Category: Economics

Are Prediction Markets Against the Public Interest?

by  Alex Tabarrok in

Here is more on the CFTC’s attack on Intrade:

Why doesn’t Intrade just obey the complicated law and become a licensed exchange? They tried, but the CFTC won’t give them a license. When an established, licensed U.S. commodity exchange applied for permission to do what Intrade does, the CFTC turned them down, too.

Most importantly, in rejecting Nadex’s application to trade “political event derivatives contracts” the CFTC said this:

As a result of reviewing the complete record, the CFTC determined that the contracts involve gaming and are contrary to the public interest…

Thus the CFTC’s attack on Intrade is not about following or not following a particular regulation; it goes much deeper, the CFTC is arguing that all such markets are against the public interest.

Addendum: Kenneth J. Arrow, Robert Forsythe, Michael Gorham, Robert Hahn, Robin Hanson,
John O. Ledyard, Saul Levmore, Robert Litan, Paul Milgrom, Forrest D. Nelson,
George R. Neumann, Marco Ottaviani, Thomas C. Schelling, Robert J. Shiller,
Vernon L. Smith, Erik Snowberg, Cass R. Sunstein, Paul C. Tetlock, Philip E. Tetlock,
Hal R. Varian, Justin Wolfers, and Eric Zitzewitz disagree with the CFTC (among others).

Attention Scarcity, Ego Depletion and Poverty

by  Alex Tabarrok in

Poor people often do things that are against their long-term interests such as playing the lottery, borrowing too much and saving too little. Shah, Mullainathan and Sahfir have a new theory to explain some of these puzzles. SMS argue that immediate problems draw people’s attention and as people use cognitive resources to solve these problems they have fewer resources left over to solve or even notice other problems. In essence, it’s easier for the rich than the poor to follow the Eisenhower rule–“Don’t let the urgent overcome the important”–because the poor face many more urgent tasks. My car needed a brake job the other day – despite this being a relatively large expense I was able to cover it without a second’s thought. Compared to a poorer person I benefited from my wealth twice, once by being able to cover the expense and again by not having to devote cognitive resources to solving the problem.

SMS test the theory with small experiments in which people are asked to play simple games. Poverty is simulated by giving some players fewer game resources. Players in the “poverty” conditions are then shown to devote more attention to the current round and less attention to future rounds, including borrowing more from future rounds. In perhaps the most surprising experiment, SMS have players play a family feud game with and without hints:

Experiment 5 offers more direct support for
the notion that scarcity creates attentional neglect.
One hundred thirty-seven participants played
Family Feud. Some participants could see previews
of the subsequent round’s question at the
bottom of the screen; others could not. We expected
that poor participants would be too focused
on the demands of the current round to
consider what comes next, whereas rich participants
would be able to consider future rounds
and whether moving on was beneficial. All participants
could borrow with R = 3. As predicted,
poor participants performed similarly with previews
(–0.02 T 0.87) and without (0.02 T 1.11),
while rich participants performed better with previews
(0.32 T 0.98) than without (–0.35 T 0.92)
[scarcity × borrowing interaction, F(1, 133) =
4.29, P < 0.05, hp
2 = 0.03; for unstandardized
scores, see table S5].

One concern might be that
the poor did not have enough time to consider
the previews. But the experiments above found
that the poor were using too much; they were
overborrowing. Their performance in the nopreview
condition left substantial room for improvement.
Even if poor participants had used
some of the borrowed time to consider the previews
and move on sooner, they could have improved.
That is, the previews benefited the rich
by helping them save more; they could have benefited
the poor by helping them borrow less. But
it appears they were too focused on the current
round to benefit.

Thus, SMS show that poverty (over)-stimulates attention to urgent problems which results in less attention given to important problems–thus, reduce some day to day urgencies and people may become more open to devoting attention to important problems like deworming or hygiene or paying the rent which would in the not-so-long-run result in greater benefits.

Crucially, notice that SMS’s experiments are about the effect of poverty not about the poor. In other words, at least some of our discussion of the poor may suffer from the fundamental attribution error.

