From the comments, on the political implications of behavioral economics

The classical MU [differential marginal utility of money] argument has, in my view, been moderated by the findings of behavioral economics, namely loss-aversion. Taking from the higher-incomes to give it to the lower incomes may be negative utility as the higher incomes are valuing their loss at an exaggerated rate (it’s a loss), while the lower income recipients under value it.

Many on the Left are too quick to grab on to the findings of behavioral economics as a critique of neoclassical economics, but while they often do point away from simplistic free-market views, they do not necessarily point towards left-wing solutions. They are just as likely to point to non-market conservative views.

For example, isn’t it another consequence of the asymmetry of the utility function with respect to the status quo (loss aversion) that social mobility destroys utility? I mean, if the tide is lifting all boats, then you can argue that it’s still better for everyone (the libertarian view), but if your utility function is heavily rank-based (a standard left-wing view) and you accept loss-aversion from the behavioral literature, then social mobility is suspect from an utility point-of-view.

This sounds shockingly old-school conservative when we discuss our own societies (“why should the children of the poor compete with my kids for a place in a good university? they have lower expectations, after all, State U is a step up for them. My kids, on the other hand, would be crushed if they had to go to their safety school”), but is quite acceptable when discussing international inequalities (“it doesn’t morally matter that people in Mexico have much less material wealth, their society has lower expectations”).

That is from Luis Pedro Coelho.

Comments

When has anyone openly argued that rich kids shouldnt have to compete with poor kids on admissions? And why is that a stereotypically conservative point of view? Don't the demographics show that the wealthy skew liberal?

or are we just conflating "conservative" with "asshole" here?

The most plausible explanation of liberal education policy is that the wealthy elites do claim to be liberal, but in fact they support policies designed to prevent upward mobility and competition for things like school places.

The New York public school system is utterly dire and there is little chance that anyone who sends their child there will end up at a graduation ceremony in the Ivy Leagues. It is also run by wealthy liberals. So in the name of fairness and equality they are turning out illiterates. Meanwhile said wealthy liberals send their children to private schools and hence to the Ivy League.

Sometimes they condemn parents who send their children to public schools even as they are doing so. As Obama did recently.

Certainly liberal education policies do not help the poor. They only help those easily able to afford private education. A comprehensive explanation is not always the right one but the evidence looks strong here.

I always advise my fellow conservatives to pay close attention to how New York City's ostensible liberals and centrists have rebuilt their city over the last generation. Don't worry about what they say -- it's blatant hypocrisy, obviously -- but pay careful heed to what they do and consider how you can implement similar policies in your own communities.

The New York public school system is utterly dire

Is it? Evidence?

Maybe you shouldn't comment about what you don't know. There are excellent public NYC high schools that send a huge portion of their graduating classes to top colleges. Stuyvesent for example.

and 1699 that aren't Stuyvesant.

You mean there are a tiny number of selective schools that the liberals have not yet managed to close down, but even as we speak are busy trying to destroy them by imposing racial quotas?

How does the fact that New York have four good public schools change the fact that all the rest range from bad to dire?

The Specialized High Schools (Stuyvesant, Brooklyn Tech, Staten Island tech + 4 others) are all quite good. Especially the three I explicitly named. A large percentage of their students go to Top10 schools for undergrad.

I challenge the assertion about NY Public Schools. I would put forth that if you found a 'typical' lower middle-class kid who has consistent attendance, earns respectable grades and applies for the opportunities that present themselves (clubs, honors classes, activities etc) and does not get into serious trouble will most likely have a very good outcome from NY Public Schools, in fact most public schools.

I tried to find an "objective" evaluation of NYC schools, and for at least a few pages of search results, I could find none that wasn't that wasn't tainted by connection with the NYC government or some liberal organization. I did find the cost per pupil at Stuyvesant at it was much lower than the cost for the entire system - http://schools.nyc.gov/SchoolPortals/02/M475/AboutUs/Statistics/expenditures.htm

To be fair, Stuyvesant has no special ed students, whose average cost of almost $46K is triple that of the average general ed student. Even counting only general ed students, the cost system wide was $15k versus $13.3K at Stuyvesant. So it costs less to educate the very bright. Why is that?

I think it is very significant that the funding for the NYC is not voluntary and the teachers unions and the mayor fight any attempt to increase the number and funding of schools outside the grip of the unions. Can't let the customers decide - they might go elsewhere.

Even counting only general ed students, the cost system wide was $15k versus $13.3K at Stuyvesant. So it costs less to educate the very bright. Why is that?

To be fair, Stuyvesant has no special ed students...

Hospital A specializes in stage IV terminal cancer patients.

Hospital B specializes in doing boob jobs for actresses.

Patients from hospital B look more beautiful, healthier and have lower average bills than A patients. Why is that?

So genetic superiority is your answer?

Well in the analogy I used that wouldn't be the main driver of cost difference between the two hospitals.

I think that thmoninthe moving to opportunity study shows that is is not schools that make the students perform badly but the bad students that make school perform badly. Good students do well in "bad schools" and bad students do not do well in "good schools".

You conveniently switched the argument around. It is very common to complain that the poor have to compete with the rich for admissions. That is what this whole 'white privilege' nonsense is about.

