Fudenberg and Levine - Self Control, Risk Aversion and the Allais Paradox

a paper by Fudenberg and Levine that develops a dual self model that explains a wide range of inconsistent behaviours

http://levine.sscnet.ucla.edu/papers/allais.pdf

Ernst Fehr on Economics and Biology of Trust

I blogged before on Ernst Fehr's European Economics Association Lecture. The paper is now available from IZA. This is required reading for most of the people who read this blog. The lectures presents a wide ranging account of trust; its relation to risk preferences; additional qualities aside from risk preferences; neural mechanisms of trust and the possible causal role of trust in economic outcomes.

link here

Previous Fortnights NBER papers

the last two weeks NBER working papers are well worth catching up on if you are not currently drunk and/or fighting with relatives

http://www.nber.org/new.html#latest

papers include

- a recent paper examining the effects of grants on college enrollment using a Danish natural experiment

- a reexamination of the role of season of birth on later outcomes

- a paper on the work-place determinants of well-being

Geary Behaviour Seminars 2009

A list of the currently confirmed seminars

January 27th 2009. Joachim Winter (University of Munich). "The Workings of a Private Health Insurance Market: Enrollment Decisions, Plan Choice, and Adverse Selection in Medicare Part D" (joint with Florian Heiss and Daniel McFadden)

February 3rd 2009. Bart Golsteyn (Univeristy of Maastricht) "Economics and Personality"

February 10th 2009. Daniel Goldstein (London Business School). "Behavioural Economics and Defaults".

February 17th 2009. Frank Walsh (University College Dublin). "Supervision and Wages"

February 21st 2009, Janet Currie, (Columbia University). "Childhood Health Inequalities".

March 10th 2009, Ian Walker (University of Leicester). TBA

March 24th 2009, Amelie Petitclerc (Université Laval) "Impact of Family events and Choices on Young childrens Conduct Problem Trajectories: Cues for Public Policy and Intervention"

April 21st 2009. Uwe Sunde, (University of St Gallen). "Risk Aversion and Behaviour".

May 19th 2009. Simon Gaechter, (University of Nottingham). "Experimental Economics"

Econometric Band Name Winner

The second annual winner of the Econometric Band Names competition is Rob Gillanders. The current honour role is below so get your thinking hats on for 2009.

2008: Rob Gillanders - "GARCH Brooks"
2007: Liam Delaney - "Chi-Squared Chiefs"

Irish Policy and Behavioural Economics

Ideas from behavioural economics have not yet entered in a meaningful way into the Irish economic policy debate. This will change in the next couple of years if for no other reason than the current dominant ideas are hitting substantial limitations. I think grand theories about how behavioural economics might transform the current situation are not helpful but below are some suggestions of where to start looking. I hope people read these with some common sense as they are clearly just areas to examine rather than an alternative economic recovery plan.

1. Innovation policy should seek to incorporate insights from behavioural economics. It is not sufficient to simply provide facilities and funding or build huge blocks of activity in certain areas. Fundamental processes such as risk aversion, loss aversion, procrastination, status seeking, peer effects and related processes are part of the innovation process as are intrinsic incentives. The potential for "motivation crowding out" in government policies that seek to centralise the innovation process needs to be taken much more seriously as does the nature of intrinsic motivation itself. This should inform how policy is set with respect to the communication of incentives, the use of prizes and awards, the degree of control given to researchers at different stages, and the setting of promotion metrics. Innovation policies need to further examine the cultural and educational contexts of innovation to begin to examine testable ways of altering urban design, tax incentives, public awareness and so on. The recent "Smart Economy" document outlines government policy with respect to innovation. Those interested in applying behavioural economics should read this and examine areas of intersection

http://193.178.1.117/index.asp?locID=601&docID=4147

2. The Irish labour market is in real trouble with respect to a growing group of young men who do not see any outlet for their identity in the new types of jobs being provided. How this could be solved is unclear but simply assuming the wage rate or better search facilities will be sufficient to deal with the complex psychological issues in this area of the labour market is clearly insufficient.

