- Paul Krugman: What Markets Will
- Links for 10-17-14
- 'Thoughts on High-Priced Textbooks'
- 'Regret and Economic Decision-Making'
- 'Those Whom a God Wishes to Destroy He First Drives Mad'
- Links for 10-16-14
Posted: 17 Oct 2014 12:24 AM PDT
Market fundamentalists should listen to what markets are saying:
What Markets Will, by Paul Krugman, Commentary, NY Times: ... We have been told repeatedly that governments must cease and desist from their efforts to mitigate economic pain, lest their excessive compassion be punished by the financial gods, but the markets themselves have never seemed to agree that these human sacrifices are actually necessary. ...
How have policy crusaders responded to the failure of their dire predictions? Mainly with denial, occasionally with exasperation. For example, Alan Greenspan once declared the failure of interest rates and inflation to spike "regrettable, because it is fostering a false sense of complacency." But that was more than four years ago; maybe the sense of complacency wasn't all that false? ...
In fact, if you look closely, the real message from the market seems to be that we should be running bigger deficits and printing more money. And that message has gotten a lot stronger in the past few days. .. I'm talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.
Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren't worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls. ...
It's also instructive to look at interest rates on "inflation-protected" or "index" bonds, which are telling us two things. First, markets are practically begging governments to borrow and spend, say on infrastructure; interest rates on index bonds are barely above zero, so that financing for roads, bridges, and sewers would be almost free. Second, the difference between interest rates on index and ordinary bonds tells us how much inflation the market expects, and it turns out that expected inflation has fallen sharply over the past few months, so that it's now far below the Fed's target. In effect, the market is saying that the Fed isn't printing nearly enough money. ...
In any case, the next time you hear some talking head opining on what we must do to satisfy the markets, ask yourself, "How does he know?" For the truth is that when people talk about what markets demand, what they're really doing is trying to bully us into doing what they themselves want.
Posted: 17 Oct 2014 12:06 AM PDT
Posted: 16 Oct 2014 11:29 AM PDT
Tim Taylor on why textbooks cost so much:
Thoughts on High-Priced Textbooks: High textbook prices are a pebble in the shoe of many college students. Sure, it's not the biggest financial issue they face, But it's a real and nagging annoyance that for hinders performance for many students. ...
David Kestenbaum and Jacob Goldstein at National Public Radio took up this question recently on one of their "Planet Money" podcasts. ... For economists, a highlight is that they converse with Greg Mankiw, author of what is currently the best-selling introductory economics textbook, which as they point out is selling for $286 on Amazon. Maybe this is a good place to point out that I am not a neutral observer in this argument: The third edition of my own Principles of Economics textbook is available through Textbook Media. The pricing varies from $25 for online access to the book, up through $60 for both a paper copy (soft-cover, black and white) and online access.
Today's marketplace offers more digital textbook options to the student consumer than ever. "Etextbooks" are digitized texts that students read on a laptop or tablet. Similar to PDF documents, e-textbooks enable students to annotate, highlight and search. The cost may be 40-50 percent of the print retail price, and access expires after 180 days. Publishers have introduced e-textbooks for nearly all their traditional textbook offerings. In addition, the emergence of the ereader like the Kindle and iPad, as well as the emergence of many e-textbook rental programs, all seemed to indicate that the e-textbook will alter the college textbook landscape for the better. However, despite this shift, users of e-textbooks are subject to expiration dates, on-line codes that only work once, page printing limits, and other tactics that only serve to restrict use and increase cost. Unfortunately for students, the publishing companies' venture into e-textbooks is a continuation of the practices they use to monopolize the print market.
Posted: 16 Oct 2014 08:34 AM PDT
Here are the conclusions to Regret and economic decision-making:
Conclusions We are clearly a long way from fully understanding how people behave in dynamic contexts. But our experimental data and that of earlier studies (Lohrenz 2007) suggest that regret is a part of the decision process and should not be overlooked. From a theoretical perspective, our work shows that regret aversion and counterfactual thinking make subtle predictions about behaviour in settings where past events serve as benchmarks. They are most vividly illustrated in the investment context.
Our theoretical findings show that if regret is anticipated, investors may keep their hands off risky investments, such as stocks, and not enter the market in the first place. Thus, anticipated regret aversion acts like a surrogate for higher risk aversion.
In contrast, once people have invested, they become very attached to their investment. Moreover, the better past performance was, the higher their commitment, because losses loom larger. This leads the investor to 'gamble for resurrection'. In our experimental data, we very often observe exactly this pattern.
This dichotomy between ex ante and ex post risk appetites can be harmful for investors. It leads investors and businesses to escalate their commitment because of the sunk costs in their investments. For example, many investors missed out on the 2009 stock market rally while buckling down in the crash in 2007/2008, reluctant to sell early. Similarly, people who quit their jobs and invested their savings into their own business, often cannot with a cold, clear eye cut their losses and admit their business has failed.
Therefore, a better understanding of what motivates people to save and invest could enable us to help them avoid such mistakes, e.g. through educating people to set up clear budgets a priori or to impose a drop dead level for their losses. Such simple measures may help mitigate the effects of harmful emotional attachment and support individuals in making better decisions.
[This ("once people have invested, they become very attached to their investment" and cannot admit failure) includes investment in economic models and research (see previous post).]
Posted: 16 Oct 2014 07:50 AM PDT
Brad DeLong wonders why Cliff Asness in clinging to a theoretical model that has clearly been rejected by the data:
... What is not normal is to claim that your analysis back in 2010 that quantitative easing was generating major risks of inflation was dead-on.
What is not normal is to adopt the mental pose that your version of classical austerian economics cannot fail--that it can only be failed by an uncooperative and misbehaving world.
What is not normal is, after 4 1/2 years, in a week, a month, a six-month period in which market expectations of long-run future inflation continue on a downward trajectory, to refuse to mark your beliefs to market and demand that the market mark its beliefs to you. To still refuse to bring your mind into agreement with reality and demand that reality bring itself into agreement with your mind. To still refuse to say: "my intellectual adversaries back in 2010 had a definite point" and to say only: "IT'S NOT OVER YET!!!!"
There's a version of this in econometrics, i.e. you know the model is correct, you are just having trouble finding evidence for it. It goes as follows. You are testing a theory you came up with, but the data are uncooperative and say you are wrong. But instead of accepting that, you tell yourself "My theory is right, I just haven't found the right econometric specification yet. I need to add variables, remove variables, take a log, add an interaction, square a term, do a different correction for misspecification, try a different sample period, etc., etc., etc." Then, after finally digging out that one specification of the econometric model that confirms your hypothesis, you declare victory, write it up, and send it off (somehow never mentioning the intense specification mining that produced the result).
Too much econometric work proceeds along these lines. Not quite this blatantly, but that is, in effect, what happens in too many cases. I think it is often best to think of econometric results as the best case the researcher could make for a particular theory rather than a true test of the model.
Posted: 16 Oct 2014 12:06 AM PDT
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