The Filter^

Alan Bennett: economic humorist

“I don’t want to put you out, just half a cup”

This was Miss Shepherd (the lady who lived in a van in Alan Bennett’s garden), asking for a cup of coffee. I like to use it in Micro as an example of the difference between fixed costs and variables costs...

Schumpeter: The pedagogy of the privileged | The Economist

A study by two economists, Nick Bloom of Stanford and John Van Reenen of the London School of Economics, concluded that companies that use the most widely accepted management techniques, of the sort that are taught in business schools, outperform their peers in all the measures that matter, such as productivity, sales growth and return on capital.

via www.economist.com

Incentives and penalties

Of course Tim Howard doesn't need any help with his pens, but England's players do. Of course the master is Matt Le Tissier, once of the greatest footballers of the modern era. I was interested to see the secret of his success:

Le Tissier said he practised by offering financial incentives to youth-team goalkeepers in training if they could save any of his kicks. "I knew [the goalkeeper] was trying for every one of them and it meant I had to focus because I didn't want to give away money because I was tight," he said.

via www.guardian.co.uk

Broken Windows in New Orleans

A nice video to help launch a class discussion on the Broken Window Fallacy. Dan D'Amico offers a clarification here.

The Israeli childcare experiment

A classic example of perverse incentives, (made famous by Freakonomics):

Imagine for a moment that you are the manager of a day-care center. You have a clearly stated policy that children are supposed to be picked up by 4 P.M. But very often parents are late. The result: at day's end, you have some anxious children and at least one teacher who must wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma—it turned out to be a rather common one—offered a solution: fine the tardy parents. Why, after all, should the day-care center take care of these kids for free?

The economists decided to test their solution by conducting a study of ten day-care centers in Haifa, Israel. The study lasted twenty weeks, but the fine was not introduced immediately. For the first four weeks, the economists simply kept track of the number of parents who came late; there were, on average, eight late pickups per week per day-care center. In the fifth week, the fine was enacted. It was announced that any parent arriving more than ten minutes late would pay $3 per child for each incident. The fee would be added to the parents' monthly bill, which was roughly $380.

After the fine was enacted, the number of late pickups promptly went . . . up. Before long there were twenty late pickups per week, more than double the original average. The incentive had plainly backfired.

Since reading it in Freakonomics, I have encountered this example on multiple occasions, almost always being used as an example of the failure of crude economics (e.g. Richard Layard's "Happiness is back" piece in Prospect). The claim is that parents view the "fine" as a fee and no longer feel guilty for being late.

But this merely implies that the fine is too low!

What if the centre raised the fine to $30? Maybe they'd find a price that would cover the cost of paying staff to work overtime and supervise the children? In short, I don't see how an example of a botched incentive system is evidence against using pecuniary incentive systems. And not only this, but the study itself may have been botched. Bryan Caplan reports:

Being a skeptic, I found it difficult to believe that the experiment could have been carried out as described. I know Israel quite well. It is a country where rules are rarely enforced... Therefore, I at least want to know what the procedure was for collecting data.

His detective work revealed that:

There was no attempt to control the accuracy of the RA’s records. Oddly, I was not allowed to talk with the teachers.

There are plenty of good reasons for using non-pecuniary incentive mechanisms, and economists should correct the myth that we associate "incentives" with "cash". But this example isn't one of them.

Employers and MBAs: Opportunity in adversity | The Economist

MBAs continue to command a premium on the market: they are more likely to get jobs than people without mbas and, on average, receive a higher salary. Employers continue to pay MBAs twice as much as people with undergraduate degrees, and 30–35% more than people with lower-level management degrees, such as Master’s of Finance. Some 98% of corporate employers report that they are satisfied with their MBA hires, a figure that has not changed since 1998. Figures from the American Bureau of Labour Statistics confirm that education still pays: better qualifications are correlated with higher wages and better job security.

via www.economist.com

YouTube in the classroom

At the APEE conference in Guatemala last April I sat in on a great session where Tawni Ferrarini and Dirk Mateer presented "Use YouTube to Upload Interest in Economics". They are behind the excellent website commonsenseeconomics.com and showed off some of the videos their students had made as part of their basic econ classes.

