Cardiff de Alejo Garcia

Links — 27 July 2010

The Great Interchange Fee Scam (Kevin Drum)

The Top Idea In Your Mind (Paul Graham)

Pilot Ejects From Diving CF-18 Fighter Jet Moments Before Impact (Laughing Squid)

I Was with Coco (GQ)

Why Our Universe Must Have Been Born Inside a Black Hole (MIT Technology Review)

Stephen Fry (via):

A response from Charles Karelis

My thanks to Professor Charles Karelis, author of The Persistence of Poverty, for his excellent comment beneath my recent guest post at Psychology Today's Headcase blog.  I'm reprinting the comment below, but first a recap and some additional thoughts.

My post focused on a 2008 study that Dan Ariely linked to a few weeks ago, and which found that premature deaths in the US are increasingly the result of bad personal decisions (rather than causes such as accidents or genetic diseases).

After explaining the study, I mentioned that some of these decisions are made disproportionately by people in poverty.  This is where Karelis's book comes into play, as its main thesis is about how the decisions faced by the poor are different in nature than those faced by everybody else.  I summarized his idea as follows:

If you have so many burdens in your life at the same time—joblessness, obesity, crime—then eliminating just one of them makes a difference so negligible that you'll simply choose not to address any of them.

As Mike Konczal explained in a great post last year, Karelis posits that solving the first of many problems brings very little satisfaction, or "utility" in economic speak.  The problems that remain are so many, varied, and painful that someone in poverty will hardly notice.  But if the first problem does get solved, then solving each additional problem would bring increasing satisfaction, as the issues become fewer and more manageable.  This is an idea that reverses the traditional economic utility function, which predicts diminishing returns for additional goods.  But the point is that because solving the first problem brings such little satisfaction to someone in poverty, it won't be worth the effort to get started.  "Hence the persistence of poverty," Konczal writes.  (That's an extremely simplistic overview, so do read Konczal's full post for more depth, or better yet buy the book.)

Anyways, the book generated additional discussion within the blogosphere (see also Tyler Cowen in 2007), with mostly favorable reviews.  But some reviewers noted that although the book's ideas were intriguing, they hadn't been tested and consequently there didn't seem to be much evidence for them.

In my post at Psychology Today, I wondered why it hadn't been investigated.  Despite the discussion of utility, along with Vaughan Bell I understood Karelis's theory to be as much about psychology as about economics.  And I closed my post by suggesting that if social scientists were going to design new experiments and conduct new research about personal decision-making (as Ariely recommends), they should keep Karelis's theory in mind.  In other words, this seems like a situation where it's not necessarily appropriate to isolate psychological influences from socioeconomic ones, as they might interact with each other in complicated ways.

Karelis writes below that the rationalist paradigm of economics needn't be discarded for his critique of the utility function to hold, and he also responds to the notion that his theory is unproven.  I thank him again for the comment and reproduce it here in full:

From the author of the Persistence of Poverty, cited in these posts. My book doesn't link the life-shortening decisions discussed by Ariely (smoking, overeating) to the utility function I hypothesized. That extrapolation seems to have been made first by Ezra Klein in his Washington Post blog, and it was carried further by Mr. Coates in his Atlantic blog and by Andrew Sullivan in his blog. But though I didn't make it in my book, I find the extrapolation very plausible. After all, it takes discipline to resist many of these life-shortening activities. They're like work, or maybe you could even say they're a kind of work. So--on the rationalist paradigm of human behavior, which has been too much disparaged by behavioral economics, in my opinion-- the prudent decision will be taken if and only if the accompanying rewards are perceived as being greater than the effort required. What my hypothesis adds here is that for poor people, whose plates are heaped high with troubles--the felt relief brought about in the short run by losing a few pounds or breathing easier as you climb upstairs will be hardly noticeable. What's one or two fewer troubles on a plate heaped high with them? So we need not embrace the (in any case distasteful) hypothesis that poor people suffer from limited time horizons in order to explain the failure to resist these life-shortening temptations.

As for the question whether my book is "empirically confirmed," I would respectfully contend that my critics have a paradigm of "the empirical" that over-relies on laboratory evidence and under-weighs the question of which among competing theories offers the simplest explanation of undisputed facts about human behavior, such as the greater obesity, alcohol consumption, and smoking among the poor; and I'd add that positivist economics has a double-standard when it comes to introspective evidence. The conventional wisdom about the utility function rests on little else besides introspection. Take down your intro econ text and look if you doubt it.

Links — 21 July 2010

Stress (Jonah Lehrer)

Conversation (Scott Adams)

Real Adventure (Robin Hanson)

The way I work (Jason Fried)

A Conversation with Christopher Hitchens (Hugh Hewitt)

Bill Murray Is Ready To See You Now (GQ)

The Steinbrenner Slobituary (Matt Taibbi)

Screwing Up (The Good Men Project)

Ethan Zuckerman:

Links — 14 July 2010

Comes a Moment to Decide  (Economic Principals)

Lost Sleep Is Hard to Find  (Harvard Magazine)

Video on innovation featuring Mike Mandel  (Ideas in Action)

The Big Lies People Tell In Online Dating  (oktrends)

How hot models acquire their heat  (Mind Hacks)

An idea for Cleveland to get back at Lebron  (The Agitator)

A grim chart from Daniel Inviglio:

Mallaby's defense of hedge funds

Another long finance post that I'm sticking beneath the fold.

