## Thursday, November 1, 2012

### Syria worrying and interesting developments

Some worrying reports from Reuters and the WaPo on intra-factional conflicts in Syria.

Reuters reports on the Syrian opposition arming friendly Palestinians to fight other Palestinians in a Palestinian neighborhood of Damascus
Palestinians have in any case been riven by factionalism for decades, their differences exacerbated by the 1975-1990 civil war in neighboring Lebanon, where they also have a strong presence. Intra-Palestinian fighting in Syria could lead to similar tensions in Lebanon.

The WaPo reports on fighting between Syrian Kurds and the FreeSyrian Army, but describe divisions within each group.
Compounding the complexity of the fight, however, are splits within both sides, which raise questions about whether the violence can be contained...Kurdish allegiances are also sharply divided between the PYD and the more moderate Kurdish National Council, which has sought an accommodation with the Syrian opposition.

In the meantime, The U.S. seems to get more involved in organizing the opposition, which seems like a good news. Clinton's words were quite strong
“We’ve made it clear that the S.N.C. can no longer be viewed as the visible leader of the opposition,” Mrs. Clinton said, referring to the Syrian National Council. It can participate, she added, “but that opposition must include people from inside Syria and others who have a legitimate voice that needs to be heard.”

I obviously write that as an expert on Foreign Policy.

## Tuesday, October 30, 2012

1. Alwyn Young argues that measures of GDP and consumption growth in Africa are flawed by mismeasurements, and that the Demographic and Health Survey, which collects "information on the ownership of durables, the quality of housing, the health and mortality of children, the education of the youth and the allocation of women's time in the home and the  market", enables a better and more consistent data source. The implications could be important for our view of Africa's development compared to other developing regions, as Young finds that
since 1990 real material consumption in sub-Saharan Africa has been rising at a rate three and half to four times that recorded by international data sources such as the PWT and UN, and on par with the growth  taking place in other regions of the world.
2. Here's a cool graph of how the Fed works

3. Alcott and Rogers find that for behavioral interventions to work, they need to be sustained for a period of time. They find that an energy conservation intervention where people were repeatedly reminded to save energy led to strong (but decreasing over time) responses after each warning, and that the long-term impact was only significant when the the intervention was long enough
attention is malleable, not static: an intervention can draw attention to one set of repeated behaviors, but that attention gradually returns to its baseline allocation. Second, our empirical results document how repeated intervention can eventually cause people to change the composition of their responses, which generates more persistent changes in outcomes.
One simple example they use to explain their findings is that if you repeatedly go to the (same?) gym, you'll find a gym buddy and develop a routine. There must be something like this in Charles Duhigg's book on the power of habit! From his NYT magazine piece last February:
One study from Duke University estimated that habits, rather than conscious decision-making, shape 45 percent of the choices we make every day...The process within our brains that creates habits is a three-step loop. First, there is a cue, a trigger that tells your brain to go into automatic mode and which habit to use. Then there is the routine, which can be physical or mental or emotional. Finally, there is a reward...
And on the gym example specifically:

In one project, 256 members of a health-insurance plan were invited to classes stressing the importance of exercise. Half the participants received an extra lesson on the theories of habit formation (the structure of the habit loop) and were asked to identify cues and rewards that might help them develop exercise routines.
The results were dramatic. Over the next four months, those participants who deliberately identified cues and rewards spent twice as much time exercising as their peers... According to another recent paper, if you want to start running in the morning, it’s essential that you choose a simple cue (like always putting on your sneakers before breakfast or leaving your running clothes next to your bed) and a clear reward (like a midday treat or even the sense of accomplishment that comes from ritually recording your miles in a log book). After a while, your brain will start anticipating that reward — craving the treat or the feeling of accomplishment — and there will be a measurable neurological impulse to lace up your jogging shoes each morning.

4. The New York Times has an interesting piece on the rise of the part-time worker. The switch is striking:
“Over the past two decades, many major retailers went from a quotient of 70 to 80 percent full-time to at least 70 percent part-time across the industry,”...the Bureau of Labor Statistics has found that the retail and wholesale sector, with a total of 18.6 million jobs, has cut a million full-time jobs since 2006, while adding more than 500,000 part-time jobs...in two leading industries — retailing and hospitality — the number of part-timers who would prefer to work full-time has jumped to 3.1 million, or two-and-a-half times the 2006 level, according to the Bureau of Labor Statistics. In retailing alone, nearly 30 percent of part-timers want full-time jobs, up from 10.6 percent in 2006
Those part-time workers take drastically lower pay:
part-time workers in service jobs received average compensation of $10.92 an hour in June, which includes$8.90 in wages plus benefits of \$2.02. Full-time workers in that sector averaged 57 percent more in total compensation

The factors the NYT points out are
workers’ schedules have become far less predictable and stable. Many retailers now use sophisticated software that tracks the flow of customers...
...when Walmart spread nationwide and opened hundreds of 24-hour stores in the 1990s, that created intense competitive pressures and prompted many retailers to copy the company’s cost-cutting practices, including its heavy reliance on part-timers...
...the use of part-timers had also escalated because of the declining power of labor unions. “They set a standard for what a real job was — Monday through Friday with full-time hours,”...

