Notes on “Snap-Back and Gone-Forever Goods”

The actual title is a bit longer than that: “Snap-Back and Gone-Forever Goods: Understanding the COVID Recession’s Economic Winners and Losers“.

Tyler Cowen had shared this link on MR a couple of days ago, and I really liked this blog post for two reasons: one, a great framework that I can use in the coming semester for teaching Principles of Economics (more about the framework in a bit), and two, it speaks about higher education towards the end of the post.

Let’s get started:

  • “Due to the impending COVID pandemic, businesses, except for essential ones, simply had to shut down. People were essentially forced to stop buying things they actually wanted to buy.”
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    It almost sounds trite put this way, but us economists are so used to thinking in terms of whether it is a “demand-side” problem or a “supply-side” problem that it makes sense to remember this: this one is neither! Folks are (more than) willing to supply, and folks are (more than) willing to buy – in most cases. We’ve imposed on ourselves, as a society, restrictions that prohibit such exchanges from taking place.
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    There will be knock-on effects, some of which are already visible. And that will then take us into familiar territory (supply shock, demand shock etc). But a crisis due to a pandemic is fundamentally different!
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  • First is the distinction between purchases of what I’ll call “Snap-Back” goods and services and those that are “Gone Forever.” In the Snap-Back category are things that we couldn’t buy during the heaviest COVID lock-down period, but these purchases were simply delayed.
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    Simple frameworks are such lovely, beautiful things. I think all of us in India experienced “Snap-Back” goods – and to a lesser extent, services – with the winding down of the nationwide lockdown. The number of Amazon deliveries in my own household is proof enough for me. Of course, services such as the ones offered by The Urban Company, for example, is another story altogether – but still, the point remains. “Snap-Back” goods ought to be a thing, especially in 2020.
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  • ““Gone Forever” goods and services, in contrast, are just like the term suggests: gone forever. Like me, you may have foregone several haircuts during shelter-in-place because you didn’t want to get (or give) coronavirus to your barber.”
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    Anybody who knows me will know that haircuts isn’t the most appropriate example! But enough of splitting hairs, the point is well taken. There are certain goods and services (am I wrong in thinking that it will be mostly services) that will be “gone forever”.
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    That being said, the nomenclature chosen here is slightly unfortunate. One might get the impression that the good or service in question will not be provided at all, except that is of course not true. It is just the case that business for the barber in question was bad during the lockdown. Fingers crossed, business will return to normal once things get back to normalcy – whenever that may be. And of course, if things open up without a vaccine/cure, business will be lower than would otherwise have been the case. But it still will not be “Gone Forever”.
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  • “Economic booms and busts cause average incomes to rise and fall. As a result, businesses that sell a good or service that people purchase during good times and bad, like haircuts and toothpaste, are more insulated from recessions. Businesses that sell the Fountain Powerboat 32 Thunder Cat speedboat (see below, retail price $400,000), and other goods whose sales depend on people having a lot of money on their hands, fare poorly in a recession.”
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    Tyler Cowen himself had made the point some months ago that certain business will probably not outlast this recession, and mentioned how that may not, on balance, be all that bad a thing. I’m paraphrasing, see the exact quote here. Would the world be worse off if we produced less Fountain Powerboat 32 Thunder Cat speedboats in the years to come?
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    To be clear, I do not at all mean to suggest that Bruce Wydick will lament the potential passing of these speedboats. I am simply suggesting that some luxury goods not being produced may not be the worst thing ever (and yes, I am well aware of the macroeconomic implications).
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Sourced from: http://www.acrosstwoworlds.net/?p=1176
  • This, above, is the simple framework I was referring to at the start of today’s blog post. 2×2 matrices are far too prevalent in management schools, and not prevalent enough in economic textbooks, and this was therefore very welcome indeed. But not just because of that! It really does help clarify my thinking.
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    I need to note that Bruce Wydick has explained what income elasticity of demand is before showing this figure. I haven’t, but a simple Google search will help you learn what the income elasticity of demand is. Alternatively, click here to read about it, or watch this video.
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  • First things first: it is interesting that all of the upper left quadrant is services, and not goods. In fact, I’m hard pressed to think of a single good that would fall in this bracket. Maybe seasonal fruits that you won’t get again until the same season comes back next year (mangoes being a classic example in India, of course). Can you think of any other goods that are “gone forever”?
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  • And now onto higher education.
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    “Enrollments in higher education are typically thought of as a normal good, and estimates of income elasticity are typically slightly inelastic (slightly greater than 1.0), meaning that for each 1 percent increase (decrease) in income, enrollments increase (decrease) by about 1 percent.”
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    That’s from this link, which I got by reading the blogpost we’re taking notes for. Worth keeping in mind for what follows.
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  • “What this means is that the data show college-bound kids keep going to college even in recessions.”
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    That quote is in the context of the income elasticity of education. I have two points to raise in this context, though:
    • First, as Bruce Wydick himself explains earlier on in the blogpost, this year is an example of supply and demand being willing, but markets still not clearing. That is, this time is different. Under normal circumstances, sure – but enrollment may drop because of other factors than change in income.
    • Second, bundling! When you buy an education from a college, you’re buying the signal that you have learnt, you’re buying the learning itself and you’re buying the peer networks you develop because you attend college.
      The current pandemic means that you need depend on college for only the first of these three goods: learning itself, if it is to be online, can happen through multiple online providers, and peer networks in the physical sense is unlikely to happen at least through 2020.
    • Combine the inevitable drop in nationwide income with the fact that only one out of the three “goods” from a college being up for sale, and you reach the conclusion that enrollment will likely suffer this year.
  • The reduction will of course be different for different countries, and different once again for colleges within the same country. But at the margin, my model of the world tells me to expect either a lower number of applications, or a lower number of enrollments – or both.
  • But this article is worth a read and a bookmark for the framework alone!

