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why I read EconLog February 12, 2008

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I don’t agree with everything posted over at EconLog all the time; of course, one shouldn’t read only opinion pieces if one agrees with the author all the time — life in an echo chamber is surely only considered good by those who are tone-deaf when it comes to self-reflection.

But there are good reasons for my daily check-ins with the blog:

Here’s Bryan Caplan with one, and Arnold Kling with another.

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weekly quote #18: Roman Frydman and Michael D. Goldberg February 5, 2008

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I’ve just begun working my way (slowly) through Frydman and Goldberg’s Imperfect Knowledge Economics, and on page 9 of my edition they briefly discuss the commonly quoted statement of Milton Friedman that all one should really care about when considering a model of reality and its predictive ability is: does the model work? Frydman and Goldberg say (at the bottom of page 9, emphasis in the original) in response:

“Fully predetermined models are flawed not because they are abstract, but because they disregard a key feature that drives outcomes in real world markets: Market participants must cope with imperfect knowledge in making decisions that underpin those outcomes.”

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don’t lose it January 22, 2008

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One of the things I’ve come across in my reading on human behavior and economic behavior (sorry, can’t think of where, although I’ve read it more than once) is that people value not losing more than they value winning — in a short phrase, we’re risk-averse. A common example is that people are more likely to pass up a chance to get a sum of money if it entails a risk of losing money, even if the risk is very small relative to the gain.

Overcoming Bias has a great example of this risk-averse behavior:

Suppose that a disease, or a monster, or a war, or something, is killing people. And suppose you only have enough resources to implement one of the following two options:

  1. Save 400 lives, with certainty.
  2. Save 500 lives, with 90% probability; save no lives, 10% probability.

Most people choose option 1.

[snip]

Ah, but here’s the interesting thing. If you present the options this way:

  1. 100* people die, with certainty.
  2. 90% chance no one dies; 10% chance 500 people die.

Now, I’m not so sure about the rest of the post… I tend to agree with Roland’s analysis, with something along the lines of apples vs. oranges, and also with those commentors who note that not all graphs are straight lines.

* The original post has the number 400 here, but I believe that is an error and that it should be 100, with a total population at risk of 500.

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making money January 22, 2008

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One of the big topics today on the econ blogs was the decision at the Fed.

Here’s the BBC’s news site on it.

And here’s The Austrian Economists with the best very short version of why it might not be the best idea…

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a handful of links on… January 15, 2008

Posted by ocmpoma in : economics, food & drink, other, society , add a comment

EconoSpeak on legal personage.

FP on the dangers of Russian wordplay.

Freakonomics has an insider on the perils — for the voters — of US electioneering.

Overcoming Bias on when not to trust a mathematical proof.

Marginal Revolution on perception as reality.

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weekly quote #16: Herbert Gintis January 10, 2008

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One of the things I’m trying to keep in mind whilst learning some econ is how people’s actions stack up to the predictions of theory. Initially, it seemed to me that theory, at least neoclassical theory, was too simplified to make good predictions. My opinion on that is changing as I learn more (to say nothing of the fact that the layman’s idea of ‘economic theory’ is most probably where the main oversimplifications are).

One aspect of Hayek’s work, as I understand Bruce Caldwell’s take on it, was how people function, especially in the absence of imposed authority. A paper I just finished reading, Herbert Gintis’s “Behavioral game theory and contemporary economic theory”, in part discusses this area as well, focusing on how games where people play employer and employee turn out. Here’s a summary line, from the end of Section 5, ‘Strong reciprocity in the labor market’ — page 15 of the paper:

“We conclude from this study that the subjects who assume the role of ‘employee’ conform to internalized standards of reciprocity, even when they are certain there are no material repercussions from behaving in a self-regarding manner. Moreover, subjects who assume the role of employer expect this behavior and are rewarded for acting accordingly. Finally, employers reward good and punish bad behavior when they are allowed, and employees expect this behavior and adjust their own effort levels accordingly. In general, then, subjects follow an internalized norm not only because it is prudent or useful to do so, or because they will suffer some material loss if they do not, but rather because they desire to do so for its own sake.” (emphasis in the original -oc)

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weekly quote #14: Ronald Findlay and Kevin H. O’Rourke December 28, 2007

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I’m finishing up Bruce Caldwell’s Hayek’s Challenge, but I couldn’t wait to start in on Power and Plenty, by Findlay and O’Rourke. It could be pithily summed up as an economic history of the world from 1000 to 2000CE, but part of the reason I became more interested in it (despite the possibility of a pass, albeit an after-I’ve-read-it pass, from Arnold Kling), is that one of its main points seems to be about how much effective war is responsible for effective trade. Here’s a relevant line from the preface, page XXV of my edition:

“It is natural to suspect that the accumulating economic and geopolitical tensions unleashed in the course of each period of peace, prosperity, and trade culminate in successive rounds of conflict, so that wars, rather than being exogenous or external shocks to the world system, have been inherent in its very nature as it has evolved over the past millennium.”

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minimalizing type I December 27, 2007

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Whilst discussing EU policy on genetically modified food — specifically, corn — EconoSpeak’s Peter Dorman discusses what it is, and why it matters, to do science:

“This single-minded insistence on avoiding Type I error is the reason why science is the one truly progressive human activity. Today’s science is better than yesterday’s, and tomorrow’s will be better than today. You can’t say this about poetry or politics.”

Not sure if I agree with what he says about economics, but I’m still a novice, so time will tell.

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wherefore grades December 13, 2007

Posted by ocmpoma in : economics, society , 2comments

So, there’s this old post by Bryan Caplan over at EconLog on grading, which I think ties in with my previous post on schooling and the comment-discussion (An actual comment discussion! Joy! If only it wasn’t only the two of us…) between the Prof and me.

The gist of the post is why Prof. Caplan doesn’t hand out grades unless they’re earned — he goes on to tie this to income. This, however, is the line I fixated on:

“…it would make all grades less informative. Does this applicant have an A because he was an A student, or had a soft-hearted teacher? Did my son maintain the B average I demand through hard work, or by telling the teacher “My dad will kick me out of the house unless you give me an A-”?”

Ignoring the emphasis on excuses, I focused in on the fact that grades are seen as conveying information. But how do any of us know exactly what information is conveyed by that B+? Is the student hard-working, or gifted? Was his teacher in a good or bad mood, and what mood was the student in, when that final was taken and graded? Is the Math101 course at this state university really equivalent to the Math101 course at that one? Does the student know the material now, even though the grade was given out three years ago?

Personally, I think grades are a pretty poor information conveyance method.

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