Thursday, June 23, 2005

Baa Baa Buff Indeed

Though many will disagree, I think Brad Delong gets it absolutely right in his post defending Richard Layard's Happiness from Will Wilkinson's vicious attacks:
Will no one save him?! I will!

The response--against which Wilkinson has no defense except to issue squidlike clouds of obfuscating ink--would be that Wilkinson believes that if he were to sacrifice his freedom for his happiness, that if he were to do so he would then look back on the choices he made and look ahead to his future life, and that he would be unhappy. If Wilkinson says otherwise--that he would look back on the choices he made and look ahead to his future life and be happy, but that he would still regret what he had done and wish he had done otherwise--Wilkinson is simply saying, "Baa baa buff." He would be demonstrating that he does not understand the rules of conversation using the English language.

Happiness--utility--plays a very special role in Bentham's philosophy. It is defined to be that which is maximized by the choices of a rational and reasonable person with enough time for reflection and sufficient information about the situation. To say "I would rather be unhappy and free than happy and a slave, and thus I have refuted Bentham" is to miss the point entirely.
Apparently Wilkinson has a very odd definition of what happiness is. If you are not happier when you are in a situation you prefer than when you are in a situation you do not prefer, than what is happiness? Now, whether that is reflected in actual choices is arguable. Setting aside whether people actually maximize utility, it seems tautological that people want to maximize utility. That is, they want to be in the situation they prefer the most.

UPDATE 6/23/05: Wilkinson's new post on the topic makes it clear that he doesn't understand what Delong is saying. Really this is just a misunderstanding of terms. Delong and I are referring to the economist's notion of utility, just a shorthand for preference satisfaction. Wilkinson and Bentham are using the hedonistic definition. But that doesn't excuse Wilkinson from ignoring the difference and not responding to Delong's argument.

Wednesday, June 15, 2005

Public Broadcasting

I am not so sure that doing away with public broadcasting is the sign of the apocalypse that the Times thinks it is. One problem is that Republicans are absolutely right when they say that NPR and PBS (have you ever listened to NPR?) are liberally biased. I have a lot of opinions that are considered liberal, but I don't think that their nationwide broadcast should be subsidized by the government. On this, it is clear that for half the nation, liberal proselytizing has positive externalities, for the other half it doesn't. That's a wash.

As far as music, children's programming, theatre, and the various other non-political services that public broadcasting provides, remind me again why these aren't viable in television and radio markets? Since PBS and NPR have decided not to solicit advertisers, instead opting for far more annoying pledge drives, we don't really know if their format is viable or not. But I suspect that even if it doesn't work out for them on the airwaves, there is a niche on cable and XM radio. Quality children's programming is not a public good! It is non-rival, yes, but it is not hard to exclude people from watching it (unless you insist on the open-air style of broadcast.) And because you can exclude people from watching it, you should be able to get someone to pay for it. All television and radio is non-rival! But we aren't subsidizing the Discovery Channel, the History Channel, ESPN, or Fox News so I see no reason why we should subsidize PBS.

Bryan Caplan

...seems to think that nominal interest rates can fall below 0%. Think about this for a minute. A one-period nominal interest rate is based on the price on a one-period bond. Let's say that the government will pay you H in the next period if you purchase a bond in this one. We'll call the price of bonds in this period p. Then the nominal interest rate is defined as i = (H/p) - 1. Now assume i < 0. What would need to be true for this to happen? We would need (H/p) - 1 < 0 which simplifies to H < p. So, the price of a bond in this period would have to be greater than the amount you will get for owning the bond in the next period. In this situation, why would you buy a bond? If you just kept your p under your mattress you'd have p in the next period instead of H and H < p.

Of course it is quite common to push the real interest rate below 0%. The real interest rate is defined as r = i - ne, where ne is the expected rate of inflation from this period to the next. Then for r < 0 we must have i < ne which is certainly possible. If we substitute for i we get (H/p) - 1 < ne which simplifies to H/(1 + ne) < p. This means that the real amount you spend on the bond today is greater than the real amount you'll receive in the next period. Now, why is this OK and H < p is not? Well, while there is a guaranteed way to maintain your money's nominal value (just holding on to it) there is no guaranteed way to maintain your money's real value. If you just hold on to it, it will be inflated away. It may be that there are no investments with a positive real rate of return. In these cases, there can be a negative real interest rate. But it is crazy to think that nominal interest rates could be negative!

Saturday, June 11, 2005

Doesn't Steven Levitt

...believe in efficient betting markets? Apparently not:
My Preakness picks were not as terrible as usual - I correctly had Afleet Alex to win, but missed my exactas. I guess they were good enough that some readers wanted my Belmont picks. Well, actually only one reader, but I'll take that as a mandate.

Anyway, I like Afleet Alex. I think he will be an odds-on favorite, like probably 3-5, although the morning line odds have him listed at 6-5. Even at odds as low as 3-5, I would bet him. Very heavy favorites, on average, are the highest return bets you can make in horse racing, although they stilll have negative expected value if you bet them all. Afleet Alex has low variance in his past performances, which in my experience, is a positive predictor of success for big favorites.

I definitely would not bet an exacta with Afleet Alex and Giacomo, even though they seem to be the two best horses in the race. Everyone and their brother will bet those two in an exacta and the payoff will be pathetic. If I were to bet an exacta box it would be Afleet Alex and Andromeda's Hero who will be about 20-1.
If there is complete information, the expected payoff of every possible bet should be exactly the same. Otherwise, there would be an arbitrage opportunity.

Sunday, June 05, 2005

Wow!

See the amazing experimental results summarized in this column by Steven Levitt (and Stephen Dubner) in the Times Magazine tomorrow. The authors elaborate a bit more here. I wonder if they have discovered any potential "Gibbon goods." Hahahaa....

These kinds of experiments have been done before and with lots of different animals but none have demonstrated economic behavior at this level of complexity. They typically have mice pull levers to get food...when they increase the number of pulls to get food the mice eat less. Basically this shows that mice understand trade-offs. But I don't think that adding the additional abstraction of money has ever been done before. And these monkeys demonstrate behavior remarkably similar to "homo economicus" from intermediate microeconomics.

Beyond that, the monkeys show cooperative behavior in repeated games. They also emulate human behavior in that they will get angry and retaliate against monkeys who are trained never to cooperate and take advantage of monkeys who always cooperate.

There are so many possibilities as to where this research can go...one path would be to see if the monkeys demonstrate saving behavior. Put them in a two-period situation, give them money and see how they allocate it. Do they think ahead? If they do, how much do they value future consumption? What is their discount rate? Can they handle an interest rate? What if it changes?