In Memoriam: Oliver Williamson

Why does Gokhale Institute exist? Why did all of the students at Gokhale Institute not choose to try and fashion their own degree, by independently getting in touch with faculty members of various universities the world over, and negotiating rates for teaching each subject?

Similarly, why did I join Gokhale Institute as a faculty member? Why do I not try and advertise myself as a guy who can teach different subjects in econ, finance and stats to students the world over, every semester?

Why, as I said at the start of this post, does the firm I work in exist at all?

For that matter, why do firms exist in general? The “miracle” that is Walrasian economics guarantees that in a perfectly competitive economy with no frictions and perfect foresight, everything will be in a state of eternal bliss.

Except, economies are not perfectly competitive. Who teaches you which subject is important to you as students – which is another way of saying that labor is not homogeneous. There are frictions, such as teachers falling ill, or monsoons disrupting schedules, or uh, pandemics occurring every 100 years or so. And there isn’t perfect foresight (see pandemics, previous sentence).

And because we live in an imperfect world, we outsource, as students, the difficult job of finding appropriate professors, managing the physical infrastructure, and awarding degrees to an entity we call “the firm”. The firm exists in order to make it worth our while to get an education without having to spend time figuring everything else out.

Professors outsource the grunt work too the college too. It would be too painful for me to try and figure out which students across the world will want to learn Principles of Economics next year. I outsource the job of filtering the students out so that I get sixty students to teach to the Gokhale Institute. Plus, Gokhale Institute fixes the fees, arranges for the whiteboard, the benches. I just have to strut over into the classroom and teach.

We – you and I – minimize transaction costs by using the Institute as an intermediary. That’s Ronald Coase’s answer to why the firm exists. Read both of his papers (The Nature of the Firm, and The Theory of Social Cost). Here are past mentions of Prof. Coase on EFE.

Now, Prof. Coase had a student. His name was Oliver Williamson.

