The friendship paradox and systematic biases in perceptions and social norms

Except I call it the Twitter paradox, and it is about how neurotics really get on each others’ nerves:

The “friendship paradox” (first noted by Feld in 1991) refers to the fact that, on average, people have strictly fewer friends than their friends have. I show that this oversampling of more popular people can lead people to perceive more engagement than exists in the overall population. This feeds back to amplify engagement in behaviors that involve complementarities. Also, people with the greatest proclivity for a behavior choose to interact the most, leading to further feedback and amplification. These results are consistent with studies finding overestimation of peer consumption of alcohol, cigarettes, and drugs and with resulting high levels of drug and alcohol consumption.

That is from Matthew O. Jackson in the new JPE.

What I’ve been reading

1. Ruby Warrington, Sober Curious: The Blissful Sleep, Greater Focus, Limitless Presence, and Deep Concentration Awaiting Us All on the Other Side of Alcohol.  Both the title and content make it self-recommending.

2. Jonathan Bate, How the Classics Made Shakespeare.  “One key argument is that Shakespeare’s form of classical fabling was profoundly antiheroic because it was constantly attuned to the force of sexual desire.”  Bate is very smart and this book shows it.

3. Henry Farrell and Abraham L. Newman, Of Privacy and Power: The Transatlantic Struggle over Freedom and Security.  An important contribution to political science, expanding on their concept of “weaponized interdependence,” namely how the U.S. (and sometimes other political actors) uses access to international networks, such as SWIFT, to push other nations around.  See #weaponizedinterdependence on Twitter for an introduction.

4. Andrew Lambert, Seapower States: Maritime Culture, Continental Empires and the Conflict that Made the Modern World.  Covers the Phoenicians, Venice, the Dutch Golden Age, the rise of the British empire, and more.  Interesting throughout, but I most liked the final section on why there are no seapowers today, and why China and Russia never will be seapowers.  Overall a nice integration of geopolitics and culture.

5. Rucker C. Johnson and Alexander Nazaryan, Children of the Dream: Why School Integration Works.  A good summary of what the subtitle promises, though I was hoping for more attention on the costs and losers from those arrangements.

6. Guzel Yakhina, Zukeikha.  Translated from the Russian by Lisa C. Hayden, a Tatar woman is sent into exile in the Soviet Union of the 1930s.  This is one of the novels I enjoyed this year, several others I know concur.

U.S.A. fact of the day

According to publisher Penguin Random House, [Becoming] has sold more than 10 million copies — including hardcover, audiobooks and e-books — since its November release. That puts it near the top, if not the pinnacle, of all-time memoir sales.” It’s already the top-selling hardcover of last year, and it has outsold both of her husband’s books put together.

Here is the full story.

Are top CEOs underpaid?

There is another lesson from the numbers: CEOs are paid less than the value they bring to their companies. More concretely, CEOs capture only about 68–73 percent of the value they bring to their firms. For purposes of comparison, one recent estimate suggests that workers in general are paid no more than 85 percent of their marginal product on average [Isen 2012]; that difference is attributed largely to costs of searching for workers and training them to become valuable contributors. In other words, workers actually seem to be underpaid by somewhat less than CEOs are, at least when both are judged in percentage terms. Both of those are inexact estimates, but in fact these results are what economic reasoning would lead us to expect. It may be easier to bargain the CEO down below his or her marginal product a bit more, given that the talents of the CEO would be worth much less in non-CEO endeavors.

I find the most convincing estimate of the gap between pay and marginal product to be that of Lucian A. Taylor, at the Wharton School of Business. He finds that a typical major CEO captures somewhere between 44 percent and 68 percent of the value he or she brings to the firm, with the additional qualification that the CEO’s contract offers some insurance value—that is, in bad times for the firm the pay of the CEO won’t be cut in proportion, but the CEO shares to a lesser degree on the upside. That 44–68 percent is therefore a better deal for the CEOs than it may appear at first glance. Still, you won’t find credible estimates suggesting that major CEOs, taken as a group, are capturing more than 100 percent of their value added. Here too, that is what you would expect from a competitive bidding process.

Part of the accompanying footnote: For the 68–73 percent estimate, see Nguyen and Nielsen 2014; for the 44–68 percent estimate, see Taylor 2013… It is a little-known fact that the current use of high-powered financial incentives for American CEOs still has not reattained the level it held in the pre–Second World War period.

That is an excerpt from my Big Business: A Love Letter to an American Anti-Hero, due out next week.

Loser companies

As economic profits grow larger, so do economic losses at the other end of the distribution. The bottom 10 percent of companies destroy as much value as the top 10 percent create, and today’s bottom-decile companies have 1.5 times more economic loss, on average, than their counterparts of 20 years ago (Exhibit 1). That means for every company that creates economic value, there is another company that destroys economic value. Yet these value-destroying companies continue to survive, holding on to their resources for increasingly longer durations and continuing to attract capital. A growing number are turning into “zombie” companies, unable to generate enough cash flow even to sustain interest payments on their debts. The impact of these economic losses goes beyond these companies’ investors, managers, and workers: it drives down the returns for healthy companies that compete for the same resources or profits.

