Tuesday, November 30, 2010

Dan Ariely for the Holidays

No this isn't another plug for Dan's book or about his most recent post on gift giving. It is a plug to see Mr. Ariely in person. Except instead of a lecture hall, it will be at a comedy theater. That's right, behavioral economist,  author, and blogger Dan Ariely will be the special guest monologist December 17th for DSI's flagship show, Mister Diplomat. Improv. Economics. Me. What more could you ask for?

Sunday, November 28, 2010

Economics of Social Safety Nets

Food stamps, unemployment, Emergency Rooms, Medicaid, disability checks are just a few of the social safety nets that most industrial countries have. They exist to ensure the "least of these" have some basic living standard provided by the government. Many economists, myself included, complain about the inefficiencies these incentives can create. But what if instead of government distortion of the free market, this is just a correction of it. What if the welfare state is genetic insurance?:
Back before you were born--in fact, before you were even conceived--nobody knew you were going to develop into the sort of sophisticated individual who reads Slate. For all anyone knew, you might have been born without enough skills to boot up a computer--or to earn a decent living.

If your unborn soul could have bought an insurance contract, then you'd probably have snapped up some kind of "skill insurance" in which everybody pays premiums, and those who land in the shallow end of the gene pool split the pot.
If this did exist, just how much insurance (or how much safety net) would there be? You'd have to know the risk of being poor and the difference between the rich and the poor. Once you know that, then you know what percentage of the population should be getting assistance:
If you take the insurance metaphor seriously, then 23 percent of the population--the 23 percent with the fewest skills--should be permanently unemployed and on welfare.
Based on those numbers the welfare state should be bigger. That is, unless, you take into account the inefficiencies created:
Factor that into the equation, redo the calculations, and you end up concluding that the fraction of the population on welfare should be just 0.6 percent--in other words, practically zero.

Thursday, November 25, 2010

Economics of Native American Stereotypes

In honor of my full stomach from two Thanksgiving dinners (two more to go tomorrow) I ask this question: What factor determines how historically authentic Native American tribes portray themselves? You might think it's how much time they spend with other tribes. It's actually the opposite, it's the tourists:
The framing analysis found that nearly 4 out of 10 tribes with casinos represent their own identities using the historic relic frame—primarily relying on the exotic Other, such as tepees and stoic chiefs in headdresses, locked in the past. In contrast, only 1 in 10 of the tribes without casinos communicates the same identity, instead being more likely to display a voiced participant frame of modern images and assertions of sovereignty and resistance.
Happy (Economics of) Thanksgiving

Wednesday, November 24, 2010

Worthwhile Sentences on Political Commentary

From moderate David Brooks: "Democratic victories are always ascribed to hope; Republican ones to rage."

From the Economic Logician: "Many see the Great Recession, as it is now called, as a dual crisis: an economic crisis and a crisis of economics, and more specifically macroeconomics."

From Professor of Shakespeare Peter Saccio: "Shakespeare and Sarah Palin have two things in common. One, they both tend to make up words. Two, half the country can't understand what the other half of the country thinks is so great about them."

From the Seattle Times: "There are no small-government disciples in massive oil spills."

From New York Magazine: "If you can't beat it, the thinking goes, yell at it."

Tuesday, November 23, 2010

Collusion in the Classroom

Recently due to a field trip, my AP Microeconomics class was cut down to just a handful. So instead of treading forward without most of the class, I decided to introduce the perfect board game, Settlers of Catan. It shows first hand some important economic principles: changes in price due to scarcity, gains from trade, and as I found out, how to collude. The first time I played with the students I won. Not necessarily a huge feat since none of them had played before and I've certainly spent enough time playing online. However they called for a rematch and I was happy to oblige them one day after school. Again I took an early lead and was close to wrapping up my second victory.