Oliver Hahl on status and authenticity

by  Tyler Cowen in

He is on the job market from MIT, Sloan School, here is his intro, here is his home page.  Here is one of his pieces (pdf), with Ezra Zuckerman, which I found fascinating:

The Denigration of Heroes: Why High-Status Actors are Typically Viewed as Inconsiderate and Inauthentic

We develop theory and report on experiments that address the tendency for high-status actors to be deemed—even by high-status actors themselves—less considerate and more inauthentic than low-status actors.   We argue that this tendency, which potentially contradicts the fact that status is accorded on the basis of an actor’s capability and commitment, stems from two paradoxical features of typical status attainment processes: (a) The benefits of a high-status position typically carry an incentive to feign capability and commitment, thereby leading to suspicions of inauthenticity; and (b) Status is typically achieved through interaction patterns in which the high-status actor asserts its superiority and another’s inferiority, thereby leading to suspicions of inconsiderateness.  Three experimental studies are designed to validate this theory and help rule out an alternative hypothesis, whereby the negative correlation between status and morality derives from a psychological need for viewing the world as just or fair–leading evaluators to compensate those who lack status with higher attributions of morality.  Our studies, based on the “minimal group” paradigm, ask subjects to evaluate two arbitrary social categories based on members’ performance in a joint cognitive task.  Implications are drawn regarding high-status insecurity and the sources of instability in status hierarchies.

As I do every year, I have been surveying some of the more interesting papers on the academic job market.

CFTC Cracks Down on Intrade

by  Alex Tabarrok in

CFTC Press Release: The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil complaint in federal district court in Washington, DC, charging Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN), Irish companies based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options trading.

Intrade and TEN jointly operate an online “prediction market” trading website, through which customers buy or sell binary options which allow them to predict (“yes” or “no”) whether a specific future event will occur, according to the CFTC’s complaint.

Specifically, according to the complaint, from September 2007 to June 25, 2012, Intrade and TEN operated an online “prediction market” trading website, which allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through the website, Intrade and TEN allegedly unlawfully solicited and permitted U.S. customers to buy and sell options predicting whether specific future events would occur, including whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, and whether specific acts of war would occur by a certain future date.

…David Meister, the Director of the CFTC’s Division of Enforcement, stated: “It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations.”

In its continuing litigation the CFTC seeks civil monetary penalties, disgorgement of ill-gotten gains, and permanent injunctions against further violations of federal commodities law, as charged, among other relief.

The CFTC acknowledges the Central Bank of Ireland for its assistance in the CFTC’s investigation of Intrade and TEN.

Intrade announces:

We are sorry to announce that due to legal and regulatory pressures, Intrade can no longer allow US residents to participate in our real-money prediction markets.

Unfortunately this means that all US residents must begin the process of closing down their Intrade accounts. We strongly urge you to begin this process immediately:

What is it that Springsteen says, “Well the cops finally busted Madame Marie for tellin’ fortunes better than they do.”

Harsh words from Scott Sumner

by  Tyler Cowen in

And how about the…GOP decision not to negotiate seriously in 2011, figuring they could get a better result after the election that Karl Rove and Dick Morris assured them they would win?  How’s that decision looking right now?

In the spirit of Arnold Kling, I took out the two harsh words, but the link to Scott’s post is here.  Many people — dare I say exclusively from “the Right” — gave me a hard time over my “now we should cut a fiscal deal” stance in 2011, but I fully expect that today’s deal will be worse.

Here are some interesting remarks from Greg Mankiw.  And here Bruce Bartlett tells his story.

Gains from Trade: Lessons from the 2007-2010 Gaza Blockade

by  Tyler Cowen in

I haven’t read this paper, by Assaf Zimring, a job market candidate from Stanford economics, but I pass it along for its obvious current relevance.  Here is the abstract:

This paper uses detailed household expenditure and firm production data to study the welfare consequences of the blockade on the Gaza Strip between 2007 and 2010. Using the West Bank as a counterfactual, I find that being removed from world markets reduced welfare by 17%-28% on average. Moreover, households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses. These effects are substantially larger than the predictions of standard trade models. I show that this discrepancy is due to a combination of resource reallocation and reduced productivity. Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export. In addition, labor productivity fell sharply by 24%-29%. This decline was however significantly higher in manufacturing (45%) than in services (5%).