He extended Coase’s ideas about the firm, and that is why he really and truly matters when it comes to economics. There are many things to learn by reading Williamson, but three concepts stand out, in my opinion:

  1. Contract incompleteness: Imagine that the director of Gokhale Institute tells me that my performance as the course coordinator for the BSc programme hasn’t been good enough, and that he’ll be letting me go by the end of the year (I’m hoping this is only an example.) Will I muster up the same enthusiasm for coming up with new stuff this year, now that I know I am going to be out of a job? Or, on the other hand, imagine that the director says that my performance has been so good that I’m guaranteed this job for the next decade. Will there be a drop in my performance, now that I’m guaranteed the post no matter what? So how to write a contract that overcomes these hurdles? That’s one of the problems he tackled.
  2. Asset specificity: There are many definitions on the internet, but I liked the one supplied by Alex Tabarrok on Marginal Revolution the best. I’ll get to it in a while, but here’s the textbook-ish statement first: “Asset specificity is a term related to the inter-party relationships of a transaction. It is usually defined as the extent to which the investments made to support a particular transaction have a higher value to that transaction than they would have if they were redeployed for any other purpose.”
    And here’s Alex Tabarrok’s explanation:
    “Marriage, for example, takes away some possibilities but it adds others. With marriage, for example, comes a greater willingness to invest in children (n.b. asset specificity, the child is of extra value but only to the specific parties involved in the marriage)”. Asset specificity can help lock in a relationship – whether it be marriage or an employment contract.
  3. Appropriable quasi-rents: Let’s say I create software to enter marks and grades while at Gokhale Institute. I wouldn’t have created this software without being employed at Gokhale Institute, and it is valuable enough to sell to other firms (let’s assume). These AQR’s exist precisely because of the fact that I (with my skill-sets) was hired by Gokhale Institute. Discernible value has been created precisely because the employee was hired by the employer – this specific employee, by this specific employer (non-homogeneity of labor)

There is a whole can of worms that opens up as a consequence of thinking through the implications of what is written above. That can of worms is called industrial organization. Long story short, if you want to study the field of IO – and as a student of economics, you do! – you really need to start with Profs. Coase, and Williamson.

Two articles from Bill Gates about Covid19 that are worth reading

The first is an AMA:

A therapeutic could be available well before a vaccine. Ideally this would reduce the number of people who need intensive care including respirators. The Foundation has organized a Therapeutics Accelerator to look at all the most promising ideas and bring all the capabilities of industry into play. So I am hopeful something will come out of this. It could be an anti-viral or antibodies or something else.

One idea that is being explored is using the blood (plasma) from people who are recovered. This may have antibodies to protect people. If it works it would be the fastest way to protect health care workers and patients who have severe disease.

And speaking of convalescent blood therapy, this is also worth reading:

A simple and medically feasible strategy is available now for treating COVID-19 patients, transfuse blood plasma from recovered patients. The idea is that the antibodies from the recovered patients will help the infected patients. The idea is an old one and has been used before with some success.

And this is the second article by Bill Gates, worth reading in full, and so I will not provide an excerpt. Consistently applied restrictions on movement across the entire country, a clear strategy on how to prioritize testing, and a clear plan on developing a treatment and a vaccine are the key takeaways. Applicable mostly to America, or written with America in mind, but really works across the entire planet. India has applied the first of these as well as she could have.

 

Five articles about – what else – the corona virus

Please read this one, even if you choose to not read the others. This is important. Alex Tabbarok in MR about the mathematics of large gatherings in the times of corona.

Now here is the most important point. It’s the size of the group, not the number of carriers that most drives the result. For example, suppose our estimate of the number of carriers if off by a factor of 10–that is instead of 20,000 there are just 2000 carriers in the United States. In this case, the probability of at least one carrier at a big event of 100,000 drops not by a factor of ten but just to 45%. In other words, large events are a bad idea even in scenarios with just a small number of carriers.

And via MR, this read:

The veteran of numerous global health crises, from SARS to bird flu to Ebola, Ryan points out that incredibly aggressive measures by China, South Korea and Japan appear to be bringing outbreaks in those countries under control.

“There’s clearly an indication that a systematic government-led approach using all tactics and all elements available seems to be able to turn this disease around,” he says.

He has been pleading with governments around the world to prepare for the new coronavirus before it shows up at their door — or to spring into action when it does arrive.

That’s what Hong Kong and Singapore did.

Both quickly set up systems to try to identify and treat every case in their territory. Hong Kong developed diagnostic tests and rapidly deployed them to labs at every major hospital in the city. At one point in February, Hong Kong had 12,000 people in quarantine. Singapore’s prime minister called for calm and assured residents that all health care related to the disease would be free.

