Behavioral Economics

The Economist has a good piece on how learning how to trade makes people better traders. It seems an obvious and unremarkable conclusion, but it turns out that people are naturally such appalling traders that it called the soundness of standard economic assumptions (and market efficiency) into question.

I've written about this many times in the past and I don't really think that behavioral econ is deeply contradictory to neoclassical econ (even Chicago-school econ). A common classical criticism of behavioral economics is that it looks at phenomenon that are either trivial to people, or rare. This means that people make suboptimal decisions because either the decisions are not important, or because they have no experience and are not expert. Chicago economist Dick Thaler's rebuttal to this is that common transactions are almost always trivial, while important transactions (such as buying a house) only come along occasionally, so these are exactly the types of circumstances that people make decisions under in the real world.


The Economist article discusses a paper where traders from one discipline avoided the usual behavioral biases in other areas -- they had learned to be good traders generally. Learning how to recognize and overcome innate cognitive biases seems to be a very worthwhile thing to learn, and it would be nice if it were taught in schools. As Clint said: "A man's got to know his limitations."

Personas

This article outlines how personas help programmers develop their interaction design. I've used some personas at IBM and Creative Good and to me it seems that the key is to build them after talking to actual customers and learning what they do in their jobs. Otherwise you end up with "Bob, 43, works in middle management, has a dog, drives a SUV, likes to hike on weekends." Not useful.

Too funny

Dave Barry can be so funny :)

Outsourcing and IT

Winterspeak began as a trade blog, but then focused on the technology industry with large doses of economics dolloped on as I moved to U Chicago. The current furor over outsourcing IT jobs to India sadly encapsulates both the economic illiteracy at the heart of free-trade opposition and the very real pain felt by out-of-work techies. Arnold Kling covers it well and links to J Delong for more economic details. But it seems that just as there are no athiests in foxholes, there are no classic liberals in a down economy.

"Comparative advantage" is one of the least intuitive but most important ideas in economics. The upshot is that since opportunity costs (gains you pass up) are as real as out-of-pocket costs (although they don't seem so) people are better off specializing and trading even if one person is absolutely better at everything. If US companies outsource some IT functions to India for lower cost, it means they can either increase their profits (which then get spent on stuff) or pass on savings to their customers (who then spend what they've just saved on other stuff). Either way, the economy as a whole grows even though a certain small sector (IT in this case) suffers. Krugman, before he lost his mind and consequently his credibility, wrote a great piece on it in the context of industrial jobs moving to China. And apart from generous unemployment benefits and retraining grants, I'm not sure what else can be done to help unemployed IT workers to change industries. In economic models, capital (ie. a factory) is treated as a fixed asset and labor as flexible, but in real-life labor flexibility comes with a lot of pain and dislocation.

On a similar note, I was chatting with a very technical MIT crytographer buddy of mine who was pessimistic about the state of the IT industry and was wondering if it was "done". His concern seems similar to this intemperate rant on the Register railing against an uncaring market that likes Dell (which does not invest in R&D) but hates Sun and Apple (which do).

My take on this is to think of technology as a stack, with hardware at the bottom, then operating systems, middle ware, software in the middle, and finally service and distribution at the top. The end customer (you and I) need to pay for the whole thing, and we don't care about how much of the purchase price goes to which bit, but we do care about how well it works as a whole. Dell, having lowered prices on the lower parts of the stack, has freed up more money that can now be spent on better software and services. And given the fact that software generally sucks, I see huge room for improvement here.

As for R&D, Apple's investment in creating a better, networked thin client experiences (iTunes, iPhoto, iMovie, hell, OS X) seems to be working well enough, and who knows if Sun's N1 investment will prove a similar boon on the enterprise side. But R&D as a public good should be left to universities and government, companies need to make it payoff, not just do it. The fact that CPUs are fast enough does not mean the end of IT, it just means that IT needs to focus on better customer experiences and not hotter boxes. I think this is a Good Thing, and long overdue.

The economic way to think about it is to consider how elastic demand is for IT at this point. Will people take their savings from lower IT prices and spend them on non-IT things, or will they use their savings to buy even more IT? Historically, the answer has been overwhelmingly the latter as CPU cycles have dropped several orders of magnitude in price over the past 30-40 years, but total sales of computers have kept increasing. I think that this is still true, but that people feel better software will improve their computers more than faster hardware, and so that's where the industry will move to. About time.

Media deregulation

Here's a long piece on Murdoch's News Corp, filtered through the meaning behind recent FCC decisions (which I believe were overturned by Congress) to relax media ownership concentration rules. It's short on numbers and ends, as these things often do, with an impassioned plea for the government to make rules that will make everything better.

It does compare News Corp's size against Viacom, Disney, GE, and AOL Time Warner, pointing out that Fox is by far the smallest. Other than that, it's a rehash of topics other articles (including ones on this blog) have covered a long time ago. Powell puts forward the basic argument for relaxation, that since competition between the Internet, radio, TV, cable, and satellite is fiercer now than it was in the 50s (when the rules were set) it makes sense to relax them now. The opposition comes in two flavors 1) incumbent media (usually statist) arguing that it might help Fox so it is bad and 2) fringe groups arguing that a more market-centric distribution network would give them less of a soapbox. Powell summed them up as "I see too much of what I don't like" or "I see too little of what I like."

The article's author is also shocked, shocked to learn that Murdoch plays nice with politicians when trying to further his business interests. I don't know what to say to that.

A buddy of mine brought up media deregulation with me the other day and we found that we disagreed on almost every point. That's OK, but I think I was the first person he had spoken with who held my views, whereas I had heard his arguments many times before. Whether or not he changes his opinion, I'm glad that he was able to hear the arguments for deregulation at least once, and I guess that's the sort of "fair and balanced" news coverage people hope other people will get (our own views, are, of course, already well founded and correct).

Also from The Atlantic is this nice article on diversity and how little of it we seem to choose. I think it's worth pointing out that local diversity creates widespread homogeneity, and local homogeneity creates widespread diversity. If you can get cuisine from all over the world in your local area then your life is pretty great, but there isn't much separating your area foodwise from any other area, so things look bland from a distance even though they are varied close-up. Alternatively, if each region only serves its local food, then your life close-up is pretty unvaried, but from a distance there is a great variety of options.

Similarly, this article speculates that although neighbourhoods tend not to be very diverse, maybe people go through many different types of neighbourhoods through their lives and get their diversity that way.

More on information markets

David Warsh has a great piece on using information markets to predict events. The terrorism market will live on, just somewhere quieter.