Economics – Page 181 – artdiamondblog.com

Ban of Affirmative Action Does Not Reduce Overall Black Enrollment

(p. 435) Using institutional data on race-specific college enrollment and completion, I examine whether minority students were less likely to enroll in a four-year public college or receive a degree following a statewide affirmative action ban. As in previous studies, I find that black and Hispanic enrollment dropped at the top institutions; however, there is little evidence that overall black enrollment at public universities fell. Finally, despite evidence that fewer blacks and Hispanics graduated from college following a ban, the effects on graduation rates are very noisy.

For the full article, from which the above abstract is quoted, see:
Backes, Ben. “Do Affirmative Action Bans Lower Minority College Enrollment and Attainment?” Journal of Human Resources 47, no. 2 (Spring 2012): 435-55.

“Education Bubble”: “A Spurious Inflation of the Credentials Required for Many Jobs”

Source of book image: http://2.bp.blogspot.com/-N1hV093ckVc/T8YmCXE2sQI/AAAAAAAAAYc/1B5hWDeXbzQ/s1600/basement.jpg

(p. 17) In June 2008, The Atlantic published an essay by an adjunct instructor of English, identified only as “Professor X,” whose job filled him with despair. Although the courses he taught were introductory, success was beyond many of his students, who, he wrote, were “in some cases barely literate.” X found giving F’s to be excruciating — “I am the man who has to lower the hammer,” he lamented — in part because he identified with his older students, who seemed to have lost their way in their careers much as X himself had.
. . .
. . . X’s function, in the ecology of the colleges where he teaches, is gatekeeper — most students who fail his classes will drop out — and he articulates the ethical challenge before him this way: “What grade does one give a college student who progresses from a 6th- to a 10th-grade level of achievement?” X gives F’s.
. . .
X and his wife got snookered in the housing bubble, and he wonders if the misery in his classroom might result from a similar education bubble. In 1940, there were 1.5 million college students in America; in 2006, there were 20.5 million. In X’s opinion, a glut of degrees has led to a spurious inflation of the credentials required for many jobs. Tuitions are rising, and two-thirds of college graduates now leave school with debt, owing on average about $24,000. A four-year degree is said to increase wages about $450,000 over the course of a lifetime, but X doubts the real value of degrees further down on the hierarchy of prestige. To him, the human cost is more conspicuous.
. . .
Professor X can be caustic about the euphemism and somewhat willed optimism that sometimes befog discussion of how to teach unprepared students. To relieve his and his students’ unhappiness, he proposes that employers stop demanding unnecessary degrees: a laudable suggestion, unlikely to be realized until the degree glut has dried up.

For the full review, see:
CALEB CRAIN. “Lost in the Meritocracy.” The New York Times Book Review (Sun., May 1, 2011): 17.
(Note: ellipses added.)
(Note: the online version of the review has the date April 29, 2011.)

The full reference for the book under review, is:
X, Professor. In the Basement of the Ivory Tower: Confessions of an Accidental Academic. New York: Viking, 2011.

Sunk-Cost Fallacy “Can Be Overcome”

(p. 346) The sunk-cost fallacy keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects. I have often observed young scientists struggling to salvage a doomed project when they would be better advised to drop it and start a new one. Fortunately, research suggests that at least in some contexts the fallacy can be overcome. The sunk-cost fallacy is identified and taught as a mistake in both economics and business courses, apparently to good effect: there is evidence that graduate students in these fields are more willing than others to walk away from a failing project.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Skilled Immigrants Increase U.S. Patents

(p. 31) We measure the extent to which skilled immigrants increase innovation in the United States. The 2003 National Survey of College Graduates shows that immigrants patent at double the native rate, due to their disproportionately holding science and engineering degrees. Using a 1940-2000 state panel, we show that a 1 percentage point increase in immigrant college graduates’ population share increases patents per capita by 9-18 percent. Our instrument for the change in the skilled immigrant share is based on the 1940 distribution across states of immigrants from various source regions and the subsequent national increase in skilled immigration from these regions.

For the full article, from which the above abstract is quoted, see:
Hunt, Jennifer, and Marjolaine Gauthier-Loiselle. “How Much Does Immigration Boost Innovation?” American Economic Journal: Macroeconomics 2, no. 2 (April 2010): 31-56.

