Monthly Archives: February 2008

The video clip is here, a prediction-market approach.

goldengate.jpg
Zubin Jelveh
points us to a pretty grim chart: the location of suicide jumps from the Golden Gate Bridge. If that isn’t cheerful enough for you, here is a piece from Slate on the economics of suicide:

Marcotte’s study found that after people attempt suicide and fail, their incomes increase by an average of 20.6 percent compared to peers who seriously contemplate suicide but never make an attempt. In fact, the more serious the attempt, the larger the boost—”hard-suicide” attempts, in which luck is the only reason the attempts fail, are associated with a 36.3 percent increase in income. (The presence of nonattempters as a control group suggests the suicide effort is the root cause of the boost.)

Why should suicide be an economic boon? Once you attempt suicide you suddenly have access to lots of resources—medical care, psychiatric attention, familial love and concern—that were previously expensive or unavailable. Doubters may ask why the depressed don’t seek out resources earlier. But studies have demonstrated that psychological and familial resources become “cheaper” after a suicide attempt: It is difficult to find free medical care when you are sad, but once you try to kill yourself, it’s forced on you.

I have to advise you not to try this at home.

I was in Singapore last week, promoting The Logic of Life. One feature of the book that some reviewers have picked up on is that the book contains a thoughtful, rigorous and (in my opinion) decorous few pages on the economics of oral sex. It was only as my interview schedule was nearly finished that the publicist said, “by the way, oral sex is illegal in Singapore“.

Hm. Fascinating. And it would have been nice to be told before commencing the tour of Singapore.

cover-custom.jpgWhile I’m in Australia, let me lament the fact that “Parentonomics” is currently scheduled to be published only in the Lucky Country. Here is author Joshua Gans’s blog; here are his thoughts on parenting; here is how to make a profit from a children’s party. I am meeting Professor Gans later this week and looking forward to it.

David Leonhardt asked around:

So when I recently set out to conduct my second annual survey of economists, I decided to try to uncover the next best thing. In its first incarnation, the survey simply asked for the names of the next generation of stars specializing in the economics of everyday life. This year, though, I went the other way — toward the big picture — and asked which economists were managing to do influential work on the crucial questions facing modern society.

Who, in other words, was using economics to make the world a better place?

I received dozens of diverse responses, but there was still a runaway winner. The small group of economists who work at the Jameel Poverty Action Lab at M.I.T., led by Esther Duflo and Abhijit Banerjee, were mentioned far more often than anyone else.

I agree – read more here and here.

Not sure where my weekend columns have disappeared to – they are supposed to appear on this blog. While we wait, here’s my review from yesterday’s FT of Dan Ariely’s excellent “Predictably Irrational”. But wait! Controversy is afoot. The Economist dislikes the book almost as much as I like it:

Mr Ariely’s weakness for soft-headed extrapolation from experimental findings are on full display at the ends of his chapters. For example, in his second chapter, a few clever experiments are deployed to show that it is possible that a trade may not produce a surplus of utility. Without any discussion whatsoever of the real-world frequency of such cases, Mr Ariely proceeds to question the general validity of the law of demand. And then we find this:

If we can’t rely on the market forces of supply and demand to set optimal market prices, and we can’t count on free-market mechanisms to help us maximize our utility, then we may need to look elsewhere… If you accept the premise that market forces and free markets will not always regulate markets for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if it limits free enterprise.

I find this flabbergasting. Every indication is given by Mr Ariely that these alleged irrationalities are general tendencies of the species. So they must afflict every voter, every politician, every bureaucrat, every power hungry general. How exactly is “a larger role” for the government supposed to improve on the coordinating function of the price mechanism? We are offered no details about the principles by which the allegedly superior mechanism is supposed to perform. I suppose we just hope, as Mr Ariely does, that “reasonable and thoughtful” people come to power. To my mind, this is just transparent political signaling (“Hey guys, I’m no right-winger!”), not social science.

