Do football coaches maximize returns?
David Romer says no:
…the behavior of National Football League teams on fourth downs departs from the behavior that would maximize their chances of winning in a way that is highly systematic, clear-cut, and statistically significant. This is true even though the decisions are comparatively simple, the possibilities for learning and imitation are unusually large, the compensation for the coaches who make the decisions is extremely high, and the market for their services is intensely competitive…The departures from win maximization are toward "conservative" behavior…
In other words, too many punts and field goal attempts. But why?
…the natural possibility is that the actors care not just about winning and losing, but about the probability of winning during the game, and that they are risk-averse over this probability. That is, they may value decreases in the chances of winning from failed gambles and increases from successful gambles asymmetrically.
If you take a gamble and it fails, and you have lost for good, it hurts so so bad. Coaches value "being in the game until the end" for its own sake. They are unwilling to give up all sources of hope, even when the associated gamble would maximize their returns.
What does this say about how we run our lives?
That is from the just-arrived April 2006 Journal of Political Economy (I’m sorry Alex, but the JPE is better and more interesting than the QJE, all things considered). Here is an earlier version of the paper. Here is my earlier post on the NFL draft.
But does Natasha like my books?
Despite the strong positive feelings that characterize newlyweds, many marriages end in disappointment. To understand this shift, the authors argue that although newlyweds’ global relationship evaluations may be uniformly positive, not all spouses base their global adoration on an accurate perception of their partner’s specific qualities. Two longitudinal studies confirmed that whereas most newlyweds enhanced their partners at the level of their global perceptions, spouses varied significantly in their perceptions of their partners’ specific qualities. For wives, but not for husbands, more accurate specific perceptions were associated with their supportive behaviors, feelings of control in the marriage, and whether or not the marriage ended in divorce. Thus, love grounded in specific accuracy appears to be stronger than love absent accuracy.
Here is the paper, and thanks to Robin Hanson for the pointer.
Public Choice Outreach
The deadline for George Mason University’s famous Public Choice Outreach Seminar, July 6-9, has been extended to May 19. Attendees get $250 toward travel expenses, room and board, and the chance to listen to many of the leading scholars in political economy.
That is Bryan Caplan, here is the application.
Austan Goolsbee on iTunes
Austan Goolsbee is now writing monthly economics columns for The New York Times. Here is his first piece on French competition policy and iTunes. Here is commentary from Henry Farrell.
New Cato blog
Michael Cannon, David Boaz, and Will Wilkinson are among the early posters, here is the link. By the way, here is a Cato paper on George Bush’s constitutional record.
Giant fire-breathing robots with rocket boots and laser eyes
So requests one MR reader. Will he settle for the economics of robots?
Start with Robin Hanson’s paper. Robin argues that robots will become close substitutes for unskilled human labor. That requires the wage rate to fall to the cost of robot production. Capitalists become extremely wealthy but laborers might die off or at least go hungry. Someday a robot might be as cheap as a laptop is today.
But will this happen? Since the Industrial Revolution, there have been numerous predictions of falling real wages due to the advent of machines. But across any thirty-year time horizon (some would say fifteen-year, but not I) real wages have risen and in the long run they have skyrocketed. The marginal return to capital has not gone up much if at all.
Even if we have really, really good robots (I still think Deckard was a replicant), they won’t substitute for all forms of unskilled labor. Maybe they can drive a car, but will they fluff your pillow? The remaining poor will fill jobs robots cannot handle, own small bits of capital, or live off of charity and transfers. Don’t forget, we are talking about a ridiculously wealthy and scientifically advanced world. A small capital investment might carry you through the rest of your life. Plus if robots will be so good, can’t they help the rest of us learn some skills or acquire some capital?
We will see a "cost disease" for services which cannot be handed over to robots, but so what? Low productivity sectors may take up an increasing share of the economy in real terms, but again this is most of all a symptom of plenty.
The robots also have to compete against technologically augmented humans, whom I suspect will be the real force of the future. Complex biology is hard to master, so let nature handle that and just purchase the mechanical add-ons, no?
So I don’t worry about the special features of robot economies. It is simply fears of Malthusian overpopulation but with metal rather than flesh. The difference is that there is a more obvious profit incentive to produce lots of robots, since they can be owned for profit. But modern technology would have pushed up wages even if we had not seen the falling birthrates as of late.
In Battlestar Galactica they call robots "toasters." In their world that may be a morally dubious judgment, but they seem to have the economics just about right. Now if we let robots vote, or if they have torrid affairs with top DOD research scientists who hold the secret computer codes to our planet’s defenses, that is another matter…
Here is my previous post on robot economies.
Twentieth century music playlist
This list is from a talk by Alex Ross, music critic at The New Yorker.
How to do an economic impact study, properly
My request for requests drew this topic. I have two simple suggestions:
1. Use a multiplier of 1, not three or four. The so-called multiplied funds are just sloshing around from one sector to another. But if your economy is in deep Keynesian unemployment and the project is relatively large, use a multiplier of 1.3 to account for aggregate demand effects.
2. Compare your studied project to the best available alternatives. Have you been hired to assess the benefits of a new stadium? Perhaps you think the stadium would be better than the status quo. But also list the forty-three projects that would be better than a stadium.
I am not aware of any economic impact studies that follow such procedures. Too often such studies are political marketing rather than an attempt to discover truth. Here is my previous post on the topic.
