The meeting was apparently as big as any, with more than 12,000 registered participants. Plenty of Asians, though they seemed less evident than in several previous years. Plenty of women, everywhere except at the head tables of the two plenary sessions I attended. For the Nobel luncheon, it was one women among 17 men. At the AFA/AEA session, women were two of 19 people.
Weather was terrible, as one might expect in Boston that time of year, with sub-freezing temperatures, a stiff wind, and snow on the second day. San Francisco next year. Hurrah. Fortunately, three weeks passed between the meetings and the storm that has paralyzed Boston and the Northeast. Unfortunately, the meetings are again scheduled in three years for Philadelphia, also being sieged by this storm. I recall taking taxis last year in Philly from my hotel (nobody in my hotel or the headquarters one seemed to know anything about the supposed shuttles) because I feared falling and breaking my head on the snow and ice between my hotel and the headquarters. When will the AEA ever learn that meetings in January in cold places are not a good idea? Future sites for the meeting after San Fran are as follows:
- Philadelphia (again after last year)
- San Diego
- Chicago (again)
- Boston (again)
This is not my idea of rationally thinking through the logistical issues relating to a meeting in early January. Clogged airports, canceled flights, presenters missing because their flight didn’t go.
Angus Deaton, a past president of the AEA, who has graciously served as my quality-control reviewer for a number of years before my summary reaches a wider audience, notes that there are few cities that can manage 12,000 people with a headquarters hotel with a nearby conference center, and that the AEA tries to hold hotel rates to a modest ($100/night) level because of the thousands of graduate students flocking to the meetings in search of a job. So it is a case where economic rationality prevails. In January, hotel rates are high in good places and low in those with more-questionable weather.
As in the previous year, lines at Starbucks in the hotel were long and slow. Just beyond the entrance to the conference center just outside the hotel, where many sessions were held, the Dunkin’ Donuts had short lines and quick service. And besides, DD coffee is better. In sum, behavioral economics sometimes offers insights into the behavior of economists that rationality does not capture. (More on this topic later.)
The incoming president is Richard Thaler, a behavioral economist. His AFA/AEA speech from the meeting several years ago provided numerous examples of the irrationality of markets, and the inability of the people supposedly best-placed to predict next year’s trends to come even close. I have annexed my summary of that presentation.
Finally, I would add that numerous sessions, including the plenaries, the Piketty session and several others are available to people from the AEA website.
- The Econometric Society Presidential Address
This was given by Manuel Arellano “On the econometrics of household income and consumption dynamics. The dataset he analyzed was the Panel Survey of Income Dynamics (PSID) that has been collecting information on American households since 1968. Arellano analyzed the data from 1999 to 2009, in six waves that only seem to have included 749 households. No matter. It was all about the econometrics. He spent 35 minutes on the intricacies of the analysis of data sets, finally arriving at several minutes to discuss practical implications. The only one I could discern was that higher-income people were better positioned to withstand negative shocks than lower-income people. What a shock!
Sometimes, this presidential address is interesting and useful, as a year ago. Other times, like this year, it is a total waste of time. Some econometricians appear totally consumed by technique.
2. The AEA/AFA Luncheon
The speaker at the AEA/AFA luncheon was Olivier Blanchard of the IMF, with the topic of “Dark Corners.” Blanchard argued that most of the time macroeconomics is linear, but sometimes it isn’t, with potentially big consequences. When it isn’t, Dark Corners can appear:
- Possible multiple equilibria
- High uncertainty about the effect of policy
- Possibly hard to exit from
Such is not a world where rational expectations prevail. When risk-taking is increased with increased leverage and increased complexity, you may be entering a dark corner. In his view, small shocks die, but big shocks amplify. In these situations, you need not only to assess the risk you face from your counterparty, but the counterparty risk he faces with other actors. This is a recipe for a financial freeze.
Blanchard’s two conclusions are modest:
- It is hard to get out of dark corners
- So, stay away from them
- The Nobel Prize Luncheon. This honored Eugene Fama, Lars Peter Hansen, and Robert Shiller. This is not the first time that Nobels have been simultaneously given to two people with opposite views. Shiller believed that “irrational expectations” sometime prevailed over common sense, while Fama believed that markets always provided the surest guidance. I vote for Shiller. Hansen, whose work is unfamiliar to me, apparently somewhat bridged the gap between Fama and Shiller.(The previous case of intellectual opposites winning the prize was in 1976, when Fredrick von Hayek and Gunnar Myrdal won the prize. The Academy might be forgiven for a Nobel to a controversial figure as long as he was alongside a Swede.) (William Easterly makes much of this in his best book so far, The Tyranny of Experts.) I have written a review of that book, available on request.
