The solipsistic economist

Products I've seen that don't exist

Wed, 17 Oct 2007 12:06:41 GMT

Yesterday, I discovered the most bizarre security product I've ever come across. It can't exist.

As a result of the usual lousy maintenance on my car, a loose battery connection caused me to lose power for one second. Result? My radio now is locked and unusable until I haul my lazy ass down to the dealership. The radio has a technology called "theftlock" in it. The owner of a car can put in a security code so that, if the radio is ever ripped out of the car (or, more benignly, if the radio is ever disconnected from the power source), it won't work until the code is re-entered. Problem comes of course when the owner forgets the code or when the bozo selling the car doesn't pass it on (yes I'm talking about you, John Hammond).

The idea, I suppose, is like this. If enough people install a code, potential thieves know that a stolen radio will likely not work. As a result, he will move on to other things, like home burglaries (I've been burgled twice in the last year so, thieves please note, there's no frigging jewelry or small electronics left!). But to an economist, this makes no sense. If everyone else installs a code, then I am better off avoiding the inconvenience of doing so. The thief doesn't know that I haven't and will still move on. But everyone should think like this, so no one installs the code; the thief knows this and takes all the radios. If no one else installs a code, then there is no point me doing so either. Hence, the only equilibrium is with no one installing the code. Knowing this, the only equilibrium is for the manufacturer not to invent the product.

Of course, everything would be different if there were some way for the owner to indicate that he (yes you, John Hammond) had set a code.

Oh, so that what that flashing red light means! I've been wondering about that for years. Isn't it great how economics helps you understand things without ever reading the technical manual?

We shoot at 'em so often we no longer keep track.

Wed, 10 May 2006 15:28:51 GMT

Heading out fishing offshore last Friday afternoon, an interesting alert from the US Coast Guard came over the VHF: "Vessel in distress has reported being fired upon. Vessel reports that its engines are damaged.. . . [pause] . . . The vessel's name is Haitian Pride an- [click to silence]."

Only a few months after the Coast Guard installed new machine guns on its boats, six months after enacting a policy of shooting out engines on boats assumed to be smuggling people or drugs, and after years of being cruelly aggressive toward Haitians, you might think that the radio operator should have been able to guess who was doing the shooting. I guess standards are slipping everywhere.

Must be MLK Day soon.

Wed, 11 Jan 2006 21:57:10 GMT

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Readers of this website may recall a claim I made almost a year ago that the Faculty Club serves fried chicken and collard greens each year in commemoration of Martin Luther King. For those of you concerned that our country is losing its values and traditions, I am pleased to report that today a special lunch was served, and it was . . . . Oh, well, I guess you know what was served.

Please don't confirm Ben Bernanke!

Wed, 16 Nov 2005 13:03:51 GMT

The Senate Finance Committee sees no problem with appointing Ben Bernanke as the next chair of the Federal Reserve. Apparently, neither do the markets. Well I do. Bernanke is way too smart to be chair of the Fed. Take a look at his CV. Wouldn't the nation be better off if Bernanke continued to devote this considerable brain power to economic research?

The job of the Board members of the Federal Reserve -- at least that part of the job that markets care about -- is rather easy. Once a month or so, on a Monday evening, have a quick scan of the latest available information, provided by staff members. The key information is summarized in a report called the Blue Book, which explains the estimated effects on the economy of different policy scenarios (e.g. if you raise interest rates a point, unemployment will go up by .5 percent and inflation will drop by 1 percent). Choose which scenario you like most, and the next morning there will be a meeting in which you can vote for it. By 10:15 at the latest, the meeting is done. Set a date to do it again the following month.

If this sounds like a lot of work, there is fortunately a short cut. Twenty-five years ago, Stanford economist John Taylor wrote down a recipe since known as Taylor's rule. The rule serves both as a prescription for what a central bank should do (more or less), and a description of what many central banks have been doing (more or less). The core of the rule goes as follows:

1. For each percentage point than unemployment exceeds what you would like it to be, lower the interest rate by x percent (and if unemployment is lower than you'd like it to be, raise the interest rate by x percent).

2. For each percentage point that inflation exceeds what you would like it to be, raise the interest rate by y percent (and if it is lower than you'd like it to be, lower the interest rate by y percent.

Using this formula, of course, you don't even need to read the Blue Book.

I propose the Senate Finance Committee puts out a call for applications for the job. The application should (i) state what the applicant believes the target unemployment and inflation rates should be, and what x and y should be; (ii) explain what the applicant will do with the rest of his or her free time to guarantee there will be no unwarranted meddling in the markets.

Here is my application:

Target unemployment: 5%.