This is fair criticism given unfair prominence. As I mention in my review, Ariely’s heroic policy conclusions are weak. But they are also a small part of the book. By the time I’d finished reading it, I’d mentally discarded them and simply remembered an excellent account of experimental science in action. No accounting for taste…

Dear Economist,
Occasionally, I buy and launch my own fireworks, generating cheerful positive externalities. Sadly, some amateur launchings end in tragedy – and there is frequent talk of a private firework ban. What is the economically efficient way of dealing with those negative externalities?
Jens Frolich Holte, Norway

Dear Jens,

If you’ve diagnosed the problem correctly, we can reach for a textbook solution. In a market with zero transaction costs, Coase theorem tells us that your neighbours could, in principle, pay you to hold firework displays, or not to, depending on their enjoyment of the spectacle or fear of injury.

More likely, we would need to approximate the Coasian solution with an externality tax on fireworks (to reflect the risks) or a subsidy (to reflect the benefits). But I am not sure you have correctly identified the positive and negative externalities here.

Unless you are shooting the fireworks down the street, most of the risk is surely borne by you and your friends, who’ve chosen to enjoy the display at close range.

There is no negative externality there: they’ve knowingly taken the risk.

On the positive externality side, I doubt that more distant neighbours enjoy the show as much as you think, not knowing when it is going to start. And they may be aggravated by the noise.

On balance, where are the externalities?

We should focus instead on encouraging more responsible use of fireworks. If your firework display hurts an innocent, you should be liable. An appropriate level of likely damages will encourage you to take exactly the right amount of care with your displays.

Questions to economist@ft.com

Here’s what I like about insurance: you pay the insurers money when you do not desperately need it, and then the insurers pay you money just when you need it most.

Curiously, this is not what other people seem to like about insurance. Most people do not try to arrange for insurance payments to arrive when they will need them most. Instead, they arrange for insurance payments to arrive after bad luck.

If your house has just burnt down, “when you need money most” amounts to the same thing as “after bad luck”. But what if your son has just been accepted by Eton, and his older sister by Harvard? That is when the money would be useful, but we are temperamentally more inclined to insure against the tragic death of a child. It goes against the grain to insure against “good news”.

The remainder of this column can be read here. Comments can be posted below.

Some good stuff out there today. Steve Levitt answers questions on a wide variety of subjects:

Q: An acquaintance of mine failed his entrance interview to Oxford University’s economics program because he was asked to talk about an economics book he’d read and enjoyed. He chose Freakonomics, and the interviewers at Oxford didn’t consider it to be a “genuine economics book.” What is your reaction to this?

A: First of all, to ask a student to talk about an economics book that he read and enjoyed is basically asking him to lie…

Good point. Although the story, which I’ve heard a few times before, is probably an urban myth. (Even if someone failed an Oxford interview after talking about Freakonomics, he certainly wouldn’t be told the reason.)

Meanwhile, Tyler Cowen offers his views on prostitution:

I am sufficiently Paretian that I don’t find the exchange aspect of the relationship, or the passing of money, objectionable per se.  (Assuming, of course, that neither age nor coercion is a concern, and often both are.)  But it is still better, on the buying side, not to do it.  Once you are aware of the kind of human stories behind the other side of the market, I would think it is hard to maintain an unflagging interest in the proceedings at hand.  Nor do I think it would improve what happens in your life next.  Yes the transaction does benefit the seller in many cases, but apply the Modigliani-Miller theorem and rebundle your action into a different blend of charity and erotic self-satisfaction, all toward The Greater Good.

That’s not jargon, for those who are wondering. It is a series of technical terms.

Well, Megan finally talked me into Skype. I have never seen the point: almost all my calls are from a mobile phone.

“It’s great for calling home from far-flung hotel rooms,” she said. Aha – now that IS a good idea. And, since I am writing this in Australia, timely advice as well.

Alas, one thing you cannot seem to do with Skype is buy credit from a hotel, because of the way most hotels access the internet. Consipracy, or cock-up? In this case, surely a cock-up. I hearby award Skype a Stupid Point and my glorious relationship with them as a paying customer will have to wait. Perhaps a very long time.

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
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