And by the way, poor kids have parents who can't afford to work around the dysfunctional liberal run and enforced school systems. How can you look yourself in the mirror knowing that you support such an awful system that dooms young people to misery?

I would, personally, support a more meritocratic system with easily understood and quantifiable parameters. No BS about athletics, leadership, ethnic activism, overcoming the micro-aggressions and racism of the whites. Just SATs, ACTs and IQ tests. This will elevate two minorities (East Asians and Jews, the latter being already overrepresented, but which might be reduced in a purely meritocratic setting), while dooming the other two big minorities, Hispanics and African Americans (though the presence of concrete goals might spur them on and reduce hang-ups people might feel if they make it through affirmative action). It might also disadvantage the majority population somewhat, but the current affirmative action already disadvantages it and a meritocratic system's disparate impact will be more legitimate than the disparate impact of affirmative action. Of course, since Ivies are not the only good Universities or the last good Universities to ever be built, you could simply fund ethnic enclave Universities, which might be a very good thing for African Americans. Harvard was never built to house the best, but to house the reasonably bright and sometimes dim scions of the Protestant families that founded and funded it for the community. Its growing reputation attracted others, most notably Jews, who threw the gates open with their exceptional academic achievements. Less meritorious minorities have followed in their wake.

What exactly makes SAT, ACT, or SB-V scores an indication of merit such that they would form a good basis for a meritocratic system?

They would select for a certain type of merit, I suppose. But society needs people with diverse skills, so a student who leads a club or involves himself in community service might be just as "qualified" to attend a top school as a dweeb who spends his life preparing for a standardized test.

Society might need them but why does Yale?

Society might need them, but how does it help poorly performing minorities to encourage them to focus on anything other than academic performance?

Do the SAT, ACT or SB-V test academic performance?

They certainly correlate to academic performance - a good enough measure.

I like Ron Unz's suggestion of introducing an element of randomness to it. For the top universities use SAT/ACT and AP/SAT II tests to select the top 2% percent of the population and then use random selection(with a bias to the smartest within the top 2%) to select the elite university classes. This would do two good things: it would neuter the unproductive educational arms race and it would eliminate the mostly unjustified sense of superiority found in those who go to elite colleges.

I did not mean conservative in the sense of Republican.

A defense of the propriety of social classes is a conservative view. It's a type of conservatism that doesn't even openly exist in large numbers anymore in the US, hence the qualifier "shockingly old-school". The international version is quite common, though. I do think it's a very conservative view, even if it's held by liberals.

Luis Pedro Coelho May 24, 2015 at 3:37 am

It’s a type of conservatism that doesn’t even openly exist in large numbers anymore in the US, hence the qualifier “shockingly old-school”.

I am not sure that is true. I think there is an openly spoken defense of the propriety of social classes. There are plenty of critiques of the upwardly mobile - most of the criticism of American society on environmental grounds are openly class based with the Upper Classes condemning the rising Middle classes.

However the best example of it would be the savaging of Sarah Palin. When people say she was unqualified they do not mean that she failed to fulfill the Constitutional requirements for Vice President. They mean she was a lower middle class oik who had no right to think of holding national office.

"most of the criticism of American society on environmental grounds are openly class based with the Upper Classes condemning the rising Middle classes."

I doubt that this is said "openly".

"However the best example of it would be the savaging of Sarah Palin. When people say she was unqualified they do not mean that she failed to fulfill the Constitutional requirements for Vice President. They mean she was a lower middle class oik who had no right to think of holding national office."

My impression is that most people who says that Sarah Palin is "unqualified" never said that about Bill Clinton (who was much more from the "inferior classes" than Palin), meaning the point is not exactly about social class (perhaps more about culture and lifestyle, and of course about the party)

I does that square with Bill Clinton or Obama for that matter? Neither came from America's upper classes.

Yeah, but they came from Georgetown, Yale, Columbia, and Harvard. For an ass like Charles Fried, that matters. If you've spent 11 years actually running public agencies, that does not matter, because University of Idaho, radio reporting, blue-collar husband, rustic hobbies, and flat vowels are oh-so-vulgar.

Bill was definitely lower class, but very bright - Rhodes Scholar.

Obama's grandmother who raised him was a VP at a bank and sent him to the best schools.

Yeah, but they came from Georgetown, Yale, Columbia, and Harvard

So liberal elitists are mean to the lower class 'cause they shut them out of the elite schools.

Liberals who come from the lower class and get into the elite school don't count because they 'come from' the elite schools.

Obama’s grandmother who raised him was a VP at a bank and sent him to the best schools.

Yes she was a VP at a local bank in Eldorado, Kansas and then in HI. A good job but not exactly the same as VP of JP Morgan.

Boonton May 24, 2015 at 4:23 pm

So liberal elitists are mean to the lower class ’cause they shut them out of the elite schools. Liberals who come from the lower class and get into the elite school don’t count because they ‘come from’ the elite schools.

No, liberals do all they can to prevent the lower classes going to elite schools, but once they are there, as long as they adopt the values of the elites, the elites are willing to accept them. Clinton did not only go to good schools, including Oxford as a Rhodes scholar, he also was perfectly willing to dump the values of his home town for those of his blue stocking Upper Middle class wife.

