Behavioral Economics and Tax Cuts

Here is a piece from Bloomberg Businessweek (HT Arts & Letters Daily) on how behavioral economists may have shaped a tax policy. The summary of the research is that the plan didn't work. However, the study is based on survey data, which is not as reliable as actual expenditure data. It's a worthwhile read if you are entering the section of fiscal policy or spend time discussing behavioral economics. 

Voting, Externalities and an "Invisible" Hand?

I've been too busy lately. I've found some time to read, but precious little to blog.  So this is about a week overdue. This article (HT to Marginal Revolution) is really a wealth of opportunity. You can connect all kinds of economic concepts to voting. The author makes some excellent arguments for voting and not voting. It is the latter that are most intriguing. In some instances, the author seems to be relying on normative judgments about what is a good policy.  In other instances, the argument of common good runs up against rational self-interest.

Do you agree with the author?

Something You Can Use the First Day

For those of you who have been gone all summer, I haven't been particularly prolific - too busy. But there are some very usable resources in the archive so you might want to spend some time back-tracking. Regardless, welcome back.

For those of you who are just starting school or haven't started yet, here's something to use on day one.

Choice: Is Decision Fatigue Worth Talking About? (Your Choice)

I suspect most of us don't go very far into the decision-making process. After all, most of us are teaching a specific curriculum and time is a scarce resource. We have to choose. 

We probably discuss why we have to make choices and perhaps we introduce a decision-making model. But unless we're really into behavioral economics or we're enamored by categorizing people into optimizers or satisficers, we probably don't go much further.  That's okay. Nevertheless, here's a recent article from The New York Times that discusses something called decision fatigue.

The research highlighted in the article looks at the types of decisions we make when we have to make a lot of decisions. The results may not be of much immediate use in our classroom. But students often ask why we don't always make rational decisions. I think the article goes well with this TED Talk on The Paradox of Choice with Barry Schwartz. 

 

It may be something for an extra credit assignment. What do you think?

Non-Price Determinants of Demand

I've been meaning to blog on an article for the past couple of weeks but just have not had the time.  I have a few moments while one of my summer classes are taking an exam so I will try to do it now.

The article in question is from The Wall Street Journal. It discusses how buying patterns have changed among the wealthy as a result of the recent recession. It offers a chance for you and your students to discuss some non-price determinants of demand.  How are non-price factors such as tastes, income, availability of substitutes/complements, expectations, and the number of buyers reflected in the article?  You can also use it to discuss the price elasticity of certain goods. What are your thoughts?

Choice in Poverty?

There is a very thought-provoking article in the new issue of Foreign Policy. (HT to EconomicsandEthics) The article examines recent research on food and poverty in much of the developing world and comes to some conclusions that are sure to stir up debate in development circles.

But there are some fundamental applications that you may want to consider. The article offers numerous examples of choices people make that many would consider questionable, especially when faced with poor diet. But the discussion of opportunity cost that can result from these examples may broaden your students' perspective of the concept.

There are also examples of inferior goods that can readily be used. Please share your thoughts.

Conservation as Conspicuous Consumption

Yesterday, I heard a very interesting interview on Marketplace, the public radio program. The interview was with Stephen Dubner, coauthor of Freakonomics and host of Freakonomics Radio. Dubner talked about the idea of conspicuous conservation. 

Now you probably know about conspicuous consumption. The phrase was coined by Thorstein Veblen who stated that one reason we spend money can be to show off our wealth. Basically what we buy can signal our wealth to others and can, presumably, have an effect on our status or how others view us.

I often ask my students why they buy certain brands of clothes, etc. when other cheaper brands would provide the same function. This leads to a discussion of utility and an understanding that many people place a high value on the perceived ability of certain products to impress other people.

This brings us back to the interview. As I said, Dubner was talking about conspicuous conservation - how certain people will buy certain things to show how "green" they are, and he cites some research by a pair of economists that indicates the payoff for making these choices can be quite high in certain communities.  In essence, the purchasers may be willing to pay a higher price in order to secure higher prestige in a given community.  This offers a great opportunity to discuss value and utility. Because certain choices may not necessarily be the best in terms of actual effect, but may have a higher value as "conspicuous conservation/consumption." Let me know what you think of the interview.

Biology and the Invisible Hand?