Near the end of the game I got distracted by a phone call from a friend of a friend asking about the Clemson economics program. Suddenly, one of my students came from behind to win the game. So suddenly in fact that I suspected a little foul play. After packing up the game the students let me in on their plan. I'll paraphrase their excited words. "Mr. Brookie we worked together! I traded what she wanted, we put the robber on you, AND we gave her our bonus points! We did that thing you talked about in class. We colluded!" As the regulator, it was important for me to not to get distracted. Then again, at least I know they're learning.

Monday, November 22, 2010

Difference Between Humans and Animals, Part XIII

Last time I highlighted something humans can't do. Well here's awesome stuff from us humans:

Here's earlier parts one, two, three, four, five, six, seven, eight, nine, ten, eleven, and twelve.

Saturday, November 20, 2010

Science of the Gold Standard

President Harry Truman once asked why you would ever want "a system in which you pay people to dig things out of the ground and then bury them in the ground again?" NPR's Planet Money asked a similar question in a recent podcast in which they give an element by element breakdown of why gold has been used for thousands for years as the medium exchange all over the world. For obvious reasons the unit of exchange shouldn't be a gas, corrode, explode, too rare, or kill you. Those simple requirements eliminate 116 of the 118 elements, leaving just platinum and gold. And unless you have a furnace that can heat up to 3,000 degrees, you can't melt platinum. So out of all the elements, gold is the clearly the best to use as a standard. Well, that is, except for trust.

Emptying the Bottle: Late-November '10 Links

Here is a list of the worthwhile sites I've Bookmarked recently:
As always, feel free to email me anything interesting you come across.

Thursday, November 18, 2010

Pre-Paying Volunteers or Economists

About a month ago I got a letter in my box at school asking me to take a survey. It was from the Educational Research Associates. I hadn't heard of them, but on the web their name was regularly associated with "individualized instruction". The idea seems to be a push away from lecture oriented learning and towards alternative instructional methods (audio, video, computer-assisted instruction) freeing the teacher to focus on individuals needs. Though that idea seems very appealing to someone who uses the crude method of talking fast to get through the vast amount of information required for most subjects, it wasn't the most interesting part of the letter. This was:

That's the letter and one dollar. At the very bottom of the letter you can read why they attached a dollar. It was to encourage, or should I say guilt, me into taking the survey. Before I tell you whether I took it or not, let me share some research:
The students made 50 decisions about giving. In some cases students started with $10, and for each dollar they gave up, their (anonymous) partner in the game would get, say, $5. In this case, giving was "cheap." In others, giving was expensive (each dollar given up yielded only 20 cents for the partner).

Someone who gives a lot when it's cheap and keeps most of the pie for himself when giving is expensive focuses on efficiency: He's making sure the maximum amount is paid out to him and his partner combined. Someone who keeps 80% of the pie when it would be cheap to give is more focused on equality. Someone who always keeps everything, regardless of the price of giving, is just plain selfish, the very embodiment of the rational, self-interested Homo economicus.

It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.
Here's some more:
A substantial body of research suggests that economists are less generous than other professionals and that economics students are less generous than other students. We address this question using administrative data on donations to social programs by students at the University of Washington. Our data set allows us to track student donations and economics training over time in order to distinguish selection effects from indoctrination effects. We find that economics majors are less likely to donate than other students and that there is an indoctrination effect for non-majors but not for majors.
There some evidence that this may be a selection effect, but I'm skeptical. Tim Harford does a decent job defending economists, but I'm not sure it will convince everyone. So back to the original question, what do you think, did the $1 bribe work? Or did I take the money and run? The latter. I didn't take the survey. Here's a couple reasons why: 1) I spent the money on "generous jeans Friday", which donates the money to needy students for graduation robes, field trip fees, etc. Perhaps that was enough to silence my conscience. 2) Maybe the bribe itself kept me from completing it. Like my previous post on paying donors to give blood, maybe the low price made me think my input wasn't that valuable. 3) Maybe I'm just not your normal teacher.  When I went to look at the site just now all I saw was this message:
Thank you for accessing the World Geography Survey. We have had an overwhelming response and the field time is now closed. We hope you will consider participating in the future.