Big Science Done Privately at Great Risk

Source of book image: http://t0.gstatic.com/images?q=tbn:ANd9GcQPLdrVlC1FT3ojxyxWJLq55AeAs87pw_Bw6ks1ugFnkcI_DBa_1w&t=1

(p. 23) Next time you find yourself grousing when the passenger in front reclines his seat a smidge too far, consider the astronomers of the Enlightenment. In 1761 and 1769, dozens and dozens of stargazers traveled thousands of miserable miles to observe a rare and awesome celestial phenomenon. They went by sailing ship and open dinghy, by carriage, by sledge and on foot. They endured discomfort that in our own flabby century would generate years of litigation. And they did it all for science: the men in powdered wigs and knee britches were determined to measure the transit of Venus.
. . .
The British astronomer Edmond Halley had realized that precise measurement of a transit might give astronomers armed with a clock and a telescope the data they needed to calculate how far Earth is from the Sun. With that distance in hand, they could work out the actual size of the solar system, the great astronomical problem of the era. The catch was that it would take multiple measurements from carefully chosen locations all over the Northern and Southern Hemispheres. But that was somebody else’s problem. Halley knew he wouldn’t live to see the transit of 1761.
That challenge fell to the French astronomer Joseph-Nicolas Delisle, who managed to energize and rally his colleagues in the years leading up to the transit, then coordinate the enormous effort that would ultimately involve scientists and adventurers from France, Britain, Russia, Germany, the Netherlands, Italy, Sweden and the American colonies. When you think about how hard it is to arrange a simple dinner with a few friends who live in the same city and use the same language when e-mailing, it’s enough to take your breath away.
. . .
Sea travel was so risky in 1761 that observers took separate ships to the same destination to increase the chances some of them would make it alive. The Seven Years’ War was on, and getting caught in the cross-fire was a constant concern. One French scientist carried a passport arranged by the Royal Society in London advising the British military “not to molest his person or Effects upon any account.” Others were shelled by the French or caught in border troubles with the Russians. An observer en route to Tobolsk, in Siberia, found himself floating in ice up to his waist when his carriage fell through the frozen river they were traveling in lieu of a road. He made it to his destination. Another, heading toward eastern Finland via the iced-over Gulf of Bothnia, was repeatedly catapulted out of his sledge as the runners caught on the crests of frozen waves. He made it too.

For the full review, see:
JoANN C. GUTIN. “Masters of the Universe.” The New York Times Book Review (Sun., May 20, 2012): 19.
(Note: ellipses added.)
(Note: the online version of the review has the date May 18, 2012.)

The full reference for the book under review, is:
Wulf, Andrea. Chasing Venus: The Race to Measure the Heavens. New York: Alfred A. Knopf, 2012.

Source of image: online version of the NYT article quoted and cited above.

Kahneman Preaches that People Can and Should Act More Rationally

(p. 338) . . . I have a sermon ready for Sam if he rejects the offer of a single highly favorable gamble played once, and for you if you share his unreason-able aversion to losses:

I sympathize with your aversion to losing any gamble, but it is costing you a lot of money. Please consider this question: Are you on your deathbed? Is this the last offer of a small favorable gamble that you will ever consider? Of course, you are unlikely to be offered exactly this gamble again, but you will have many opportunities to consider attractive gambles with stakes that are very small relative to your wealth. You will do yourself a large financial favor if you are able to see each of these gambles as part of a bundle of small gambles and rehearse the mantra that will get you significantly closer to economic rationality: you win a few, you lose a few. The main purpose of the mantra is to control your emotional response when you do lose. If you can trust it to be effective, you should remind yourself of it when deciding whether or not to accept a small risk with positive expected value. Remember these qualifications when using the mantra:

It works when the gambles are genuinely independent of each other; it does not apply to multiple investments in the same industry, which would all go bad together.

(p. 339)

It works only when the possible loss does not cause you to worry about your total wealth. If you would take the loss as significant bad news about your economic future, watch it!

It should not be applied to long shots, where the probability of winning is very small for each bet.

If you have the emotional discipline that this rule requires, you will never consider a small gamble in isolation or be loss averse for a small gamble until you are actually on your deathbed and not even then.

This advice is not impossible to follow. Experienced traders in financial markets live by it every day, shielding themselves from the pain of losses by broad framing. As was mentioned earlier, we now know that experimental subjects could be almost cured of their loss aversion (in a particular context) by inducing them to “think like a trader,” just as experienced baseball card traders are not as susceptible to the endowment effect as novices are. Students made risky decisions (to accept or reject gambles in which they could lose) under different instructions. In the narrow-framing condition, they were told to “make each decision as if it were the only one” and to accept their emotions. The instructions for broad framing of a decision included the phrases “imagine yourself as a trader,” “you do this all the time,” and “treat it as one of many monetary decisions, which will sum together to produce a ‘portfolio’.” The experimenters assessed the subjects’ emotional response to gains and losses by physiological measures, including changes in the electrical conductance of the skin that are used in lie detection. As expected, broad framing blunted the emotional reaction to losses and increased the willingness to take risks.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.
(Note: ellipsis added; italics in original.)