Both Hong Kong and Singapore continue to find a few new cases each week, but they’ve avoided the explosive outbreaks that have occurred elsewhere.

And a silver lining:

COVID-19 is a massive global economic and health challenge, having caused >3500 global deaths as of this writing (Mar 8) and untold economic and social disruption. This disruption is only likely to increase in coming days in regions where the epidemic is just beginning. Strangely, this disruption could also have unexpected health benefits — and these benefits could be quite large in certain parts of the world. Below I calculate that the reductions in air pollution in China caused by this economic disruption likely saved twenty times more lives in China than have currently been lost due to infection with the virus in that country.

The psychology of the virus:

If you’re feeling overwhelmed as you try to assess what this all means for you and your family, know that this is a normal and perhaps even useful response. “The adjustment reaction is an emotional rehearsal, getting you psychologically ready to cope if you have to,” Peter Sandman, an expert on risk management, has written. “It is also a logistical rehearsal; it’s how you start figuring out what to do and how to do it.”

And finally, not an excerpt, but a useful catch-all guide to the corona virus from The Atlantic.

Scott Sumner on Parasite, Paris as a 15 minute city, and then the Coronavirus!

Five articles that I enjoyed reading this week, and figured you might too:

I’d actually prefer they not allow foreign language films in the best picture category, as they’ll never be judged on a level playing field. Alternatively, have three Oscars; best high-brow film, determined by highbrow critics. best middlebrow film, determined much like the current Best Picture, and best popular film, determined by box office receipts. The same film would be allowed to compete in all three categories.

The Godfather would have won all three, but I’m not sure any other film would have (Birth of a Nation?, Lord of the Rings III?)

Rear Window would have won highbrow and popular, but it wasn’t even nominated for Best Picture. LOL. Middlebrow people are the worst.

Scott Sumner being provocative – but notice that this is kind of how Filmfare Awards work!

Paris, the 15 minute city:

Even in a dense city like Paris, which has more than 21,000 residents per square mile, the concept as laid out by the Hidalgo campaign group Paris en Commun is bold. Taken at a citywide level, it would require a sort of anti-zoning—“deconstructing the city” as Hidalgo adviser Carlos Moreno, a professor at Paris-Sorbonne University, puts it. “There are six things that make an urbanite happy” he told Liberation. “Dwelling in dignity, working in proper conditions, [being able to gain] provisions, well-being, education and leisure. To improve quality of life, you need to reduce the access radius for these functions.” That commitment to bringing all life’s essentials to each neighborhood means creating a more thoroughly integrated urban fabric, where stores mix with homes, bars mix with health centers, and schools with office buildings.

 

In any crisis, leaders have two equally important responsibilities: solve the immediate problem and keep it from happening again. The COVID-19 pandemic is an excellent case in point. The world needs to save lives now while also improving the way we respond to outbreaks in general. The first point is more pressing, but the second has crucial long-term consequences.

Bill Gates on not just how to contain the coronavirus, but how to build better capacity for the next one. Worth two excerpts:

Pandemic products are extraordinarily high-risk investments, and pharmaceutical companies will need public funding to de-risk their work and get them to jump in with both feet. In addition, governments and other donors will need to fund—as a global public good—manufacturing facilities that can generate a vaccine supply in a matter of weeks. These facilities can make vaccines for routine immunization programs in normal times and be quickly refitted for production during a pandemic. Finally, governments will need to finance the procurement and distribution of vaccines to the populations that need them.

Check the info graphic out in the article as well.

Goldman Sachs now forecasts (nowcasts) -6% q/q AR growth in Q1, down from -0.5%.

Hmmmmm.

Speaking of which

2020 @PredictIt recession prediction market probabilities are now above 40% amid #Coronavirus concerns.

Understanding Horizons, Understanding Time

The more I think about time, the more confused I get. The more I read about time, the more I cannot help but think about time.

In today’s post, I hope to be able to inspire you to get as confused about time as I am.

Before we get to the five links, here are some questions for you.