My main hesitation was that the novelty of shooting a film would detract from the message (i.e. a triumph of style over substance) and the technical considerations and complications would obstruct the delivery of a piece of sound analysis. Tawni did a great job responding to these concerns and so I gave the students in my QM class this year the option of either presenting their work in class (as normal), or upload onto youtube in advance. Of the 19 groups 2 of them did videos, and they're available here.

The main lessons are:

• We need to invest in skills - I took for granted that students would be able to use basic video editing software, but this isn't always the case
• Make equipment available - the video quality does matter and using mobile phones won't work. The IT department need to be able to loan out equipment
• The videos tended to focus on one key message (which is a good thing), but the instructions of the assignment become all the more important
• Making a video takes significantly more time and effort than a powerpoint, but it does seem to be fun and enjoyable for the students. The engagement of the class was brilliant

I'm now more likely to encourage videos. I am convinced that they satisfy the main learning objectives, and - a massive additional bonus - they break down the barriers between the classroom and the outside world. If other students are watching and sharing these videos outside of class that is fantastic. And they also contribute to our interface with the wider community.

Perfect compeition and pricing

I recently bought the "Petrol Prices" app for my phone. I drive into work 2-4 times a week and figure that I pass several petrol stations en route. Therefore if there's a slight difference in price it might be possible to save a bit of money. My assumption was, however, that competition would mean that the prices within any particular boundary would be roughly the same, and the only stations with especially low prices would be so far out of my way the marginal benefit would equal the marginal cost. However, given that I'm an Austrian and not a Chicago-school economist instead of leaving this as an assumption I decided to buy it and find out (click to enlarge).

Textbook micro is everywhere...

Method of Marks for student elections

This week our students have been voting for their 3 class representatives. Since it's my responsibility to administer the vote I decided to satisfy my interest in radical constitutional design, and utilised a "method of marks" or "point-voting" system. As i've said previosuly:

Popularised (and dismissed) by famous political scientist Charles Dodgeson (aka Lewis Carroll), the Method of Marks is a simple way to demonstrate the weight of a preference ordering.

Voters are given a "budget" of votes to distribute between the candidates as they wish.

The only criticism of this seems to be that it's undermined by strategic voting (in a similar way to a Clarke Tax being undermined by possible collusion), but as James Buchanan (rightly) says "All voting is Strategic".pdf

I was curious to see the extent to which the system is undermined, since the common complaint is that voters would simply confer all their votes onto their favourite candidate. But this didn't happen. Of the 62 voting slips only 19 voters gave their entire budget to one candidate. Indeed there were 12 candidates, so assuming that they all voted (and gave their entire budget to themselves) only 7/50 (i.e. 14%) actually voted in this way. Even splits were common, and almost every combination of vote was in evidence. Obviously this system has a novelty value, but it does seem to do a better job of capturing the weighting of preference than simple "one man one vote".

Teaching Bayes

Peter Klein asks for recommendation about teaching Bayes. Bayes' theory is part of my Quantitative Methods syllabus and I take three steps:

1. As a method of assimilating new information (i.e. regardless of the math, do we actually behave in this way? do we "update" our beliefs based on new evidence?)
2. Defective Machine Example - I took this from several other MBA courses (e.g. see here) and it's a fairly straightforward worked example. It allows us to make calculations, and also builds on the use of decision trees
3. Drug Testing Example/Disease Example - taken from wikipedia and Nassem Taleb's 'Fooled by Randomness' respectively, these are two "counter intuitive" probability questions that Bayes helps to solve. 

I teach Managerial Economics to the same class so we come back to behavioural biases that question 1 and the Monty Hall problem that gets to 3. That's all the attention I give it.