Some introductory behavioural economics notes

Last night I gave a brief talk on behavioural economics to the Carleton economics student societies. The slides are here: Download Behavioural_econ_talk. 

Comments

[Kevin Milligan]

Homo Economicus vs Homer Economicus. Good one!

[Fran R Woolley]

Not original, sadly, but it got a laugh.

[Eric Cai - The Chemical Statistician, @chemstateric]

Hi Frances,

1) Thanks for posting these slides - I really enjoyed reading them! Ditto Kevin on Homo Economicus vs. Homer Economicus - hilarious!

2) Regarding the last slide on predicting life satisfaction with carrot consumption is likely a tongue-in-cheek exercise, I think that you're trying to show that consuming carrots may be a short-term pain but a long-term gain, and that using lessons from behavioural economics (commitment contract, libertarian paternalism) to encourage carrot (or other similar) consumption is worthwhile. Does that summarize your message? After some thought, I would still much appreciate your clarification on what you're trying to convey.

3) I recognize that your regression model on that last slide is likely a tongue-in-cheek exercise, but the line that you drew in the plot seems to suggest that you used normal linear least-squares regression. As a statistician, I gently ask to momentarily spoil the fun and point out that this is not the best model for a non-negative, integer-valued target variable, such as this measure of life satisfaction; Poisson regression would be better. If the target is considered to be ordinal, then ordinal logistic or ordinal probit regression would be suitable.

Thanks again for an entertaining introduction to a field that I have heard a lot about but not learned in detail.

Eric

[FR Woolley]

Eric - thanks for the comments. The last slide was getting, very indirectly, at a point I've made here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/09/behavioural-and-welfare-economics.html.

The idea is that behavioural econ fundamentally questions the way in which economists make normative judgments/policy prescriptions. E.g. - as a number of people in the audience mentioned after the talk - economists figure that more choice can't possibly make someone worse off, but the empirical evidence from behavioural econ contradicts this.

But if we don't rely on choice/demand to make policy prescriptions, what do we rely on? Typically, it's either health ("this is good for you") or happiness ("this will make you happier"). But the empirical evidence behind these types of studies is sometimes not much more sophisticated than that slide I just put up.

I agree that if I was trying to do a serious analysis of the happiness/carrot consumption relationship I would break down the data a little differently. I often find ordinal logit and probit hard to interpret, agree with your the basic point is that one needs to figure out where carrot consumption matters - does it push people from being satisfied to very satisfied, or keep them from dropping down into unsatisfied? And is it a causal relationship?

But I mostly put it up because, whenever I do carrot-related regressions in class, students always seem to find them funny. I don't know why.

[rsj]

One thing that seems very odd to me is that all the behavioral econ notes I've seen have to do with the consumer, and none with the producer. Yet the problems facing the producer are much more complex, difficult to measure, and subject to bias than the problems facing the consumer.

Just a couple of examples.

My local (family owned) coffee shop is run by a guy who noticed that people were buying iced americanos or iced espressos and then putting a lot of milk into the cup, creating what was, in effect, an iced late. As the iced lattee costs $1.50 more than the iced espresso, he saw that he was being robbed of $2. His solution was to raise the price of the iced americano to that of the iced lattee, substantially cutting his revenues as people don't want to pay $3 for an iced americano. Obviously the cost of the milk is less than $1.50 per cup.

But he remains profitable and now he is no longer being robbed, so he is certain this was the right decision.

There is a building next to my muni stop that held a restaurant which went out of business in 2008. The building remains vacant to this day. I talked to one of the laid off waitresses about this and here is the conversation, in brief:

Her: "They were taking in $200 per night on weekends just on parking and $4000 per month for the lease. But it was too much for the restaurant to pay in the recession so they shut down."

Me: "It's been vacant for a few years now. Why doesn't the landlord lower the asking price? They would make more money than nothing."

Her: "But they already have a lot of money"

Me: "Yes, but they would have more if they lowered the rental price"

Her: "But they want to charge the same amount as before. Besides, they have tons of money."

Me: "But if they don't care about money, why not lower the price?"

Her: "I don't know. They made their money doing something else. Maybe they aren't that smart."

Me: "Then why don't they sell the property?"

Her: "Because it's *their* land. They don't want to sell it. They want to rent it out for what it was making before."

It is also a curious observation that there was a famous hotel, "Hotel Utah", in San Francisco, which has been vacant for 22 years in a prime location. They owners lived in another state, pay almost no property taxes, and refused to lower their asking price for the property. The 'for sale' sign on the building was put up in 1990. Eventually the city acquired the Hotel by way of eminent domain, after a prolonged legal battle with the owners that would rather leave it abandoned. The city will turn it into subsidized housing. Was market intervention the right thing here?

Next to my home is an abandoned liquor store. The last owners left in 2007 and the landlord has refused to lower their asking price to obtain a new tenant.

There are many stories such as this, but I believe the behavior of the producer is more important, economically, than the behavior of the consumer, as the producer is the one who makes decisions about leaving the factors of production unused.