Thank you for your interest.
Apparently the average teacher hasn't taken enough economics. Or maybe I've taken too much.

Tuesday, November 16, 2010

I Fixed the Deficit!

Even though it seems most Americans don't care about the deficit, I've talked plenty about it. How our government's debt is the fault of every president of the last 80 years and how it  may be a small problem now, but could turn into a big problem if nothing is done. I mostly proposed more immigration and economic growth as the main ways to ensure fiscal stability. However, the New York Times recently created a Budget Puzzle interactive graphic that lets you cut or tax (you have to do both) what you'd like in order to balance the budget in 2015 and 2030. I tried it out and was surprised how easy it was.

The federal budget was balanced by only increasing the Social Security retirement and Medicare eligibility age to 68, reducing the tax break for employer-provided health insurance, capping Medicare growth starting in 2013, enact medical malpractice reform, cut troops in Iraq and Afghanistan in half by 2013, reduce the size of the other  military to pre-Iraq level, eliminating loopholes in the income tax, ending farm subsidies, measuring inflation more accurately, and returning the estate tax to Clinton-era levels (although I also cut foreign aid and eliminated earmarks just for the fun of it). I didn't even have to change the Bush tax-cuts or payroll tax. I even refrained from the personally preferred carbon tax. Here's a link to exactly what I did. Now go and try it yourself, especially if you're a member of Congress.

Economics of Advice

I've posted my most repeated advice and why taking advice can be so important. Even though we know we don't know everything, it's often hard to take advice. There's a way to fix that, pay for it. Here's the experiment:
Dozens of students were asked questions about American history and received small cash prizes for correct answers. The students were either given the option of receiving advice on the correct answers, or advice was imposed on them. Sometimes this advice was free; other times it was paid for out of the students' winnings. Crucially, the advice always came from the same source - in the form of the answer that a student from a pilot session had given to the same question - so the quality of advice was held constant regardless of whether it was free or paid for.

Throughout the study, the participants took more account of advice they had paid for than advice they were given free, even though it was made clear to them that the advice was of the same quality. A final study showed the students took even more account of advice if it was made more expensive.

Gino said her findings could be explained by a phenomenon in decision-making theory known as the sunk cost fallacy. This is our desire to justify our past investments through our present and future behaviour - it's why that expensive pair of shoes that you never wear is still cluttering up your cupboard. In the case of advice, it seems we feel compelled to use guidance we've paid for, so as to justify the expense. And perhaps it explains why expensive frauds can sometimes be so influential.
This explains why expensive therapy can be so helpful. Just so you know, I love getting specific questions from readers. Feel free to pay me for extra effect.

Monday, November 15, 2010

We Lost the Election

Some great lines from P.J. O’Rourke:
I think we lost the election on November 2. Every race was won by a politician. True, we elected some angry nuts. These are preferable to common politicians. Their anger provokes honesty, and their mental illness prevents honesty from being obscured by charm. (What a loss -Barney Frank would have been as an exemplar of the furious, insane left!) We also elected some amateur politicians. However, politics is like vivisection—disturbing as a career, alarming as a hobby. And we may have elected a few reluctant politicians. But not reluctant enough.

We will win an election when all the seats in the House and Senate and the chair behind the desk in the Oval Office and the whole bench of the Supreme Court are filled with people who wish they weren’t there.

In a free country government is a dull and onerous responsibility. It is a parent-teacher conference. The teacher is a pompous twit. Our child is a lazy pain in the ass. We undertake this social obligation with weary reluctance. And we only do it at all because the teacher (political authority) deserves cold stares, hard questions, and maybe firing, and the pupil (that portion of society which, alas, needs governing) deserves to be grounded without TV and have its Internet access screened and its allowance docked.