Target inflation: 2%

Value of x: 1%

Value of y: 1.5%

What I will do to keep my meddling paws out of where it doesn't belong: Fishing in the Florida Keys.

If this meets with the Senate's approval, I can be reached by phone or email. Please be sure to mail the first month's paycheck -- my truck is playing up again. But in any case, help our country: give Ben Bernanke a difficult job.

Robert J. Aumann - Economist with deep ties to FIU wins Nobel.

Mon, 10 Oct 2005 17:08:25 GMT

Robert Aumann, game theorist, was awarded the Nobel Memorial Prize in Economics today. Before the University of Chicago claims him as one of their own, I want to draw attention to Professor Aumann's deep ties to FIU, and to the economics department in particular.

In 1965 Aumann was a visiting professor at Yale, exactly 25 years before Costas Syropoulos, who used to work here at FIU, graduated from the very same institution.

Our very own game theorist, Jesse Bull, has read almost everything Aumann has written, except for the papers that weren't on the required reading list.

Aumann has also held jobs at Berkeley, Stanford, Tel Aviv, Minnesota, and Northwestern. By an amazing coincidence, these are all places where not one of our department has ever worked.

Since 1996, Aumann has been a Fellow of the Econometric Society. I was for a few years a member of the very same society, although I lapsed in my subscription.

Aumann worked for Bell Telephone Laboratories in 1956, and this is the very same company that provides my phone service.

Clearly, not only can the University of Chicago claim him as one of their own; he is one of ours too!

We already know how to do that!

Wed, 07 Sep 2005 15:01:12 GMT

My colleague Alan Gummerson brought the following gem to my attention today:

Florida International University
Division of Human Resources
Due to a lack of enrollment, the "Facilitating Conflict Between Others" learning program scheduled for September 8 in GL 220 has been cancelled. We apologize for the inconvenience.

A modest proposal

Tue, 06 Sep 2005 12:55:22 GMT

So I hear that President Bush has tapped former presidents Bush and Clinton to fundraise for the victims of Katrina. It strikes me that a more ethical approach would be to use tax dollars for the victims of Katrina and ask Presidents Bush and Clinton to fundraise for the war in Iraq.

I bought a nice pair of shoes this weekend. I'll never buy them again.

Mon, 25 Jul 2005 13:39:48 GMT

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I bought myself a nice pair of shoes this weekend. I was looking for a pair that would (a) complement my new Miami Vice jacket and (b) wouldn't hurt my bunions. But I hit pay dirt. Here's what I got:

Sperry Top-Sider invented the boat shoe in 1935 with the goal of letting you make the oceans, lakes and rivers your own personal frontier. Our Nautical Collection will let you own the water. Sperry Top-Sider is best known for boat shoes that have logged more miles of open ocean than any other. The shoes have out-raced, out-cruised, out-fished any and all competitors, again and again, from 1935 to this moment. Now, after almost 70 years of quality and craftsmanship, STS celebrates the new generation that's discovering that classics are helping to kick off the Sperry Top-Sider brand of tomorrow. It's a global brand that lives and breathes adventure at sea, and excitement on every other body of water. Our brand talks to sailors, kayakers, windsurfers, power boaters, and fisherman -- to everyone who loves the water. If you can't live without water, Sperry Top-Sider. Get Wet.

So I did. Turns out that the shoes fill with water and do a damn good job of holding it in all day. I haven't yet been able to test whether wet feet will help my fishing, maybe even let me win a competition. But I'm optimistic.

My STS's got me thinking. My immediate thought, of course, was to wonder why anyone would sell a pair of shoes on the basis that they're good for doing things that involve, essentially, sitting on one's arse all day.

But seeing as I was indeed sitting on my arse (although, technically, I wasn't owning the water at the time), I continued thinking. STS's are what we call an experience good. I can't really tell how good they are until I buy them. Once I buy them, if they turn out to be good enough I'll make repeat purchases in the future. The firm's challenge is to get me to make that first purchase. It does so by sending me signals -- in this case, purple prose that would have made Ernest Hemingway (who, chances are, owned a few pairs of STS's himself) reach for the bottle -- to convince me that the product meets my standards.

An unfortunate byproduct of advertising is that each firm is setting me up for a winner's curse. I buy products with only limited information about their quality. The upshot is that I am likely to buy goods for which I have received the most misleading, overoptimistic, signals. A lot of these goods will not only turn out to be worse than I had hoped; they will also turn out to be of a quality that does not even meet my minimum standard.

The usual solution to the winner's curse problem is to raise my standards. In the future, not only will I demand that any shoes I buy let me own the ocean and cushion my bunions. They have to cure my hemorrhoids as well. Or as Tom Waits once put it:

That's right, it filets, it chops,

it dices, slices, never stops,

lasts a lifetime, mows your lawn,

and it mows your lawn.

