Links for 28th March, 2019

  1. “While nightlife and entertainment are certainly drivers of the night-time economy, they need not be the only ones. According to a report released by the London mayor’s office, 1.6 million people in London—constituting more than a third of the workforce—worked at night in 2017. Of these, 191,000 worked in health and 178,000 in professional services, with nightlife coming in third at 168,000. These were closely followed by transport, automotive, IT and education.In other words, the city’s nighttime economy is not merely bars and restaurants, but an extension of its day-time economic activities as well. It is estimated that the night component comprises 6-8% of the city’s economy and contributes £18-23 billion in gross value added to the British economy. The figures are approximations but significant enough for Mayor Sadiq Khan to champion the night-time economy and appoint a “Night Czar” to manage it.”
    In which Nitin Pai makes the argument for having more shops, establishments and services operate at night as well, in India. A useful read for students of urbanization, microeconomics and life in India.
  2. “I think that our economic system reflects our understanding of humankind, and that understanding has been developing, with especial rapidity lately. You have to understand people first before you can understand how to devise an economic system for them. And I think our understanding of people has been accelerating over the last century, or even half-century.”
    Robert Shiller chooses five books to help us understand capitalism better. I haven’t read all of them, and read one a very long time ago (Theory of Moral Sentiments) – but this has tempted me to go and read at least A.O. Hirschman’s book, if not all of them!
  3. “The problem with cricket in most cricket-playing countries, certainly in India, is that the cricket market is what economists call a monopsony. A monopsony is a market in which there is only one buyer for a particular class of goods and services. Until now, a young Indian cricketer who wanted to play at the highest level could only sell his services to the BCCI. If it treated him badly and did not give him his due rewards, he had no other options open to him.”
    I am happy to admit that I got the IPL gloriously wrong – I approached the IPL while wearing my cricketing purist hat, but I really should have approached it wearing my economist’s hat. Which is exactly what Amit Varma did, ten years ago. Monopsony, the power of markets, incentive mechanisms, it’s all here.
  4. “The 737 assembly line in Renton, Wash. is a marvel of lean manufacturing. The line inches forward little-by-little as assembly proceeds. Born from Toyota’s production methods, the process is one of continual improvement. It’s what made the 737 the lifeblood of Boeing in the first place and why this crisis, taken to its most extreme, could threaten the company’s very existence. But the assembly line also comes with a tool called an Andon cord. The cord empowers all employees to pull it and stop the line if something is amiss or requires investigation and needs fixing. The rest of the world has already pulled it.”
    A mostly understandable explanation of the possible reasons behind the crash – but when I say possible reasons, I do not mean the technical ones. Why compromises had to be made, and the impact of those compromises.
  5. “I’m happy for the descriptive part of economics to stay as it is. The prescriptive part, when we tell people what to do – that one should be much more broad. In fact, we should stop using just economics and take all kinds of ideas from psychology, sociology, anthropology, philosophy and economics, and test which ones work, which ones don’t work and under what conditions. There is no question that behaviour is the ultimate goal – to try to understand behaviour, and how to change or modify it. I hope we can create a discipline that is much more empirically based and data driven. Maybe we can call it “applied social sciences”. It will draw from all the social sciences equivalently as we approach problems in the real world, and try to find solutions for them.”
    Dan Ariely on five books that he’d recommend when it comes to understanding behavioral economics better. If you are interested in this topic, as I am, the interview is great reading – and the books too! I have not read Mindless Eating, and will begin it soon.
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Links for 6th March, 2019