America’s elected and appointed officials ought to be longing to return to their personal lives and private interests. They should feel burdened by their powers, irked with their responsibilities, and embarrassed at their prominence in the public eye. When they say they want to spend more time with their families, they should mean it.
I'm not one to pine for the past, but that's one of the characteristics I most appreciated from our Founding Fathers, especially George Washington. So what's the author's solution to this problem? A random draft for politicians.

Sunday, November 14, 2010

Targeted Advertising to Speeders

I got a speeding ticket last Monday. One of those downhill speed traps that would catch any patriotic speeder. The officer assured me that if I show up for the court date they'll probably drop the charges. It seems the biggest bummer about the speeding tax is that eventually you'll have to pay it. Lucky for me I get an interesting blog post out it. It wasn't the ticket itself, but what happened afterward that was most interesting. By Saturday, just a couple of days later, I had this in my mailbox:

That's a dozen letters from local lawyers letting me know they could help in my case. Apparently my ticket is public information and this is the direct mail version of ambulance chasing. Best of all, most of the letters acknowledged the ridiculousness of the situation. One even stated that I should expect to receive up to twenty similar letters, but that if I wanted quality I should hire them. I think for now I'll go rogue and represent myself.

Saturday, November 13, 2010

Results from News Bias Survey

Whether it's MSNBC and Kieth OlbermannNPR and Juan Williams, or CNN and Rick Sanchez, it seems journalists have come under a lot of fire lately. Not accounting for the importance of journalistic integrity, there is evidence that balanced arguments can actually be more persuasive. This is why last week I asked my readers to take a list of traditional news sources and rank them based on their perceived bias. Thanks to surveyor extraordinaire Justin Landwehr, here are the results organized in a nice graphic :

(Extreme Conservative, Conservative, Unbiased, Liberal, Extreme Liberal)

Though my sample size was only a dozen (you can read all the details here), the results were enlightening. The usual suspects fell where I expected with Fox News and the Wall Street Journal on the right and the Los Angeles Times and MSNBC on the left. What I wanted to see most was what sources were viewed as actually fair and balanced. Here it seems USA Today, BBC News, and the Washington Post win out. Most surprising to me was that I, the Bottlenecked Blog, was seen as one of the most conservative sources. Perhaps it's my appreciation for the free market or my regular mention of God. Either way I did not expect to be seen as so far right.

My takeaway from the survey is that bias is hard to avoid. This is certainly nothing new. Here's a great podcast I've shared before about the economics behind the rise of balanced journalism. This may be another one of the great benefits to blogging. Like op-eds for the everyman, they give us the opportunity to know and trust our sources of information. Thanks again to all who participated in the survey and to those who continue to support this little corner of the blogosphere.

English From Around the World

Last year I shared a video on what English sounds like to foreigners. Now for the opposite. The Speech Accent Archive recorded speech samples from people all over the world reading the same paragraph. At first I thought I would just use it to improve my characters on stage, but I've mostly been playing the "guess this place" game with my wife. Here's some to try out: Australia, China, Brazil, Sudan, and Texas.

Friday, November 12, 2010

Economics of Oprah's Book Club

Like any post on Oprah, this one is for my wife:
It is well known that celebrity endorsement can have a very significant impact on the sale of products, and nowhere is this more true than with the Oprah Winfrey book club. If Oprah endorses a book, not only club members buy it en masse, but also non-members who see the endorsement on television or in the New York Times. But the spill-over does not stop here.

Indeed, Eyal Carmi, Gal Oestreicher-Singer and Arun Sundararajan show that when potential buyers go to Amazon.com to make their purchase of their endorsed book, they are presented with recommendations, which they may also buy, and then get further recommendations. It turns out that these recommendations are followed quite a bit, which generates something like a network contagion effect. The authors find that over several days after the endorsement, such a contagion effect can be significant through five levels. I would have expected this to happen when an academic click through a literature by looking at a paper's references and citations, but I would not have expected this to be so important for laypeople purchasing books, especially within days.
That's from Economic Logic.