Per Stromberg, a member of the Economics Prize Committee introduced the session. He argued that the prize had nothing to do with politics, that the committee spent months or years assessing contributions of economists who had been nominated (nobody who wasn’t nominated could be considered), and that the deliberations of the committee will be publically available to everyone 50 years after each award.
Eugene Fama was a no-show. None of the Nobelists spoke. Instead, former students extolled their virtues. This allowed the one woman among the 18 men at the head table, Monikka Piazzesi, to praise Hansen as a great advisor. The other two were equally enthusiastic about their mentor. But the most effusive (properly) was a student of Shiller (Nicholas Barberis), who identified how Shiller sailed against the wind of the entire economics profession in doubting the Fama hypothesis. But he went on to talk about Shiller’s other accomplishments, including the Case-Shiller index of real estate prices, behavioral finance, and his proposals for risk management in real estate , usually most households most important asset. And yet, Shiller still looks like a young man.
4. The Richard T. Ely Lecture
This was given by Raj Chetty on ”Behavioral Economics and Public Policy: A Pragmatic Perspective.” Chetty argued that there were many problems in economics that were best analyzed in the rational expectations framework, but many others that needed to include a behavioral component.
Defining behavioral economics (BE) as bringing insights from psychology and other social sciences into economic analysis, he argued that rationality is only one of the possible starting points for economic analysis.
This was a brilliant lecture, impossible for me to properly summarize. He makes clear that the impact of behavioral considerations is very important in understanding real behavior. Even though he claims not to be a behavior economist, he provides a plethora of examples where understanding behavioral issues is critical to understanding what people are doing. Inattention and loss aversion are only two of numerous behavioral matters that economists need to keep in their tool kit.
There are many policy issues where rationality is the preferred methodology:
- Policy tools, such as Heckscher-Ohlin on international trade
- Overall macro policy, and better predictions of the future direction of the economy (a bit dubiously, as most such predictions are often far off the mark.)
But for lots of questions, like employee sign-ups for pension plans, behavioral considerations matter a lot. A Danish study found that 80% of new employees were “inattentive” to the issue. Changing the rules from opt-in to opt-out for new employees led to an increase of pension sign-ups from 20% to 90%.
But he offers numerous other examples, like loss aversion, that Daniel Kahneman laid out in his wonderful book, Thinking, Fast and Slow. For example, research shows that teachers respond more strongly to a deduction in pay if their students do poorly than to a bonus if they do well. But the whole thing is available as an AEA webcast.
4. The AEA Presidential Address
This was given by William Nordhaus on the topic of “Climate Clubs: Designing a Mechanism to Overcome Free-riding in International Climate Change.” Long seriously involved in climate change debates, Nordhaus reviewed the evidence on global warming, and concluded that it was compelling. He reviewed the experience with the Kyoto Protocol, showing how major countries gradually opted out, including the U.S. in 2001. More notable was Canada’s departure in 2009. He asked the audience how many people knew about the abdication by Canada, previously a strong supporter of Kyoto. Maybe a half-dozen hands were raised (not including mine). He argued that the discovery of the economic value of the oil sands in Alberta was the prime factor in opting out. While noting that the CO2 emissions per dollar of GDP in the U.S. have been declining at 2.3% per year for several decades, total U.S. emissions have still risen.
This led to his general principle that international treaties are a poor vehicle for addressing global issues. There are no sanctions for non-participation or for going back on commitments. Even if many countries agree on carbon limits (as in the recent agreement between the U.S. and China), there will be other countries opting to be free riders on the principle that others are doing the heavy lifting, so I don’t need to do anything. The structure of international law makes free riding very easy, he argued.
So how to achieve a global commitment to reduce carbon emissions? He rejected the idea of import duties based on carbon content of the products as too complicated. The best way forward was to provide real penalties for countries that failed to reduce emissions. While this is not customary practice on the international scene, he saw it as the best way forward.
