Discounting the Future

Matt Gaddis over at Undergradecon, claims that students aren't rational.

Last night I was really trying to use economics to make my decision about what I should do for the night. Let me take you through my thought process. I was in the shower it was 10:00pm I had just gotten back from playing some basketball and running when I was deciding which of the following to do:

A) Go downtown to Brothers for $5 all you drink.
B) Stay at home and watch some TV.
C) Stay at home and do homework.

So I learned a little bit about decision making in my micro class and I was told people choose their decision based what option maximizes their utility. So I considered the utility of each.

A)Probably the greatest utility because drinking at bar is good times, BUT being hungover at work all day is no fun at all. So this raised some questions. Is the utility I am trying to maximize only in the short run so it only includes that night? Is their negative utility the next day and does that offset the positive from the night before?
B)...

Matt discovered the challenges of maximizing utility over more than one period. Several econ students at other schools emailed him to suggest he was not being irrational by going to the bars, but rather he was just heavily discounting the future.

I wonder when he'll stumble across the currently vogue idea of hyperbolic discounting?

One reason hyperbolic preferences are less convenient in a model is not only that there are more parameters but that the agent's decisions are not time-consistent as they are with a constant discount rate. That is, when planning for time two (two periods ahead) the agent might prepare for what looks like the optimal consumption path as seen from time zero; but at time two his preferences would be different.

Who hasn't awoken the night after drinking only to utter the requisite "I'm never drinking again" hangover mantra? Brad Delong has another example of hyperbolic discounting from the ASSA meetings in DC, where he spied one of its biggest proponents, David Laibson.

"My feet hurt. These marble floors are hard. I want to go sit down." "But here comes David Laibson, the master of hyperblic discounting. If we stay here, we can talk to him." "But then our feet will hurt worse later on in the afternoon." "Ah, but right now we don't care: you see, we are hyperbolic discounters, and so underweight future pain relative to present pleasure. It's true that later on we'll regret the fact that we spent so much time standing around and did not sit down. However, right now the benefits of discussing hyperbolic discounting with David Laibson are irresistible!" "But if we stay here, we'll be doing the wrong thing..."

You can find a nice paper by Laibson here.

Keywords: ECO308, ECO110, Discounting

Kuznets and GDP

From Brad Delong, comes this reference to an article in The New Yorker.

This steady flow of data is easy to take for granted; few things, surely, are as dreary as a soybean-export-price index. But the economy depends on these numbers; they make business smoother and policy smarter. (Recessions after the Second World War, for instance, have lasted about half as long as recessions before it.) This is why, ever since the days of Kuznets, the government?s basic assumption, at least when it comes to economic data, has been: the more information, the better, no matter how dismal it may be.

Does it? There is some evidence that the moderation in the business cycle is an artifact of the poor quality data that is estimated for the days before Kuznets and the boys. Christina Romer has written:

But appearances are deceiving. The kind of statistics that economists use to measure the severity of business cycles, such as data on the unemployment rate, real gross national product, and industrial production, have been kept carefully and consistently only since World War II. Therefore, the conclusion that government policy has smoothed business cycles [Ed- Or that business's access to data has smoothed the cycles] is based on a comparison of fragmentary prewar evidence with sophisticated postwar statistics.

In some recent research, I have tried to avoid the problem of inconsistent data by comparing the crude prewar statistics with equally crude postwar statistics. That is, I have compared the existing prewar series with modern data that are constructed using the same assumptions and data fragments that were used to piece together the prewar series. These comparisons show essentially no decline in the severity of cycles between the prewar and postwar eras. They also show little change in the duration and frequency of cycles over time. Thus, much of our apparent success at eliminating the business cycle seems to be a figment of the data.

So much for trying to claim economists have become more like the dentists of Keynes's dreams.

Update: Russell Roberts on his new blog Cafe Hayek follows Friedman's lead arguing that the improved performance of the economy is due to a better undestanding of central banking. Read more here.

Keywords: ECO120, ECO305, ECO307, ECO301, ECO712, GDP, Data

Affluent Action?