Boonton May 24, 2015 at 4:30 pm

Yes she was a VP at a local bank in Eldorado, Kansas and then in HI. A good job but not exactly the same as VP of JP Morgan.

Not everyone can be the son of a VP of JP Morgan. But Obama's mother did the liberal elite thing - she spent her life in academia and things like the Peace Corp.

The President's American grandparents were kind of the black sheep of their respective families, so it's easy to underestimate Obama's class background. Both his maternal grandfather and maternal grandmother had siblings with Ph.D.s Janny Scott's biography of the President's mother had a lot of interviews with members of the extended families, who were consistently highly educated and well-spoken.

Also, the President's stepfather, Lolo Soetoro, came from a prosperous, well-connected family in Indonesia. His father was the top petroleum geologist in the country. Similarly, Obama's first serious girlfriend was the daughter of an Australian Ambassador to the United States and stepdaughter of a top global mining industry lawyer. His male friends were mostly rich Pakistanis and the son of an American diplomat.

As Obama has observed, up until he decided to move to Chicago in 24, he was on track in life to work for the Foreign Service, the Ford Foundation, or teach international relations in academia.

Clinton did not only go to good schools, including Oxford as a Rhodes scholar, he also was perfectly willing to dump the values of his home town -

Hmmm, yet according to you even being a VP of a bank in Kansas (remember this would have been before branch banking) is 'elitist' and also dumping your 'home town' values.

But endlessly nominating Bush's to high office is 'small town' values?

I think the Not to Subtle's and other self-styled anti-elitist Republicans here should provide us with a set of rules that they think Democrats should follow to be termed non-elitist. It seems like a very long and convoluted system whose only purpose is to trash Democrats of any background while leaving one open to fall in line with whatever nonsense wins the next GOP primary.

An even better counter-example - more or less the same people who despise Palin also despised G.W. Bush (probably the most "blue blood" president of US recent history), and with very similar arguments (something in the line of "unsophisticated ignorant"), meaning that the "problem" was not the social class of birth.

Palin was despicable because she was:

1. Stupid.
2. Essentially an affirmative action pick by the people who like to badge themselves as above affirmative action.
3. Stocked hatred (look at the heat Obama took for the comment about 'clinging to guns'. Imagine if Obama had just declared places like Texas, S. Carolina, etc. as the 'less American' parts of the country).

Right wingers here who are still clinging to the meme that Palin got a bum rap can care to explain to us why the GOP is scrapping the crust from the bottom of the barrel for Presidential nominees yet don't even want to consider Palin this time around!

She is not stupid, you are. You mistake matters of personal style for actual experience and performance.

Thanks for making it plain that portside politics has nothing left to it anymore but inane status games.

She's probably not the brightest bulb, but still more accomplished than Obama, both at the time of the election, and now.

You underestimate the value of governing, which Palin did at the local level as mayor of Wasilla and as governor of Alaska, until legal challenges by deranged opponents made it impossible to continue. Obama is a third rate intellect, with a hard-left philosophy. It will take years of work to repair the damage he has done.

Your visceral reaction to her is a reflection of the weakness of your case.

You underestimate the value of governing, which Palin did at the local level as mayor of Wasilla and as governor of Alaska, until legal challenges by deranged opponents made it impossible to continue.

Yes clearly if you can't make it in Alaska you should be in a high national office since there you don't have to worry about 'opponents'.

How come you never defend Obama?

Obama is a third rate intellect

Kind of like a fat, bloated drunk person sitting in a bar telling the world he would be a better quarter back than Peyton Manning.

If Obama is a 3rd rate intellect then what rate would the people who ran against him be?

@SMFS: Nah, in Sarah Palin's case it was much simpler. She is as dumb as a bag of hammers. So is Rick Perry, which is why he is also unqualified to be president or veep. Not every redneck or 'lower class' person is dumb. But those 2 are.

So is Joe Biden. This criticism would be so much stronger if it did not come from people who voted for him.

The Constitution says nothing about intelligence. Being dumb does not make you unqualified in a legal sense. It means you are outside of the cognitive elites Charles Murray keeps talking about.

I'm just saying her problem was not being lower class, nor was she technically unqualified to run for the office. She's just a dumdum.

msgkings May 24, 2015 at 5:57 pm

I’m just saying her problem was not being lower class, nor was she technically unqualified to run for the office. She’s just a dumdum.

But that was not the criticism. The criticism was that she was not qualified. So there is some other system of qualification apart from what the law says. Clearly it is related to the claim - without much evidence - that she is stupid. That is, she is not a member of the sort of class Charles Murray writes about.

And again, your criticism would be stronger if it did not come from people who voted for Joe Biden. Who is just as stupid if not even dumber. Has a vastly worse record of saying offensive things. And is only one heart beat away from the Presidency. Stupid is acceptable when it was an old White male.

No one who is from Texas would say Rick Perry was as dumb as a bag of hammers. The man completely dominated the second largest US state, serving longer than any governor in its history, while he stacked every state board with his loyalists and crushed all opposition utterly while having an approval rating that rarely exceeded 50%, and was often considerably lower.