He proposed the creation of “climate clubs,” made up of a collection of nations that were serious about carbon reduction. Countries outside the club would be subject to a tariff on their exports to club members. He noted (optimistically, IMHO) that the issues with the WTO rules were not a big obstacle. He had done some modeling, concluding that a tariff of 5% on imports from non-members of the club could do the trick. At that rate, non-members would see the light and join the club.
Could it work? Who knows, but this is serious. President Obama was eloquent in his discussion of climate change, but, sadly, failed to include either raising the gas tax or say what is on my bumper sticker “There is no Planet B.”
Individual Sessions I Attended
- The Piketty Session
This is the most densely-packed session I have ever seen. There were no corridors, no aisles, just wall-to-wall people. If the fire marshal had been around, I’m sure he would have shooed at least 150 people out. And yet, there were many more wanting in. The moderator told them to go away and watch the webcast on their computers. Fortunately, I understood the likely situation, and secured a good seat 20 minutes early.
Piketty’s main thesis in the book is that the rate of profit is likely to exceed the rate of gdp growth during the future (r>g in the parlance of the book) and we are on the way to a new gilded age of wealth accumulation by the few who are already rich. Piketty proposes to combat this by highly progressive income taxes, and more controversially, by a universal wealth tax.
It was a heavyweight panel, with three discussants preceding Piketty on the rostrum.
David Weil, the economic historian, led off. He (as others who followed) richly praised Picketty’s enormous data collection for his book, as well as the transparency and the “superb” documentation that went into it.
Weil thought that the book had made an important contribution, usually ignored by economists, on the political dimension of wealth. (Wall Street, anyone?) And he suggested that current economic models generally had no place for issues of wealth.
Still, Weil was dubious on several fronts:
- He thought the conflation of capital and wealth was overstated
- His view was that human capital was becoming the most important form of capital, outweighing all other forms of capital
- He cited evidence that capital-deepening was responsible for 2/3 of French economic growth from 1990 to 2010. He quoted Keynes as saying “thank you, rich people.”
- He noted the importance of Social Security for many oldsters – something that cannot be transferred on one’s death, but it has become an important factor in moderating the issue of wealth in rich countries.
Alan Auerbach followed. He first spread doubt on Piketty’s steadily increasing trend toward greater concentration, using annual data to show ups and downs in wealth not evident in Piketty’s smoothed series. In the two recent recessions, the wealthy did less well. And he offered other research that made Piketty’s wealth trends more questionable.
But Auerbach’s focus was mainly on the tax issues, his area of considerable expertise. He argued that the risk-adjusted r was below g, particularly after including taxes. Wealth can disappear at the stroke of a pen by a political leader, as it did several times during the 20th century. Moreover, since 2/3 of the increase in the share of the top 1% was due to labor income, he saw no benefit from a wealth tax. Income or consumption taxes could do the job. Taxing income or consumption, not wealth, seemed a better approach.
Greg Mankiw took on the r>g frontally, noting that the Solow model sees that as the golden rule, as capital deepening leads to faster productivity growth. Don’t we want more capital?
Mankiw then addressed the inter-generational issue, arguing that it is hard to assure that your progeny will stay rich or get richer. People do consume wealth, and estates are typically divided among the heirs. Moreover, the estate tax of 40% (plus 15% more in Massachusetts) reduces estates substantially. (Mankiw does not mention the various mechanisms of avoiding or minimizing the estate tax.)
Finally, Mankiw suggested that Piketty doesn’t really like rich people, an implicit bias that I also found in the book, and suggested by both of the other panelists. When someone from the floor asked if Mankiw didn’t also have biases, he responded that he always tried to make his biases explicit, but Piketty did not.
He went on to say that Americans seldom feel concerned about great wealth, but only how it was acquired. There was an “occupy Wall Street” movement, but no “occupy Silicon Valley” or “occupy Hollywood” because it was widely believed by many (including me) that much of Wall Street’s wealth was ill-gotten. Nobody thinks that about Silicon Valley or Hollywood or the NBA.
Thomas Piketty took the floor, making three main points:
- Inequality was much higher in Europe in 1900-1910 than in the U.S., but inequality is now much higher in the U.S. This is due largely to labor income, not to r>g.
