Bad behaviour

It’s a rare privilege to be able to choose which one (or two) of 17 Nobel economics laureates I can have dinner with. The 4th Lindau Meeting on Economic Sciences achieved exactly what it sets out to do, at least for the invited young economists: educate, inspire and connect.

Despite being inspired by Diamond’s brilliant intellectual attacks on Prescott, and by Mirrlees’ astute analysis of economic policy, I was a little surprised by the issues raised during ‘Panel on Behavioural Economics’. For a start, the only economist to win a Nobel for what we now call ‘behavioural economics’ – Daniel Kahneman – wasn’t there. It was left to Maskin, Akerlof, Selten, Aumann, Phelps and McFadden (and Martin Wolf) to fill the gap.

The following issues were raised:

1) Criticism: Behavioural economics is essentially a patchwork of unrelated models, which explain specific deviations from classical economic theory. There is no single ‘behavioural economic theory’. My answer: The whole of economics is a patchwork of models, which explain specific phenomena. You shouldn’t apply moral hazard to a lemons market. A good economist uses the right model to explain the right phenomenon, but the best (i.e. curious) economist comes up with the best model when all other models seem to fail.

2) Criticism: Experiments put people into artificial situations, which bear no resemblance to reality. My answer: The only reason why we set up experiments is because we observe particular deviations outside the lab. In the lab, we can measure (very) precisely the effects of particular treatments and be more accurate about cause and effect. Experiments may not prescribe perfect policy, but they can push it in the right direction.

3) Criticism: People can learn in any any environment, so eventually most deviations from classical models disappear anyway. Real-life mistakes are costly so people learn fast. My answer: firstly, mistakes don’t always disappear in the long-run. Secondly, these statements are almost contradictory: we do not always have the opportunity to learn over long periods of time in real life because mistakes are costly. Experiments allows us to see what happens when we can’t learn.

Experiments must be done carefully. Plott and Zeiler showed recently that Kahneman’s endowment effect can be undone by extensive subject training. David Eil, whom I met at Lindau, also showed that he could reverse hyperbolic discounting by allowing subject to choose the time delay between two fixed payments and produce what he, with Vincent Crawford’s encouragement, called ‘hypobolic discounting’.

Doing good experiments and creating good models to explain the data they generate is simply good science. Ignoring the data is not.

London Review of Books Vol. 33 No. 16

Corey Robin’s article “The War on Tax” is poor for three reasons:

1) His grasp of recent American economic history is incomplete. It is true that the U.S. was on the path to eliminating its debt in 2000, but Clinton’s reforms were a combination on taxes on the rich and reduction is government spending. Whether it was a product of his policies or not, Clinton benefitted from strong economic growth in the 90s. 

2) Marxist analysis of the debt crisis is completely inappropriate. Fine, America is not Sweden. But it ignores American ideology of upward mobility of the last 200 years. As an excellent article in The Economist pointed out recently American poor don’t like taxing the rich and it is not obvious that they would even if the state provided more for them.

3) There are elementary errors. For example, corporate taxes in the US are not the lowest of any OECD country. In fact, the combined corporate income tax rate in 2011 in the U.S. is the second highest in the OECD after Japan.

Turn over the page, and you’ll find Stefan Collini’s superb article on the language of the the government White Paper on Higher Education (which came out after the disgraceful Browne Review). Collini takes us on an entertaining ride through the White Paper with an astute analysis of  ”economistic idiom” and “econobabble” and contrasts it with the intelligence, humanity, and maturity of the 1963 Robbins (yes that one!) Report on a similar matter. But I think Collini is a little too romantic about the ideal of unencumbered, joint pursuit of knowledge by teacher and student in universities – even at Cambridge, Collini’s ‘employment provider’.

Hooligan: A History of Respectable Fears by Geoffrey Pearson

Hooligan: A History of Respectable Fears by Geoffrey Pearson

“Beloved” by Toni Morrison


The most extraordinary American novel I have ever read. I feel like I’ve read it twice already because I have tried to catch every last drop of the magic and beauty. The turns of phrase are often so stunning, it feels like it was written by a talented foreigner, like Nabokov. You could sing this novel to your children.

Chapter 4 of Behavioral Game Theory by Colin Camerer

I was watching Big Bang Theory and they made a joke about a research journal (I think it was Sheldon) and, sadly, I thought it was a pretty good idea for keeping track of the work I’m doing for my DPhil. I’m ashamed of being so disorganised, but it’s good to have a sensible place for all the ideas, read research papers, policy stuff, teaching etc. The Moleskines are for maths only from now on.