3. Policies directed toward energy efficiency, transport and other areas in which consumer behaviour is central need to look clearly at the ideas from behavioural economics. "Nudge" is not a bad place to start to read about some of this work. Again, people should use common-sense when taking these ideas into account. The British debate has turned from an interesting discussion of how behavioural economics might be applied into a turgid bun-fight about whether this could lead to Thatcherism or extreme socialism depending on who is providing the rant. It really has very little to do with any of that and instead those interested in improving policy should examine discrete points of intersection between policy and behavioural economics

4. Furthermore, financial regulation certainly needs to attempt to take on board psychological aspects of consumer and investor behaviour. The standard behavioural models of investment should only be viewed as theoretical benchmarks. Investment institutions, in particular, need to be examined as complex hierarchical agencies in which psychological processes such as compliance, conformity, unrealistic optimism and so on drive behaviour as much as rational investment appraisals. Similarly, consumers should be viewed as making decisions subject to an array of psychological processes that, under some conditions, lead to behaviour that is sub-optimal by any reasonable definition of the term.

5. Competition and utilities regulation needs to examine how psychological processes, in particular the endowment effect, place constraints on switching behaviour. A recent EU conference (below) addressed this in depth.

http://ec.europa.eu/consumers/dyna/conference/programme_en.htm

6. Policies surrounding savings incentives, pensions, government regulations, taxation and so need to be tested to make sure that surface features such as complexity, awkwardness and so on are not leading to sub-optimal decisions. The Save More Tomorrow paper by Thaler and Benartzi is the most famous example of the use of a behavioural intervention to promote saving and the core idea of this type of policy needs to be examined in the irish context.

http://www.chicagogsb.edu/capideas/summer02/savemoretomorrow.html


7. The well-being literature should be interrogated for usefulness to policy. Should policy makers take this work on board and what might this imply for policies in areas such as urban planning, health care systems development, social insurance and so on? I have blogged at length about research papers in the area that examine the psychological consequences of unemployment, business loss and home foreclosure and this is a rapidly expanding literature. But can it be useful? Richard Layard's book is one place to start and one of his main thrusts was the need to expand the provision of cognitive behavioural therapy and these policies seem now to be actively underway in the UK. It is important that we debate this properly in Ireland.

Happiness by Layard

Happiness for Beginners

8. All of this needs to be examined in the context of the aging and health of the Irish population. One crucial dynamic in Ireland at present is an aging population which will imply higher pension commitments and greater health care burden in terms of chronic illness. Examining how individuals make provisions for their future health and finance is now crucial to thinking about policies to manage a demographic transition. This involves, among many other things, examining the psychology of savings and investment, health risk behaviours, chronic illness management and so on. All of these issues are at the intersection of health, psychology and economics and yet many of the people working in each of these areas are indifferent to the other two. A major improvement in Irish policy could be realised by a stronger collaboration in these areas.

9. If any of the above ideas are to be integrated into policy they should be done so in a structured and scientific way emphasising small-scale trial studies that focus on defined outcomes in ways that can be causally related to specific policy changes.

10. Also, none of the above in any way implies that we should ignore core areas of public policy such as fiscal management, trade legislation, development of transport and energy infrastructures, monetary policy and so on. Nor does it neccesarily imply that the role of government should be increased or decreased.

Consideration of Future Consequences in Times of Recession

The Economist journal review points to an interesting article from Knowledge@Wharton: "When the going gets tough, the tough don't skimp on their ad budgets". According to the article:

"Research shows that companies that consistently advertise even during recessions perform better in the long run. A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise."

Considering the future consequences of business decisions during a recession is of course nothing new. I can remember reading management case studies about firms that kept staff on during recession rather than re-hire them at a later date. This is because the costs of recruitment search, re-hiring and/or re-training may be higher than paying employees during a profits squeeze. Of course, a strategy such as this depends on how much cash is on the balance sheet, the nature of business conducted by the firm and the likely duration of recession. This brings us to an interesting question: How Long Will the Recession Last?

Predicting the timing of market developments is a perilous task; Brendan Walsh summed up it up quite well on last week's Eamon Dunphy radio-show on RTE1, when he said its like "trying to predict when a goal will be scored in a football match". (The link to the full interview is available here on the Irish Economy blog). According to Anthony Karydakis, former chief U.S. economist for J.P. Morgan Asset Management and currently an adjunct professor at New York University's Stern School of Business, the prevailing view is that the recession should technically end during 2009. However, this will be followed by a "gradual recovery" (see a recent edition of Fortune - here).