Should I have a gulab jamun after lunch today? If you are anything at all like me, your answer is likely to be a resounding “aye!”

Do you know who might want to say no? 70 year old Ashish (assuming I live to be that age) might not be such a big fan of I having that gulab jamun today.

Should 38 year old Ashish (for that is how old I am right now) listen to the entreaties of a 70 year old Ashish who doesn’t exist?

Well, if 38 year old Ashish wants 70 year old Ashish to have a chance of existing, I think it makes sense to ditch that damn dessert.

But, uh, good luck trying to convince 38 year old Ashish at 1.45 pm of the importance of thinking about the hypothetical existence of 70 year old Ashish.

That’s the problem of time discounting.

How important is the future, compared to the present?

Think of it in terms of gulab jamuns or interest rates offered to you by the bank, it’s the same thing. A weeekend trip to Goa (38 year old Ashish says yes!), or a fixed deposit in the bank (70 year old Ashish says yes!)?

Now: that was the easy bit. Let’s amp things up a little.

Do you wish your parents had saved a little bit more when they were younger? Hell, imagine if your grandparents hadn’t had that gulab jamun when they were young, and put the money in a fixed deposit instead. Go as far back in time as you wish, and imagine how important a rupee saved a couple of centuries ago would have been today – for you.

But, um, by that measure, shouldn’t you be saving every single rupee you can today for your child’s tomorrow? The argument holds whether you have children or not, by the way. If you wish your great-great-great-grandfather had been more financially responsible at age 27, when he was unmarried and without kids, then that goes for you today as well!

And all that being said, let’s get cracking with today’s set of links!

  1. “Time discounting research investigates differences in the relative valuation placed on rewards (usually money or goods) at different points in time by comparing its valuation at an earlier date with one for a later date”…
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    says the very simple introduction to time (temporal) discounting on behavioraleconomics.com. While you’re on that page, also look up hyperbolic discounting.
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  2. “Someone with a high time preference is focused substantially on their well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.Time preferences are captured mathematically in the discount function. The higher the time preference, the higher the discount placed on returns receivable or costs payable in the future.”
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    That is from Wikipedia, and as homework, ask yourself if you should live life with a zero discount rate attached to most things.*
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  3. “What has become known as the “Ramsey formula” says that the rate at which one should discount an increase in consumption that occurs in the future depends on three key factors, elaborated upon below: our pure rate of time preference, our expectations about future growth rates, and our judgment about whether and how fast the marginal utility of consumption declines as we grow wealthier”
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    So here’s a way to understand the point above: I was in Europe on work recently. Should I have splurged on a three star Michelin meal in Paris? Or banked the money I might have spent over there and gone for three such meals when I was 70 instead? Will such a meal at age 70 hold the same importance for me as it does now?**
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  4. “When brain science was young, it was thought that the frontal lobe had no particular function. There were famous cases such as that of Phineas Gage, a railway worker who, in an explosion, had a long iron rod driven through the front of his brain. The rod was removed and Gage, miraculously, survived, seemingly with his intelligence, language and memory intact. Before long he was back at work.However, observation of others with frontal lobe damage soon revealed the cost – problems with planning, and also, strangely, a reduction in feelings of anxiety. What was the link between the two? Both planning and anxiety are related to thinking about the future. Frontal lobe damage leaves people living in a permanent present, and as a result they will not be bothering to make plans, so can’t be anxious about them.”
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    That is from a review of one of the finest books I have read, Stumbling on Happiness, by Daniel Gilbert. Read the book, please. I promise you that it is worth your (excuse the pun) time.
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  5. “But there’s an alternative path. Generations overlap, and so by doing more to empower younger people today, we give somewhat more weight to the interests of future people compared to the interests of present people. This could be significant. Currently, the median voter is 47.5 years old in the USA; the average age of senators in the USA is 61.8 years. With an aging population, these numbers are very likely to get higher over time: in developed countries, the median age is project to increase by 3 to 7 years by 2050 (and by as much as 15 years in South Korea). We live in something close to a gerontocracy, and if voters and politicians are acting in their self-interest, we should expect that politics as a whole has a shorter time horizon than if younger people were more empowered.”
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    Via Marginal Revolution, this lovely, thought-provoking essay by William Macaskill. As both the MR blog post and Macaskill are careful to point out, this necessarily implies that younger people should be more informed, for such a system to have even a shot at succeeding.

