Category: Economics

“You are wrong to believe that a new kitchen will make you happy for as long as you imagine.”

Conversely, a tense marriage or a trick knee will give you more agony than you think. But most things matter less than we think they will, an old theme from the seventeenth century French moralist La Rochefoucauld. There is a good deal of experimental evidence that we make these “happiness mistakes” time and again, failing to learn from experience.

So argues Daniel Gilbert, professor of psychology at Harvard, profiled in today’s New York Times Magazine (registration required). Daniel Kahneman, last year’s Nobel Laureate in economics (with Vernon Smith), once told me that time spent with friends, not new gadgets, is what people really enjoy.

Our brains are trying to regulate our behavior, not trying to make us happy. According to Tim Wilson,

“We don’t realize how quickly we will adapt to a pleasurable event and make it the backdrop of our lives. When any event occurs to use, we make it ordinary. And through becoming ordinary, we lose our pleasure.”

We systematically fail to realize how powerful our psychological defenses are, once those defenses become activated. But Gilbert suggests we might need these carrots and sticks to get things done, even if they are illusions.

George Loewenstein, an economist at Carnegie-Mellon, says

“…he [Loewenstein] doesn’t see how anybody could study happiness and not find himself leaning left politically; the data make it all too clear that boosting the living standards of those already comfortable, such as through lower taxes, does little to improve their levels of well-being, whereas raising the living standards of the impoverished makes an enormous difference.”

I buy the basic claims about happiness, but dispute the political conclusion. To the extent we should care about happiness, our imperative is to boost the rate of economic growth, strengthen Western civilization, and hope that Western-style institutions spread around the world. All of these mean a heavy reliance on markets, incentives, and the rule of law.

“…80 percent of the lots Christie’s sell go for under $8,000.” From the Thursday New York Times (registration required), and why couldn’t an editor improve the grammar in that sentence? The median lot at Sotheby’s sells for $4,177, at Christie’s South Kensington, a branch, the median lot sells for $2,259. More than ever before, collecting is no longer the exclusive province of the wealthy.

If you earn $36,000 per year, you are in the top one percent of our planet, for a more comprehensive look at your relative status, check out the Global Rich List, don’t use commas when you type in your yearly income. Their stated goal is to encourage charity and make us feel happy about how rich we are, in reality I think they are trying to make us feel guilty about how rich we are. They don’t mention the policies and cultural attitudes that created this wealth.

The reference is from the blog of John M Scalzi.

Addendum: Donald Sensing tells us much more about the genesis and meaning of the list.

Peter Wallison, in today’s Wall Street Journal (registration required, and yes you have to pay), serves up a biting critique of Sarbanes-Oxley, the recent legislation aimed at limiting conflicts of interest within corporations.

Here is a key passage:

…this was a wholesale change in the governance of American corporations, putting significantly more authority into the hands of independent directors and correspondingly reducing the power of corporate managements…it may have had unintended consequences – a reluctance of managements to take the risks and make the investments that had previously brought the economy roaring back from periods of stagnation or recession…The independent directors of a company are part-timers…Unfamiliarity in turn breeds caution and conservatism…They [directors] have little incentive to take risk and multiple reasons to avoid it.

There is not much more to the Op-Ed than that, no real facts, but this is an important point. Passing Sarbanes-Oxley was a kneejerk reaction from a Congress that felt the need to do something, anything, about corporate scandals. The Senate voted for it 99-0 (only a few negative votes in the House), never a good sign, unanimous votes often mean that an angry and uninformed public opinion rules the day. Time will tell what costs we will pay for this mistake.

Here is a small bit on implementation costs, but keep in mind they are secondary to the question of how investment gets distorted. I realize that corporate insiders are not the ones to trust here, but they don’t like the law either.

Let’s accept the fact that corporate governance isn’t always fair, and opt for the system that does the best job of delivering the goods.

Addendum: Here is a direct link.

James K. Galbraith (son of John K.) has a strange review of William Greider’s The Soul of Capitalism in today’s Washington Post. He doesn’t say much about Greider’s book but does offer the following:

More deeply, we may question the book’s premise. Has the United States really solved the scarcity problem? That may have been more true five decades ago when a tract called The Affluent Society first made the case. Then, the United States was the world’s dominant industrial power. Today, our material abundance rests on fragile strands: our military reach, the willingness of the world to export cheap goods to us and to lend us the means to pay for them.