  1. “A new transatlantic alliance will require both a U.S. president who recognizes its value and Europeans who are able to overcome their own internal divisions and commit to an equal partnership. The next alliance cannot be only about channeling U.S. contributions to European security; it must also be a global partnership to which each side contributes in order to protect their mutual security and economic interests. That sort of alliance remains possible. It is worth fighting for.”
    Not for the optimistic note that it strikes at the end of the article, but rather for the good summary of the history of the alliance between America and Europe, and how it hasn’t always been rocky – but never before as at risk as it is today.
  2. “I long held the belief that my grandfather felt regret at Pakistan’s creation because of the bloody years of the War on Terror, but now I know that he saw far worse. I wonder whether the regret came to him early, or if it was the last straw, his final impression of the history of a country he was able to witness from birth until his own death. ”
    Via The Browser, an article from a Pakistani about Pakistan – ranging from his grandfather and the start of that country, to the sad mess that is has become since.
  3. “In other words, what matters is not “technological innovation”; what matters is value chains and the point of integration on which a company’s sustainable differentiation is built; stray too far and even the most fearsome companies become also-rans.”
    I am teaching a part of the course on Industrial Organization at Gokhale Institute, and every so often, I feel like outsourcing it to Stratechery. This article is one reason why – it helps you not just understand what value chains are, but provides multiple examples of how to think about them, and through them. As almost always with Stratechery, a great read.
  4. “I think that a lot of people, on some level what they think they’re doing when they sponsor young co-workers is spotting talent—they called it “talent-mapping” in the accounting firm we studied. But a lot of people we talked to were also able to reflect and say, “Part of why I was excited about that person, probably, is because they reminded me of a younger version of myself.” The word we use in sociology is homophily—people like people who are like themselves.”
    File this under a variety of things: hiring practices, labor productivity, people compatibility – but more than anything, I’d file it under behavioral economics, and the word homophily.
  5. “It’s more important than ever to manage your passwords online, and also harder to keep up with them. That’s a bad combination. So the FIDO Alliance—a consortium that develops open source authentication standards—has pushed to expand its secure login protocols to make seamless logins a reality. Now Android’s on board, which means 1 billion devices can say goodbye to passwords in more digital services than seen before”
    It didn’t take long to go from unlocking your phone with your fingerprint to unlocking everything online with a fingerprint. How long before the next innovation in security and identity comes along, and will it mean that the phone will become irrelevant? A question worth pondering.

Links for 5th March, 2019

  1. “Using a neural network trained on widely available weather forecasts and historical turbine data, we configured the DeepMind system to predict wind power output 36 hours ahead of actual generation. Based on these predictions, our model recommends how to make optimal hourly delivery commitments to the power grid a full day in advance. This is important, because energy sources that can be scheduled (i.e. can deliver a set amount of electricity at a set time) are often more valuable to the grid.”
    The big problem with renewable energy is its utter unpredictability – which is why we will always struggle to move to a world that uses renewable energy as a primary source. Unless, of course, we figure out how to make great batteries. But in the meantime, anything that helps us predict the pattern of availability of wind and solar power is great news.
  2. “Still, people do break Google’s protection. CAPTCHAs are an ongoing arms race that neither side will ever win. The AI technology which makes Google’s approach so hard to fool is the same technology that is adapted to fool it.Just wait until that AI is convincing enough to fool you.
    Sweet dreams, human.”
    Ever clicked on the “I’m a human” button and wondered why it seemed like such a stupid idea. Well, uh, not stupid. Not stupid at all.
  3. “This further tells us that people are buying and selling homes. It’s just that the builders are not a part of this transaction.”
    This is a very short excerpt, but especially for Indians, this article is well worth reading (and Vivek Kaul is well worth following!). Home loans are going up every year, but unsold inventory is also going up every year? What gives?
  4. “All of economics is meant to be about people’s behavior. So, what is behavioral economics, and how does it differ from the rest of economics?”
    An essay about behavioral economics and its many applications, written by two people who are more familiar with the field than almost anybody else. There isn’t much here for people who are already familiar with the field – but if you are new to behavioral economics, this is an excellent introduction.
  5. “Two landmark events helped pushed along the proliferation of Sichuan cuisine in New York. In 2005, the peppercorn ban was lifted, though imported peppercorns still had to be heat treated and were thus less potent than they might have been. (This restriction was finally lifted in 2018.) ”
    I was in New York in 2007, and knew nothing of how to try new food, and it is a major source of regret. Especially when I read articles like these.