 

But hey, that’s as good an argument as any for the existence of this blog!

 

*Yes, you should, far as I can tell. But god, it’s hard!

**If you were wondering, the answer is no. I didn’t go for that meal. I wish I had though!

 

 

Ec101: Choices matter!

We’ve, in our Thursday posts this year, learnt about incentives and costs. But, and this is a really, really big “but” – they become operational only when we live in a world where we’re able to choose.

Tyler Cowen and Alex Tabbarok – two people who have probably done more for educating people in economics than anybody else over the last thirty years or so – have written two of the best textbooks on economics available anywhere – one on micro and the other on macro.

In the book on microeconomics, they summarize ten different “big ideas” in economics: incentives, the invisible hand is the best kind of magic*, trade-offs matter, thinking on the margin matters, trade matters, wealth matters, institutions matter, business cycles are unavoidable, printing more money will lead to inflation and central baking is hard.

*I’ve paraphrased practically all of the big ideas, but this in particular is my phrasing, not theirs.

Two other asides before we proceed: in retrospect, it is interesting (at least to me) that at least one of their PhD’s (Tyler Cowen’s) and quite a few of their books are based literally on nothing more complicated than an exposition of these big ideas. There’s a lesson in there somewhere.

Also, they say that the biggest idea of them all is that economics is fun. I’d paraphrase that too: learning about the world is fun, and economics is a great tool to use towards that end.

Now, that allows for a neat segue to the topic du jour. At the very start of the book, even before the table of contents, they provide their definition of economics, one that I agree with wholeheartedly: economics is the study of how to get the most out of life.

Here’s the two word version: choices matter!

Unless we live in a society that is free to choose, at an individual level or otherwise, none of the other big ideas even come into play. So, to me, economics is first and foremost about being free to choose – and then about the benefits and costs of the choices that you make.

Which, I’d argue, means that learning about choices is plenty important. Ergo, this post.

  1. First things first. What is choice?
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    I chose (see what happened there?) this Quora post not because it is the “best”, but simply because it is so typical. Here’s what I think choice is: it is an admission of the fact that you can’t have everything. A particularly relevant example for me: what to eat from a buffet at a five star restaurant? With every passing year, “everything!” becomes an increasingly unrealistic answer. So choose those dishes that are likely to taste the best (maximizing happiness), or those dishes that are likely to cause the least harm (minimizing unhappiness) along some dimensions such as spiciness, oiliness or what have you.
    Or hey, do both at the same time! Choose the dish that is likely to taste the best and the dish that is likely to do the least harm. That’s half your micro paper right there – the rest is just math and diagrams. (I am kidding, of course, but only a little bit.)
    Choice is an admission of the fact that you can’t have everything, but that’s a good thing! It forces you to go with the best. Which paintings should you look at when you’re at the Louvre? “Every single one!” is unrealistic. Force yourself to choose, therefore, the very best of the lot. Constraints help you understand your own tastes better: aesthetics is, among other things, a matter of acknowledging the existence of constraints.
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  2. So having too many choices is a bad thing? It would seem so:
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    “It all began with jam. In 2000, psychologists Sheena Iyengar and Mark Lepper published a remarkable study. On one day, shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were one-tenth as likely to buy as people who saw the small display.”
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  3. But hang on. Of what use is an economics theory that doesn’t have a on-the-other hand angle? Tim Harford, as is so often the case, to the rescue.
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    “But a curious thing happened almost immediately. They began by trying to replicate some classic experiments – such as the jam study, and a similar one with luxury chocolates. They couldn’t find any sign of the “choice is bad” effect. Neither the original Lepper-Iyengar experiments nor the new study appears to be at fault: the results are just different and we don’t know why.”
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  4. And on a related note, have you heard of Herbert Simon and satisficing? This excerpt is from a Wikipedia article on Barry Schwartz’s book, The Paradox of Choice, but it is actually about Herbert Simon.
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    “A maximizer is like a perfectionist, someone who needs to be assured that their every purchase or decision was the best that could be made. The way a maximizer knows for certain is to consider all the alternatives they can imagine. This creates a psychologically daunting task, which can become even more daunting as the number of options increases. The alternative to maximizing is to be a satisficer. A satisficer has criteria and standards, but a satisficer is not worried about the possibility that there might be something better. Ultimately, Schwartz agrees with Simon’s conclusion, that satisficing is, in fact, the maximizing strategy.”
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  5. And the final word goes to Tyler Cowen. Or is it Herbert Simon all over again? Choices, choices.
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    “What if you asked people the following: do you wish to choose your own means of limiting your (subsequent) choices, or do you wish to let someone else, perhaps the government, do the work? I suspect the answers would overwhelmingly favor the former option, namely voluntary choice at the meta-level. And if you reexamine the experiments mentioned above, they are all about ways in which people voluntarily limit their own choices. Maybe you don’t wish to run your own cancer treatments, but you wish to choose the doctor who will.”

