Results for “thaler”

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Dick Thaler writes:

Swoopo has even sold cash using this format – specifically, checks for $1,000. My colleague Emir Kamenica and I looked at 26 such auctions we found in a data set posted on the Swoopo Web site. For each of these, the average revenue to Swoopo was $2,452. Winning bidders also did well: Of the winners, all but two made money even after accounting for the cost of their bids, with an average profit of $658. Still, the important point to remember is that, collectively, bidders are losing money. Only the lucky last bidder is a winner.

At the end of the column Thaler adds:

In my previous column, I tried to nudge Steve Jobs to have an app written for the Apple iPhone that would allow users to sign up easily to become organ donors.

Mr. Jobs can relax. Raymond Cheung from Serenity Integration read the column and made it happen. IPhone users can download the free Donate Lives app and sign up directly on their phones.

Libertarian paternalism is the brainchild of Profs Thaler and
Sunstein, but nudging is not. Nudging is good architecture, good design
or good marketing and most nudges have been invented by private sector
companies. Prof Thaler’s best policy idea – a pension plan called Save
More Tomorrow – was tried by a manufacturing company rather than a
government.

Effective nudges are so common in the private sector
that politicians should be asking themselves why.

Here is more.

In Nudge Thaler and Sunstein motivate their Save More Tomorrow plan with the following unfortunate illustration:

Consider, for example, the case of Tony Snow, the former White House press secretary, who resigned at age fifty-two in 2007 to return to the private sector.  He said his motivation for leaving was financial.  "I ran out of money," he told reporters…Before serving as press secretary, Snow worked a much more lucrative gig as a Fox News Channel anchor.  But he arrived at the White House not having learned Retirement 101 lessons.  "Snow conceded: ‘As a matter of fact, I was even too dopey to get in on a 401(k).’

Sadly, Snow’s choices now look optimal.  Ok, I know that may be in poor taste but let’s try to rescue this observation with some theorizing.  Are we more likely to commit the error of saving too much or too little?

There are people who don’t save much because they have very low incomes, their behavior does not seem to be in error, especially when we take into consideration the various welfare programs that will cover people in their old age.

So let’s focus on people with moderate to high incomes.  Thaler and Sunstein say that we are more likely to make errors when the benefits are upfront and the costs are delayed.  Eating too much chocolate being a classic example.  Ok, that suggests we may save too little.

T. and S. also argue that the less frequent a decision the more likely are errors.  Frequency, however, cuts both ways – we only die once – so that’s a wash.

Over confidence and in particular the idea that we are special and will live a long life suggests the error is saving too much.  Note that we also tend to think that our partner will be alive as well.  My wife once asked me whether we were saving enough for "our" retirement.  "Sure," I said, "don’t forget one of us will probably die before the other and I’m not saving for your future husband."  "Why," she replied with a sigh, "can’t economists be more human?"   

Availability bias probably also suggests we save too much – we see people who saved too little in the street but the ones who saved too much are dead and gone. 

In theory, optimal saving equalizes the marginal utility of income across one’s lifetime – some programs like Kotlikoff’s ESPlanner attempt to calculate such an eqi-marginal utility flow and Kotlikoff’s finding is that a large fraction of Americans, some 40%, are saving too much.  Kotlikoff’s program takes into account that we may need less wealth when we are old and retired (e.g. less transportation for work related reasons) but not that the marginal utility of wealth may be lower when we are old.  (e.g. Money’s not so valuable if you don’t need it to or can’t use it to attract a mate.)  Thus over-saving may be even more common than Kotlikoff suggests.

I do not know which error is more prevalent but if we are to be neither spendthrift nor miser we need to recognize both types of error.

Greg Mankiw asks and receives many answers. 

One guess is William Nordhaus, for his concept of "green accounting."  An environmental prize is overdue but perhaps Nordhaus is too skeptical about stringent anti-global warming measures to get the appropriate reception in Stockholm.

Another option is Eugene Fama, both for testing CAPM for securities prices and for figuring out what is wrong with it.  You can imagine pairing his prize with either Richard Thaler (behavioral finance) or Kenneth French (Fama’s co-author on many important papers).

Or how about Oliver Williamson and/or Jean Tirole for principal-agent theory as applied to the business firm?

I would offer the prize jointly to Anne Krueger, Jagdish Bhagwati, and Gordon Tullock for their work on rent-seeking, but that is not my prediction.  Readers, what do you think?