Professor M

2021-05-12 13:33:33 Earlier this spring, I gave a talk at the All-Russian Economics Olympiad for high school students. If you speak Russian, you might be curious to tune in.

It’s a long lecture. If you have only 15 minutes, tune in to the last 15 minutes (from 1:06:50 onward). If you have 5 minutes, go to 40:15 (Experiments as a source of knowledge).

Timecodes:
0:20 Beginning
0:30 Building blocks in sciences
1:05 Principal-agent model as a building block in economics
5:06 The reason why economics matters
10:50 Personal background
13:36 How has the Economics Olympiad changed my life?
16:25 I know that I know nothing
18:58 The sources of knowledge
22:10 Newton’s law of gravity
26:18 Distinction between physics and economics
28:20 Expected utility theory in economics and how it breaks down
34:38 Prospect theory and behavioral economics
40:15 Experiments as a source of knowledge
46:31 Experiments in economics
47:28 Natural experiments in economics
54:59 Estimating the effect of winning in the Economics Olympiad
1:06:50 How can economics inform decision-making in life?
1:08:29 Where does economics fail? Open / Comment

2021-05-05 17:53:21 Measure and target what matters?

Goodhart’s law states: “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”

Marilyn Strathern generalized it beyond statistics and control: “When a measure becomes a target, it ceases to be a good measure.” (Presumably, because people start gaming the measure, and it stops reflecting what truly matters.)

With this in mind, the predicament of our two economist friends is unsurprising. When you target growth, you end up pursuing things in its interest at the expense of some more meaningful endeavors that the targeted measure fails to capture.

Others may get us to buy into their targets. Fight Club puts it succinctly: “Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.” The phrase “…to impress people we don’t even like” begs inclusion.

Measure what matters? True. Target this measure? If you are utterly convinced that it includes everything that matters, sure. If not, maybe be a little chill about the target? Open / Comment

2021-05-02 16:39:02 GDP as a measure of progress

Two economists are walking in the park when they come across a pile of dog shit. One economist says to the other, “If you eat that dog shit, I’ll give you $50.” The second economist thinks for a minute, then reaches down, picks up the shit, and eats it. The first economist gives him a $50 bill, and they keep going on their walk.

A few minutes later, they come across another pile of dog shit. This time, the second economist says to the first, “Hey, if you eat that, I’ll give you $50.” So, of course, the first economist picks up the shit, eats it, and gets $50.

Walking a little while farther, the first economist looks at the second and says, “You know, I gave you $50 to eat dog shit, then you gave me back the same $50 to eat dog shit. I can’t help but feel like we both just ate dog shit for nothing.”

“That’s not true,” responded the second economist. “We increased the GDP by $100!” Open / Comment

2021-04-29 16:49:01 In the pre-digital age, people hid their embarrassing thoughts from other people. In the digital age, they still hide them from other people, but not from the internet and in particular sites such as Google, which protect their anonymity. These sites function as a sort of digital truth serum.

Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are | Seth Stephens-Davidowitz

Yearning for more? Ask me about Top 100 Books & Movies. Open / Comment

2021-04-24 16:59:42 Recommendation #1 — Money Stuff

If you are interested in finance and have not heard of Matt Levine, behold—your lives will never be the same.

Matt Levine is a former lawyer and investment banker who left his lucrative job at Goldman Sachs to become a financial blogger. He shares his wit and insights with 150,000+ people subscribed to his free daily newsletter “Money Stuff.”

You can become one of them! Subscribe to Money Stuff. View the latest newsletter.

If your information intake is at capacity, do yourself a favor — unsubscribe from my channel and subscribe to Money Stuff. I’ll sleep better knowing that I’ve contributed to the optimal allocation of attention.

I’ve wanted to recommend “Money Stuff” ever since my attempt to crowdsource Telegram channels and strengthen Telegram’s two-sided network by spreading the word about high-quality channels with original content. I haven’t received many tips on great English language channels (contact me if you know of a gem), but I’ll soon give a shout-out for some non-English ones. (Can you guess which language I have in mind?)

Recommending “Money Stuff” still benefits Telegram. The more Telegram users read “Money Stuff,” the more accustomed they’ll get to high-quality content, the more refined their palates will get, the less they’ll crave junk food. I’m a gardener, and “Money Stuff” is one of my fertilizers.

Why now? Shibboleth. I sometimes write about shibboleths. It turns out so does Matt Levine, even though he doesn’t use the term.

Simple fact. Until 2006, the investment banking division of Credit Suisse used to be called Credit Suisse First Boston, after a joint venture with First Boston, an investment bank.

Here’s how Matt Levine spins this simple fact:
— One day I should write down a list of, like, the cool names for each big bank. Clearly the best reason to go work at Credit Suisse Group AG is so you can answer the phone “First Boston.” And then the cool people will be like “oh hey, you’re cool too,” and you’ll feel cool, and the uncool people will be like “I thought I was calling Credit Suisse?” and you’ll scoff at them and feel even cooler.