Before Perry the governorship was not that important in the state, but during his regime the Lt. Governor and the House Speaker's offices dramatically declined in real power. if you think a stupid man could gain and hold this kind of power you really know little about either intelligence or humanity. Also though I have been a Texas voter for most of the past quarter century, I have never voted for the man.

So is Joe Biden. This criticism would be so much stronger if it did not come from people who voted for him.

Not really. Biden is actually very smart and a very able politician and this is evidenced by a long successful career in the Senate and two stints as VP.

Look fact is Palin has never won any election of great importance. Biden, Obama, and even Hillary all have. Politics is a blood sport. Every person who holds a high position has lots of people who want to unseat him and claim that position for him or her self. To be successful for any extended period of time requires intelligence or at least good instincts. What exactly has Palin done to demonstrate this? Amass Facebook friends and reality TV gigs? Yea ok, very nice but beyond that she has demonstrated no objective political intelligence. If you think I'm wrong please tell us why we have something like 75 GOP candidates floating around at the moment yet no one even dares suggest 'draft Palin'?

Oddly, I think both threads of argument here are right.

a. Palin, through her words and actions, has given me very little reason to suspect her of being smart or knowlegable enough to make a good president. She's not alone in this, by any means.

b. A huge amount of the hostility against her was tribal, as it always is in politics. Some of that was red team/blue team stuff, but a lot was social class--she has the wrong accent and the wrong class markers. Most of the people doing the initial judgment of her are themselves pretty clear on the right class markers, but are ill-equipped to make judgments about anyone's intellect or knowledge.

Politicians generally run on a professionally-created image, and once that image is established, it can be almost impossible for it to change, even when it's obviously contradicted by the facts. (Consider McCain's image as an outsider maverick, despite his decades of power in the Senate and his nearly-perfect partisan voting record. Or George W Bush's "regular guy" schtick, complete with downmarket accent and vocabulary, despite his lifetime spent in the power elite of the globe and his world-class education.)

Palin was a governor, and in American political culture being governor of one state is considered equal to being governor of any other state regardless of its size and importance. Of course this attitude is nonsense, and the political credentials of both Clinton and Howard Dean were taken much too seriously. Before she was mayor of a suburban town, and really once she got on the political stage it was obvious that this was the post she was best suited for.

There has been a trend in my lifetime of seriously considering or actually electing candidates for President and Vice President with paper thin resumes of political experience -one term governors, small state governors, one term Senators, legislators who were perpetually on the backbenches. I think this is deplorable and don't want to cut Palin any slack on the issue.

There was an active campaign against legacies in admissions way back when bright Jews tended to have gone to CCNY because of quotas limiting Jewish students at Harvard and Yale. But Harvard dumped its quotas by the mid-1950s or so and Yale finally stopped limiting Jewish admissions in 1965. By the early 1970s most elite colleges had pro-black and, sometimes, Hispanic quotas in place.

So, we are now one and often two generations out from the big ethnic shift in admissions. For example, the President of the United States was a legacy at Harvard (due to his Kenyan father getting a Master's degree there in the mid-1960s) and the First Lady was a legacy at Princeton due to her basketball star big brother.

This means that legacy policies don't have any organized ethnic opposition these days -- and race/ethnicity is much easier to organize around in 21st Century America than is class -- except Asians, and they're not very politically powerful. So you hear a lot of grandstanding about how horrible it is that Thurston Howell VI is getting into Harvard as a legacy, but, amazingly enough, nothing much seems to change.

This does explain the emphasis on redistribution than predistribution and how much easier, more preferable, and more common it is to manipulate the latter than the former.

Within any state, the wealthy are more conservative than the middle-class who are more conservative than the poor. Rich people in California and New York are more liberal than rich people elsewhere though.

Perhaps the example was bad but the point well advanced nonetheless?

The argument is that the wealthy erect barriers to entry and perhaps doing so are adequately by the theories of behavioral economics which are often used by the Left to justify market intervention. He is criticizing the Left for its intellectual inconsistencies.

The ranks of billionaires and hundred-millonaires do tilt left, but millionaires and above tilt right. I think you are correct though that money does not adequately explain political affiliation.

The Left also tends to be disproportionately represented among higher educated people, but also the least educated people. I'd also argue that one should not conflate education with intelligence. Lots of people with Ed.Ds and Ph.D.s and MAs in useless liberal arts are morons.

" I’d also argue that one should not conflate education with intelligence. Lots of people with Ed.Ds and Ph.D.s and MAs in useless liberal arts are morons. "

The ghost of Richard Hofstadter would not agree.

It would be wrong.

By "morons," I guess you mean "a lot smarter than the average person, but not up to the standards of people who get PhDs in harder subjects."

"why should the children of the poor compete with my kids for a place in a good university? they have lower expectations, after all, State U is a step up for them. My kids, on the other hand, would be crushed if they had to go to their safety school”

It seems to me that rich people having to face a large disappointment early in life would be an active social good!

Optimal solution is a zombie apocalypse. That was, once it's over whatever happens it's like, hey, this is still way better than the zombie apocalypse.