- Wealth inequality is always much higher than income inequality
- Still, wealth inequality is less than in 1900, but r-g is an amplifier of inequality, and this is likely to continue.
Piketty added that he had no animus against the wealthy. But if r-g rises from 2% to 3%, the share of the top 1% will rise from 20-30% to 50%. An inherence tax of 50-60% could help, but the global wealth tax would also help – even though he saw that as very implausible. He considered even a progressive consumption tax as quite inferior to a wealth tax. How should we measure consumption, he asked? Are the political contributions of the Koch brothers (recently announced as likely to be close to $1 billion for the 2016 political season) consumption? He thinks so, but tax agencies might have difficulties with such a concept.
- New Growth Theory after 25 years
Robert Lucas led off, arguing that productivity growth in the U.S. was almost entirely due to human capital. Further, he stated that this was not due to individual efforts alone, but crucially dependent on being enmeshed in a nexus of other people that one interacts with. Due to these interactions, U.S. productivity has risen at a steady 2% for 150 years. Tipping his hat to us oldsters, he argued that 50-year olds were simply more productive than 30-year olds. And the higher the productivity of people you work with, the better for your productivity increase.
When I recall my most productive years at USAID, I had to agree. There were lots of people joined in a common purpose – development in poor countries – overseen by visionary leaders like Peter McPherson and Jim Michel. I am amazed now at my productivity then, compared to my current state. My wife taught and ran economics training at the State Department for two decades. We were busy. But we managed to (if I may brag a bit) raise three kids – in economic jargon, finely honed pieces of human capital, and for me to coach 16 seasons of kid’s soccer and 8 of basketball. My wife and I both marvel at how we did this. But we were both enmeshed in productivity-enhancing environments.
Al Harberger wrote a paper several years ago about how productivity growth was no automatic process that “lifted all boats,” but, like mushrooms, popped up in unpredictable places. He also argued that many enterprises suffered negative productivity growth when employees lost a sense of direction of the enterprise, or where the information-sharing that Lucas talked about turned into information-withholding or secrecy.
Following Harberger’s lead, I wonder if USAID today might be in this quantry. If you don’t know where you’re going, it is probably hard to get there. I see some evidence that USAID has lost a clear focus, and that professional staff members are just going through the motions of following instructions and hiring consultants to do the work. (Admittedly, I have seen this problem much more in Washington than in the USAID Missions abroad where I have been able to consult.) If an organization has a hundred objectives, it really doesn’t have any. Further, long-time experienced economists have suggested to me that their voices are little heard by the USAID leadership. The leaders believe that they know what needs to be known, so input from professional staff is of no value. In sum, my diagnosis of the current situation of the Agency is that it has lost its way.
Paul Romer (my hero, although his halo dimmed a bit in this session) followed, with his usual penchant for the unusual. He said that, when he was in graduate school in the late 1970s, he made three conjectures:
- That there was too much pessimism afoot in the country
- That math was important to discovering truths
- That economics was becoming a science
On the first point, Romer recalls that period, after Paul Ehrlich’s 1968 book “The Population Bomb, the Club of Rome’s declaration that economic growth would be resource-constrained before the millennium, a sense that inflation couldn’t be controlled, and that economic stagnation was the way things were. On this point, he said, he was exactly right. (A 1980 Harvard Magazine, which I seem unable to put my hands on at the moment, contained predictions about the future from a half-dozen Harvard professors. Most worried about global food shortages and starvation, just as the world was beginning a two-decade period of agricultural abundance and declining food prices. Of the group, only E.O. Wilson, who worried about ecosystems, seemed prescient. In sum, many academics look at the future through a rear-view mirror.)
His second hypothesis, he said, was fully justified by the work of economists during the next two decades, where quantification and modeling uncovered many things before unknown.
His third hypothesis, he now concluded, was erroneous. Science converges when important breakthroughs occur, as with F=MA. All scientists accept this, and have moved on to other challenges. He sees no convergence in economics, with conflicting theories rampant. Some of the divergence, he said, was personal, citing a dispute I was unaware of. He concluded by saying that too many economists use math like politicians, choosing numbers that make them look good, or their opponents look bad.