This gradual recovery may gather pace two years from now, if commercial decision-making that considers future consequences is anything to go by. A friend who works in an Irish bank recently took a redundancy-type package of €20,000 with an agreement to re-join the institution in two years time. I wonder if that institution will perform better in the long run?

Behavioural Economics and Innovation

As in many countries, innovation in areas such as ICT, pharma and biotech is at the core of national policy in Ireland. Examining how behavioural economics research can inform this is an interesting line of inquiry. Below is one recent attempt to make connections between behavioural economics and innovation from researchers at the University of Queensland

http://espace.library.uq.edu.au/view/UQ:159497

Keynes and Microeconomics

Martin’s recent post and the sudden renewed interest in Keynesianism have reminded me about the debate on the interpretation of Keynes. When people refer to Keynesianism they generally mean the kind of economics familiar to all undergrads with 45º diagrams relating aggregate supply and aggregate demand, and government intervention. This “Popular Keynesianism” was discredited with the stagflation of the 1970s, with much of the criticisms coming from Monetarists, and later Neoclassical economists who argued that Keynes’ theories lacked any foundation in behavioural choice. They argued that he provided no proper explanation for the mechanism through which the economy could become stuck out of equilibrium, or be brought back to it through expansionary fiscal policy. As Shackle (1967) puts it:

“At each curtain rise the General Theory shows us, not the dramatic moment of inevitable action, but a tableau of posed figures. It is only after the curtain has descended again that we hear the clatter of violent scene-shifting”

However, many of his contemporaries such as Joan Robinson believed that what became known as Keynesianism was a complete misrepresentation of his ideas. In his JEL article (1976), Alan Coddington describes some of the alternative interpretations. Post Keynesians have argued that the General Theory did have a micro basis in the concept of effective demand, and that the Neoclassical attack on Keynes was misguided. Workers who lose their jobs have notional demand for goods and services, but cannot express this as their labour cannot buy goods (only money can buy goods). When this happens fiscal intervention from the government will translate this notional demand into effective demand. More recently, Neo Keynesians have attempted to use sticky wages and prices to justify the type of government intervention advocated by Keynes.

Coddington quotes Robinson as saying “there were moments when we had some trouble in getting Maynard to see what the point of his revolution really was”, so perhaps the confusion surrounding what Keynes really meant is not surprising. This seems like a good opportunity to revisit these different perspectives given the present interest in Keynes, and the recent rise in behavioural economics.

StatCentral.ie

Thanks to the Irish Economy blog for pointing us towards StatCentral.ie. Its a new CSO-maintained data site that brings together all the CSO data, plus data from a range of other official agencies. Should be useful.

New Blog on the Irish Economy

Thanks to Stepehen Kinsella for pointing me towards the new blog on the Irish economy: http://www.irisheconomy.ie/. Featuring many of Ireland's top macroeconomists, this blog looks like an interesting read, and a valuable source of information on economic developments as they are happening in Ireland.

Macroeconomics and finance don't feature a whole lot on this blog, but the chart below caught my imagination when it was forwarded on by a friend this week. It shows that investing in U.K. government debt is almost twice as risky as buying bonds sold by McDonald’s Corp., based on prices in the credit-default swap market since June. “Talk about ‘McBritain’ is an insult to Ronald’s outfit,” said Sean Corrigan, chief investment strategist at Diapason Commodities Management SA in Lausanne, Switzerland.

I assume that Irish government debt would stack up in a similar position to British govt. bonds. I'm hoping to get some data on this soon; but in the meantime its fascinating to see how financial markets can view a corporation as more of a safe bet than a major European government. I wonder if the average Joe's 'perception of risk' would correspond accordingly. In saying all of that, these are times when Keynesianism may be more appropriate than expanding the monetary base (see here, here, here, here and here), and McDonald's are making sizeable profits during this global recession, as we mentioned before (here).

Update on 19th December:

I got the chart for Ireland's government debt priced in the credit-default swap market for the same time period. Irish govt. debt is considered to be even riskier than the British counterpart, as well as a McDonald's bond.

Presentation on Health and History in Ireland

Below is a talk I gave recently in NUI Galway that outlines some work we are doing here looking at patterns of infant mortality in Ireland in the 20th century and the evolution of living conditions and life expectancy in Ireland.

Galway

View SlideShare presentation or Upload your own.