“What I learned is how little is actually known about mental illness. All I know is it’s rarely about finding solutions. It’s just more about managing expectations,” Georgia’s mother says. Georgia's case became so bad, her mother's expectations became for her to wish for her own daughter's death. (Source: avclub hannibal-buffet-froid-90080) .. (Hannibal season one episode “Buffet Froid.” ) (And no, I'm not exactly sure what it means in this context. Just an interesting juxtapositioning.)

Very thought provoking.
An additional question is the interaction between where the marginal utility curve drops for various individuals without influence of comparison too others. We are all pretty happy with what we have until we see that someone else, or others, have more.

This also partially explains the success of withholding taxes: if you never even see your money, it doesn't feel like a loss.

Yeah, "success".

The most disruptive thing we could do to the political system from a libertarian perspective would be to get rid of withholding taxes. Make everybody pay their taxes directly on a quarterly basis, just like entrepreneurs do.

Why quarterly? Taxes are progressive so you do not know how much you owe until the year is over. Annually. (and btw I am one of those who has to make quarterly payments and I hate it.

Rational expected loss aversion

There may be "old school Conservatives" out there who use a harm based, subjective morality to justify why their kids should get more (subjectively my kid would suffer more than another, so should be privileged to offset this, for fairness sake).

But in general, I don't think Conservatives assume their kids are massive p*ssies, (and in general their kids probably aren't, especially compared to other political groupings).

The more common thing for Conservatives to justify their kids being advantaged is that they view institutions as passing on group culture, and as cementing the bonds of group culture (there is such and such an ingroup whose members are all bonded by the fact that they went to the same school and we have a duty to keep that group together, even if it's not "fair" to people outside the group). Consequently they are quite happy for *both* their kids and the kids of others to suffer a little in their well being if it means not coarsening or degrading the bonds of culture and tradition.

Basically, not a "well being" based morality at all, let alone one which privileges their own offspring's well being. The reasoning is based on social and cultural stability and continuity itself, as one might actually expect from genuinely conservative people.

The subjective well being idea might apply to a few of the "Conservatives in name only" grouping who helicopter and hothouse their kids though, out of genuine overprotectiveness. My subjective opinion is I don't think there are many such people, and neither did they really exist in such great numbers.

People who come from a traditions with roots in the utilitarian movement tend to overperceive harm and individual interest based motives.

Yes. This thread got me thinking of my elite father's school (not university) in Sri Lanka. I would have gone their had we stayed in SL.

Schools like to call themselves "communities", but that kind of british-inspired independent school really means it. Like all real communities, they need tribal loyalty with tribal elders lending support. They also want kids walking the gate on their first day proud of their tribe.

All this is useful, because villages and regiments these schools are contexts where young people are socialised. Classrooms are not. Much of the socialisation is bad (bullying etc. are accepted), but all together, it's a society where 16-year old boys to win status through academic, (or cricketing) acheivement. There's no such thing as "too ecool to study".

There are intellectual arguments you can make for privileging your kids over others, but I think they're almost always after-the-fact rationalizations. I'm going to spend a lot of effort helping my kids both be happy now and get ahead in their lives. As I understand the research, it's quite hard for parents to have a big long-term effect (other than obvious bad stuff like letting them eat lead paint chips off the walls), but getting them into better schools so they have a better class of friends and girlfriends/boyfriends and such is still worthwhile, and helping them get into top colleges probably helps them substantially in life if they're remotely prepared for it.

The loss aversion curve is steepest near zero (there is diminishing disutility to losses), so if you used that curve as the basis for tax policy then you'd set things up so that as many people as possible pay 0 in taxes and the rest pay a whole lot in taxes. In a society where everyone's income is the same, everyone paying an equal amount in taxes would be the worst possible solution according to that function - there'd be much less disutility if you picked as few people as possible to soak as heavily as possible. With unequal incomes, you get to minimize the number of people being soaked by soaking the rich.

The right half of the prospect theory utility function, for gains rather than losses, is also steepest near 0. The first dollar of gains matters less than the first dollar of losses (by a ratio of about 1:2.5), but it matters more than the 10,001th dollar of losses. So, if you used the full prospect theory curve as the basis for tax policy, then you'd set things up so that as many people as possible got a modest payment from the government, and a (slightly larger) few get thoroughly soaked with extremely high taxes.

However, I doubt that the prospect theory curve actually reflects the impact of taxes on well-being. Costs are generally treated somewhat differently than losses, and taxes are usually batched with other transactions. Income taxes paid via withholding are probably framed as reducing the gains from one's salary (rather than as a loss starting at 0), and sales taxes are probably framed as increasing the cost of a purchase (rather than starting over at 0).

Best remark on the post.

Very good response.

"For example, isn’t it another consequence of the asymmetry of the utility function with respect to the status quo (loss aversion) that social mobility destroys utility? "

Haha. There's just an endless supply of these greed rationalizations. When the 99% have finally heard enough , the 1% will find they've become even more "loss averse" :

http://i.ytimg.com/vi/0yaKqTCOJ08/hqdefault.jpg

May they get your head first.

It is not the place of government to engineer the distribution of wealth to fit some social science fantasy from a utilitarian wet-dream.

Government should provide a basic welfare floor - protection against some level poverty, homelessness, disease that the culture finds repellent. Beyond that, government has no right to push people around the wealth distribution.

That is the libertarian position, for your information.