Thursday, November 11, 2010

Problem with Veteran's Day, Another Controversial Belief

Two years ago I posted my most controversial belief: "that I don't support many seemingly innocent charitable causes". After a good (and long) conversation with my readers, I was convinced that private donations can be an important way the market accounts for passionate consumers. In light of Veteran's Day, and Penelope Trunk's own controversial post, I'd like to share another controversial belief of mine in the hopes that it will be refined again. I believe that the wrong kind of appreciation is paid to American soldiers.

Today the airwaves were full of patriotic stories praising our soldiers with hyperbolic statements that overshadowed the real commitment our soldiers have made. The reality is that the United States has not fought a defensive war since Japan bombed Pearl Harbor in 1941 (which happened because of U.S. exports to Allied forces). That means every military conflict since World War II have not been about for "protecting our freedom". Whether it's the Korean War, Vietnam War, our numerous conflict with South American nations or the intervention in the Middle East of the last two decades; almost every living U.S. Veteran is not responsible for the freedom I personally experience.

That doesn't mean they're not worthy of recognition. I've posted before on how supporting our troops doesn't imply believing "in the nobility of the mission". I've also posted about the importance of social rewards to most the valued members of our society. I'm not suggesting we ignore the brave soldiers of the U.S. military. What I do suggest is praising them for the important things they have accomplished. Like Great Britain before us and Rome before them, the United States military has increased global connectivity to the betterment of its people and the world. Not only have we been more successful at this important goal, we've done it with less coercion than our predecessors.

I'm the last person to suggest that all, or even most, American military action is acceptable. However, today I'd like our soldiers for the role they've played in American and global prosperity. Today I'd like to specifically thank my grandfather, my father, and my uncle for their past and present contribution.

Wednesday, November 10, 2010

Emptying the Bottle: Mid-November '10 Links

Here is a list of the worthwhile sites I've Bookmarked recently:
As always, feel free to email me anything interesting you come across.

Tuesday, November 09, 2010

Remember, Remember the 9th of November

I got the chance this weekend to watch one of my favorite movies, V for Vendetta. It's got all the action and thrill I love along with a strong libertarian message I can't resist. This weekend also marks the 405th anniversary of the Gunpowder Plot to which the entire movie/comic is loosely based. The movie's famous poem calls the people of London  to remember what V does on the 5th of November, but I think the focus should be on what happens the days following.

Now that the election results are in I can't help but appreciate the outcome. Not because Republicans won. Not even because of my appreciation for divided government. I like that the election restored fear, not to the people, to the government. I got a chance to attend the Daily Show rally in D.C. a couple of weeks ago and got to see hundreds of thousands of Americans rally for sanity (and comedy). I won't go into the rally itself, but here and here are two great takeaways from friends.

I will however compare Stewart's desire for sanity with the call to action in V for Vendetta. The terrorist V commits acts of violence to create fear, but unlike Colbert's push to "keep fear alive" for citizens, V wants to keep "governments afraid of their people". That is what I saw in the midterm election speeches. The great success of the Tea Party isn't that they helped the conservative movement, that isn't clear, but they they reminded politicians that they are held accountable by the voters. It isn't the election days that matter, it's the days that follow that determine our future.

Monday, November 08, 2010

Stossel and O'Reilly's Bet on Pot

Economics of "Economics of"

In the three years I've been blogging, I've done over 50 "economics of" posts. What's the value in trying to use economics to explain everything? I've mentioned before that libertarianism is tied to political knowledge. And apparently, the ability to "think like an economist" is tied to intelligence. First let's clarify how economists think:
they're more likely to be optimistic about the economy; to recognise the economic advantages of markets free from government interference, and the advantages of foreign trade and foreign workers; and to appreciate the economic benefits of achieving greater productivity with less man-power.
Here's the results of the study from Bryan Caplan:
Prior research has established that the more time a person spends in education, the more likely their broad economic views are to match that of the typical economist (pdf). Caplan and his colleague Stephen Miller point out that these studies failed to take into account the influence of intelligence. After all, it's known that people with higher IQ tend to spend longer in education and intelligence itself may also directly influence economic beliefs.