The link and the author’s home page you will find here.

Are benefit costs increasingly driving the cyclicality of employment?

by  Tyler Cowen in

Here is the job market paper of Grace Weishi Gu, from Cornell:

The Cost of Benefits and Employment Dynamics in Recent U.S. Recoveries

Abstract: I document (1) the slow rebound in U.S. aggregate employment following recent recessions, despite recoveries in output, as well as (2) a rising trend in per worker benefit costs, the cyclicality of those costs, and a positive correlation of the cyclical benefit costs with employment growth cycles. I show how these two phenomena are related. Then I develop a DSGE model that includes firms’ dynamic benefit costs, financial conditions (i.e., borrowing capacity), and the tradeoff between extensive and intensive labor margins to explore the effects of these features on post-1990 employment dynamics. I find that the benefit costs’ rising trend, cyclicality, and interactions with financial conditions have contributed significantly to the observed slow employment growth following the three most recent recessions in the U.S. This paper offers two main improvements over the standard model, which lacks such arrangements: (1) delivering 2-to-7-quarter delays relative to NBER business cycle troughs for the employment recoveries from the 1990, 2001, and 2007 recessions while generating no delay for the pre-1990 period, which is in line with the data; and (2) explaining 40-90 percent of employment volatility and harmonizing with that of output and per worker hours.

I would like to see more testing of this against alternative explanations, but still this is provocative and important work.

*Thomas Jefferson: The Art of Power*

by  Tyler Cowen in

I quite liked this book, which is by Jon Meacham.  Here is the bit best suited to MR:

“She [Sally Hemings] was just beginning to understand the French language well, and in France she was free, while if she returned to Virginia she would be re-enslaved,” said Madison Hemings.  “So she refused to return with him.”

It was an extraordinary moment.  Fresh from arranging terms with the bankers of Europe over a debt that was threatening the foundation of the French nation, Thomas Jefferson found himself in negotiations with a pregnant enslaved teenager who, in a reversal of fortune hardly likely to be repeated, had the means at hand to free herself.

…So he began making concessions to convince Sally Hemings to come home to Virginia.  “To induce her to do so he promised her extraordinary privileges, and made a solemn pledge that her children should be freed at the age of twenty-one years,” Madison Hemings said.

Sally Hemings agreed…

Their father kept the promise he had made to Sally in Paris. “We all became free agreeably to the treaty entered into by our parents before we were born,” Madison Hemings said.  It was one of the most important pacts of Jefferson’s life.

Claims about nursing homes

by  Tyler Cowen in

From Neil Emery:

 Nursing homes are chronically understaffed in times of economic prosperity. But, when the job market tightens, a one percent increase in unemployment sees full time employment in nursing facilities rise three times as fast. After a recession, when the economy picks back up and jobs become available again, low skilled workers abandon nursing homes jobs’ low pay and even fewer accolades for better prospects. The shift of workers in and out of nursing jobs drives the swings in the national death rate and underscores the importance of these under-appreciated jobs.

A look at the relationship between economic downturns and health outcomes in the United States reveals a complex picture: harm from lost insurance and increased anxiety but better care for the elderly. These two trends coexist because, while harm concentrates in working age people, retirees reap the majority of the benefit.

I do not know if these claims are true, but see the post for a discussion of the evidence.

More on Online Education

by  Alex Tabarrok in

At Cato Unbound I respond to some of the critics of my article Why Online Education Works. Here is one bit:

We do need more studies of offline, online, and blended education models, but the evidence that we do have is supportive of the online model. In 2009, The Department of Education conducted a meta-analysis and review of online learning studies and found:

  • Students in online conditions performed modestly better, on average, than those learning the same material through traditional face-to-face instruction.
  • Instruction combining online and face-to-face elements had a larger advantage relative to purely face-to-face instruction than did purely online instruction.
  • Effect sizes were larger for studies in which the online instruction was collaborative or instructor-directed than in those studies where online learners worked independently.
  • The effectiveness of online learning approaches appears quite broad across different content and learner types. Online learning appeared to be an effective option for both undergraduates (mean effect of +0.30, p < .001) and for graduate students and professionals (+0.10, p < .05) in a wide range of academic and professional studies.