Really??? That sounds left-wing ;) The government needs to push people around the distribution, otherwise where would it get money to pay for protection against poverty???

It's not really left wing since there is no level of poverty, homelessness and disease that libertarians actually find repellent enough to merit any redistribution.

Steve

Don't you mean that there is no level of redistribution, short of completely equal shares of wealth, that will satisfy a progressive?

You think that would be satisfactory? It's not about equality or anything else but control.

If we had lower levels of spending as a whole and no spending on non-market failures, there would be plenty of revenue from a flat tax to provide a safety net for the poor. This doesn't even include the effect of greater willingness to be charitable when most of your reward isn't taxed away. The super-rich can be super-rich if you took 90% of their wealth. The average 1%er would not.

If we want a liberty-friendly social safety net, I think the best choice is some kind of universal basic income, perhaps combined with medicaid eligibility for everyone. This eliminates the paternalistic aspects of social safety nets and the perverse bits where someone has a 90% effective marginal tax rate if she takes a raise, because she'll lose access to medicaid and rent subsidies.

"The classical MU [differential marginal utility of money] argument has, in my view, been moderated by the findings of behavioral economics, namely loss-aversion. Taking from the higher-incomes to give it to the lower incomes may be negative utility as the higher incomes are valuing their loss at an exaggerated rate (it’s a loss), while the lower income recipients under value it. " This claim does not make any sense and except for mood affiliation i dont understand why this is highlighted... "Lower income recipients under value it"... I bet none of you guys has ever been on welfare or had any risk of being on welfare in your lifetimes, because if you would, you wouldnt say such silly things....

prospect theory (behavioral) assumes agents maximize a 'value function' (not a utility function)
this does not measure true well-being, but something like an emotional/short-term response to change
in another words, loss aversion is a bias. we over-estimate 'pain' from loss (we under-estimate big picture (level of wealth) and quick adaptation)

so, i don't think prospect theory is relevant to welfare analysis of redistributive taxation

Behavioral economics has been applied most in finance - the section of the economy where decision-making is most computerized and human psychology least relevant.

I think Tyler Cowen made a somewhat similar argument here, in point 3:

http://marginalrevolution.com/marginalrevolution/2012/01/why-economic-mobility-measures-are-overrated.html

John Quiggin responded here:

http://johnquiggin.com/2012/01/25/how-not-to-defend-entrenched-inequality/

You will see another resoponse by Cowen in Quiggin's post, but as far as I can see, it's the usual "mood affiliation" nonsense, i.e. no response at all, instead alluding to a trolling devise disguised as a "fallacy."

Also, I would like to know how these things actually scale: if we are to talk seriously about loss aversion vs. utility, we need at least to know orders of magnitude, isn't it? I am asking this because it reminds me of Andrew Gelman getting nervous whenever risk aversion is explained in terms of utiliy functions, though they seem to operate at completely different scales:

http://andrewgelman.com/2014/09/10/notion-geocentric-universe-come-criticism-copernican-astronomy/

Possible that I missed it, but I think if this debate is to move away from a war of rhetorics about ill-defined concepts (in the realm of the specific point being made), it should involve something quantifiable and actually well-defined notions that allow a real comparison of what is being suggested.

This is incorrect. Loss aversion is considered a failure of rationality. Traders and other specialists learn to ignore loss averse sentiments and become more effective, as do the rest of us in all areas of life. Behavioral economics documents irrationality; we use it to understand how irrational choices make people worse off, NOT to figure out how to help people make irrational choices as Luis is suggesting.

MR posts like this are disappointing; equally bad thinking from the left doesn't get headlined on this blog.

Good response. Yes, financial advisers are trained to identify and mitigate irrational behavior. The point here, though, is how the theory of behavior on the whole supports one's economic views - not whether one person or one advisor can overcome biases. If people at the track largely chose race horses based on the colors of the jockey's jersies, the odds would reflect that fact. A smart bettor might identify and exploit this irrational behavior, but the model of choice depending on colors still explains people's behavior. You might claim that people deconstructing the model would bet the farm and drive out the dumb money, but the risk of ruin is so high that a few unlikely events will wipe out the exploiters.

I suspect that in the state of nature loss aversion is a very well adapted trait. It is present in all higher animals, from mammals to molluscs. Sure avoidance of it can be advantageous in certain situations where the risk of loss is minor, such as finance and commerce, but in the rest of life it is a very good strategy.

This is silly. If you ramp up redistribution then the richer people whose incomes go down will be unhappy for a little while (months or a year or two) but then they'll adapt to the lower level. The decline in income which generates loss aversion is only temporary.

Good post, but it is interesting how the topic is always if taxes on the wealthy are fair, and never if FICA taxes are too high.

Seems to me the best text to cut now would be FICA taxes, directly benefitting in those who work and employ.

Never a topic.

The logic of many of these posts is impossible to follow because the meaning of words like "liberal" and "conservative" is not shared, and is instead based on the implicit personal stereotypes of each individual. It may be that each one is focused on his or her red herring, but we don't even know that without more clarity in the terms being used.

Eat the poor: there's more fat on 'em.

An oddity in America and the UK.

My thought is similar to John's, that you aren't going to get as much as you could out of Behavioral Economics if all you do is overlay it on Left-Right politics.