To overome this problem, Caplan and Miller have focused on answers to the General Social Survey, a massive US poll of national opinions performed every two years. Crucially, it includes questions about the economy and a small test of verbal IQ.

Caplan and Miller's finding is that the link between educational background and 'thinking like an economist' is weakened when IQ is taken into account because IQ is the more important factor associated with economic beliefs.
Hat tip to best of "economics of", Freakonomics.

Sunday, November 07, 2010

Yet Another Look at Government Stimulus

I know I've belabored this issue to death, but with the costs so large I think it's worth at least one more look. Over two and a half years ago I first predicted that the stimulus packages would not work. Later I posted that the stimuluses probably didn't work in the past (especially the New Deal) and that at best we'll never know if the cost was worth it. I eventually concluded that stimulus as a temporal tax progressive tax is the best and least used argument in favor.

The most famous example of government stimulus is World War II. And it with Ben Bernanke's recent announcement to print an extra $600 billion in a process called quantitative easing (aka increase the money supply), it seems the Federal Reserve's faith in government stimulus has not waned. However, a recent paper published by David Henderson suggest that World War II is a great study on stimulus, except that it proves the opposite of what you might think. First, here's the traditional thought process:
We often hear that big cuts in government spending over a short time are a bad idea. The case against big cuts, typically made by Keynesian economists, is twofold. First, large cuts in government spending, with no offsetting tax cuts, would lead to a large drop in aggregate demand for goods and services, thus causing a recession or even a depression. Second, with a major shift in demand (fewer government goods and services and more private ones), the economy will experience a wrenching readjustment, during which people will be unemployed and the economy will slow.
Now's here's the reality:
Yet, this scenario has already occurred in the United States, and the result was an astonishing boom. In the four years from peak World War II spending in 1944 to 1948, the U.S. government cut spending by $72 billion—a 75-percent reduction. It brought federal spending down from a peak of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP.

While government spending fell like a stone, federal tax revenues fell only a little, from a peak of $44.4 billion in 1945 to $39.7 billion in 1947 and $41.4 billion in 1948. In other words, from peak to trough, tax revenues fell by only $4.7 billion, or 10.6 percent. Yet, the economy boomed. The unemployment rate, which was artificially low at the end of the war because many millions of workers had been drafted into the U.S. armed services, did increase. But during the years from 1945 to 1948, it reached its peak at only 3.9 percent in 1946, and, for the months from September 1945 to December 1948, the average unemployment rate was only 3.5 percent.

Saturday, November 06, 2010

Survey on News Bias

With the mid-term election coming to close, it seems traditional media (TV, newspaper, magazine) has continued to be influential. They also continue to be biased. These two realities can be a problem, especially if we aren't aware of them. If you would please take a minute and label each news source by your perceived bias, not what you think most people will say. If you can't answer some, please feel free to leave them blank. I will post the results in one week. Your participation is greatly appreciated.


*The survey has been closed. Here are the results*

Friday, November 05, 2010

Where God and Libertarianism Meet

A main focus of my writing here has been my lack of faith in government and my firm belief in God. Apparently the two are may be connected:
when personal control is threatened, people defend external systems of control, such as God and government. This theoretical perspective also suggests that belief in God and support for governmental systems, although seemingly disparate, will exhibit a hydraulic relationship with one another. Using both experimental and longitudinal designs in Eastern and Western cultures, the authors demonstrate that experimental manipulations or naturally occurring events (e.g., electoral instability) that lower faith in one of these external systems (e.g., the government) lead to subsequent increases in faith in the other (e.g., God).