Walter Benn Michaels' article in today's New York Time's Magazine, "Diversity's False Solace" argues that while universities have achieved some success in the area of racial diversity, they are lacking in terms of economic diversity.

He's a professor of English at the University of Illinois, Chicago, and the catalogues at U.I.C., boast about being "ranked among the Top 10 universities in the country for diversity."

"And the enthusiasm for such differences is widespread. When I asked a group of Harvard literature students about what distinguished them from a parallel group of literature students at U.I.C., they were prepared to acknowledge that the U.I.C. students might be even more diverse than they were, but they were unable to see the relevance of the fact that the U.I.C. group was also less wealthy. And this is equally true of the students at U.I.C. who identify themselves as black, white, Arab, Asian and Hispanic and not as poor or working class. After all, your ethnicity is something you can be proud of in a way that your poverty or even your wealth (since it's your parents' wealth) is not.

But the real value of diversity is not primarily in the contribution it makes to students' self-esteem. Its real value is in the contribution it makes to the collective fantasy that institutions ranging from U.I.C. to Harvard are meritocracites that reward individuals for their own efforts and abilities--as opposed to rewarding them for the advantages of their birth. For if we find that the students at an elite university like Harvard or Yale are almost as diverse as the students at U.I.C., then we know that no student is being kept from Harvard because of his or her culture. And white students can understand themselves to be there on merit because they didnt' get there at the expense of black people.

We are often reminded of how white our classrooms would look if we did away with affirmative action. But imagine what Harvard would look like if instead we replaced race-based affirmative action with a strong dose of class-based affirmative action. Ninety percent of the undergraduates come from families earning more than $42,000 a year (the median household income in the U.S.)--and some 77 percent come from families with incomes of more than $80,000, although only about 20 percent of American households have incomes that high. If the income distribution at Harvard were made to look like the income distribution of the United States, some 57 percent of the displaced students would be rich, and most of them would be white. It's no wonder that many rich white kids and their parents seem to like diversity. Race-based affirmative action, from this standpoint, is a kind of collective bribe rich people pay themselves for ignoring economic inequality.

In the end, we like policies like affirmative action not so much because they solve the problem of racism but because they tell us that racism is the problem we need to solve. And the reason we like the problem of racism is that solving it just requires us to give up our prejudices, whereas solving the problem of economic inequality might requrie something more--it might require us to give up our money."

Keywords: Affirmative Action, ECO110, ECO336

Hell of the North

The internet continues to amaze me. This morning, while reading the coverage of cycling's "Queen of the Classics", Paris-Roubaix, I decided to check Eurosport's website, and sure enough they were again offering live audio coverage. American fans of European cycling used to have to wait weeks to find out what happened in Europe, now you can read live minute by minute coverage of most races, and even catch the audio for a few. And later today I'll watch the recap on OLN.

Some Quick Hits

Econ PhD
More info on grad school in economics over at Marginal Revolution.

Marriage
Data on the not so sacred institution of marriage. (via Newmark's Door)

Teaching Economics
A great piece on how to put passion back into the first econ classes, from the Idea Shop.

Social Desireabilty Bias
We know people over report exercise and under report drug use on surveys, but it turns out they also over report church attendance. The Idea Shop provides the links, and remember that next time someone cites data about church attendance.

Keywords: Grad School, Marriage, Teaching, ECO120, ECO305, ECO307, ECO301, BUS230, Polls

Height

As a short guy, I long for the days of yore, when the underfed would not see heights even close to my towering 5'8" frame.

Newmark's Door provides this link:

Biologists say that we achieve our stature in three spurts: the first in infancy, the second between the ages of six and eight, the last in adolescence. Any decent diet can send us sprouting at these ages, but take away any one of forty-five or fifty essential nutrients and the body stops growing. (“Iodine deficiency alone can knock off ten centimetres and fifteen I.Q. points,” one nutritionist told me.)

But the article, THE HEIGHT GAP by BURKHARD BILGER is really about trying to understand why Europeans are getting taller and taller—and Americans aren’t.