 

Ec101: Links for 19th December, 2019

  1. “Based on the provided support, it is apparent then that it’s advantageous to be as random as possible for generation of ideas, but sticking with a particular response is predictive of creative originality. So next time your friends say that you are “sooo random,” hold your head up high and keep at it. But don’t forget to spot those brilliant ideas among the dis-order, and focus. Such is the recipe for creativity.”
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    On the benefits of being random.
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  2. “Convex functions play an important role in many areas of mathematics. They are especially important in the study of optimization problems where they are distinguished by a number of convenient properties. For instance, a strictly convex function on an open set has no more than one minimum. Even in infinite-dimensional spaces, under suitable additional hypotheses, convex functions continue to satisfy such properties and as a result, they are the most well-understood functionals in the calculus of variations. In probability theory, a convex function applied to the expected value of a random variable is always bounded above by the expected value of the convex function of the random variable.”
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    That is from the Wikipedia article on convexity, and the next sentence after the excerpt leads us to…
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  3. Jensen’s inequality!
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  4. “The point is subtle and widely misunderstood. Here’s a simple example. Suppose that the average return is 10%. If $100 is invested for two periods the average payoff is $100(1.1)^2=$121. But on average that is not what happens. More typically, you get say 0% in the first period and 20% in the second period, i.e. $100(1.0)*(1.2)=$120. Notice that the average return is exactly the same, 10%, but the total payoff is smaller in the second and more realistic case”
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    And Alex Tabbarok explain why Jensen’s Inequality matters
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  5. As does Nassim Nicholas Taleb.

Tech: Links for 10th December, 2019

  1. “To be clear, both roles can be beneficial — platforms make the relationship between users and 3rd-parties possible, and Aggregators helps users find 3rd-parties in the first place — and both roles can also be abused.”
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    The always excellent Ben Thompson on regulating monopolies online, drawing a distinction between platforms and aggregators. His articles, as I have mentioned before, are always a delight to read, and this one in particular is a great collection of links to articles he has written before. Plus, this article is inspiration, if you will, for the links that follow.
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  2. “Columbia University law professor Tim Wu coined the term “network neutrality” in a 2003 paper about online discrimination. At the time, some broadband providers, including Comcast, banned home internet users from accessing virtual private networks (VPNs), while others, like AT&T, banned users from using Wi-Fi routers. Wu worried that broadband providers’ tendency to restrict new technologies would hurt innovation in the long term, and called for anti-discrimination rules.”
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    An excellent explainer from Wired about Net Neutrality.
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  3. “For years, I winced at how Big Tech approached regulatory matters. When they wade into policy matters, they fail to see the bigger picture — and the younger the company, the worse they are at this. The hole that Facebook has dug for itself is entirely because its leadership seemed to believe that if they stayed within the letter of the current law they wouldn’t be regulated. This is a completely naive and ahistorical view. And this view has prevented Facebook from innovating in their own policy space. Without that policy innovation, we are left with essentially nonsensical suggestions to break up Facebook — which wouldn’t actually solve any of the issues anyone has with Facebook.”
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    If you’re looking to do research in this field, you can’t not read Joshua Gans. This is just one of many excellently argued articles. Do read the whole thing!
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  4. The internet activist Nikhil Pahwa lists out his expectations about the future of internet regulation in India. Agree or disagree (as usual, I fall in the middle), it is worth reading.
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  5. “More generally, however, the bigger Google gets the more countries it has a physical presence in (servers, sales staff and support etc.) and thus the more leverage individual countries, especially large countries, will have to degrade the services that Google offers not just within-country but to the world.”
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    Alex Tabarrok gives a fun example and a chilling analysis in the same short blog post.