Thursday, November 04, 2010

Economics of The Simpsons

I recently posted on the Economics of Seinfeld. So here's some highlights from a paper, Homer Economicus, on one my other favorite TV comedies:

Bureaucrats and bureaucracy
As Gwartney, Stroup, Sobel and Macpherson (2003, 135) state, "Economic analysis suggests a strong tendency for bureaucrats and public-sector employees to favor expanding their budgets beyond what would be considered economically efficient." The Simpsons episode titled "Trash of the Titans," provides a great example of this tendency. After getting into an argument with the garbage men and refusing to apologize, Homer decides to run for Sanitation Commissioner. Running on the slogan "Can't someone else do it?" Homer wins and institutes a sanitation program that does just about everything for the residents of Springfield, from collecting diapers inside the house to cleaning their ties. This excessive spending leads to the following exchange between Homer and Mayor Quimby.

Quimby: Simpson, you idiot! You spent your entire year's budget in a month! Your department's broke!
Homer: Uh...oh no! Wait! I think I've got the perfect solution.
Quimby: You'd better! 'Cause those garbage men won't work for free!
Homer: D' oh!
Later, Homer and Marge are going over the sanitation department's expenses to figure out how he could have spent so much in such a short period of time.
Homer: Oh... [the previous commissioner] was right! I'm crashing and burning! Crashing and burning!
Marge: How could you spend 4.6 million dollars in a month?
Homer: They let me sign checks with a stamp, Marge! A stamp!

Although a bit over the top in that few (if any) bureaucrats are as stupid as Homer is portrayed to be, this episode of The Simpsons does provide a humorous beginning to a discussion of the incentives facing bureaucrats and bureaucracies.

The role of advertising in a market economy
Non-economists (and even some economists) tend to view most, if not all advertising as wasteful, misleading, manipulative, or a combination of all three. The previously mentioned episode of The Simpsons called "Trash of the Titans" provides a scene that ascribes to this viewpoint and can be used to begin discussion of the role that advertising plays in the market process.

The scene begins with a stereotypical cigar-smoking businessman in a dark room discussing with his staff the importance of finding a new holiday to exploit.

Businessman: Okay, people. We need to cook up a new holiday for the summer. Something with gifts, cards, assorted gougeables.
Woman: How about something religious? We had great penetration last spring with "Christmas II"!
Man: Ooh, I kno\v, Spendover -like Passover but less talk, more presents!
The company then creates "Love Day" and we cut to the Simpsons celebrating the holiday by exchanging presents. Homer receives a talking toy bear dressed in a suit of armor.
Bear: I'm Sir Loves-A-Lot! The bear who loves to love
Homer: They didn't have Lord Huggington?
Marge: It's the same basic bear, Homey.
Homer: [dejected] I guess.

I use this exchange to introduce a discussion of advertising in a market economy. Is it manipulative? Does it make us pay more for products that are functionally the same as other, cheaper products? What, exactly, are we paying for when we pay for a brand name?

The Springfield Nuclear Power Plant where Homer works provides an excellent opportunity to liven up discussions of monopoly. For example, When discussing why entry barriers are sometimes high, the Springfield Nuclear Power Plant provides a nice illustration of a case where monopolies exist because of economies of scale.

The power plant also provides a good opportunity for discussion of the factors that make some monopolies stronger than other monopolies. After all, it takes two conditions to make a market a monopoly (Gwartney et. al., 255) .The first, as we just discussed, is high barriers to entry such as economies of scale. The second condition is a well-defined product for which there are no close substitutes. Even products provided by a single seller have substitutes, however, even if that substitute is nothing. The degree of monopoly power, and hence the ability to take advantage of one's monopoly status, therefore depends heavily on the nwnber and appropriateness of substitutes.

In the episode titled "Who Shot Mr. Burns, Part 1," C. Montgomery Burns, the owner of Springfield Nuclear Power Plant, apparently felt that one of the kno\vn substitutes to electrical lighting was eroding too much of his monopoly power and resolved to take out the competition.