In the past 50 years real GDP per-capita has almost tripled (and this doesn’t account for improvements in the quality of many goods and services) and yet it may have been more true 50 years ago that the scarcity problem was solved?!! This is taking family fealty too far. The explanations for our fragile abundance are not too convincing either. Put aside the fact that the US is less dependent on trade than most other industrial nations. More interesting is that Galbraith thinks that the hundreds of billions of dollars we are spending on military adventures in Iraq, Afghanistan and elsewhere are a net positive for the economy. Why? Later he suggests that the Iraq war is about a “tenacious drive for oil.” Where then is the oil dividend? Has Galbraith filled up at the pump recently? In truth, Empire rarely pays and whatever the political case for war it will never turn a profit.

Having siblings costs you money over the course of a lifetime, just ask Ohio State sociologist Lisa Keister.

How much? Holding a variety of relevant factors constant, individuals with one sibling have an average net worth of $62,000. If you have another sibling, it drops to $49,000, then to $40,000, then to $24,000. Seven or more siblings, you have on average net worth of $6,000. Keister suggests, consistent with the research of Gary Becker, that parents invest less in each child when they have more children.

Keister herself has three brothers. See this summary of the research.

I am surprised that the effect from one child to two, or from two to three, is so small. And how much stems from a change in parental investments? Some fraction of the parents with more kids did not expect the pregnancies but rather made planning mistakes. If you think that planning/execution capabilities are carried in the genes, you would expect the offspring to be worth less for genetic reasons. So the Becker effect may be weak rather than strong, at least for the first few children.

Keister’s research also argues that much of the black-white wealth gap is due to the lesser willingness of African-Americans to put their money into stocks and mutual funds. It has long been a puzzle to economists (see here for one account) why individuals do not invest more money in the stock market, given that American stocks have outperformed bonds by significant margins over all previous twenty to thirty time horizons. Keister’s research both deepens the puzzle and hints at the relevance of psychology and context for understanding investment decisions.

The Economist has a good write-up on the work of experimental economist John List. As you may know, an endowment effect arises when you value something more, simply because you own it. In the context of laboratory experiments, often people will value a coffee mug more, much more (say five times more), once someone gives them the mug as theirs. In contrast, economic theory suggests that your willingness to pay for the mug should only be slightly less than your willingness to give up the mug for money (willingness to be paid). Here is a piece by recent Nobel Laureate Daniel Kahneman on the same topic.

List had the ingenious idea to see which traders were most subject to this ownership bias. So he took people who traded sporting cards and gave them other sporting memorabilia. The key result is this: the more real world trading experience a person had, the weaker the ownership or endowment effect. Professional dealers hardly seemed to be biased at all. The lesson is simple: asset markets work well when traders have the necessary experience. List also showed that sellers learn how to trade properly, without much of a bias, more rapidly than buyers do, which may explain why neophyte buyers get taken advantage of in stock markets, and why upward-moving bubbles may start. (Researchers have found that other distinctions may matter as well, you may value the mug more if you won it in a tough competition, as opposed to receiving it as a gift.)

Al Roth has a good general site on experimental economics, as does Vernon Smith’s ICES group, who are colleagues of ours at George Mason.

Iain Murray reports on the new London five pound fee (about eight dollars, and enforced by a penalty), charged to each car entering central London. It turns out the fee has been set too high, and traffic has fallen by more than the projected fifteen percent. Nor does the fee appear to be maximizing revenue. Mayor Livingstone wants to continue the high fee, however, because he likes the environmental effects of much lower traffic, despite a serious hit to London retail sales.

By the way, over 100,000 people are refusing to pay their penalty notices.

Addendum: Transportblog.com, an excellent source, offers some follow-up and commentary.

Go to www.nationmaster.com, an excellent source of data across the nations, on many different topics. The pointer is from www.crookedtimber.org, which also pulls out a list of countries where you are most likely to die before reaching forty years of age. The first thirty-four are all in Africa, then comes Haiti, then Madagascar.