Links for 20th February, 2019

  1. “There is no amount of growth that can’t be destroyed by an investor’s temptation to grab too much of it. And there is no opportunity so appealing that it will catch the eye of someone who refuses to look.But greed and fear aren’t always character flaws. People with the best intentions and ethics fall for their temptation. The two traits evolve from something innocent: the amount of confidence we have that our actions influence our outcomes.”
    I am currently teaching, at the Gokhale Institute, a course on Behavioral Finance. This blog post will be a part of the required reading when I teach the section on overconfidence (and it’s mirror image)
  2. “A Facebook press officer said, in a prepared statement: “This is one study of many on this topic, and it should be considered that way.” The statement quoted from the study itself, which noted that “Facebook produces large benefits for its users,” and that “any discussion of social media’s downsides should not obscure the fact that it fulfills deep and widespread needs.”
    What happens if you go cold turkey on Facebook? I haven’t read the paper itself, but this article from the NYT is a useful read – but not for the usual Facebook bashing reasons. There are benefits to using Facebook, for all of us. I myself no longer have the Facebook app on my phone, but freely admit to checking Facebook every now and then on the browser on my phone.
  3. “Mere hours into the first day of the Google block, my devices have tried to reach Google’s servers more often than the 15,000 times they tried to ping Facebook’s the entire week before. By the end of the week, my devices have tried to communicate with Google’s servers over 100,000 times, comparable to Amazon, at 293,000 times during its block. Most of Google’s pings seem to be in the form of trackers, ads, and resources built into websites. ”
    Speaking of which, what might life look like if you decided to go cold turkey on Google? Much worse, it turns out – your productivity takes a direct hit, as the article above makes clear.
  4. “We’ve made the case for the divergence among equipment manufacturers before: Ultimately robots and excavators aren’t dependent on the same business cycles. This is now playing out.”
    Partially because my own research during the PhD was on this topic, but also because it is a useful way to start thinking about which sectors in the economy tend to move together, and which don’t. More – does this relationship hold over time?
  5. “But the rental market is largely fragmented and unorganized. The build-to-rent model that has worked well globally in many countries hasn’t even scratched the surface here. It is a space ripe for disruption.And in the past 3-4 years, a slew of startups have begun to do just that, particularly targeting young adults and millennials (those in their 20s and early 30s) who need a place to stay when they move out of their parents’ nest or are moving to a new city.”
    This had to happen sooner or later in India – it was simply a function of the way the real estate market is, and has been in India for some time. Watch this space – I’d argue that future growth in India’s real estate sector will happen in this fashion.

Beh Econ Update, Day 2

Yesterday was all about fallacies: the gambler’s fallacy, the conjunctive and disjunctive fallacy, the base rate fallacy, the framing effect (which, if you think about it, is a kind of fallacy) and one of my favorite stories from behavioral economics: the organ donation case from Europe. We’ll get to each one in turn.

The word fallacy comes from the Latin word fallere, which means to be decieved – also making me wonder if the phrase “to fall for” is related to the same word. The story with the three “fallacies” that we’re talking about in this post is the same: our brain falls prey to some errors that are in retrospect irritatingly obvious.

The Gambler’s Fallacy

Have you ever felt you were on a lucky streak while playing a game of cards – felt as if you were invincible while rolling a pair of die? That’s the hot hand fallacy. On the other hand, have you ever felt tempted to continue playing a game because you have been losing for a while, and feel like your luck is due to turn for the better? That’s the reverse of the hot hand fallacy – but both are really (excuse the pun) two sides of the same coin: you think the next outcome is a function of the previous ones, whereas basic probability teaches you that they are independent events.

The Conjunctive (and Disjunctive) Fallacy

Say a person is introduced to me at a party, and I learn that this person has done her education in finance and investing, and is very enthusiastic about Picasso’s paintings. Which of the two options I describe below is likelier?

One, that she is in banking. Two, that she is in banking and has some Picasso prints hanging on her wall at home.

Most people (myself included) would be tempted to go with the second option. But again, basic probability teaches us that this is wrong, because we are talking about the intersection of two things (the probability that she is a banker AND the probability that she has Picasso prints hanging at home) – and two things happening at the same time is unlikelier than either of these things happening individually.

The disjunctive fallacy is the same idea in reverse. Meet my friend Rahul. Rahul is six and a half feet tall, is built like a bull, and can demolish multiple plates of food at the same sitting. He spends a couple of hours a day (at least!) at the gym. What is likelier:

  • Rahul is a wrestler
  • Rahul is a wrestler or a classical singer

The point is that once should always choose the second option because it includes the first in any case.

The Base Rate Fallacy

I’ll not get into the math in this case, but just give you the short description of the idea: false positives are going to be overwhelmingly likely if the base rate is very low, and the human brain has trouble understanding this idea.

Here’s what this means:

Of the millions of people who transit through airports the world over, a vanishingly small minority will actually be terrorists. If the algorithms used to detect them are even slightly inaccurate, they are likely to err on the side of over-identifying potential terrorists. We would therefore be wrong to assume that every person who is flagged as a potential terrorist actually is a terrorist.

(Note that it is way more complicated than this, but that’s the shortest version I could manage).

This post is already a fairly dense one in terms of ideas, so I’ll split this one into two, and cover the rest tomorrow: the framing effect, and the European organ donation saga.

Update from Day 1, Beh Econ

Teaching undergraduates is a whole lot of fun, because generally speaking, their curiosity hasn’t been completely killed just yet. And this seems to be true with the people who have chosen to attend the behavioral economics workshop as well – they’ve (hopefully voluntarily) chosen to spend their afternoons attending a workshop over the course of every workday this week. Catch ’em young!

We kickstarted things yesterday by speaking about ways and means to think about microeconomics in a rather conventional sense. I chose to not bore them to death by talking about utility functions and all of that, firstly because it is the worst way on the planet to get people thinking about economics, and secondly because they are all economics students to begin with – the indoctrination has been done by their colleges already.