Discrimination against shorter people, as reported by Andrew Solomon

by  Tyler Cowen in

One recent study observed that adults with achondroplasia have “lower self-esteem, less education, lower annual incomes, and are less likely to have a spouse.”  The income statistic bears witness to institutional discrimination against LPs; the study found that while three-quarters of the dwarfs’ family members, presumably demographically similar to them in most regards, made more than $50,000 per year, less than a third of the dwarfs made that amount.

That is from Andrew Solomon’s new book, Far From the Tree: Parents, Children, and the Search for Identity.

I pre-ordered this book eagerly, but overall I am having difficulty with it.  Too many sections throw too much at the proverbial wall and fail to sort out truth from fallacy.  I am not sure what is supposed to be insight and what is supposed to be a recording of different views.  I would have liked a more direct confrontation with the issue of parental narcissism.  This is still a good review of the book.  I longed for a page of Ross Douthat or Michael Bérubé.

The book, however, supplies excellent data for anyone wishing to study the utter hypocrisy of current understandings of diversity.

One Amazon reviewer raised a good question:

As a special ed teacher, my question is, does it make sense to include murderers in the same category with deaf people, dwarves, and people with physical disabilities? Perhaps he has a justification for it, in that parents might be disappointed and heartbroken in all these cases. But right off the bat that seems wrong to me, categorically different, moral deviance v. physical or intellectual.

Solomon is a very smart guy.  But overall this book leaves one with a sense of being tired of the value of the individual, written by an author overwhelmed by what comes across as, despite Solomon’s quest for nobility, a rogue’s gallery of misfits, baroque style, and without the writing itself coming to terms with the book’s own underlying emotional tenor.  Is it unfair to read this as still being, ultimately, a book about depression?

This book may interest many of you, and its publication can be seen as an event of sorts, but I can’t quite bring myself to recommend it.

The High Price of False Security

by  Alex Tabarrok in

Charles Kenny has an excellent piece in Bloomberg BusinessWeek about security:

The attention paid to terrorism in the U.S. is considerably out of proportion to the relative threat it presents. That’s especially true when it comes to Islamic-extremist terror. Of the 150,000 murders in the U.S. between 9/11 and the end of 2010, Islamic extremism accounted for fewer than three dozen. Since 2000, the chance that a resident of the U.S. would die in a terrorist attack was one in 3.5 million, according to John Mueller and Mark Stewart of Ohio State and the University of Newcastle, respectively. In fact, extremist Islamic terrorism resulted in just 200 to 400 deaths worldwide outside the war zones of Afghanistan and Iraq—the same number, Mueller noted in a 2011 report (PDF), as die in bathtubs in the U.S. alone each year.

…According to one estimate of direct and indirect costs borne by the U.S. as a result of 9/11, the New York Times suggested the attacks themselves caused $55 billion in “toll and physical damage,” while the economic impact was $123 billion. But costs related to increased homeland security and counterterrorism spending, as well as the wars in Iraq and Afghanistan, totaled $3,105 billion.

Matt Yglesias adds a good point:

Something that I would love to see the Transportation Security Administration, the FBI, the CIA, and whoever else do is pull together an estimate of how many airplanes they think would have been blown up by terrorists if there was no passenger or baggage screening whatsoever. One way of thinking about it is this. If commercial airplanes were no more secure than your average city bus, planes would be blown up as frequently as city buses—which is to say never. I’ve heard some people postulate that terrorists have a special affection for blowing up planes, but I’m not sure that’s right. In the not-too-distant past, Israel had a substantial terrorists-blowing-up-buses problem and had to take countervailing security measures. But unlike Israel, we’re not doing anything to secure our buses. It’s at least possible that nobody blows up American buses because nobody is trying to blow anything up.

I would also add to the monetary costs the price of lost civil liberties and a populace that has sadly grown accustomed to government surveilling, scanning, and groping. As I said some years ago when visiting Independence Hall, the price of eternal vigilance is liberty.