Thursday, July 27, 2017

On behavioral economics

Good post: Tejvan Pettinger's Applying economics in everyday life. It is a collection of short notes on various topics. For example:
Behavioural economics and bias

Traditional economic theory assumes man is rational. However, the work of behavioural economics suggests we can be prone to bias and irrational behaviour. For example, we may be prone to a present bias where we overvalue pleasure in the short-term and ignore long-term implications. For example, consuming demerit goods like alcohol or not saving sufficiently for retirement. The insight of present bias suggests we make decisions our future self would not make. If we become aware of these bias and irrational behaviour, then we can make better decisions which improve our long-term welfare.

See: Behavioural economics

I followed that last link:
Behavioural economics

Behavioural economics examines the psychology behind economic decision making and economic activity. Behavioural economics examines the limitation of the assumption individuals are perfectly rational.

And that's probably a good thing. But I always say I don't like "behavioral" economics because it is about manipulating people's behavior. Doesn't sound like that, from what Pettinger says. Sounds like an attack on "rational expectations". But read a little more:
Concepts in behavioural economics

Bounded rationality – making decisions based on limited information and from a narrow range of heuristics (simple rules)
Choice architecture – The theory consumer choice is influenced by the ways goods are presented. For example, complementary goods placed together can help sales. Related to concept of nudge.

Ah, the nudge. That comes later in the "Concepts in behavioural economics" list:
Nudges – Factors which encourage consumers to change behaviour through small suggestions

There ya go: Behavior modification. Fuck that.

Wednesday, July 26, 2017

Thinking in the can

Brad DeLong: How to Think Like an Economist (If, That Is, You Wish to...)

It's an awkwardly constructed title. The "that is" should come first or last inside the parentheses. When you separate the "if" from the "you wish to", the power of those four syllables is weakened immeasurably.

Also, since parentheses set off minor ideas, the "..." doesn't belong in there. (Or if you do put it there, maybe you shouldn't close the parentheses...

An awkward title, but the first six words drew me to it. DeLong opens with a grand introduction:

I have long had a "thinking like an economist" lecture in the can. But I very rarely give it. It seems to me that it is important stuff—that people really should know it before they begin studying economics, because it would make studying economics much easier. But it also seems to me—usually—that it is pointless to give it at the start of a course to newBs: they just won't understand it. And it also seems to me—usually—that it is also pointless to give it to students at the end of their college years: they either understand it already, or it is too late.

By continuity that would seem to imply that there is an optimal point in the college curriculum to teach this stuff. But is that true?

JFC, he's setting up a Laffer Curve to describe the "optimal point in the college curriculum" to give his lecture-in-the-can.

Oh, and the last time I saw anybody use the word "newbie" they spelled it "newbie".

"Every new subject requires new patterns of thought," DeLong says. Not sure what he means. Creative spelling, maybe?

What is a "pattern of thought"? I look at patterns all the time in the lines on my graphs. One line goes up, or it goes down, or it doesn't; and the other line does something similar, or it doesn't. Those are patterns. But what the hell is a "pattern of thought"? Maybe it's like being in a rut?

After a semicolon, DeLong finishes his thought:

every intellectual discipline calls for new ways of thinking about the world.

Well, I'd hesitate to disagree with that. But I still don't know what he is talking about, apart from vague generalities.

After too much of this grand emptiness, DeLong gets around to describing economics:

While economics is not a natural science, it is a science—a social science. Its subject is not electrons or elements but human beings: people and how they behave...

I disagree. Economics is not about human beings. Economics is about monetary balances. Most economic quantities are measured as monetary balances. DeLong continues:

While economics is not a humanity, it is humanistic. Its subject matter is made up not of quarks or molecules or animals but of people. And to understand people you have to get inside their heads: understand their hopes, fears, desires, reasoning, plans, expectations, and actions. Thus one of the principal intellectual moves in economics is one that is totally absent from the natural sciences: it is for you to imagine yourself in the place of the people you are studying. Thus economics often turns into an exercise in introspective psychology.

I get very uncomfortable when someone starts talking about getting inside my head. I worry that they might want to understand my behavior so that they can change me, to get me to do something else instead: drink Mountain Dew instead of coffee. Or smoke Marlboro instead of Winston. Or get people to stop smoking. Or get people to think Donald Trump has a personality disorder, or doesn't have. Or, however you want to manipulate society, instead of just letting people be.

Whatever economics is, what it should be is the study of what's wrong with the economy, of when it went wrong, and of how we can fix it. It's not about people. It's about piles of money: monetary balances and, in particular, monetary imbalances.

Just one more thing.

DeLong talks about "The principal things to remember that flow because economics is a social and not a natural science". First on his list:

Because economics is a social science, debates within economics last a lot longer and are much less likely to end in a clear consensus than are debates in the natural sciences. The major reason is that different people have different views of what makes a free, a good, a just, or a well-ordered society. They look for an economy that harmonizes with their vision of what a society should be.

In other words, you've got a bunch of self-interested assholes with "different views" and they base their science on their views, when really they should base their views on their science.

Tuesday, July 25, 2017

There's no such thing as a free shipping

I hadn't done it in 30 years. Maybe I was over-confident. I "carefully" started the brass fitting into the plastic connection on my Miracle Grow garden sprayer, grabbed a wrench, and tightened it up. Then I looked at what I had in my hands.