I spoke instead about the Choices, Costs, Incentives and Horizons framework, which I have spoken about earlier on the blog. Within each of these concepts, however, I added a sprinkling of behavioral economics. What, for example, are your choices when confronted with a buffet spread?

And how long before you realize, if at all, that not eating it is also a choice? Sometimes, being presented with a choice to consume blinds us to the option of not doing so – which explains why checkout counters at supermarkets tend to have chewing gum on sale.

When it comes to costs, we spoke about opportunity costs and how it is often misunderstood – the people attending the workshop are paying me the fees of the program, plus they are paying fifteen hours of their time. Fifteen hours that they could have spent doing something else.

In addition, we spoke about sunk costs. My favorite example is of how I and my wife were finally able to go out for a movie together after the birth of our daughter – and we ended up watching Happy New Year. And yet, even though the movie was tripe of exceptional quality, we chose to sit through the whole thing. Neither of us enjoyed the movie, and by the end, every second was exquisite torture, but we went through the whole experience. This after I’ve been teaching the concept of the sunk cost fallacy for over a decade.

Incentives are both fairly well understood and applied in conventional economics – but how about negative incentives? Rather than reward yourself with a nice shirt if you lose weight, how about allowing a friend of yours to post a picture of you on Facebook where the paunch is especially noticeable? Which is likelier to be more effective?

Finally, horizons: exercise today evening, or finish an episode of your favorite series on Netflix? We tend to go for short term pleasure over long term gains – and that is to our detriment in the long run. But our brain, unfortunately, is not trained to think about long term consequences.

Finally, we spoke a little bit about signaling and it’s importance to us. That’s a topic deserving of a separate blog post entirely, but I will ask you guys a question I asked everybody in class:

Imagine you are able to attend the best college in the world, and are able to handpick the people who will teach you whatever courses you want. The ideal education, structured just the way you want it. The only problem is, you won’t get a degree at the end of it. Or, you could get, right here and now, a degree of your choice from whichever college you like – but you will not be able to attend a single class. Which of these options would you pick?

The question is based, of course, on a question that Bryan Caplan asks in his excellent book: The Case Against Education. Let me know your answer, I am genuinely interested.

Finally, we spoke about Kahneman’s “fast and slow” thinking. How and why it evolved the way it did, why it may have been of help in the fast, but isn’t much use in the world we live in today.

It was an exceptionally fun session, and hopefully it will continue in a similar vein for the rest of the week.

A five part series on behavioral economics

This week’s posts were going to be about podcasts that I listen to, but I’ll push that out to next week.

I and a colleague of mine at the Gokhale Institute (which is where I work) are running a five day seminar at the Institute on behavioral economics. This one is for undergraduate students only, but based on how this one turns out, we might do a couple more through the year. But for that reason, I figured we might take a look at behavioral economics is, and explore work being done in this area, and why it matters.

In this post, I’ll give you an overview of behavioral economics, and in the five subsequent posts that follow, I’ll detail what we spoke about in each session.

First things first: behavioral economics really is a tautology, because economics is the study of choice, and we make our choices given what we know and given what we feel.

The trouble is, modern economic theory (most, but not all of it) would tend to say that what we feel ought not to matter, and in fact doesn’t actually matter in the real world. Except we’ve all demolished a big fat bowl of ice-cream because we’re feeling blue, the diet be damned. We’ve all bought items on sale on Amazon, when we clearly had no need for them. And we’ve all chosen to play a game on the phone over completing a task at hand, and hang the consequences. I could go on (and not just where individuals are concerned, but firms and governments too!), but you get the picture.

We’re all predictably irrational.

In a sense, behavioral economics is about the first word in that link. As a social scientist, it’s not much use to say that we’re irrational. That’s akin to saying that there’s nothing that we can say, do or predict about the choices that all of us make.

But predictably  irrational? Ah, how exactly? If our irrationality can actually be modeled, then perhaps we could understand how and why we make the choices we do. Even better, maybe we could push people towards eating more salads and less ice-cream. Although you should note that there are some people in my tribe who don’t necessarily think this to be a good idea.

Still, the study of

a) whether we think “rationally” or not, and…

b) if not, then can we think systematically about how we are “irrational” and why…

c) and can we use our findings from this exercise to make people, institutions and therefore societies behave differently (and hopefully better)…

…is the study of behavioral economics.

And the five day version (duly expanded) of this is what Savita Kulkarni and I will be talking about at Gokhale Institute over the course of the next five days. And I’ll keep you guys updated as we go along.