And guess what? This is a footnote! If a footnote is like this, can you even begin to imagine the main part? Open / Comment

2021-04-21 12:24:53 The streetlight effect

— A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys, and they both look under the streetlight together. After a few minutes, the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the drunk answers, “this is where the light is.” (Wikipedia)

Searching in the wrong place may feel easier than looking in the right place. In other words, the prospect of comfort or pleasure influences the way we tackle a problem and may send us toward a dead end. But it gets deeper.

Occasionally, we get sidetracked because of our desire to use familiar tools. After all, we’ve spent all this time mastering them. The sunk cost fallacy screams that it would be wasteful not to deploy these skills whenever we can.

The ultimate sunk cost fallacy applies to our identities. What if you see yourself as a person who does things a certain way? Doing things differently would threaten the very sense of who you are.

— A patient tells a surgeon: “Doctor, my stomach hurts.” Surgeon: “No problem. We should cut off your ears.” The patient runs away in fear and talks to a general practitioner next: “Doctor, my stomach hurts, and the surgeon wanted to cut off my ears!” General practitioner: “Surgeons! All they think about is cutting! Let me prescribe some pills to you, and the ears will fall off by themselves.”

If all you have is a hammer, everything looks like a nail. If you don’t know that hammers exist, or don’t care about getting one, or don’t see yourself as a person who uses hammers, you may never hit the nail on the head. Open / Comment

2021-04-10 17:22:03 — But even though the top was no more than sixty minutes above, he decided to turn around, believing that he would be too tired to descend safely if he climbed any higher. To turn around close to the summit...showed incredibly good judgment. With enough determination, any bloody idiot can get up this hill. The trick is to get back down alive.

— Unfortunately, the sort of individual who's programmed to ignore personal distress and keep pushing to the top is frequently programmed to disregard signs of grave and imminent danger as well. This forms the nub of a dilemma that every Everest climber eventually comes up against: in order to succeed you must be exceedingly driven, but if you're too driven you're likely to die.

Into Thin Air | Jon Krakauer

Desperate for more? Ask me about Top 100 Books & Movies. Open / Comment

2021-04-02 14:33:00 Rivalry-Excludability & Technology — Part 3

Lighthouses often come up as an example of an archetypal public good (i.e., non-rival and non-excludable). The government had to finance them because of the private sector’s inability to collect payments. This interpretation is not entirely accurate, though. In the past, boats docked by a lighthouse paid a docking fee that would finance, among other things, the cost of running a lighthouse. In other words, ships moored by a lighthouse were subsidizing the lighthouse use for vessels passing by. No public sector had to be involved. At the same time, the non-rivalry and non-excludability properties of lighthouses are beyond reproach.

Nowadays, however, lighthouses are of little use, except for picture-taking purposes, because of superior technology. Modern boats come with advanced (and excludable) GPS-based navigation systems; each ship is its own lighthouse. The technology has made non-rival and non-excludable lighthouses obsolete.

Part 1
Part 2 Open / Comment

2021-03-11 14:43:44 Rivalry-Excludability & Technology — Part 2

You can light one candle against another because a candle is a horribly inefficient way of producing light. Besides light, which is a candle’s main output, candles also emit heat. And it’s the wasteful byproduct of heat that enables the transfer of light from one candle to another.

Efficient light bulbs, on the contrary, don’t warm up when in use because people have learned to direct the use of energy (almost) exclusively to a light bulb’s primary objective. After all, it’s a light bulb—not a heat bulb.

Let’s run with this thought. What if traditionally non-rival and non-excludable goods are such precisely because we haven’t yet figured out technology-wise how to produce and deliver a better version of these goods to customers in a rival and excludable fashion? What if the non-rivalry and the non-excludability properties of goods are analogous to the wasteful heat emitted by candles?

Rivalry-Excludability & Technology — Part 1 Open / Comment

2021-02-17 20:20:00 Rivalry-Excludability & Technology — Part 1

Introductory economics textbooks introduce the distinction between private and public goods using the terms rival and excludable.

A good is rival if its consumption by one consumer prevents simultaneous consumption by others. A good is excludable if it is possible to prevent consumers who have not paid for it from having access to it.

Private goods are rival and excludable (e.g., food, clothing, devices, and any tradable tangible good, by and large). Public goods are non-rival and non-excludable (e.g., national defense, air, and street lighting).

“Capitalism without Capital: The Rise of the Intangible Economy” elaborates on how the differences between intangible and tangible assets manifest themselves in the knowledge economy.

Investments into intangibles (e.g., knowledge, design, processes) are prone to large spillover effects. The ideas created by R&D are non-rival. If I eat an apple (a rival good), you can’t also have it. However, the same piece of knowledge (a non-rival good) can serve multiple parties.

Thomas Jefferson agrees: “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.”

Think about a weakness in Jefferson’s analogy. I’ll share my thoughts on it in the next part. And I’ll also talk about how technological progress affects the ability to provide goods in rival vs. non-rival and excludable vs. non-excludable ways. Open / Comment