What I’ve been reading
1. The People’s Act of Love, by James Meek. You wouldn’t think a Brit could imitate a 19th century Russian novel, but he pulls it off. Excellent mid-brow fiction, give it a few chapters to grab you.
2. The Singing Neanderthals, by Stephen Mithen. The author starts with sexual selection theories of the arts, and then asks why we sing in large groups rather than exclusively one-to-one. The Neanderthals are portrayed as a static culture, dependent on music for their communication, and thus unable to come up with new ideas. Recommended for those who like just-so stories and yes that includes me.
3. Capital and Collusion: The Political Logic of Global Economic Development, by Hilton Root. Here is the book’s web page. Hilton will be moving full time to George Mason, School of Public Policy.
4. Polio: An American Story, by David Oskhinski. There are few Pulitzer Prize-winning works you can gulp down and enjoy in a single brief sitting, but this is one of them.
5. You Must Set Forth at Dawn: A Memoir, by Wole Soyinka. Wonderfully written, sadly he doesn’t seem to see why capitalist enterprise is important for Africa.
6. The Book of Lost Books: An Incomplete History of All the Great Books You Never Will Read, by Stuart Kelly. Aeschylus, Dante, Kafka, and many others wrote works that were lost, destroyed, or never finished. (Hey, what about the missing second volume of Hayek’s Pure Theory of Capital? You know, the one where he integrates the theory of money and capital?) Here is the history of those works, in bit-sized, ready-to-consume form. Here is one good review. If you are tired of popular literary treatments which simply recycle material you already know, this book is for you. A gem.
Jean-Francois Revel dies
It has been a tough week for writers, here is one obituary. Here is Wikipedia. Here is a review of his essay on why Europeans hate Americans. Revel was probably the most important conservative French thinker of the last thirty or forty years; his writings on food and gastronomy also repay the effort of study.
Housing futures
Read James Surowiecki. Excerpt:
At a new online site called HedgeStreet, investors can bet on changes
in home prices in certain cities. And later this month the Chicago
Mercantile Exchange is going to start trading futures contracts pegged
to housing-price indexes in ten major metropolitan areas. The Chicago
plan, which is the brainchild of two economists, Karl Case, of
Wellesley, and Robert Shiller, of Yale, is straightforward: if you just
spent, say, $1.5 million on a two-bedroom apartment in Manhattan, and
you want to hedge against the risk that it might be worth $1.2 million
three years from now, you can sell contracts that will reap you a
profit if local prices fall, allowing you to lock in the current value
of your home. Alternatively, if you think the housing boom in Los
Angeles still has a ways to run–or if you’re interested in buying a
year from now but are afraid that you’ll be priced out of the
market–you can place a bet that will pay off if prices keep going up.
Should we tax oil company profits?
Forget about how much you like either oil companies or taxes. Let’s boil down the comparison to either taxing profits or taxing gasoline prices.
Taxing profits will reduce the incentive to increase future supply, even if you think oil companies form a cartel. Fewer profits means less exploration and less incentive to develop new extraction technologies.
The weakening of supply responses is desirable only if you think we are approaching the "end of oil" — and indeed all feasible substitutes — and that we don’t want to discover more oil right now. Perhaps it would be better to run out our string of doom more slowly. You also presumably would believe that more conservation, as would be induced by higher prices, won’t much help. These views, taken together, are possible but I find them doubtful.
Alternatively, you might believe that our government can tax short-run profits that arise from supply kinks or slow-to-adjust refineries. Yet we will magically remove those taxes within a few months, so they do not discourage long-run elasticity of supply. That again strains the imagination.
Taxing gas prices puts an immediate burden on motorists, although the profits tax may bring higher prices in the longer run. But the gas tax encourages conservation and maintains the incentive for new supply. Surely that is the superior approach.
Pramoedya Ananta Toer passes at 81
Here is one notice. I regard his The Buru Quartet as, after Orwell, the great political novel of the twentieth century. At a deeper level it concerns different notions of what a life consists of. As you read each volume, your understanding of what has come before shifts radically. Most of it he wrote while in prison. Of the living writers he was my "no brainer" pick for a Nobel Prize. Here are other notices of his death.
A request for requests
A very loyal MR reader in New Orleans asks for more space to make requests. What would you like to read about?
This time I disavow "three times is the charm" as a rule of collective choice. I do promise, however, that my response to your requests will embody the property of monotonicity, namely that more asks for a topic won’t lower its chance of being covered. Comments, of course, are open…
Did Gary Becker prove that advertising is informative?
So claims a NYT obituary for John Kenneth Galbraith. CrookedTimber and Brad DeLong question whether such models should be called "proofs." Fair enough, but neither does the obituary correctly represent Becker’s theory of advertising. As I understand Becker’s work (with Kevin Murphy) on the topic, individuals consume "social images" or "self-images." Having Nike shoes gives you the "benefits of being cool" if a) you actually have Nikes, and b) the ad links Nikes to a cool image for your relevant peer group. The standard economic theory of complements then applies for analyzing ads. Under some conditions, advertising can be a "bad" for consumers, not a "good," and advertisers will pay consumers to watch ads. Furthermore ads will present images and cultural linkages, rather than substantive information in the traditional sense. This generates some Galbraithian results, but without requiring that consumers are "tricked" or even "persuaded" into a particular point of view. This is not a proof; I think of it as an existence theorem that advertising can make corporate sense, and sometimes be socially welfare-improving, yet without being very informative.
Keep in mind that Becker titled his 1998 book Accounting for Tastes, a concession to the Galbraithian way of thinking.