His antagonists on this point passed me by, but David Warsh (www.economicprincipals.com) enlightened me in his weekly blog – highly recommended. Warsh wrote an important book on the new growth economics: Knowledge and the Wealth of Nations: A Story of economic Discovery. Romer was criticizing his fellow panelist and Nobelist Robert Lucas for a 2014 paper with Benjamin Moll, for which Romer claimed that “mathiness” was used to obscure, rather than illuminate, reality. I have no idea, despite David Warsh, what this was about.
He also meditated on his signal insight about excludable and non-excludable innovations, noting that some non-excludable products, like pharmaceutical formulas, can still be excluded via secrecy.
Philippe Aghion followed with an attempt to operationalize Schumpeter’s concept of creative destruction. He offered three propositions:
- Growth comes from quality-improving innovations
- R&D produces such quality improvements
- Lots of things become obsolete, creating issues within firms
He follows these with three conclusions from the research:
- Non-frontier companies innovate less than frontier ones
- Two neck-and-neck leaders are the most innovative
- Patent protection is useful for innovation
Gene Grossman talked about the implications of new growth theory for globalization and growth. For him, the international flow of ideas has resulted in larger, but more competitive markets, leading to greater specialization, and incentives for greater diffusion of knowledge.
Grossman concluded that theoretics on these issues were way ahead of the empirics. He thought that cross-country methodologies were flawed, and that attention should instead focus on mediating variables, such as the size and existence of international knowledge spill-over. (I have no idea what he was saying, but it seemed interesting at the time.)
- India’s Employment Project
This session focused on the largest employment project in recent history (maybe pyramid-building was bigger, but we lack records). Started in 2005, and extended to the entire country in 2008, it allowed up to 100 days per person of work on public works projects at the minimum wage, with equal pay for women. The first presentation included numerous charts and graphs that I found unintelligible. The abstract for that presentation suggested that it functioned mainly as a social safety net, reducing temporary migration somewhat. A subsequent presenter suggested that the program had little effect on school attendance, but led to qualitative improvements in knowledge of the affected children. But it seems not to have been a huge success.
- Secular Stagnation
Robert Gordon, the technology historian who famously argued at the AEA in 2000 that the high-tech bubble wasn’t really a bubble, led off. He led off with Alvin Hansen’s 1938 presidential address to the AEA, predicting continued depression after the end of the war for lack of innovation. (I thank my graduate school professors for assigning it. But Joseph Schumpeter’s 1942 book (not assigned) Capitalism and Democracy while dubious on its big conclusion that democracy would sink capitalism, was prescient about the postwar. He predicted an explosion of consumer demand for all kinds of consumer durables and automobiles, with inflation the real threat. And so it was. Three decades of growing prosperity followed.)
Back to Gordon. He showed that productivity growth in 2010-2014 was only 0.8% per year, well below historic averages. He contrasted this performance with the three previous technology revolutions. The first, based on the steam engine, powered growth for decades. The second, based on electricity and related matters did the same for decades, as the innovations led to more innovations. The third technology revolution, via information technology, ran its course in a couple of decades. Now everybody uses it. The fourth, involving smartphones, iPads, and video on anything you carry in your hand, is much less promising of continued innovation. It is done, and we aren’t going anywhere except to our Facebook pages. This is a new era of secular stagnation.
Larry Summers followed, with a similarly gloomy picture, also evoking Alvin Hansen. My thought about Hansen was the old adage that even a stopped clock is right twice a day. Secular stagnation was Summers’ idea, and he intended to market it. There was a shortage of demand, and low interest rates could not fix the problem, as they couldn’t get below zero. (The Swiss Central Bank recently proved him wrong, lowering their interest rate to -0.75%.) Maybe Americans no longer want more stuff, but the continued proliferation of storage facilities suggests to me that they need to store some of their stuff so that they can buy some more for their dwelling. And moreover, there seem to me to be several billion people in the world who are anxious to purchase the items Americans are stuffing into their storage lockers. Like Hansen was in 1938, I believe that Summers is mistaken.
The economic historian, Barry Eichengreen, followed. He looked at the long-term historical trend, and saw no clear evidence that excessive savings or low interest rates led to secular stagnation.
Greg Mankiw threw some additional sand into the wheels of secular stagnation, implying that economies didn’t really work that way. Nobody could predict the “new new thing” just around the corner.