I think both Left and Right have a mental model of rational actors, especially for themselves.

Perhaps this is true for all ideologs, and a focus on how left and right respond to BE is misguided for that reason.

If anything, the Left-wing is (or was) more in the "rational actors" model than the Right-wing - perhaps the main point of ideologies like traditional conservatism is that humans are not (ad should not) be absolutely rational, and things that prejudices, traditions, shared values, etc. are, in many situations, more important than "pure reason"

To oversimplify another way, if neither the central committee nor the market can be trusted to be right all the time, then no one understanding bounded rationality can be too far right or left.

Real systems should recognize error and adjust, not double down on some self-deception designed to protect the ideology.

I wonder why then more traditional conservatives overseas (and here, I suppose) don't distrust the idea of the state overseeing affairs. They apparently assign bureaucrats more rationality than is due if they're serious about interrogating man's ability to be rational.

In an ideal situation, perhaps neither committee nor company would always have the upper hand.

Some randomness might actually be preferred to the idea that bureaucrat or CEO is always right, or always wrong.

I mean, as I read behavioral economics, we should stop thinking we have the right answer all the time.

So what sort of politics can incorporate behavioral economics? I think it has to be the pragmatic varieties, those that will tune their methods and their philosophies to meet reality.

It seems like loss aversion provides an argument in favor of maintaining the status quo in arrangements like taxicab licensing or farm subsidies--those thing make the world as a whole worse off, but the cabbies/farmers who are hurt by their loss will care a lot more about that loss than the customers/taxpayers who gain from it.

And moving away from "ought" statements and toward "is" statements: this probably explains some of why entrenched interests are so effective at fighting to keep their special treatments. Cabbies who already have medalions or farmers who are able to keep operating only because of subsidies fear the loss of their special-treatment-enabled career more than they would look forward to a similar-sized gain.

This posting shows a profound misunderstanding of loss aversion. It is loss aversion in the face of uncertain choices. Knowing that I will have to pay higher taxes or tax rates at higher income levels has nothing to do with that. This is just embarrassing.

Uncertain choices is not the only place where loss aversion shows up.

Certainty is merely uncertainty with probability 1. The equilibria change in predictable ways as uncertainty is resolved, no?

I don't think you are correct, although I could be wrong. Every definition I see of loss aversion refers to the utility of each event (loss or gain) rather than the expected utility of the gamble relative to a certain payoff.

I want to thank a wonderful informative article Tyler Cowen

TH has a good point.

The notion of loss aversion arises when individuals are faced with gambles. It relates to decision-making by the individual, not public policy.

Indeed, standard notions of the marginal utility of wealth can be used to supprt these same claims.

The well-financed and never-ending quest to justify our Gilded Age continues.

I don't think so. Loss aversion means that the disutility of a loss is greater than the utility of an equal sized gain. This is a post dice roll evaluation. Loss aversion is characterized as risk aversion over such a utility space.

My understanding could be wrong, but I'd like to hear a more specific discussion rather than THe dismissal of contrary views as "embarrassing".

Loss aversion is characterized as risk aversion over such a utility space.

Ordinary declining marginal utility of wealth also leads to risk aversion as you describe it. Loss aversion can lead to risk-seeking as well as risk-aversion.

For example, in one of their papers* Tversky and Kahneman cite the following example:

Subjects are to imagine themselves $500 richer than they actually are and are given a choice between:

a. A 50% chance of losing $200 and 50% chance of losing nothing.
b. A certain loss of $100.

The majority choose (a), the risk-seeking choice.

When they are told to imagine themselves only $300 richer, and given the choice of:

a. A 50% chance to win $200 and a 50% chance to win nothing.
b. A sure gain of $100.

They choose (b) - risk averse.

Several other examples are given, often in the form of gambles or lotteries, not a "post dice roll evaluation."

*Rational Choice and the Framing of Decisions

Ah, the never-ending nattering from near-arbitrary points of view throughout the economic free-market 'plane' of existence. The endless whinging generated by making points on a fundamentally-flawed, but in retrospect useful (for data gathering purposes), scarcity-aspirational system (far be it from this system to aspire to abundance or morale-building waste or temporary innovation resulting inefficiency).
Until we accept a planned society with set schedules for position, salary, and duties standardized and set into a complex tapestry of abundance, personal ambition, and infinite but effort-based flexibility, these debates will continue to divide, distract, and demoralize all. Better a gilded cage with always-open door to an undeveloped but thoroughly unregulated, infinitely-fertile expanse - limitless possibilities but utterly unconnected.
The benefits of this planned system (best compared to an online MPORG networked, fantasy video game - certainly not an old communal system), of course, are entirely dependent on the work-ethic, self-motivation, and technical ambition of at least the top 50% of those employed people (in services, non-finance jobs) within the current free-market system, transferring over to almost all participants - due to the morale of having transparent, fair, and near-infinite possibilities. This is the unknown factor - given that you are guaranteed a job 'path' based on successful completion of all prior activities (similar to school)(failure means re-location or remedial), free from all political distraction (office drama and nepotism), and free to relocate to similar, would overall work ethic be higher when averaged across all professions and personal backgrounds? I believe that the one true benefit of free-market capitalism, creating a fear-of-being left-behind or get-rich-quick-hopefully 'work/innovation ethic' in a large (but not majority) proportion of the population, will be outdone by a planned system with 'free-market' expectations built in (adjusted to healthy work week levels) but none of the 'failure' downsides such as cronyism, work-fanaticism burn-out, and less-than-most-profitable activities discarded. The cost being the long development time and integration with the current system - but this will likely come in the form of cheap and ubiquitous work-network apps - client, supplier, and consultants all networked outside of traditional corporate structure a la Uber for business. Of course, as with piracy concerns in distributing media, distributing work and client relationships will be under siege by non-competitve and non-moonlighting rules - easily overcome. This is the future - behavioural economics will be but a quaint facet of an obsolete system so set on promoting and self-indoctrinating its own scarcity values, that it lost view of the overall picture of maximizing each individual's potential within the context of a productive and innovative society - which through its own consuming success will necessarily mitigate poverty, war, and health epidemics in a shorter timeline - all products of poorly distributed scarcity and lack of planned, innovative strategies not immediately profitable or subject to corporate vision. Amusingly, it may be China that first realizes and implements this type of system of planned flexibility – utterly crushing G7 levels of productivity and innovation.