Links — 12 July 2010

Posting will continue to be light this week while I'm working on various projects and job-related stuff.  [How can you be working on "job-related stuff" if you don't have a job? — ed.  Yeah, that's what I'm working on.  Wait, am I supposed to be the imagined voice of a nagging editor, the idea for which you copied from Dan Drezner? — ed.  Yeah, I doubt he'd mind, especially because I'm linking to a recent post of his.  Also because nobody reads your blog. — ed.  Shut up.]

How facts backfire  (The Boston Globe)

Dani Rodrik debates Josh Lerner on the efficacy of industrial policy (The Economist)

Computer program deciphers a dead language that mystified linguists (io9)

Extinction Burst  (You Are Not So Smart)

The Creativity Crisis  (Newsweek)

How to read research papers  (Dan Drezner)

David Brooks explains why IQ is overrated:

Minimum wage and employer behavior

In the course of a long, thoughtful post on the complications involved in dealing with unemployment, Felix Salmon writes:

But if workers at places like Wal-Mart start being paid a decent living wage, that is surely a significant improvement on where we are now. And if we raise the minimum wage to a point where employees are less likely to quit and more likely to learn reasonably high-level skills, that will help get us to Richard Florida’s promised land. Without unions and minimum-wage laws, corporations compete on who can pay the least. With them, they compete on who has the best employees and they invest significantly in those employees. Which is exactly what we want, especially since raising the minimum wage is unlikely in and of itself to increase unemployment visibly.

A respectful quibble.  How do we know that with a higher minimum wage, employers will "compete on who has the best employees" and "invest significantly in those employees"?

It seems just as possible that employers would react by doing one of the following, or some combination thereof:

• Hiring fewer workers and asking existing workers to do more (a tactic employers are more likely to get away with in an environment of sustained unemployment)

• Investing more in capital (whose price relative to labor obviously declines as the minimum wage increases) to help the company do the same work with fewer people

• Simply continuing to compete on price, even if the prices will be higher across the board as the increased minimum wage affects all employers in the same industry

These probably read like libertarian talking points.  But my impression it that the issue of the minimum wage's impact on employment and wages is more sharply debated by economists than was implied in Salmon's post, though it's likely that the kinds of changes typically proposed by legislators are small enough to have only have a marginal effect. 

Regardless, I've never seen the argument that employers react to higher minimum wages by increasing their investment in human capital.  I'm not saying Salmon is wrong about any of this, but I'm genuinely curious to know what the evidence is for it.

UPDATE: Thanks to Felix for responding here.

Links — 8 July 2010

Behavioural Finance's Smoking Gun (The Psy-Fi Blog)

The Pragmatic Rebels (Bloomberg Businessweek)

How to Lose Time and Money (Paul Graham)

Building One Big Brain (Robert Wright)

What Soccer Says About Us (The Nation)

Welcome to the Latin American decade (FT)

Marlon Brando to Michael Jackson: "Try not to make an ass of yourself" (Letters of Note)

The 7 Habits of Highly Ineffective People (Dan Ariely)

Get ready for a lot more of this guy as the elections approach (starts 30 seconds in):

Decisions that kill

My friend and Psychology Today Headcase blogger Eric Jaffe remains busy with his book tour, and because I have the flexible schedule of a guy who lounges all day in his underpants waiting for editors to call him back freelance writer, I agreed to contribute another guest post to his blog.  It just went up, and here's an excerpt:

Most of us know that our bad choices can eventually kill us, especially when these choices become hard-to-break addictions like smoking or binge drinking or overeating. We're not usually thinking in such morbid terms each time we light up another cigarette or reach for a second piece of chocolate cake, but maybe we should be. ...

The paper (pdf here), written by operations research professor Ralph Keeney, defined a personal decision as "a situation where an individual can make a choice among two or more alternatives," and where a person is aware of these alternatives. Using data from public agencies and previous studies, the paper links causes of premature death to personal decisions:

The analysis indicates that over one million of the 2.4 million deaths in 2000 can be attributed to personal decisions and could have been avoided if readily available alternative choices were made. Separate analyses indicate 46% of deaths due to heart disease and 66% of cancer deaths are attributable to personal decisions, about 55% of all deaths for ages 15-64 are attributable to personal decisions, and over 94% of the deaths attributable to personal decisions result in the death of the individual making the decisions.

I go on to argue that if social scientists plan to do more research into the psychology of personal decision-making (as Dan Ariely recommends), they shouldn't conduct their experiments without regard to how socioeconomic factors alter the way people think.

Read the whole thing here.  My earlier post on why your boss sucks is here.

Kling, Reinhart, and capital inflows

What follows is long and consists entirely of finance geekery, so it goes beneath the fold.