Marginal Revolution provides this:

For two centuries, the American man stood tall in the world. Literally. But today the average Dutch man is six foot one and the average American man is much shorter. Even as little as fifty years ago, American men were considerably taller than Dutch or other European men but since the mid 1950s the Northern Europeans have shot up while Americans have grown wider but not taller. No, it's not a composition effect due to immigration. Native born, English-speaking American men are only five feet nine and a half and this has not changed much in more than a century. Why then the difference?

Some of the more important research was done by the Economic Historian, and Nobel Laureate, Robert Fogel. Again quoting from the Bilger article:

Fogel, who won the Nobel Prize in Economics in 1993, is the man most responsible for Komlos’s interest in height. In the fall of 1982, when Komlos was working on a Ph.D. in economics at the University of Chicago (he had earlier earned a Ph.D. in history there), Fogel gave a lecture on stature that Komlos attended. Most historians, if they thought about height at all, tended to assume that it was tied to income. The more people earn, the better they eat; the better they eat, the taller they grow. “Men grow taller and faster the wealthier their country,” the French hygienist and statistician Louis-René Villermé wrote in 1829. “In other words, misery . . . produces short people.”

Fogel knew it wasn’t that simple. In 1974, he and Stanley Engerman published an exhaustive study of slave economics entitled “Time on the Cross.” Historians had long insisted that slavery was not only inhuman; it was bad business—hungry, brutalized workers made the poorest of farmers. Fogel and Engerman found nearly the opposite to be true: Southern plantations were almost thirty-five per cent more efficient than Northern farms, their analysis showed. Slavery was a cruel and inhuman system, but more so psychologically than physically: to get the most work from their slaves, planters fed and housed them nearly as well as free Northern farmers could feed and house themselves.

Keywords: ECO120, ECO305, ECO307

Two Things

Craig Newmark, guest blogging for Marginal Revolution (A job I someday hoped to be asked to do), has an excellent post where he points to an idea of Glen Whitman on the Two Things. Here is a brief outtake:

The Two Things
Glen Whitman, Cal State Northridge economist, presents an elegant idea: The Two Things.

A few years ago, I was chatting with a stranger in a bar. When I told him I was an economist, he said, “Ah. So . . . what are the Two Things about economics?”
“Huh?” I cleverly replied.

“You know, the Two Things. For every subject, there are really only two things you really need to know. Everything else is the application of those two things, or just not important.”

“Oh,” I said. “Okay, here are the Two Things about economics. One: Incentives matter. Two: There’s no such thing as a free lunch.”

Keywords: ECO110, ECO120, ECO301, ECO205, ECO307, ECO712

On the One Hand

Economists are notorious for disagreeing, so notorious in fact, they have been the object of famous quips...just a few from JokEc:

If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.
- Winston Churchill

If all economists were laid end to end they would not reach a conclusion.
- George Bernard Shaw

But the truth is we agree on a lot of things. In fact a recent study by Dan Fuller and Doris Geide-Stevenson found at least a modest consensus on all but 3 of 44 items. Here is a sample that is relevant to the current discussions in the press.

Interestingly, the conclusions of strong consensus were comparatively concentrated
in the area of international economics: the responses to five of the eight
propositions dealing with the implications of a global economy exhibited strong
consensus (numbers 1, 2, 4, 6, 26). Specifically, there was strong agreement with
the propositions that restraints on free trade reduce welfare (2) and that market determined,
flexible exchange rates are effective (1). There was also strong disagreement
with the propositions that increasing globalization threatens national
sovereignty in environmental and labor standards (4), that U.S. trade deficits are
a result of nontariff trade barriers (6), and that the increasing inequality in the
U.S. distribution of income is caused by the pressures of a global economy (26).

To read the full paper go to the Journal of Economic Education. (Link via Political Theory Daily Review)

Update: The new online journal Econ Journal Watch has a section dedicated to addressing different topics and discussing whether or not a consensus exists among economists. Do Economists Reach a Conclusion?

Keywords: ECO120, ECO301, ECO305, ECO712