Thursday, November 26, 2009

Behavioral Economics and Thanksgiving

From Ezra Klein:

It happens every year. It's not that you resolve to be virtuous on Thanksgiving, just reasonable. Two plates of food, and no more. One piece of pie, and that's enough. But when you're sitting at that table, staring at that food, there is no more self-control. No more reasonable. You stop when you can hardly breathe.

Or maybe I'm projecting. This column, however, will not be about exercising self-control at the table. It's Thanksgiving! Rather, this column will be about something far more powerful: exercising some economic principles.

For a long time, economists operated under the "rational actor model." Human beings were thought to be rational creatures who correctly weighed costs and benefits and calculated the best choices for themselves. Then some economists met some human beings and realized we don't really work like that. The result has been the rise of "behavioral economics," which attempts to build the responses of actual human beings into its models.

MIT economist Dan Ariely is a pioneer in the field. His bestselling book "Predictably Irrational" is as good an introduction to the discipline as you'll find. Human beings, he argues, aren't just irrational: They are irrational in predictable ways and in predictable circumstances. That means we can plan for that irrationality beforehand, when we're still feeling rational.

I asked Ariely how he would set up his Thanksgiving feast to limit overeating without having to exercise self-control. His answer was to construct the "architecture" of the meal beforehand. Create conditions that guide people toward good choices, or even use their irrationality to your benefit.

"Move to chopsticks!" he exclaimed, making bites smaller and harder to take. If the chopsticks are a bit extreme, smaller plates and utensils might work the same way. Study after study shows that people eat more when they have more in front of them. It's one of our predictable irrationalities: We judge portions by how much is left rather than how full we feel. Smaller portions lead us to eat less, even if we can refill the plate.

Speaking of which, Ariely suggests placing the food "far away." In this case, serve from the kitchen rather than the table. If people have to get up to add another scoop of mashed potatoes, they're less likely to take their fifth serving than if they simply have to reach in front of them.

"Start with a soup course," he says. That is what economists refer to as a default: Rather than putting everything on the table for people to choose, you begin by making the choice for your guests. If the first course is relatively filling and relatively low in calories, everyone will eat less during the rest of the meal.

Indeed, it's not a bad idea to limit the total number of courses. Variety stimulates appetite. As evidence, Ariely brings up a study conducted on mice. A male mouse and a female mouse will soon tire of mating with each other. But put new partners into the cage, and it turns out they weren't tired at all. They were just bored. So, too, with food. "Imagine you only had one dish," he says. "How much could you eat?"

What you eat, of course, is also important. Studies show that people aren't very consistent in the amount of calories they eat each day, but they're very consistent in the volume of food they eat each day. Thanksgiving is an exception to that consistency, but probably not to the underlying rule. Satisfaction doesn't depend on caloric intake; low-calorie, high-fiber foods and foods high in water content are filling. Thus, the more broccoli rabe there is at the table, the better.

Speaking of which, take a page out of the pilgrims' book and make sure all the food at the table was cooked by someone in the house. Economists believe that the obesity epidemic is largely attributable to the rise in food we don't make for ourselves. In 1900, it was hard to snack on potato chips because it was time-consuming for a member of the household to make potato chips. Today, of course, things are different, and there is a surfeit of vending machines and drive-throughs and supermarkets. But on Thanksgiving, make like you're in Plymouth, and ensure all of the food is homemade. There will be fewer calories available if Grandma's stuffing isn't supplemented with bowls of chips and cheese.

For all that, Ariely's main advice is not to worry too much about Turkey Day. "I don't think Thanksgiving is a time to watch your diet," he says. "How many calories can you put away in a day? Maybe 5,000 or 6,000 calories, if you really try hard." The problem, he says, is another human irrationality: remembering to pay attention to the season's big meals but not the everyday ones in between. The solution to overeating, Ariely says, "comes from [making] small changes across many normal meals."

That seems rational. But if you insist on trying to cut back at Thanksgiving, Ariely does have one more piece of advice: "Wear a very tight shirt."

Thursday, November 19, 2009

EC 303 HW 3 solutions

Ec303 Hw 3 Solutions

Friday, November 13, 2009

Ec 303 Quiz 2 solutions

Quiz2 Solutions

EC 303 assignment

EC303 – Assignment 3

Monday, November 09, 2009

Well, then

Dick Armey on Larry Summers, and, by extension me and my friends:

"I don’t consider Larry Summers a serious economist," [Dick] Armey said. “You can get a Ph.D. from Harvard without ever having seriously considered the subject.”

Monday, November 02, 2009

From the Archive: Terrorism and Economics

Given our brief discussion of terrorism and economics in metrics on Friday, here's an old post on some the stuff we talked about:

Today, we will discuss terrorism. Economics provides a great deal of insight into the problem of terrorism. The decision to commit a terrorist act is just that ... a decision. As such, we can identify the relevant tradeoffs and design policies that should reduce the probability of terrorist acts.

Terrorism has its roots in group level hatred. The suppliers of group level hatred are frequently the demanders in the market for terrorist acts (though they needn't be the same people), and the people who demand hatred are usually the people who end up actually carrying out (or supplying) terrorist acts. The whole thing is further confused by the fact that frequently demanders and suppliers of terrorism are the same people.

As such, if we hope to be successful in our "War on Terror", we need to focus on policies that dramatically change either the supply or demand of terrorists. And this ultimately requires reducing the supply and demand of hate.