## Saturday, October 27, 2012

### Readings -- UK growth and black swans

FT Alphaville has a nice post on pessimism about he UK economy even after the somewhat good numbers for GDP this week, notably due to the Olympic bounce, and then make a general point on the problem of monetary policy pass-through to inflation in a leveraged, underconfident economy, via Nomura's Richard Koo
No matter how much liquidity the central bank supplies under such conditions, the money will not leave the vaults of financial institutions because there are no borrowers. Hence it cannot stimulate the economy.

The second, really important reading today is Florin Diacu's post in the New York Times on the appalling conviction of seven earthquake scientists for the failure to predict the L'Aquila April 2009 earthquake. There are two things to keep in mind here. The first is that the failure to think in terms of probabilities is, for everyday purposes, not a big problem, although it annoys me slightly. But it has had important consequences in this case. Yep, they said that an earthquake was unlikely. I made a comment on Brad Plumer's post in the WaPo this week when in a discussion of Intrade manipulation of the Romney v. Obama contract, he suggested, as a lot of people have, that Intrade had been wrong on the ACA ruling. In that particular case, Intrade predicted the overruling of the ACA mandate by the Supreme Court with a 80% probability, which gave you a 1 in 5 chance that it won't be overruled. Intrade was not wrong, or at least, the argument that is being made is incorrect.
The general point is really Nassim Taleb's black swan theory, and Diacu alludes to that in his editorial. You can't predict black swans, but you can build robust system that will be able to suffer extreme events. In the particular case of earthquakes, Diacu writes:
We should not fear earthquakes, since most of us will never experience a major one. But we must prepare infrastructure to withstand disaster and learn how to react when disasters do hit.
Yes.

Note: A New Scientist opinion post argues that the charges were less about the predicition accuracy than with the communication strategy:
Employed by Italy's Major Hazards Committee to assess earthquake risks and communicate them to the government and the public, the seismologists got the science right, but left the job of public communication to a civil protection official with no specialist knowledge of seismology. His statement to the press was, to put it mildly, a grossly inaccurate reflection of the situation: "The scientific community tells us there is no danger, because there is an ongoing discharge of energy. The situation looks favourable." At this point, the seismologists should have stepped in. But they did not, and the message stuck.
I find it slightly confusing and still don't see why the scientists should be convicted for that. As Arthur Charpentier writes, they should then just say that there will be an earthquake every day: Instead of making a risky forecast, make the one that minimizes the type II error -- failing to predict an earthquake -- while forgetting everything about the type I -- predicting an earthquake when it doesn't happen

 Risky prediction
 Yay! Safe prediction

## Friday, October 26, 2012

### Morning stuff

• The Wall Street Journal had an interesting case study on hysteresis. The story is on how new-home construction is just picking up, but prices are quite high because builders seemed to be capacity-constrained because of the layoffs and capital reduction after the bubble-pop.

Timber companies and drywall manufacturers, for example, laid off thousands of workers and idled capacity at plants when the downturn hit and want to see at least six months of rising demand before reversing course. (Lumber shortages are also the result of an infestation of bark beetles that has destroyed millions of acres of pine trees in the U.S. and Canada.)

• The New York Times reports the creation of a new, right-wing party in Japan by the governor of Tokyo, who is the guy who caused the purchase of the Senkaku islands by the Japanese government last months, rekindling the fire in the sino-japanese relation. After the nomination of Abe at the head of Japan's conservative party (and his recent visit to the Yasukuni war shrine) , the evolution of Japanese politics, with its incessant succession of prime ministers and this rise in nationalism, is worrying  for the future geopolitical issue in South East Asia.
• Hillary Clinton has had a long career and The Guardian is here to provide the gifs
• Floyd Norris summarizes some good points about the Euro crisis. The first point is that the euro is still popular, even in crisis countries.
polls in Greece ... still show strong support for the euro, and so do polls in Finland, which has been upset over the need to support the periphery.
but the most important point is the fact that "The euro zone as a whole is running smaller budget and current account deficits than is the United States. If it were one country, there might be articles about depressed regions, but not talk of collapse."

• Silvio Berlusconi withdrawal from the national elections next spring might create a complete reshuffle of Italian politics as the right seemed to have been an aggregation of diverse party glued together by the polarizing leader, while the left is embroiled in a conflict between the young mayor of Florence and the current, older, party leader.

## Wednesday, October 10, 2012

### Behavioral econ and voting behavior

As a quick side-note to the previous post, I was told that I seem to really like Woodford's theory paper and that I should work on it. That's probably true. One thing that is fascinating in politics and how people vote is the importance of party labels. There are two main papers on this, that used the incidence of partisan and nonpartisan elections in the judiciary: how do voting patterns change between two comparable elections where only one o them has candidates explicitly linked to parties?