Robert Hall concluded with an interesting and nuanced analysis of labor markets since 2000. He was perplexed about what has been happening. There has been a decline since 2000 in hours worked per household, along with a fall in labor force participation per household, due entirely to reduced participation in the upper quarter of the income distribution. Part of this, he thought, was due to a decline in teenagers working from 50% in 2000 to 20% now. He remarked that his grandchildren saw working during high school as a foreign idea. His final thought was that much was due to the fall in the price of entertainment. In sum, people are too busy doing Facebook or watching YouTube or some other thing else beyond my ken to want to work.
- Seasonality in Developing Countries
The one paper I heard was about the “hungry season” in Zambia. Zambia has one rainfall season per year, and 60% of Zambians are in agriculture. During the dry season, food consumption is often restricted, though temporary migration to work in urban areas often helps. The experiment sought to identify food constraints to agricultural productivity.
Fifty villages were used as a control, with maize lent to 50 others, and cash to 50 more, at a 36% interest rate. Altogether, 3,000 farmers were included. The results were modest. Migration to urban areas was reduced somewhat, nutrition improved a bit, and there was a modest (7%) increase in the value of production from assisted farmers. And cash worked better than maize.
- Soccer balls in Pakistan
This study was the result of a multiyear analysis of the costs and prices of soccer balls in Pakistan’s soccer producing mecca – a town where 135 firms produced the product. After 8 rounds of getting price, cost, and profit data from these companies, they concluded that:
- Mark-ups were more dispersed than average costs
- Bigger firms had higher mark-ups and prices
- Larger firms produced higher-quality balls, though they still produced lower-quality ones too
- Marketing activity raised markups. The big marketing event was an annual soccer-ball exposition in Munich. Firms represented there sold more balls in rich countries, benefitting their bottom lines.
- Industrial Policy
The first presenter acknowledged that industrial policy had a bad name. Yet, he correctly asserted, some sectoral policies are unavoidable. Climate change, agriculture, and oil, to name a few. Drawing on China, he argued that industrial policy plus competition led to rapid productivity growth. Favoring a sector without such competition was a bad idea. And tariffs are also bad for productivity growth.
A second paper looked at Genetically-modified soy in Brazil. It was released in the U.S. in 1996, but only in 2003 in Brazil. The result in Brazil was a significant increase in agricultural productivity, but with lower labor input, so agricultural employment went down, and, due to rural-urban migration, manufacturing wages also fell. IMHO, not a big deal. Creative destruction rules!
This session dealt with a new form of microfinance, called savings groups, usually involving 25-30 members who hold weekly meetings. The innovation is apparently that members make commitments to save regularly. The first paper, based on a Catholic Relief project in East Africa, compared groups run by that NGO, with NGO-paid leaders with others, where they were managed by private entrepreneurs. About 1.5 million people in Uganda belong to such groups. The study concluded that the groups run by entrepreneurs were a bit more successful in raising savings, but much more profitable, as the NGO leaders of such groups were paid twice as much as what the entrepreneurs earned.
A second paper dealt with a Colombia experiment in promoting savings in such groups, which rose from 1.5 million in 2011 to 9 million by 2014. The experiment compared groups where the members made private commitments to the amount they would save weekly with ones where each member’s commitments were made public to the group. Unsurprisingly, the latter groups accumulated 30% more savings.
- The Bottom Line
The meeting reinforced my belief of the seriousness of professional economists in attempting to address serious economic and social issues. And it was clear that the work of Abhijit Bannerjee and Esther Duflo at MIT has had an important influence on the way microeconomic research is conducted. Controlled experiments showed up in a number of sessions. While the jury is still out on their ultimate impact on the way we do economics, they have altered the face of micro research. I, personally, am skeptical that experimental methods can live up to the expectations of their promoters. Excluded variables between the control and experimental groups, possible limitations of the specific protocols in the experiment that could limit its generality, etc., etc. But, still, it is an important step forward in attempting to understand human behavior, and a useful step away from macro models to the way people make choices.
11. Other Stuff
The John Bates Clark Medal went to Matthew Gentzkow of the U. of Chicago Business School
Distinguished Fellows awards went to:
Robert Barro of Harvard
Gregory Chi-Chong Chow of Princeton
Robert Gordon of Northwestern, and
Richard Zeckhauser of Harvard
The AEA has for several years awarded prizes for the best papers in each of its four subsidiary publications, made necessary by the explosion of economic research and, not coincidentally, by the need of academic economists to publish or perish.