To begin, focus only on the market for terrorist acts. A key component in our current strategy is negative deterrence. Gary Becker's classic model of criminal behavior suggests that criminals tradeoff the expected benefits (probability of success * value of success) of a criminal act against the expected costs (probability of being caught * penalty). Much of our current terrorism policy is designed to increase the probability of detection and increase the penalties associated with participating in terrorism. This effectively raises the price of terrorist acts by shifting the supply curve up.

The effectiveness of supply side polices is limited, however, by the amount of substitution available in the terrorism production function and the low price of terrorist acts. If we raise the price of attacking a government building, terrorists can attack shopping malls; if we profile all middle-eastern looking men, terrorists can recruit people who look different. Ultimately, the biggest cost faced by terrorists is probably the lives of any suicide attackers. Reducing the supply of suicide bombers would likely making committing terrorism more difficult. However, consumers of terrorist acts have done a good job of convincing their "employees" that there are substantial eternal rewards for their sacrifice. But even reducing the number of willing suicide bombers won't make a huge impact. Killing people in public places is unfortunately cheap. Benn Steil and Robert Litan estimate:

...acts of terror are cheap to carry out. The truck bomb used at the World Trade Center in February 1993 cost $400. The cost of training and support of the 19 individuals who participated in the 9/11 airline hijackings is estimated at only $500,000. Terrorist operations since 9/11 have been even cheaper: the October 2002 Indonesia bombings cost $50,000; the November 2003 Istanbul attacks cost less than $40,000; and the March 2004 Madrid bombings, carried out with dynamite and cell phones, cost less than $10,000. As Defense Secretary Donald Rumsfeld admitted in a memorandum leaked to the press in October 2003, "The cost-benefit ratio is against us! Our cost is billions against the terrorist cost of

(Source) Ultimately, there is not a whole lot that we can do to make the price of terrorist acts prohibitively high.

Even if we were successful at increasing the price of terrorist acts, the reduction in the equlibrium quantity of terrorist acts depends on the elasticity of demand. Peter Boettke and Christopher Coyne argue in their paper "Liberalism in the Post-9/11 World" that the demand for terrorist acts is highly inelastic (this approach is similar to Becker, Murphy, and Grossman's work on the failure of the "War on Drugs"). As such, supply-side policies are unlikely to reduce terrorist acts.

Reducing terrorism, then, requires fundamentally changing preferences for terrorist acts and prompting an inward shift in the demand curve. Unfortunately, this is extremely difficult. Some of the policies Glaeser outlines in the "Political Economy of Hatred" (e.g., increase ties between groups, promote hating the haters, etc.) will likely have some effect. However, it is important to note that blanket prescriptions like reducing poverty and increasing education are not likely to automatically improve things (Krueger and Maleckova document no relationship between income and education and individual decisions to be terrorists and only small relationships between country level poverty and education and terrorism). Indeed, some rich dude can always set up and fund his own terrorist group (see Al Queda and SPECTER).

So how does the war in Iraq fit into all of this? Initially, it was about reducing the probability of attack by raising the price of engaging in terrorism. The fear was that Saddam Hussein would provide WMD to terrorists, so we needed to intervene in order to "raise the price" of this type of terrorist attack. At the same time, we would "shock and awe" other states who might be willing to sell weapons to terrorists. Thus further raising the price of terrorist activities.

After this rationale turned out to be based in fantasy, the rationale changed to "bringing democracy to the middle east". Setting aside the question of why you would choose to promote democracy from the barrel of a gun in Iraq rather than working to increase democracy in semi-democratic places like Turkey or Egypt, the idea of reducing terrorism via democracy, I guess, works like this -- Creating a democracy in Iraq is supposed to generate more freedom and tolerance. This, in turn, should increase ties with the West and lead to less hatred of the West and more intolerance of terrorists and terrorist groups. This should reduce the supply of terrorists, reduce the demand for terrorism, and make it harder for those who do still demand terrorist acts to operate.

This is not a crazy theory in the abstract, but, in practice, there are a number of problems. The historical record for producing liberal democracies at will is not very good. Boettke and Coyne also consider this issue. They point out that of the 15 times the US attempted reconstruction efforts from 1898-1996 only four were democracies after 10 years. As they remind us, economics predicts that "conflict should not persist where gains from exchange exist." However, in most reconstruction efforts (and Iraq in particular) a number of barriers exist that prevent peaceful bargaining. I encourage you to check out their interesting arguments.

The Economic Cost of Harboring Terrorism

Another interesting paper on the economics of terrorism:

10. The Economic Cost of Harboring Terrorism
by Efraim Benmelech, Claude Berrebi, Esteban F. Klor - #15465 (LS PE POL)


The literature on conflict and terrorism has paid little attention to
the economic costs of terrorism for the perpetrators. This paper
aims to fill that gap by examining the economic costs of committing
suicide terror attacks. Using data covering the universe of
Palestinian suicide terrorists during the second Palestinian
uprising, combined with data from the Palestinian Labor Force Survey,
we identify and quantify the impact of a successful attack on
unemployment and wages. We find robust evidence that terror attacks
have important economic costs. The results suggest that a successful
attack causes an increase of 5.3 percent in unemployment, increases
the likelihood that the district's average wages fall in the quarter
following an attack by more than 20 percent, and reduces the number
of Palestinians working in Israel by 6.7 percent relative to its
mean. Importantly, these effects are persistent and last for at
least six months after the attack.

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