Economics – Page 182 – artdiamondblog.com

No Amount of Econometric Sophistication Will Substitute for Good Data

(p. 234) Using a powerful method due to Singh, we have established a relationship between God’s attitude toward man and the amount of prayer (p. 235) transmitted to God. The method presented here is applicable to a number of important problems. Provided conditional density (1) is assumed, we do not need to observe a variable to compute its conditional expectation with respect to another variable whose density can be estimated. For example, one can extend current empirical work in a variety of areas of economics to estimate the effect of income on happiness or the effect of income inequality on democracy. We conjecture that this powerful method can be extended to the more general case when X is not observed either.

For the full article, from which the above is quoted, see:
Heckman, James. “The Effect of Prayer on God’s Attitude toward Mankind.” Economic Inquiry 48, no. 1 (Jan. 2010): 234-35.

“The New Upper Class Must Start Preaching What It Practices”

Source of book image: http://si.wsj.net/public/resources/images/OB-RO889_bkrvmu_DV_20120130124608.jpg

(p. C2) There remains a core of civic virtue and involvement in working-class America that could make headway against its problems if the people who are trying to do the right things get the reinforcement they need–not in the form of government assistance, but in validation of the values and standards they continue to uphold. The best thing that the new upper class can do to provide that reinforcement is to drop its condescending “nonjudgmentalism.” Married, educated people who work hard and conscientiously raise their kids shouldn’t hesitate to voice their disapproval of those who defy these norms. When it comes to marriage and the work ethic, the new upper class must start preaching what it practices.

For the full essay, see:
CHARLES MURRAY. “The New American Divide; The ideal of an ‘American way of life’ is fading as the working class falls further away from institutions like marriage and religion and the upper class becomes more isolated. Charles Murray on what’s cleaving America, and why.” The Wall Street Journal (Sat., January 21, 2012): C1-C2.

The essay quoted above is related to Murray’s book:
Murray, Charles. Coming Apart: The State of White America, 1960-2010. New York: Crown Forum, 2012.

School Competition Benefits Students

(p. 150) We study competition between two publicly funded school systems in Ontario, Canada: one that is open to all students, and one that is restricted to children of Catholic backgrounds. A simple model of competition between the competing systems predicts greater effort by school managers in areas with more Catholic families who are willing to switch systems. Consistent with this insight, we find significant effects of competitive pressure on test score gains between third and sixth grade. Our estimates imply that extending competition to all students would raise average test scores in sixth grade by 6 percent to 8 percent of a standard deviation.

For the full article, from which the above abstract is quoted, see:
Card, David, Martin D. Dooley, and A. Abigail Payne. “School Competition and Efficiency with Publicly Funded Catholic Schools.” American Economic Journal: Applied Economics 2, no. 4 (Oct. 2010): 150-76.

The Precautionary Principle Would Have Blocked Many Great Innovations

(p. 351) The intense aversion to trading increased risk for some other advantage plays out on a grand scale in the laws and regulations governing risk. This trend is especially strong in Europe where the precautionary principle, which prohibits any action that might cause harm, is a widely accepted doctrine. In the regulatory context, the precautionary principle imposes the entire burden of proving safety on anyone who undertakes actions that might harm people or the environment. Multiple international bodies have specified that the absence of scientific evidence of potential damage is not sufficient justification for taking risks. As the jurist Cass Sunstein points out, the precautionary principle is costly, and when interpreted strictly it can be paralyzing. He mentions an impressive list of innovations that would not have passed the test, including “airplanes, air conditioning, antibiotics, automobiles, chlorine, the measles vaccine, open-heart surgery, radio, refrigeration, smallpox vaccine, and X-rays.” The strong version of the precautionary principle is obviously untenable. But enhanced loss aversion is embedded in a strong and widely shared moral intuition; it originates in System 1. The dilemma between intensely loss-averse moral attitudes and efficient risk management does not have a simple and compelling solution.

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

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.