The fitting turns a corner going into the sprayer. It was cross-threaded to death. I spent an hour trying to make it right. Then I went up to my local hardware store to buy a new one. They didn't have the Miracle Grow sprayer.

I settled on a Green Thumb sprayer. It was like 15 bucks.

That was yesterday, day before. I used it this morning for the first time. (No problems with the brass quick-connect this time.) I like the sprayer. I think I like it better than the Miracle Grow sprayer. Still too soon to say.

After I cleaned it and put it away I sat down to re-read the cleaning directions. But the directions I sat down with were in Spanish. Instead of getting up, I looked the thing up on the Internet. Found this:

Yup. That's the one. And I found this:

Yup. That's what I paid.

Then I wondered if it was cheaper at Amazon Prime. Found this:

Free shipping. But the sprayer costs $10 more at Amazon. And I can get it in only 2 days instead of 20 minutes.

My wife loves Amazon Prime. So do I. But not always.

Monday, July 24, 2017

Sleight of Amazon

Why can't I find something for $20 or $25 that I can use to sharpen my mower blades? Turns out, I can:

It looks like this:

Ordered it right away. While I was waiting for the two shipping days to come and go, I thought: Gee, that was quick. I didn't shop around at all.

Hey. The price was what I was looking for. And in my mind I can justify spending that much money for a tool I may or may not ever use.

But I did have two days. So I did my shopping around after the fact, and found the sharpener at Smith's. Different part number. Same part. Half the price.

Shipping is free at Amazon, but the sharpener costs twice as much.

Sunday, July 23, 2017

Averages, above-average averages, and below-average averages

Yesterday I said

When economists talk about "the Great Moderation" they refer to a time when growth was more consistent. Not necessarily high or low. Just not a lot of variability. However, if the reduction in variability occurs primarily because the "high points" of growth are lower than in the past, then the low volatility of the Great Moderation will primarily be the result of consistently low growth.

I was thinking something like this, from VOX:

the nature of the volatility reduction associated with the Great Moderation is linked to the features of expansion phases, in particular, to the absence of high growth recoveries.

But I made a graph, and now I don't know. I broke Real GDP per Capita into three periods on the graph:

1. Before the Great Moderation (1948-1984)
2. The Great Moderation (1985-2007)
3. After the Great Moderation (2010-2017)

Quarterly data. I left out the crisis years 2008-09 as not relevant to the topic of volatility reduction.

For each period I figured the average rate of growth. This allowed me to split the data into two groups for each period: values above the average, and values below the average. Then I got averages for those two groups. I put all three average values on a graph, for all three periods. The period averages are shown in blue. The averages of "above average" values are shown in red. And the averages of "below average" values are shown in green:

Graph #1: Economic Performance Before, During, and After the Great Moderation
The blue line shows the average growth of Real GDP per Capita. A little better before the Great Moderation than during it, and a lot worse after.

More noticeable, however, are the changes in the red (above average) and green (below average) period averages. The "good" performance during the Great Moderation definitely indicates "the absence of high growth recoveries". But the "bad" performance definitely indicates an absence of severe recessions as well.

The "bleedin obvious" I guess.

Nice conclusion, Art. And all you had to do was leave out the severe 2008-09 recession.

// The Excel file

Saturday, July 22, 2017

How does growth affect volatility?

Friday, July 21, 2017

How volatility is calculated

Wednesday, July 19, 2017

Low volatility, interrupted by periods of high volatility

Under the heading Possible end in Wikipedia's Great Moderation article, we read that some economists have said the Great Recession brought an end to the Great Moderation. Some, but not all. According to the article,

Todd Clark has presented an empirical analysis which claims that volatility, in general, has returned to the same level as before the Great Recession. He concluded that while severe, the 2007 recession will in future be viewed as a temporary period with a high level of volatility in a longer period where low volatility is the norm, and not as a definitive end to the Great Moderation.

I thought that was interesting. I looked up the link the article provides to a paper by Mr. Clark. In his opening, Todd Clark writes:

This article conducts a detailed statistical analysis of the putative rise in volatility and its sources to assess whether the Great Moderation is over. The article concludes that, over time, macroeconomic volatility will likely undergo occasional shifts between high and low levels, with low volatility the norm.

Writing in 2009, Clark said the Great Moderation will probably continue, interrupted by periods of high volatility.

Very interesting. Clark's view of the future is compatible with mine:

Tuesday, July 18, 2017

A Greater Moderation

While making my recent graphs of RGDP per Capita trends, I noticed that the trend line after 2007-2009 completely hides the data from the 2009-2016 period. First I was worried about creating confusion because the data points were not visible. Then I started thinking about "volatility".

I avoided the confusion (I hope!) by bringing the data line to the foreground and making it dotted. But I was left thinking about the volatility. So now I'm making the dotted line continuous again and putting it back behind the red lines where it is partly hidden by them.

I also made the black line thicker this time so you can see it behind the red:

Graph #1
You can see white space between the black and red in the early years. Not so much white between them since the 1970s. None since the mid-1980s. And then after the 2007-2009 gap in the red lines, the black would completely disappear behind the red if the black line wasn't thick. After 2007-2009, the volatility is gone!


Using quarterly data for RGDP per Capita, selecting subsets for effect, and looking at the standard deviation of the subsetted data, yes: Volatility has decreased more, since the crisis:

Graph #2
Not sure why people think moderation of economic growth is a good thing.