This is sort of an open thread, so I'll note that John Nash has just died.

I always assume these are just musings and people shouldn't necessarily take these arguments as arguing for rich people to lord it over poor people because rich people would be devastated to lose money while a poor person has less to lose. If such a utility function existed, I suspect it would be based on percentage of personal wealth.

For example, there is a famous, perhaps apocryphal story, of Kerry Packer who challenged another rich guy to a bet based on the other person's entire net worth.

"In an epic story, Kerry Packer encountered a rich Texan who bragged about his $60 million worth. The annoyed Kerry Packer offered him to gamble his entire $60 million fortune on a coin toss. The Texas millionaire backed down and was never heard of again."

Isn't this theory suggesting that since Packer is richer, he should be MORE risk averse than the Texan?

In a similar story, remember in 2012 when there were rumors on-line that "Romney was going to take away our EBT cards?"

EBT is not a lot of money. But it might be a decent percentage to a poor person. Thus, whoever started this rumor, probably managed to motivate some LIV to go vote Obama. (You can probably figure out who I think started this rumor..same with the rumor that Romney will ban tampons.)

I suspect people are risk averse about their current level of income/assets and up to a certain maximum level. Once you have a billion dollars, you might decide, like Elon Musk, that you'd be okay with 100 million, and play with 900 million to try out spaceships, and solar, and electric cars. (I'm sure he does his best to make these ventures make money, but he knows he's taking a risk. OK, maybe not so much with Solar City.)

That said, if you have a billion dollars and business income, and a financial advisor, they might be risk averse and put your money in tax-exempt muni-bonds.

This brings me to one of my personal bugbears. The left claims they wants to tax the rich. They probably would be especially eager to tax the wealthy, and perhaps avoid hitting the higher income people who are not yet wealthy.

Why isn't the first step in this process a removal of tax-free status of muni-bonds?

Oh, sure, they may claim its to help cities, but all it does is allow the idle rich to shield their income from taxation, and force the productive rich to pay more. I think this is one tax hike that some on the right could support, as the subsidy is anti-market.

Just saying that this observation is implied by a more general theory of contextual nature of mind.

"Our emotions are also relative to some reference point, try describing happiness in absolute sense, actually a sub-saharan African nomad might just be more contented than a wall-street banker. Recently watched a documentary which claimed that the slum dwellers of Kolkata are on an average happier than the residents of the United States. Ignorance can be bliss but it’s irrelevant because no matter how attractive this happiness may sound not many Americans will trade their suburbs for an Indian slum residence. Similarly ranking emotive responses of various individuals after disregarding their relative mental benchmark is quite meaningless."

http://politick.me/2014/04/20/relativity/

Isn't it more interesting to consider from a **societal** point of view who you would rather have spending (or possibly investing) that marginal dollar?

Why are we looking at it from an individual utility function then adding those all up?

The sum of the individual utility functions is not the same as the societal utility function.

Society might not care much about consumption transfers (although individuals might), but might care about investment transfers and their relative returns - ie taxing rich people, effectively moving money from savings( or stock market or bonds) into educating poor people or giving them healthcare, or maybe building infrastructure.

The loss aversion stuff might be a good argument not to transfer among adjacent deciles.

Society doesn't have a point of view. When you suggest we take society's preference instead of the sum of all individual's, aren't you just suggesting we take yours?

Wrong, Sir Thomas A vote of individuals about a collective utility function for example will not lead to the same policy decision as maximizing revealed individual utility functions (even if such a thing was possible).

What is the difference between maximizing *revealed* individual utitlity functions and a free market?

For one, there are many externalities that can be addressed by regulations and interventions which improve upon free market outcomes. The easiest example is subsidized education, and the principle of polluter pays is also a pretty sensible improvement upon free market outcomes which would amount to a difference between revealed individual utility functions and the free market.

This discussion reached a truly high level of abstraction :)

I wrote a blog post in response to this post: http://carolabinder.blogspot.com/2015/05/the-limited-political-implications-of.html

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