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No, not because of this, although it can get rough.

I teach the third course in the first year PhD micro sequence at Northwestern and I also teach my intermediate micro course in the Spring. I am just finishing up teaching this week and my students will soon be writing their evaluations of me. They will grade me on a scale of 1 to 6.

Because I am the third and last teacher they will evaluate this year, I face some additional risk that my predecessors did not. Back in the fall, when they evaluated their first teacher they had only one data point with which to estimate the distribution of teaching ability in the Northwestern economics faculty. An outstanding performance would lead them to revise upward their beliefs and a poor performance would revise their beliefs downward.

As a result, when the students sit down to evaluate their fall professor, even a very good performance will earn at most a 5 because the students, now anticipating higher average performance in the winter and spring, will be inclined to hold that 6 in reserve for the best. Likewise, very bad performances will have their ratings buoyed by the student’s desire to save the 1 for the worst.

When Spring comes, there is nothing more to learn. By now they know the distribution and the only thing left to do is to rank their Spring professor relative to those who came earlier. If he is best he gets a 6, if not he gets at most a 4. His rating is a mean-preserving spread of the previous ratings.

There is a general principle at work here. The older you get the more you know about your opportunity costs, the more decisively you act in response to unanticipated opportunities. (There is a countervailing force which I believe on net makes us more conservative when we get older, but that is the topic of a later post.)

I teach undergraduate intermediate microeconomics, a 10 week course that is the second in a two-part seqeunce at Northwestern University. I have developed a unique approach to intermediate micro based originally on a course designed by my former colleague Kim-Sau Chung. The goal is to study the main themes of microeconomics from an institution- and in particular market-free approach. To illustrate what I mean, when I cover public goods, I do not start by showing the inefficiency of market provided public goods. Instead I ask what are the possibilities and limitations of any institution for providing public goods. By doing this I illustrate the basic difficulty without confounding it with the additional problems that come from market provision. I do similar things with externalities, informational asymmetries, and monopoly.

All of this is done using the tools of dominant-strategy mechanism design. This enables me to talk about basic economic problems in their purest form. Once we see the problems posed by the environments mentioned above, we investigate efficiency in the problem of allocating private goods with no externalities. A cornerstone of the course is a dominant-strategy version of the Myerson-Satterthwaite theorem which shows the basic friction that any institution must overcome. We then investigate mechanisms for efficient allocation in large economies and we see that the institutions that achieve this begin to resemble markets.

Only at this stage do markets become the primary lens through which to study microeconomics. We look at a simple model competition among profit-maximizing auctioneers and a sketch of convergence to competitive equilibrium. Then we finish with a brief look at general equilibrium in pure exchange economies and the welfare theorems.

There is a minimal amount of game theory, mostly just developing the tools necessary to use mechanism design in dominant strategies, but also a side trip into Nash equilibrium and mixed strategies.

In the coming weeks I will be posting here my lecture notes with a brief introduction to the themes of each. I am distributing these notes under the Creative Commons attribution, non-commercial, share-alike license. Briefly, you are free to use these for any non-commercial purpose but you must give credit where credit is due. And you are free to make any changes you wish, but you must make available your modifications under the same license.

Today I am posting my notes for the first week, on welfare economics.

I begin with welfare economics because I think it is important to address at the very beginning what standard we should be using to evaluate economic institutions. And students learn a lot from just being confronted with the formal question of what is a sensible welfare standard. Naturally these lectures build to Arrow’s theorem, first discussing the axioms and motivating them and then stating the impossibility result. In previous years I would present a proof of Arrow’s theorem but recently I have stopped doing that because it is time consuming and bogs the course down at an early stage. This is one of the casualties of the quarter system.

In the film *A Beautiful Mind* about John Nash, there is a scene which purports to dramatize the moment in which Nash developed his idea for Nash equilibrium. He and three mathematician buddies are in a bar (here I might have already jumped to the conclusion that the story is bogus, but I just got back from Princeton and I can confirm that there is a bar there.) There are four brunettes and a blonde and the four mathematicians are scheming about who will go home with the blonde. Nash proposes that the solution to their problem is that none of them go for the blonde.