Smithers: Well, Sir, you've certairlly vanquished all your enemies: the elementary school, the local tavern, the old age home...you must be very proud.
Burns: [stuffing money into his wallet] No, not while my greatest nemesis still provides our customers with free light, heat and energy. I call this enemy...the sun. Since the beginning of time man has yeared to destroy the sun. I will do the next best thing... block it out!
Smithers: Good God!
Bums: Imagine it, Smithers: electrical1ights and heaters running all day long!
Smithers: But Sir! Every plant and tree will die, owls will deafen us with incessant hooting...the town's sundial \vill be useless. I don't want any part of this project; it's unconscionably fiendish.

In addition to being reminiscent of Bastiat's "A Petition" (1964), this episode provides an excellent opportunity to discuss what will happen to the short-run price and output ofMr. Burns' power plant, if his "fiendish" plan were to have worked.

Wednesday, November 03, 2010

Reason and Emotion Drive Market Efficiency

Earlier this year I posted about our two tools for decision making, reason and emotion. Justin Landwehr recently posted a great explanation of the idea:
This is where I think the camera analogy is very useful. If you think of emotions being like the automatic settings and you think of manual mode as being like reasoning, you can ask of a photographer, "What's better: the automatic settings or the manual mode?" And what the photographer will say is "different things are good for different circumstances" -- that if you are in a standard kind of photographic situation, the kind that the manufacturer of your camera could anticipate, then go ahead and use your automatic landscape setting or whatever. But if you're facing a fundamentally new kind of photographic challenge, then you are probably going to have to put your camera in manual mode.
It seems obvious that the manual mode in our brain is helpful. We do the mental math and calculate which decisions are best. This drives producers and consumers alike. Here's a description of an experiment showing how our automatic setting can hurt and help:
Montague’s experiments go like this: A subject is given $100 and some basic information about the stock market. After choosing how much money to invest, the player watches as his investments either rise or fall in value. The game continues for 20 rounds, and the subject gets to keep the money. One interesting twist is that instead of using random simulations of the market, Montague relies on real data from past markets, so people unwittingly “play” the Dow of 1929, the S&P 500 of 1987 and the Nasdaq of 1999. While the subjects are making their investment decisions, Montague measures the activity of neurons in the brain.
Here's the big reveal:
But then Montague discovered something strange. As the market continued to rise, these same neurons significantly reduced their rate of firing. “It’s as if the cells were getting anxious,” Montague says. “They knew something wasn’t right.” And then, just before the bubble burst, these neurons typically stopped firing altogether. In many respects, these dopamine neurons seem to be acting like an internal thermostat, shutting off when the market starts to overheat. Unfortunately, the rest of the brain is too captivated by the profits to care: instead of heeding the warning, the brain obeys the urges of so-called higher regions, like the prefrontal cortex, which are busy coming up with all sorts of reasons that the market will never decline. In other words, our primal emotions are acting rationally, while those rational circuits are contributing to the mass irrationality.

Tuesday, November 02, 2010

How to Increase Voting

I'm very interested in the culture of voting. I talked plenty about how your vote doesn't count, which helps explain why it's so hard to get people to vote. I've posted about how Swiss mail-in ballots decreased turnout. And here's Megan McArdle on how early voting may do the same. I even wrote my graduate thesis on the effects of compulsory voting laws. So when I read about a way to actually get people to vote, I couldn't resist. So what's this magical method? Peer pressure. Here's the story:
Before the 2006 Michigan gubernatorial primary, three political scientists isolated a group of voters and mailed them copies of their voting histories, listing the elections in which they participated and those they missed. Included were their neighbors’ voting histories, too, along with a warning: after the polls closed, everyone would get an updated set.

After the primary, the academics examined the voter rolls and were startled by the potency of peer pressure as a motivational tool. The mailer was 10 times better at turning nonvoters into voters than the typical piece of pre-election mail whose effectiveness has ever been measured.
My next question is, do we even want those pressure driven votes?

Monday, November 01, 2010

Emptying the Bottle: Early-November '10 Links

Here is a list of the worthwhile sites I've Bookmarked recently:
As always, feel free to email me anything interesting you come across.