The AEJ Applied Economics prize was awarded to Pascaline Dupas, for the paper “Do Teenagers respond to HIV Risk Information? Evidence from a Field Experiment in Kenya” AEJ, January 2011 (!)
The AEJ Economic Policy prize went to Paul Niehaus and Sandip Sukhtankar for “Corruption Dynamics: The Golden Goose Effect,” November 2013.
The AEJ Macroeconomics prize went to Michael Elsby and Ryan Michaels for “Marginal Jobs, Heterogeneous Firms and Unemployment Flows,” in January 2013.
The AEJ Microeconomics prize went to Susan Athey, Dominic Coey and Johnathon Leven for “Set-Asides and Subsidies in Action,” February 2013
Annex: The 2012 AEA/AFA Joint Luncheon Speech by Richard Thaler
“How Much Rationality is Rational?”
Richard Thaler, a finance economist, gave the address, but offered important insights for both the economics and finance professions.
He first asked the question about what model to use. Conventional wisdom is that it depends on the difficulty of the problem, its frequency, and the quality of feedback we receive from previous experiences with the problem. He suggests that the extremes in using rationality might be that homo economicus, Robert Lucas, and that anecdotal thinker, Homer Simpson.
While common sense suggests that we would look to experts for advice on the most difficult and infrequent problems, we typically do otherwise. Our most common high-stakes decisions in life are both difficult and infrequent:
- Career choices
- Buying a home
- Saving for retirement
- Choosing a mortgage
Thaler suggests that people faced with these decisions consult an expert no more than 5% of the time. People do not act rationally in the way economists think about it for their most important life questions. Similarly, Ricardian equivalence is a nice piece of economic theorizing, but it has nothing to do with how people behave.
An annual survey at the beginning of the year has asked CFOs to predict the S&P 500 at the end of that year, but also to add an 80% confidence level estimate for that prediction. The predictions of only 33% of the forecasts fell within the 80% confidence range of these financial “experts”.
The NFL draft provides more evidence. With some fascinating details about the models used to value potential draftees, a study concludes that the first person drafted costs the team six times as much as the 40th draftee, but is likely to be of less net value to the team. The top pick consistently costs more than he is worth.
People in general expect things to keep rising (e.g., housing prices) when they are going up, and expect them to keep falling when they are on a downtrend. They regularly identify the current trend as permanent – despite the obvious falsity of this from looking at the historical record.
For housing, a sensible regulator would impose limits when a bubble was suspected. These might include requirements such as proof of income or increased down payments in such cases. Sadly, sensible regulators were outnumbered by cheerleaders in the last bubble.
The crown jewel of irrationality was described in Lamont and Thaler, JPE 2003, relating to separating the then-hot Palm from its parent 3Com. 3Com thought that setting Palm free would help its stock price, so it arranged an IPO to sell 6% of Palm. The initial offering price was $38, but Palm quickly rose to $160 (this was the dot.com bubble era). The other 94% of Palm was to be offered to 3Com stockholders at 1.5 shares of Palm for each share of 3Com. So investors had the choice to acquire Palm by buying it directly at its inflated price, or by buying 3Com shares that would have the added advantage of giving them 1.5 shares of Palm for each 3Com share. During the period between the announcement and the actual issuance of the Palm stock to 3Com stockholders, the gap between the benefit of buying Palm directly and buying it by acquiring shares of 3Com grew so large that if one subtracted the market value of the Palm shares soon to be owned by 3Com shareholders from the value of 3Com stock, 3Com’s market value was a negative $23 billion! Somehow, investors were making idiotic choices. And the shortage of Palm stock made arbitrage by selling short difficult, though one of Thaler’s students was able to make $100,000 by finding shares to borrow.
The bottom line:
- Markets are not efficient;
- Expectations are systematically overconfident and biased; and
- Most mistakes create no arbitrage opportunities (e.g., if an acquaintance thinks your marriage will be a disaster, he has no way to bet against it.)Or, in many cases, the appropriate model is Homer economicus, not homo economicus.
[American Economic Association, American Social Science Association, AEA 2015, ASSA 2015, Economic Nobel Prizes 2015]