Etc: Links for 29th Nov, 2019

  1. “When the British actor Jonathan Routh published the first edition of his Good Loo Guide (“Where to Go in London”) in 1965, he singled out the device for mention every time he found one. Only five toilets, out of more than a hundred, held hand dryers – of the pedal-operated kind that, in the 1965 movie Help!, inhale the jacket sleeves of Ringo Starr and Paul McCartney. Mostly, Routh encountered towels of cloth or paper, and quite often, he had to pay to use these products. (“Do loos ever advertise their attractions?” he wondered, while extolling the virtues of the splendid restrooms of Hyde Park in the 1968 update. “Has anyone ever seen an ad saying ‘Just arrived – new free electric hand-drier at the so-and-so loos.’”) Even in the third and final edition of the guide, released in 1987, I counted more instances of electric razors, armchairs and pre-pasted disposable toothbrushes than of hand dryers.”
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    The excellent, excellent Samanth Subramanian in this lovely article about (of all things) paper towels and hand driers. Yes, really. What’s more, Samanth won the Financial/Economic story of the year award for this write-up. Read the book by clicking on his name here, also read Following Fish, and definitely read this article itself. Congratulations, Samanth!
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  2. “And which book takes the very top prize for best of the year? You can’t compare the Alter to the others, so I will opt for Eric Kaufmann’s Whiteshift and also Pekka Hämäläinen’s Lakota America, with Julia Lovell on Maoism and Alain Bertaud on cities as the runner-ups. But again a strong year all around.”
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    Tyler Cowen’s list of books he found worth his time in 2019. As he would say, self-recommending.
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  3. “So what’s a desperate founder to do? Smith impulsively flew to Las Vegas and played blackjack with the last of the company money .Amazingly, when he came back the next week, he had turned the remaining $5,000 into $27,000 – just enough for the company to stay in operation for another week.

    In the book “Changing How the World Does Business: FedEx’s Incredible Journey to Success – The Inside Story,” Roger Frock, a former senior vice president of operations at FedEx, describes the scene when he found out what Smith did. “I said, ‘You mean you took our last $5,000 – how could you do that? [Smith] shrugged his shoulders and said, ‘What difference does it make? Without the funds for the fuel companies, we couldn’t have flown anyway.'””
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    A lovely story about how Fedex came back from the dead.
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  4. “The money of the world’s mega-wealthy, though, is heading there in ever-larger volumes. In the past decade, hundreds of billions of dollars have poured out of traditional offshore jurisdictions such as Switzerland and Jersey, and into a small number of American states: Delaware, Nevada, Wyoming – and, above all, South Dakota. “To some, South Dakota is a ‘fly-over’ state,” the chief justice of the state’s supreme court said in a speech to the legislature in January. “While many people may find a way to ‘fly over’ South Dakota, somehow their dollars find a way to land here.””
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    Oh hey, Tiebout. Whassup.
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  5. “Behavioral finance is finance. That individual human beings can sometimes do silly things, for reasons to do with either nature or nurture, is not under dispute. That they may make these same mistakes in the aggregate is no longer heretical. That is the gift of those that have been “misbehaving” by attacking hallowed, efficient market doctrine. Economists now can consider potential irrationality versus a standard model of profit-maximizing utility without being disinvited to (those wild and crazy) economist parties. Economists can now suggest that cognitive biases can affect asset prices without threatening their tenure.”
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    The term may be overrated – the logic isn’t: in defense of behavioral finance.