Converting Between Different Types of Data

A good place to start reading on this topic is the SAS-SPSS-STATA FAQ on the UCLA STATA website. You'll see StatTransfer mentioned here, which is the most comprehensive package for switching between different types of data. However, this is a commercial package. There is a free version to download which converts 15 out of every 16 observations, but this is obviously undesirable for the perfectionist.

So I've been looking into data conversion possibilities besides StatTransfer, with an emphasis from the STATA user's point of view. The first thing I noted is that STATA reads in many types of data using infile, infile2, insheet, infix, odbc and fdause. Infile reads unformatted ASCII (text) data. Infile2 reads ASCII (text) data in fixed format with a dictionary. Insheet reads ASCII (text) data created by a spreadsheet. Infix reads ASCII (text) data in fixed format. Odbc reads Access, Excel and dBase files. Fdause reads datasets in FDA (SAS XPORT) format.

Besides all these possibilities, researchers can often find themselves with an SPSS file that they need to convert to STATA. It is possible to do this by opening the SPSS file (.sav) in SPSS and saving it in STATA .dta format (there are many formats to choose from). One thing I noted when saving to STATA format within SPSS is that SE should be selected when saving large (i.e. >250 obs.) data-sets. The highest STATA format available in SPSS 17 is STATA 8 SE, but this opens fine in STATA 9 and 10. It is also possible to get SPSS 17 on a free 30 day trial from the SPSS website.

As an alternative, there is a relatively new STATA plug-in called "usespss". It is available as a STATA ado-file here and here. It reads SPSS (.sav) files into STATA, but if one needs to convert portable SPSS (.por) files (as I did), then a version of SPSS will have to be used for conversion to .dta

Undergraduate Research Opportunities in USA

Irish undergraduates may be interested in the University of Michigan ICPSR Summer Undergraduate Internship in Quantitative Methods of Social Research. According to their website, authorisation to work in the United States is one of the requirements to qualify for the internship programme; this would be possible to get through a J1-visa. Full details, including stipend information, are available on the link above. The application deadline is February 2, 2009.

Popularising Risk Assessments

I am currently involved in a project examining how to communicate risk on complex issues to the general public

the website below is DG Sanco's "popularising risk assessments" page containing risk assessments on several areas from tooth whitening to nanoscience. these are interesting to read in themselves and raise a lot of interesting questions about the effect of information and message framing on perceptions and behaviour.


here

NanoScience and EU Health

A nice resource below on different aspects of risk communication, risk perception and use of nanoscience in an EU context from a conference hosted by DG Sanco last year.

link here

More On Emotional Mapping

Thanks to Ana Andjelic and Paul der Van for writing up about ifeelnyc.com. This website allows you to see where people go and what they do when they are in various moods, in London, New York and Toronto. It seems like this brings us to the bi-directional causality problem. That is, do people go to certain places because of their mood? Or do places affect mood? Or a bit of both?

Top Ten Articles on Developments in Neuroscience

From New Scientist- Your amazing brain: Top 10 articles from 2008

What is the going rate for flipping burgers?

In the current edition of Princeton Weekly, there is an article about Professor Orley Ashenfelter, from the Department of Economics and Industrial Relations Section at Princeton University. When faced with the question as to whether China’s and India’s growing economies will soon rival that of the United States, Ashenfelter poses the question: "What is the going rate for flipping burgers?"

He is conducting a study of McDonald’s employees’ wages in many countries to illustrate the relative strength of their economies, and early results indicate that developing nations still have a long climb. While the average hourly “McWage” is around $6 in the United States and other western nations, the same job in China, India and other developing countries pays less than 50 cents.

Opiates for the Matches

A working paper (2008) by Jasjeet S. Sekhon from the Department of Political Science at UC Berkeley: "Opiates for the Matches - Matching Methods for Causal Inference".