And it picks up the kids from school.

It gets rid of unwanted facial hair,

it gets rid of embarrassing age spots.

It delivers a pizza,

and it lengthens, and it strengthens.

And it finds that slipper that's been at large

under the chaise longue for several weeks.

And it plays a mean Rhythm Master.

It makes excuses for unwanted lipstick on your collar,

and it's only a dollar. Step right up.

Raising my standards induces firms to raise their claims. Which makes me skeptical and causes my to raise my standard yet again. This is an arms race.

But firms may be doing things wrong. Firms that disappoint me too much may end up pissing me off. Even if my STS's are comfortable (which they are), I might not buy them again because I will remember, above all else, just how disappointed I was the first time I went fishing in them. Emotions such as disappointment undermine my rationality. (There is an fascinating new literature on emotions and decision-making, much of it pioneered by Carnegie Mellon economistGeorge Loewenstein -- see this article from the New York Times Magazine).

Firms selling to emotional people like me have to balance two very different concerns. On the one hand, they need to make outlandish promises to induce me to buy things the first time round. On the other, they need to make modest claims to avoid disappointing me, thereby inducing me to buy things more than once. Now there's a challenge for the advertisers.

Love Disappoints. In David Henry Hwang’s play, The Golden Child, a character comments that “the fact that something is new means only that it hasn’t had time to disappoint us.” This insight explains why most of your relationships will turn out to be a less than you hoped for. Imagine you are single and looking for a partner. You meet people from time to time, and you get some rough indication of their quality as a potential partner. When one meets your no doubt very exacting standard, you start dating. But then, over time, you discover their true quality. The winner’s curse tells us that the person you are most likely to start dating is the person you whose quality you had initially most overestimated. It is likely therefore, that whoever you date is the person who will disappoint you most. But when you dump him or her, you shouldn’t be angry. After all, you almost certainly proved to be a disappointment as well.

Faced with the winner's curse, you should raise your standards. Only date people who seems to be near-perfect. But this strategy backfires if, like me, disappointment makes you unhappy. Then what you need to do is date only the least attractive. If the relationship turns out to be lousy, you can always claim you did it for a dare. If it turns out to be good, the surprise will double your happiness. This was a strategy I followed assiduously as a teenager in the United Kingdom. I'm not sure it worked, but I sure did get a lot more dates.

I'm an idiot, but I'm an above-average idiot

Fri, 29 Apr 2005 12:39:05 GMT

I just gave my students a hard exam. I have always believed that students should be indifferent between hard and easy exams. After all, no matter what a professor says (and "the curve" is the biggest fraud out there), grades ultimately depend on a student's relative standing in the class. So what does it matter if the average score is 80% and you're in the 60th percentile, or the average is 40% and you're in the 60th percentile? One might even argue that hard exams are better: you leave more questions unanswered and at least everyone gets to leave without writer's cramp.

Turns out I'm an idiot. In a new paper* Luis Santos-Pinto and Joel Sobel have developed a neat explanation for why rational students prefer easy tests. Imagine you need two skills to perform well in one of my exams. For the sake of generality, let us call these skills mathematical wanking (W) and pointless regurgitation (R). A student can spend time studying to improve her ability in each skill, but she has limited time. So what should she concentrate on? The answer is obvious. If she thinks increasing her ability in W is more effective in raising her grade than effort spent mastering R, she will concentrate on W.

Not every student makes the same choice. Some students think W is most important, while others think R is most important. So some students come to the exam well prepared at W, others well prepared at R. Students skilled in W will look down on those skilled in R, because they believe W is the most important skill. Similarly, students skilled in R will look down on their colleagues skilled in W.

So why the preference for easy tests? One way to capture the idea that a test is easy to imagine that for easy exams a student can increase her effective ability more with any given effort. So, when tests are easy, a W student will perceive a bigger gap between her own near-genius skills in W and the skills of R students, and vice versa. Imagining they are that much better than the others, every student believes he or she will do relatively better, and so get a higher grade.

Santos-Pinto and Sobel can cite plenty of evidence for their theory. In experiments, people ranked their ability relative to others much higher for easy tasks (e.g. manipulating a computer mouse) than for difficult tasks(e.g. juggling). People are also more likely to choose a payment based on their relative performance in a test instead of a toss of a coin when the test is easy.

Evidence tells us that students prefer easy tests, and now theory tells us why. So, should I make my exams easier? Of course not. Giving hard exams is an important characteristic of above-average professors. That's why I give them.

____________________________
* Santos-Pinto, Luis, and Joel Sobel (2005): "A Model of Positive Self-Image in Subjective Assessments." American Economic Review, 95(5):1386-1402.