That is from a new McKinsey study, via Marty Manley.

Wednesday assorted links

1. Where should Americans go to live abroad?

2. Cycling in Asmara.

3. “As far as I can remember, I always wanted to be… well not a gangster, but someone with a solid understanding of drama.

4. Noah Smith on MMT.

5. “The [Arkansas] state legislature on March 20 passed a measure banning food companies from marketing “cauliflower rice” as “rice.”

6. Arnold Kling reads *Big Business*.

Preemptive Overfishing

The Endangered Species Act endangered some species and announcing that a fishing area will be protected in the future increases fishing now.

PNAS: Most large-scale conservation policies are anticipated or announced in advance. This risks the possibility of preemptive resource extraction before the conservation intervention goes into force. We use a high-resolution dataset of satellite-based fishing activity to show that anticipation of an impending no-take marine reserve undermines the policy by triggering an unintended race-to-fish. We study one of the world’s largest marine reserves, the Phoenix Islands Protected Area (PIPA), and find that fishers more than doubled their fishing effort once this area was earmarked for eventual protected status. The additional fishing effort resulted in an impoverished starting point for PIPA equivalent to 1.5 y of banned fishing. Extrapolating this behavior globally, we estimate that if other marine reserve announcements were to trigger similar preemptive fishing, this could temporarily increase the share of overextracted fisheries from 65% to 72%. Our findings have implications for general conservation efforts as well as the methods that scientists use to monitor and evaluate policy efficacy.

One puzzle is why there should be an increase in over-fishing? Shouldn’t a commons already be overfished to the point of zero return? One possibility is that previous steps to limit overfishing were working.

The possibility of preemptive overfishing suggests the utility of surprise protections, but that’s not always possible and the authors don’t suggest that preemptive overfishing makes protection unwise only that it has a short term cost.

Hat tip: Paul Kedrosky.

The evolution of political views

This paper examines the effect of party affiliation on an individual’s political views. To do this, we exploit the party realignment that occurred in the U.S. due to abortion becoming a more prominent and highly partisan issue over time. We show that abortion was not a highly partisan issue in 1982, but a person’s abortion views in 1982 led many to switch parties over time as the two main parties diverged in their stances on this issue. We find that voting for a given political party in 1996, due to the individual’s initial views on abortion in 1982, has a substantial effect on a person’s political, social, and economic attitudes in 1997. These findings are stronger for highly partisan political issues, and are robust to controlling for a host of personal views and characteristics in 1982 and 1997. As individuals realigned their party affiliation in accordance with their initial abortion views, their other political views followed suit.

That is a new paper by Eric D. Gould, and Estaban F. Klor, via the excellent Kevin Lewis.

p.s. don’t call it “tribalism,” that is something else.

Facts about Native Americans

Not only have those who identify on the census as Indian risen from about 200,000 in 1900 to over 2 million by 2010; another 3 million identify as Native and something else.  Of this ever-increasing population, in 2010 more than 70 percent lived in urban areas, continuing the trend begun in the years after World War II.  Indians are young, too: 32 percent are under age eighteen, compared with 24 percent of the overall population.  On reservations, the median age is twenty-six, compared with thirty-seven for the nation at large…Between 1990 and 2000, the income of Americans Indians grew by 33 percent, and the poverty rate dropped by 7 percent.  There was no marked difference in income between Indians from casino-rich tribes and those from poorer tribes without casinos.  Between 1990 and 1997 the number of Indian-owned businesses grew by 84 percent.  And the number of Native kids enrolled in college has doubled in the last thirty years.

That is from David Treuer, The Heartbeat of Wounded Knee: Native America from 1890 to the Present.

Is the corporation your friend?

The funny thing is, although it is wrong to think of corporations as people, it is probably also necessary for social cohesion. If the American people are going to support business in the court of public opinion, business must to some extent have a friendly face. Otherwise politics might treat business too harshly, ultimately leading to bad consequences for American private enterprise. Furthermore, consumer loyalty to corporations, even if irrational, is part of what induces better behavior from those corporations. Companies know that if they build up a good public image and stick around with a track record of reliable service, consumers will reward them with a kind of emotional loyalty. Overall, that creates a largely positive business incentive, one that would not be present if all consumers were more aware of the somewhat more cynical truth: that corporations should be judged not as friends but as abstract, shark-like legal entities devoted to commercial profit. The more that consumers see the relationship as possibly long-term, the more loyally profit-seeking corporations will end up behaving in a long-term and socially responsible manner. Societies need their illusions in this regard, and thus it can be dangerous to fully articulate and make publicly known the entire truth about business corporations and the fundamentally dubious nature of their loyalty.