Abstract

In recent years there has been a burst of innovative work on methods for estimating causal effects using observational data. Much of this work has extended and brought a renewed focus on old approaches such as matching, which is the focus of this review. The new developments highlight an old tension in the social sciences between a focus on research design versus a focus on quantitative models. This realization along with the renewed interest in field experiments has marked the return of foundational questions as opposed to a fascination with the latest estimator. I use studies of get-out-the-vote interventions to exemplify this development. Without an experiment, natural experiment, a discontinuity, or some other strong design, no amount of econometric or statistical modeling can make the move from correlation to causation persuasive.

religion and attitudes to nanotechnology

the development and use of nanotechnology is likely to be central to one of the most interesting debates of our time. the bbc report below on a paper from nature nanotechnology examining the role of religion and culture in determining attitudes to nanotech

link here

Nationmaster.com

Nationmaster.com is "a massive central data source and a handy way to graphically compare nations. NationMaster is a vast compilation of data from such sources as the CIA World Factbook, UN, and OECD... you can generate maps and graphs on all kinds of statistics." Apparently its used by the New York Times and the BBC.

Here is a graph I generated showing the percentage of the adult population (aged 25-64) educated up to tertiary level across multiple countries (at the year 2000). Ireland is ranked third (according to the OECD source), with 36% of the 25-64 age group having tertiary education. The figures are at a little old in places, but it seems a useful resource.

Australian Economic Review - Behavioural Economics

The Australian Economic Review has a number of nice features including a student's section.

A recent issue includes a review of behavioural economics "for the student"

http://www3.interscience.wiley.com/journal/119881675/issue

thanks to Colm for pointing this out

Economics and Psychology Course: UCD and TCD

Below is a link to the course I will be giving in UCD and TCD next years. This website is evolving rapidly and I am currently in the process of linking to readings, updating lectures and so. Anyone who is interested or wants to comment on some of this, please feel free to get in contact

http://geary.ucd.ie/econpsych/

Do Blogs Have Personalities?

According to http://www.typealyzer.com/ they do. Apparently this blog is of the type - ISTJ (The Duty Fulfillers): "The responsible and hardworking type. They are especially attuned to the details of life and are careful about getting the facts right. Conservative by nature they are often reluctant to take any risks whatsoever. The Duty Fulfillers are happy to be let alone and to be able to work int heir own pace. They know what they have to do and how to do it."

The diagram below shows what parts of the brain are dominant during writing on this blog, according to Typealyzer. However, I take all of this with some caution. According to a similar engine (GenderAnalyzer), it is 63% likely that this blog is written by women. That is incorrect. However, some trials with other blogs predict gender correctly.

Do Younger Students Do Better?

In a recent IZA working paper, Billari and Pellizzari show that the youngest students in an Italian university perform better compared to their oldest peers, particularly in the most technical subjects. They also find that the youngest students perform slightly better in cognitive tests and also appear to have less active social lives: they are less likely to do sports, go to discos and have romantic relationships. Based on this, Billari and Pellizzari suggest:

(i) a profile of cognitive development that might be decreasing already around age 20; (ii) psychological relative age effects that lead the youngest in a cohort to develop social skills (self-esteem, leadership) at a slower pace

Their conclusion is that younger students have less active social lives and devote more time to studying (which they say is backed up by additional evidence from the PISA study).

Where Would You Live in London?

Would it depend on the price? Or the distance to work? Or both? You would probably find these travel-time maps very useful. They were developed by Chris Lightfoot at MySociety.Org after the UK Department of Transport approached MySociety about experimenting with novel ways of re-using public sector data. One particular set of intearctive maps allows users to set both the maximum time they’re willing to commute, and the median house price they’re willing or able to pay. Slide the sliders on the last link to see constrained minimisation at work --- with the BBC Television Centre and Olympic Stadium as the focal points.

On the main page, the same can be done with the Department of Transport close to the centre of London. Try setting a maximum travel time here of one hour, and a maximum price of £500,000. You'll see that Chelsea/Kensington is blacked out, as is Hampstead Heath. (House prices are based on house sales recorded in the Land Registry for a large random sample of London postcodes, inflation adjusted to be the price as at December 2006. Journey times to work are for a week day in 2007. They were generated by screen scraping the Transport for London and Transport Direct journey planner websites.)

MySociety makes open source software, so you can get the source code for the scripts that made these maps, and MySociety will provide copies of the OpenStreetMap base mapping. (Other data requires permission from the owners). MySociety is a non-profit with a community of volunteers and (paid) open source coders. It runs most of the best-known democracy and transparency websites in the UK. One of its initiatives that blog readers may find interesting is PledgeBank. This allows people to set up a campaign or a committed behaviour where they say "I’ll do something, but only IF other people will too."

Heckman on Irish Education Policy

James Heckman speaking on Irish radio on Irish education and theories of child development

here