The shape of things to come?

Thu, 14 Apr 2005 12:46:58 GMT

I had a surprise today

I had a surprise today. Apparently, as part of an ongoing accreditation process, every semester we test a random sample of our students' knowledge of economic principles with a short multiple choice test. Not nice to discover that there is a standardized list of things that our students are expected to learn in the fourteenth week of the semester. Also not nice to discover what is on that list.

Several questions in the test demand an understanding of U-shaped cost curves, and this puts my students at something of a disadvantage: they've never seen them. The standard way we teach competitive supply imagines a world in which all firms are identical and eventually face diseconomies of scale. The explanation for diseconomies of scale is always vague -- some handwaving about coordination problems in large firms -- and takes up no more than a couple of sentences. That something so central to the whole analysis of competitive markets is explained so briefly and unconvincingly suggests something is wrong. What is wrong is that the notion is more fiction than reality. Empirical evidence, at least as far back as 1963, shows that in most cases unit costs are constant or declining even at the highest levels of output [Walters, A. A., "Production and cost functions; an econometric survey", Econometrica, 3(1):1-66. Moreover, U-shaped long-run average costs curves introduce some logical inconsistencies in what we teach. For example, it is typical to point out that monopolies produce less than their competitive equilibrium counterpart, as though the marginal cost of the millionth unit of output for a single firm were equal to the marginal cost of the 1000th unit of output for one thousand identical small firms. There is another way to approach the determination of supply under competition -- based on the combination of heterogeneous firm capabilities and binding capacity constraints -- that I have tried to develop in my course.

But I'm not really losing sleep over the shape of cost curves to come. I am more concerned about the principle that as teachers we need to ensure our students learn a fixed set of ideas. I object because lists developed by committee always end up reflecting tradition -- conservative tradition -- and traditional syllabi in economics principles classes have been under attack from faculty and students (registration required) alike. Innovation in the classroom, one would therefore suppose, is to be encouraged, even if at times it fails. My friend and former colleague John Miller has pioneered the use of experiments in teaching principles. Doing so comes at a cost -- of not covering some material that gets covered when you race through a textbook -- but John has been very successful in getting students excited about economics. I can't imagine that John wouldn't have felt stifled by a committee's contents list. I am neither as adventurous as John, nor as good in the classroom. But I have spent 10 years thinking about why too many of our principles students appear so disengaged, and I am trying to do my own small part to address the problem.

I only see things getting worse. Last year the Florida Board of Governors devised an "Academic Learning Compact." Best as I can tell, its implementation will involve a statewide committee that decides on a common denominator of material we must teach and have our students tested on. If that is not stifling enough, the compacts will be reviewed by Florida's Department of Education Staff for whether they meet expectations. I'll be interested to see how many staff members at the Department of Education have a developed opinion on the validity of u-shaped cost curves.

A Not so Warm Welcome to New Graduate Students

Fri, 04 Mar 2005 21:21:38 GMT

Every year we hold an orientation session for incoming graduate students. Last year, I gave a welcoming address. As I probably won't be invited again, I thought I would post what I had to say here.

I am not here to welcome you because I have mixed feelings about you. You are here because we hope that some of you will serve our purposes. As faculty we do research and we teach undergraduates. That is our mission. But we want you here because you can make our lives more interesting. The university wants you here because they want to keep faculty who want you here. The university wants you to graduate on time so they can maintain their PhD production level and thereby maintain Carnegie I research status. We want you to graduate on time because we will get sick of seeing you if you stick around too long. And we all want this to happen without providing enough resources to make it easy.

This is the background that explains why we pay most of you to be here, and why most of you do not pay tuition. It is a point worth remembering, especially for international students. In 1990 the United States started paying for my education and living expenses, without any demands that I subsequently repay them. To them I was a total stranger – I had never even visited the States on vacation. My parents have never paid a penny in taxes in the United States. Later, when I decided to stay in the United States after graduation, I was welcomed. If you work hard enough to develop skills in short supply, and you choose to stay here, you will be welcomed too. All this changed my life, and I remain very grateful.

Perhaps we do not have pleasantly altruistic reasons for you to be here. That does not matter. Because of our selfishness as a faculty, you get a free education that opens the door to one of the best jobs in the world. Whether you get to walk through that door largely depends on you.

I want to talk, briefly, about your time here under four rubrics. First, I want to talk about each of you as individuals. Second, I want to talk about your relationship with other students. Third, I will have a few words to say about your relationship with faculty. These are not entirely independent topics, of course. Finally, I will say something about your life after FIU. If time permitted, there would be much more to say than I will touch on in these few words. But that’s the first lesson – I don’t have enough time for you.

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