A True Tall Tale: Mankiw Lays a Reductio Ad Absurdum on the Egalitarians

(p. 155) Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard utilitarian framework for tax policy analysis answers this question in the affirmative. This result has two possible interpretations. One interpretation is that individual attributes correlated with wages, such as height, should be considered more widely for determining tax liabilities. Alternatively, if policies such as a tax on height are rejected, then the standard utilitarian framework must in some way fail to capture our intuitive notions of distributive justice.

For the full article, from which the above abstract is quoted, see:
Mankiw, N. Gregory, and Matthew Weinzierl. “The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution.” American Economic Journal: Economic Policy 2, no. 1 (Feb. 2010): 155-76.

Reference Point Ignored Due to “Theory-Induced Blindness”

(p. 290) The omission of the reference point from the indifference map is a surprising case of theory-induced blindness, because we so often encounter cases in which the reference point obviously matters. In labor negotiations, it is well understood by both sides that the reference point is the existing contract and that the negotiations will focus on mutual demands for concessions relative to that reference point. The role of loss aversion in bargaining is also well understood: making concessions hurts. You have much (p. 291) personal experience of the role of reference point. If you changed jobs or locations, or even considered such a change, you surely remember that the features of the new place were coded as pluses or minuses relative to where you were. You may also have noticed that disadvantages loomed larger than advantages in this evaluation–loss aversion was at work. It is difficult to accept changes for the worse. For example, the minimal wage that unemployed workers would accept for new employment averages 90% of their previous wage, and it drops by less than 10% over a period of one year.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Macro Policy Should Be Less Interventionist, More Rules-Based, and More Predictable

(p. 165) This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy. It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist, less rules-based, and less predictable. The policy implications are thus that policy should “get back on track.”

For the full article, from which the above abstract is quoted, see:
Taylor, John B. “Getting Back on Track: Macroeconomic Policy Lessons from the Financial Crisis.” Federal Reserve Bank of St. Louis Review 92, no. 3 (May-June 2010): 165-76.

Kahneman Grants that “the Basic Concepts of Economics Are Essential Intellectual Tools”

(p. 286) Most graduate students in economics have heard about prospect theory and loss aversion, but you are unlikely to find these terms in the index of an introductory text in economics. I am sometimes pained by this omission, but in fact it is quite reasonable, because of the central role of rationality in basic economic theory. The standard concepts and results that undergraduates are taught are most easily explained by assuming that Econs do not make foolish mistakes. This assumption is truly necessary, and it would be undermined by introducing the Humans of prospect theory, whose evaluations of outcomes are unreasonably short-sighted.
There are good reasons for keeping prospect theory out of introductory texts. The basic concepts of economics are essential intellectual tools, which are not easy to grasp even with simplified and unrealistic assumptions about the nature of the economic agents who interact in markets. Raising questions about these assumptions even as they are introduced would be confusing, and perhaps demoralizing. It is reasonable to put priority on helping students acquire the basic tools of the discipline. Furthermore, the failure of rationality that is built into prospect theory is often irrelevant to the predictions of economic theory, which work out with great precision in some situations and provide good approximations in many others. In some contexts, however, the difference becomes significant: the Humans described by prospect theory are (p. 287) guided by the immediate emotional impact of gains and losses, not by long-term prospects of wealth and global utility.
I emphasized theory-induced blindness in my discussion of flaws in Bernoulli’s model that remained unquestioned for more than two centuries. But of course theory-induced blindness is not restricted to expected utility theory. Prospect theory has flaws of its own, and theory-induced blindness to these flaws has contributed to its acceptance as the main alternative to utility theory.

Source:
Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

Incentives Matter, Even in Refereeing Articles for Journals

(p. 678) A natural experiment in an economics fleld journal afforded time-series observations on payments to referees for on-time reviews. The natural experiment yielded 15 months’ worth of data with no payments and about two subsequent years of data with payments. Using referee and manuscript-specific measures as covariates, hazard models were used to gauge the effects of payments on individual referee’s review times. All models indicate statistically significant reductions in review times owing to referee payments. Reductions in review times translate into significant reductions in first-response time (FRT). Median FRT was reduced from 90 to 70 days, a 22% reduction in the presence of payments. With payments, only 1% of the FRTs exceeded six months; without payments, 16% of the FRTs exceeded six months.

For the full article, from which the above abstract is quoted, see:
Thompson, Gary D., Satheesh V. Aradhyula, George Frisvold, and Russell Tronstad. “Does Paying Referees Expedite Reviews?: Results of a Natural Experiment.” Southern Economic Journal 76, no. 3 (Jan. 2010): 678-92.