There is an article in The Boston Globe about the scientific basis of altruism. (HT to Arts & Letters Daily) Evidently there is a controversy brewing in the field of biology about the reasons members of a species will help other members, often at their own expense.  One group argues for something called “kin selection” (helping other members of a genetically-related group) as a method of guaranteeing survival of genes. The other group argues for “group selection” (helping a more diverse group survive).

I am no biologist and I wouldn’t dream of saying there is or isn’t a connection between the biological and economic behaviors. But I see a parallel in the behavior of group selection and if there is a genetic pre-disposition to altruistic behavior in nature, then I would say the “invisible hand” would possibly be a stronger explanation of market behavior than it already is.

I would welcome any comments on this. I’d like to know if you see what I see or if I’m still recovering from fever and pharmaceuticals.

Behavioral Economics

One of the great things about economics is that the models are fundamentally simple, particularly for Microeconomics. By simple, I don't mean that all of the implications are obvious or that that we can figure out what those implications are without doing some math. However, much of economics is encompassed by the idea that people are trying to do the best that they can with their limited resources, and as a result we would expect voluntary exchange between fully informed parties to make both players better off (or at least no worse off).

Part of the joy of behavioral economics is how it demonstrates where predictions from the reductionist economics approach to modeling human interactions badly and consistently miss how actual humans behave. An illustration of this comes from a recent Dilbert.

Tragedy of the Commons Meets Institutions

There are always lots of examples when discussing the tragedy of the commons. But today's edition of The Wall Street Journal has a new take on an old issue - fishing. The story (free content at this writing) is about fish migration in the Bosporus - that narrow stretch of water near Istanbul that connects the Black Sea to the Mediterranean.

It seems that the annual fish migration has drawn fishermen for centuries. But in recent years, the take has been diminished – a classic example of overuse of a common resource. But what makes this story a little bit different is the institutional twist. Turkey is seeking admittance to the EU. The EU may put restrictions on Turkish fishing as a condition of admittance. (Remember, rules set up the incentives that impact decision-making.) Turkey doesn't think limits are warranted. But there are ethnic issues involved, as well. (Cultural norms are part of the institutional matrix.)

The article also has a slide show and brief video to accompany it. I think you'll find it a worthwhile resource.

On the Grinch, Pigouvian Taxes, Externalities and the Coase Theorem

Forbes magazine has this wonderfully entertaining take on a classic by Dr. Seuss. (Big HT to Greg Mankiw for this one.)

I'm going to share it with students. I hope you do, as well.

Institutions and Entrepreneurship

Regular readers of this blog know I find the idea of economic institutions interesting. Institutions have been defined as "the rules of the game." More specifically they are the set of rules and organizations (both formal and informal) that influence our decision-making by setting up incentives to action. They can include written laws, voluntary standards of conduct, even cultural beliefs. The last category is the subject of this post.

An article in today's edition of The Wall Street Journal (free content at this writing), discusses motorcycle taxis in Nigeria. Specifically, the article is about how dangerous the motorcycle taxis are. Evidently, there are so many accidents that one hospital has a ward specifically for people who were in motorcycle taxi accidents.

But attempts to get people to wear helmets have been unsuccessful, largely because of superstition (cultural belief). There is a belief among many that placing the helmet in contact with their head is bad "juju" which can have drastic consequences. People can disappear, lose their brains or their luck. People make choices, often tragic, because the belief presents a perceived cost that exceeds a perceived benefit. Thus, they make a "logical" choice.

Enter one entrepreneur who has developed a cloth liner that can be placed between the helmet and the wearer. It eliminates the contact and, for some at least, overcomes the cultural fear. There are other issues involved, including hygiene, but the fact is the entrepreneur was able to use his understanding of an institutional factor to identify and open a market. I don't know how successful he will be, given there are many inexpensive substitutes like personal handkerchiefs. And there are likely to be more commercial substitutes. But this remains an interesting example of entrepreneurship mixed with institutional economics.

I look forward to your comments.

Debt Issues...Micro and Macro

I've been busy with my online courses and I hope to get busier. 

Nevertheless, here is a comic that, in my opinion, offers all kinds of possibilities as a discussion starter.


The first and third panels carry the weight. 

The first panel can be related to expectations, the business cycle, and employment. (For those of you unfamiliar with the strip, Gene is the soon-to-graduate college age son of the couple you see.)

The third panel can be used to illustrate credit, debt & deficits, normative statements, business cycle, animal spirits, expectations, and behavioral economics.  And those just hit me in the first minute.  Do you see other possibilities?  If so, please share.