Let’s go to the video.

Of course this is not a Nash equilibrium (also it is inefficient so it cannot be a dramatization of Nash’s bargaining paper either.) However, this makes it the ideal teaching tool.

- This game has multiple equilibria with different distributional consequences.
- The characters talk before playing so its a good springboard for discussion of how pre-play communication should or should not lead to equilibrium.
- One of the other mathematicians actually reveals that he understands the game better than Nash does when he accuses Nash of trying to send them off course so that Nash can swoop in on the blonde.
- Showing what isn’t a Nash equilibrium is the best way to illustrate what it takes to be a Nash equilibrium.
- It has the requisite sex to make it fun for undergraduates.

I got two speeding tickets in less than one year. I worked off the first one by taking an online course. For the second one, they make you go to an 8 hours (!) course over two nights. The only course that fit my schedule was in Rolling Meadows. Just like Old Orchard in Skokie, there may have been farmland there a while ago but there are no rolling meadows now.

It’s obvious that the punishment in terms of wasted time is harsh so that you do not speed again. Your first thought is whether you can persuade the teacher to let you go early. This desire was very strong on Thursday night when the Bulls were playing the Celtics in Game 6 of their best of seven series. The class took place in the basement of a courthouse and it turns out the police monitor the teacher to make sure he does not let the class off early. Of course the teacher would love to go home early too so the incentives for renegotiation are huge. The police have to stay anyway so they enforce the rules.

So I was stuck in the class but I kind of enjoyed it because I got to meet people I do not meet everyday otherwise. I also got lots of information that I would not gotten in my normal interactions.

The hippie woman: “I got a ticket because I gave a ride to a Jamaican guy who turned to be a homeless ex-convict. I got a speeding ticket when I got scared driving him to his shelter.”

The hippie girl: “When I have fatigue, I do yoga to wake up before I drive”

The truck driver: “Go to White Castle before you drink. The grease soaks up the beer.”

The Comcast guy: “Ritalin is like cocaine if you don’t have ADD. I’m taking Ritalin now so I can sit in this class without going crazy.”

Lucca, the waiter: “The strip clubs in Indiana are better than the strip clubs in Chicago. The Indiana girls are nicer and they want dates. Always go to a ranch style strip club.”

I’m not sure how the last comment was related to the class.

Writing and studying for an exam is a game played between Professor and student. In this game the Professor has to pick which questions to ask and the student has to pick which topics to study. The game has the flavor of rock-scissors-paper in that the Professor would like to be unpredictable. That way the students will have to devote studying time to all topics rather than focus on just one that they know the Professor will ask about.

But the Professor might not want the students to spend too much time memorizing concepts from the book. Instead he may want them to spend their time thinking about how to apply those concepts to new problems. How can the Professor be unpredictable and still deter the students from trying to memorize the book? The solution is to use an open book exam. This way the Professor is committing not to ask rote questions which would turn the exam into nothing more than a contest to see which students are the fastest to search through the book and find the topic.

With an open-book exam, the students can predict that the Professor will not ask such questions and they will not bother studying for them. They bring their books to the exam and never have to open them. And they still cannot predict which questions (apart from the mundane ones) the Professor will ask.

Keep in mind that this means students should *dislike* open-book exams. Many students don’t understand this and are always asking for open-book.

Also, the worst possible format is the common practice of allowing students to write out crib notes on one sheet of paper. This turns studying into pure rent-seeking. All students will predict which are the essential concepts from the book and will write them down and, predicting this, the Professor will not ask questions about those topics. In the end the outcome is just like open-book except the poor students lose valuable studying time while they squeeze the book onto a sheet of paper.

(To my PhD students and undergrads taking exams today: aren’t you glad the exams are closed book? Oh and good luck!)

Smart classroom + YouTube + Golden Balls.

Golden balls indeed.