Squire and Smith use 1982 California sate supreme court confirmation contests and rely on survey data where the sample was split between people who were told the partisan affiliation of a candidate, and those who were not. Conclusion:

Partisan information increases the probability of an individual holding an opinion on the
elections, and results in votes which are based on the respondent's partisan identification and
opinion of the governor who appointed the justice.

Snyder and Lim, more recently, have strong findings. The sad news:
we find that incumbent judges' quality has little effect on their vote share or probability of winning in partisan general elections...
we fi nd that voting is highly partisan in partisan judicial elections -- i.e., there is a strong correlation between the Democratic "normal vote" and the Democratic vote share for judges --but not in non-partisan or retention elections.

The nice thing with Woodford's paper is that the cognitive constraint explains the decoy effect. Consider the example of Huber et al. two goods that differ on price an quality, one is low price-low quality and one is high price-high quality. In the Figure below, those are the "Competitor" and "Target" goods. Each good dominates the other on one dimension. Let's assume for our example that the Target good is the high-quality high-price one. You can look at the choice people make based on this choice set.
Now, consider a new choice set where you introduce a good with intermediate quality (dimension 2) and higher price (dimension 1) than both goods. This is the shaded area in the picture. You can see that introducing this Decoy makes the choice still hard between the Decoy and the Competitor, but the choice between the Decoy and the Target is easy: the Target is the best product on both dimensions. The fact that the comparison is easy leads to the Target product being selected more often than initially.

Partisan labels are useful because they provide an easy dimension of comparison between the two candidates. One extra problem is that the interpretation of party labels is not clear. But that's a question for another time...

### Resources for predictions of the US 2012 presidential elections

This post will be updated, but here are the links:

## Tuesday, October 9, 2012

### The future of behavioral econ and the importance of initial choices

I attended an interesting lecture by Sendhil Mullainhatan on the behavioral economics of poverty this morning, and I wanted to write something that came to my mind when listening to the first part of his talk, which was more about the philosophy of testing - and trying to solve for - behavioral biases in the field.

It seemed to me that there were two problems. First, it is hard to compare welfare before and after the experiment. If the problem at stake is about the take-up of HIV medication, then using a treatment increasing the take-up rate is probably indisputably an improvement. But other interventions, say on savings behavior, or less clear-cut.

The second problem is about the intervention itself. Mullainhatan discussed an experiment where he and some colleagues were just sending reminders to save money for the future purchase of fertilizer. The reminders "worked", in that the purchase of fertilizer increased. But what was the reminder actually doing? What behavioral bias did it solve? Was the problem actually a behavioral problem?

In any case, the thing I wanted to discuss was that the main issue with behavioral econ right now seems to be the unlimited number of biases that have been tested and proven. Have fun. So we don't really know what we're doing.

So let's say we choose the biases we want to study. We might then be entering into Hughes' theory of technology:
the technologies we end up using aren’t determined by any objective measure of quality. In fact, the tools we choose are often deeply flawed. They just happened to meet our particular social needs at a particular time and then became embedded in our culture.

If you think of the cars story, we're stuck today in an equilibrium with plenty of gasoline refueling station and people have cars working on gasoline, but for instance it would make a lot of sense to change that to have more cars, and more stations for natural gas, that function the same way, have a far lower energy-equivalent impact on greenhouse gas emissions, and is now far cheaper at least in the US.  Here's James Hamilton quoting Christopher Knittel:
Large-scale adoption of natural gas vehicles requires coordination between vehicle manufacturers, consumers, and refueling stations-- either existing gasoline stations or replacements. This creates a chicken-and- egg problem, or a network externality issue.

I was thinking about this more generally because as Sendhil mentioned, there are a lot of theories we can test in behavioral. The first choice of what we choose to test might be important...

As a last point, one thing that might help us solve the problem is going one step back and look for models of thought process that will help us understand all those biases. This is what I feel Mike Woodford has been trying to do in an amazing paper that everybody should read. The simple idea is that people make choices not under a budget constraint, but under a cognitive constraint. With a budget/monetary constraint, you have to make choices between goods, say. With a cognitive constraint, you have to make choices about the precision of the information you're collecting. For instance, is it worth it to be able to distinguish between two different shades of blue? Is it worth it to make a distinction between two interest rates a couple of basis points apart? Generally, for instance, you discretize any continuous variable. You can also think of how you interpret probabilities. Certainty is easy to understand, but distinguishing 65% and 55% is pretty hard.
Models of rational inattention, or Xavier Gabaix'"sparsity-based model of bounded rationality" can also generate a list of behavioral biases that could provide a more general approach. Importantly, Mullainhatan concluded his talk on the impact of scarcity on what we choose to focus on, which is quite consistent with the three models mentioned above.