Marginal Revolution

Endowment effects and trader experience

The Economist has a good write-up on the work of experimental economist John List. As you may know, an endowment effect arises when you value something more, simply because you own it. In the context of laboratory experiments, often people will value a coffee mug more, much more (say five times more), once someone gives them the mug as theirs. In contrast, economic theory suggests that your willingness to pay for the mug should only be slightly less than your willingness to give up the mug for money (willingness to be paid). Here is a piece by recent Nobel Laureate Daniel Kahneman on the same topic.

List had the ingenious idea to see which traders were most subject to this ownership bias. So he took people who traded sporting cards and gave them other sporting memorabilia. The key result is this: the more real world trading experience a person had, the weaker the ownership or endowment effect. Professional dealers hardly seemed to be biased at all. The lesson is simple: asset markets work well when traders have the necessary experience. List also showed that sellers learn how to trade properly, without much of a bias, more rapidly than buyers do, which may explain why neophyte buyers get taken advantage of in stock markets, and why upward-moving bubbles may start. (Researchers have found that other distinctions may matter as well, you may value the mug more if you won it in a tough competition, as opposed to receiving it as a gift.)

Al Roth has a good general site on experimental economics, as does Vernon Smith's ICES group, who are colleagues of ours at George Mason.

The psychology of defeat -- hope for Iraqi reconstruction?

Here is a money quote from The Culture of Defeat by Wolfgang Schivelbusch:

"Losers who have completed the first stage of reaction to defeat - surprise, dismay, disbelief, and the search for scapegoats - begin to examine their history for the deeper reasons behind their failure. Forced to admit that they took a wrong turn somewhere, they try to ascertain where they strayed from the true path." (p.69)

It gets better: "...conquered societies...strive to emulate the victors..." (from the inner flap).

There are some good examples: France after the Franco-Prussian War, Germany and Japan after World War II, parts of Germany after the invasion of Napoleon, or Russia after the 1905 war with Japan. Attaturk and Turkey, following the collapse of the Ottoman Empire. Or Argentina after the Falklands. But I can think of exceptions. Did losing territory cause Peru to mimic Chilean organization? Did it do much for Bolivia? Poland has lost many wars, but fortunately stuck to its course rather than emulating the Russians.

What about contemporary Iraq? Here is a good review of Schivelbusch that raises the right questions. In any case reading his book made me more optimistic, though I would still like a comparative study of the successes and failures. Thorough defeat appears to be one key for later success. Schivelbusch suggests that allowing for a certain feverish insanity -- including crazed dancing -- after the defeat, might be another.

Road pricing, taken to an extreme

Iain Murray reports on the new London five pound fee (about eight dollars, and enforced by a penalty), charged to each car entering central London. It turns out the fee has been set too high, and traffic has fallen by more than the projected fifteen percent. Nor does the fee appear to be maximizing revenue. Mayor Livingstone wants to continue the high fee, however, because he likes the environmental effects of much lower traffic, despite a serious hit to London retail sales.

By the way, over 100,000 people are refusing to pay their penalty notices.

Addendum: Transportblog.com, an excellent source, offers some follow-up and commentary.

Nathaniel Branden and Ayn Rand on Alan Greenspan

It is well-known that Alan Greenspan was an acolyte of Ayn Rand in his early years. Jerome Tuccille's new book, Alan Shrugged offers juicy anecdotes about these times. Here is Branden and Rand speaking of Alan (p.53):

"He was tall and solidly built," said Branden of Alan, "with black hair, dark horn-rim glasses, and a propensity for dark, funereal suits. He was somberness incarnate, looking chronically weary, resigned, and unhappy. He was twenty-six years old. Barbara, Ayn, Frank, and I once encountered him, with Joan, coming out of an elevator. 'He looks like an undertaker,' Ayn commented."

For Alan on Rand, see my blog post at The Volokh Conspiracy.

African food scandal

Zambia, Lesotho, Malawi, Ethiopia, Mozambique, and Zimbabwe -- not exactly marvels of good nutrition -- have been destroying food shipments from America. Why? This will sound like a sick joke, but they are afraid of genetically-modified foods. These countries have now expressed official opposition to American food entering their country, at a time when almost 3 million Zambians, to cite just one example, desperately need food aid.

There is another villain in the story, namely some of the European nations. The Africans fear that if they accept genetically-modified foods, the seeds will mix with their current crops. Europe will then be reluctant to import African foodstuffs. By the way, Greenpeace opposes the food shipments as well.

Peter Pringle offers a good survey of the debates on genetically-modified foodstuffs.

A good source of cross-sectional data across nations

Go to www.nationmaster.com, an excellent source of data across the nations, on many different topics. The pointer is from www.crookedtimber.org, which also pulls out a list of countries where you are most likely to die before reaching forty years of age. The first thirty-four are all in Africa, then comes Haiti, then Madagascar.

Is Alan Greenspan underpaid?

If you look at what different central bankers earn, Alan Greenspan is way down on the list with his $172,000 a year. Is the Finnish central banker really worth more money?

The deeper question is whether we need to pay American central bankers more. How many of you have heard of Matti Vanhala? Well, he is the Finnish central banker. Greenspan earns a greater fame (and power) return. The head of the Hong Kong central bank makes over a million dollars a year. High public sector salaries are useful for limiting corruption, but this is not an obvious danger in the case of the American Fed. The head of the New York Fed makes $315,000, almost twice what Greenspan does, but how many of you could produce the name of Bill McDonough at the drop of a hat?

Virtual economies

What does it mean to have property rights and prices in the virtual world of computer games? Did you know that you can buy a "virtual sword" on ebay? Did you know that the male avatars sell for more than the female avatars, despite having the same capabilities? What are virtual economies all about? Read this article, fascinating but sometimes incoherent as well, for a take on these new developments.

Even the Christians Can't Agree

Lew Rockwell complains that the version of the Ten Commandments that Alabama Judge Moore chose for his 5,300 pound monument is "a sectarian one promoted by Calvinist and fundamentalist Protestants, but rejected by Catholics, Lutherans, and Episcopalians. (The difference has to do with whether the first commandment should be split into two parts to seem to justify iconoclasm.)"

The Right argues that the first amendment is all about defending atheism when, as Rockwell's comment illustrates, it's really about defending the religionists from themselves.

China's trade deficit

"While China is running a large ($100 bn in 2002) bilateral trade surplus with the US, its trade balance with the rest of the world is in deficit, at $75 bn." From today's Financial Times (registration required), Morris Goldstein and Nicholas Lardy argue that only a modest revaluation of the renminbi [yuan] is needed.

Japan is the biggest source of China's trade deficit, so clearly a high-wage country can have a trade surplus with China, are you listening trade protectionists?