is high enough, only those patients who actually intend to take the drug will pay the price. Thus the attrition rate can be directly observed by noting which patients continued to pay for the drug. This removes the entanglement and allows statistical identification of the effectiveness of the drug.
This is one of a number of new ideas in a new paper by Sylvain Chassang, Gerard Padro i Miquel and Erik Snowberg.
Followup: Sylvain Chassang points me to two experimental papers that explore/implement similar ideas:
http://www.dartmouth.edu/~jzinman/Papers/OU_dec08.pdf
http://faculty.chicagobooth.edu/jesse.shapiro/research/commit081408.pdf
I hate checking in bags at the start of a flight and waiting for them at the other end. So, I always travel with a carry-on bag. If there is no space left, there is a chance that you have to gate-check your bag. But I can only recall once instance where that has happened. It’s likely to be a more frequent event as I discovered on Sunday. Why?
United is now charging for checking in bags but carry-ons are still free. This increases the incentive to bring a carry-on where you might have checked-in a bag before. Moreover, if you are forced to gate-check your bag, you do not get charged. So, there is an additional incentive to carry-on a bag. So the optimal strategy will imply more passengers moving to “carry-on” from “check-in bag”. The two forces together meant that all the carry-on storage space was full by the time many people boarded my flight on Sunday and they were forced to gate-check their carry-ons.
This could end up being annoying for United if there is lots of gate-checking going on, delaying flights and distracting flight attendants. What should they do? Four options:
(a) Stop charging for checked in bags. Not an option United will choose as they need cash
(b) Start charging for gate checking carry-ons. This gives United the incentive to claim there is no room for carry-ons even when there is. Even if they are honest, no-one will belive it. This will to United broke my Carry-on as a follow up to United Breaks Guitars. Not a good option for United.
(c) Start charging for carry-ons. Seems like the most attractive option for United. Except no competitor is doing it. United has become more extreme than American with check-in bags: AA does not charge for the first checked bag. Is United going to be the first airline to take the next step and charge for carry-ons or..
(d) Stick with the status quo.
Some research suggests that a child’s ability to delay gratification is a good predictor of achievement later in life. The research is based on some famous experiments in which children were left in a room alone with sweets and told that if they resisted until the experimenters returned, they would be rewarded with even more sweets. Via EatMeDaily here is a really cute video by Steve V of the marshmallow test.
If a drug trial reveals that patients receiving the drug did not get any healthier than those who took a placebo, is this a failure? It depends what the alternative treatment is. Implicitly its a failure if we believe that doctors will prescribe a placebo rather than the drug. Of course they don’t do that (often) but we can think of the placebo as representing the next-best alternative treatment.
But the right question is not whether the drug does better than the next-best alternative, but instead whether the drug plus the alternatives does better than just the alternatives. It could happen that the drug by itself does no better than placebo because the placebo effect is strong, but the drug offers an independent effect that is just as strong.
If so, then the right way to do placebo trials is to give one group a placebo and another group the placebo plus the drug being tested. The problem here is that the placebo group would know they are getting placebo which presumably diminishes its effect. So instead we use four groups: drug only, placebo only, drug plus placebo, two placebos.
Maybe this is done already.
Followup: Thanks to some great commenters I thought a little more about this. Here is another way to see the problem. Conceivably there may be a complementarity between the placebo effect (whatever causes it) and the physiological effect of the drug. The more you believe the drug will be effective the more effective it is. Standard placebo controls limit how much of this complementarity can be studied.
In particular, let p be the probability you think you are taking an effective drug. Your treatment can be summarized by your belief p and whether or not you get the drug. Standard placebo controls compare the treatment (p=0.5, yes) vs. (p=0.5, no). But what we really want to know is the comparison of (p=1, yes) and the next-best alternative. If there is a complementarity between the placebo effect and the physiological effect then (p=1, yes) is better than (p=0.5, yes).
In previous lectures we looked at the design of mechanisms to allocate public and private goods in “small markets.” In both cases we saw that incentive compatibility is a basic friction preventing efficiency. But in the case of private goods we saw how that friction vanishes in larger markets. In this lecture we show that the opposite occurs for public goods. The inefficiency only gets worse as the size of the population served by a public good grows larger. We are capturing the foundations of the free-rider problem. This is another set of notes that I am particularly proud of becuase here is a completely elementary and graphical proof of a dominant-strategy version of the Mailath-Postlewaite theorem.
The conclusion we draw from this lecture is that the idea of “competition” that restored efficiency in markets for private goods cannot be harnessed for public goods and therefore some non-voluntary institution is necessary to provide these. This gives an opportunity to have an informal discussion of the kinds of public goods that are provided by governments and the way in which government provision circumvents the constraints in the mechanism design problem (coercive taxation.) The possibility of providing public goods by such means comes at the expense of losing the ability to aggregate information about the efficient level of the public good.
Want to work for Al Qaeda? The pay is terrible, your future is bleak and Al Qaeda has not managed a big attack for many years so you’ll be working for a declining terrorist entity.
Not much glamour in that job description and the Guardian reports that Al Qaeda is having a hard time finding recruits:
Amid a mood of cautious optimism, some experts talk of a “tipping point” in the fight against al-Qaida. Others argue that only Bin Laden’s death will bring significant change. But most agree that the failure to carry out spectacular mass attacks in the west since the 2005 London bombings has weakened the group’s “brand appeal” and power to recruit.
And there’s a backlash against Bin Laden and al-Zawahiri by other Islamic leaders who are offended because they have been vilified by Bin Laden or regret attacks on Muslims perpetrated by Al Qaeda (links here).
- What books would you bring if you were going to be stuck on a tropical island? Did I mention you were going to have to wear a flourescent orange jumpsuit and have water poured into your nose every day?
- Farewell Spotted Dick.
- Amish romances are hot.
- When great tits are involved, you snooze you lose.
The reason is to enable them to import cheaper cars from Japan which have the steering wheel on the right. So far the switch has not caused any accidents but public transportation has taken a hit.
All but about 18 of the Pacific island nation’s buses are banned from driving because their doors now open onto the middle of the road.
via mental floss.
Cheap Talk 