So the trick is this: the public needs to some extent to believe in corporations as people, just to keep the system running. Workers need to hold similar feelings, to maintain workplace cohesion. Yet when it comes to politics and public policy, we need to distance ourselves from such emotional and anthropomorphized attitudes. We need to stop being loyal to corporations for the sake of loyalty and friendship, and we also need to stop being disappointed in corporations all the time, as if we should be judging them by the standards we apply to individual human beings and particularly our friends. Instead, we should view companies more dispassionately, as part of an abstract legal and economic order with certain virtues and also plenty of imperfections. Unfortunately, that is not about to happen anytime soon.

That is from the final chapter of my forthcoming book Big Business: A Love Letter to an American Anti-Hero.  Ah, and there is more:

One reason we like to think of corporations as our friends is that we can feel in greater control that way. I’ve already discussed just how much we rely on corporations—for our food, for our entertainment, for communicating with our friends and loved ones, and for getting around from one place to another. But for all the talk from economists about consumer sovereignty, it’s not clear how much people actually are in control at all. It’s true you can choose what to buy in the Giant, Safeway, or Whole Foods, but it’s hard to step outside the commercial network as a whole, and the nature of that network shapes so many of our choices and thus our lives.

Of course, it is impossible for customers to ponder these philosophical questions in their deepest and subtlest terms all day long, as that would consume way too much of people’s mental and emotional energies. So instead people translate their rather bizarre, non-hunter-gatherer modern commercial society into terms that their more primeval selves are familiar with. That is, people carry around a mental picture of being surrounded by people they can trust, if only salespeople, and of being in a familiar environment in which they are exercising their free will as consumers and also as workers. Given the need to get through each day, it is emotionally very hard for people to internalize emotionally the true and correct picture of those businesses as partaking in an impersonal order based on mostly selfish, profit-seeking behavior.

You can debate exactly how true or untrue our generally held picture of freedom in modern commercial society is, but I can’t help but feel that part of it is a lie. The system offers many formal properties of freedom, such as the immense choice of products and jobs, and the relative lack of imposed coercion on most of these decisions. Still, when you combine pressures for conformity, the scarcity of attention, the stresses of our personal lives, and the need for “ready quick” decision-making heuristics, it’s not exactly a life of true freedom we are living. It is (more or less) close to the freest life a society is capable of providing us, but it isn’t quite free in the metaphysical sense of actually commanding our individual destinies through the exercise of our own free will. At least some of the freedom of contemporary consumer society is an illusion, taken upon ourselves to make our lives feel bearable and to help us feel more in control—precisely because, to some extent, we are not very much in control at all.

Recommended, by your friend, namely me.

New issue of Econ Journal Watch

In this issue:

Are a Few Huge Outcomes Distorting Financial Misconduct Research? Emre Kuvvet confronts the extreme-values problem in firm penalties and other SEC enforcement outcomes against financial misconduct, and how outliers might affect research in finance, as well as policy judgment, focusing on an article in Journal of Accounting ResearchAndrew Call, Nathan Sharp, and Jaron Wilde respond.

Both terrorist and public mass shooter? In 2016 Adam Lankford published a news-busting article purporting to show that during a 47-year period the United States represented 31% of worldwide public mass shooters, and claiming that the outsized U.S. percentage is a result of gun prevalence. John Lott and Carlisle Moody criticize Lankford’s terminology and methods. Lankford replies to Lott and Moody. Once the terminological disputes are clarified, the issue that emerges is: Why does the United States have an outsized number of lone-wolf mass shooters? Lott and Moody offer explanations different than Lankford’s.

Another round on right-to-carry and violent crimeCarlisle Moody and Thomas Marvell have another go at John Donohue, treating the weighting of fixed effects by population and synthetic controls. Donohue, Abhay Aneja, and Kyle Weber respond.

Tennis and loss aversionMichał Krawczyk challenges a set of authors who read loss aversion in tennis data. Nejat Anbarci, Peren Arin, and Christina Zenker return serve.

Why Did Milton Friedman Win the Nobel Prize? James Forder and Hugo Monnery appreciate Friedman’s underappreciated early work on the complexity of stabilization policy.

Edmund Burke, liberal:

EJW Audio:

James Forder on Milton Friedman’s Early Work on Stabilization Policy

Leo Krasnozhon on Liberalism in Ukraine

John Cairns on the 1758 Pamphlet about Hair-Cutting in Edinburgh

China fact of the day

It is undeniable that China since the late 1950s has deployed hard and soft power in its determination to exert influence over Africa.  In the Mao era this translated into enormous aid budgets.  By 1975, China was throwing ‘more than’ — in Zhou Enlai’s revealingly hazy formulation — 5 per cent of its national budget into foreign aid; in fact, two years earlier it had reached 6.92 per cent.  Compare this proportion with the 0.7 percent of national income that the much wealthier UK annually reserves for international aid..It thus seems certain that Mao-era china spent a greater proportion of income on foreign aid — including in Africa — than did either the US (around 1.5 per cent of the federal budget in 1977) or the USSR (0.9 per cent of GNP in 1976).

That is from Julia Lovell, Maoism: A Global History, so far my favorite book of the year.  One implication of course is that One Belt, One Road isn’t as new as you might think, and that contemporary China has more in common with the Mao era — and I’m not just referring to the censorship element — than many people realize.