## We’re going after themJanuary 11, 2014

Posted by Ezra Resnick in Economics, Law, Politics.
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In 1971, President Nixon launched “a full-scale attack on the problem of drug abuse in America.” In 1982, though the battle had not yet been won, President Reagan was optimistic:

The mood toward drugs is changing in this country, and the momentum is with us. We’re making no excuses for drugs—hard, soft, or otherwise. Drugs are bad, and we’re going after them. As I’ve said before, we’ve taken down the surrender flag and run up the battle flag. And we’re going to win the war on drugs.

So, did we win yet? Let’s see…

Source: unodc.org

Source: justice.gov

Well, I guess we must not yet have captured or killed enough of the enemy. I’m sure victory is near, though, and it will all have been worth it! No excuses — no surrender!

## Frames vs. realityOctober 27, 2013

Posted by Ezra Resnick in Economics, Math, Reason.
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Suppose your household owns two cars, which are used equally: car A gets 8 miles per gallon of fuel, while car B gets 25. You have the opportunity to either trade in car A for a newer model that gets 10 miles per gallon, or you may trade in car B for a model that gets 50 miles per gallon. Which choice would save you more on fuel costs?

This seems like a no-brainer: trading in car A improves its mileage by only 2 mpg (25%), while trading in car B improves its mileage by 25 mpg (100%)! Just for fun, let’s use our brain anyway, and do the math. If each car drives 10,000 miles a year, then upgrading car A would save 250 gallons (consuming 1000 instead of 1250), while upgrading car B would save only 200 gallons (consuming 200 instead of 400) — so choosing to trade in car A would save you 25% more money!

How could our intuition have been so wrong? The cause of the error (dubbed “The MPG Illusion” by psychologists Richard Larrick and Jack Soll) is in the framing of the question. We don’t really care about optimizing the distance we can drive on a fixed amount of fuel; we want to optimize the amount of fuel we consume for the distance we drive. Consider this alternative formulation of the above choice: you can either upgrade car A from .125 to .1 gallons per mile (saving .025 gpm), or upgrade car B from .04 to .02 gallons per mile (saving .02 gpm). This formulation is mathematically equivalent to the original, but they evoke opposite intuitions — which is quite disturbing, considering the widespread assumption that consumers (and policymakers) will reliably make choices that are in their own rational interests.

When comparing differences in fuel efficiency, it’s clear that one frame (gallons per mile) is superior to another (miles per gallon). This is not always the case, however, as shown by an example due to the economist Thomas Schelling. (Both the following scenario and the previous one are discussed in Daniel Kahneman’s Thinking, Fast and Slow.) Say we are designing a tax code, and are thinking of including a “child credit”: families with children will get a deduction on their taxes. Would it be acceptable for the deduction to be greater for rich families than for poor families? You probably answered with a resounding No.

Now, let’s think about it a different way. Giving a tax deduction to families with children arbitrarily designates a childless family as the default case, but we could just as well rewrite the tax code such that having children is the default case, and childless families would pay a tax surcharge. In that case, would it be acceptable for the surcharge paid by the childless poor to be as great as the surcharge paid by the childless rich? Again, you probably feel strongly that it would not.

The problem is that you cannot logically reject both proposals — since a surcharge that is smaller for childless poor families than for childless rich families is the same thing as a deduction that is smaller for poor families with children than for rich families with children. For instance, a surcharge of \$500 for the childless poor and \$1000 for the childless rich is equivalent to a deduction of \$500 for poor families with children and \$1000 for rich families with children.

The lesson is not that it’s impossible to design a tax code that burdens the poor less than the rich. The disturbing fact uncovered here is that our intuitions about fairness, like our intuitions about fuel efficiency, are unreliable: they can give contradictory answers to the same question depending on how that question is framed.

Kahneman’s conclusion is stark:

You have moral intuitions about differences between the rich and the poor, but these intuitions depend on an arbitrary reference point, and they are not about the real problem… Your moral feelings are attached to frames, to descriptions of reality rather than to reality itself.

Strong intuition is never a substitute for slow, careful analysis.

## What the lord said to the queenNovember 25, 2011

Posted by Ezra Resnick in Economics, Religion.

The UK Chief Rabbi, Lord Sacks, has discovered what’s wrong with modern society:

Speaking at an interfaith reception attended by the Queen this week, Lord Sacks said: “People are looking for values other than the values of a consumer society. The values of a consumer society really aren’t ones you can live by for terribly long.

“The consumer society was laid down by the late Steve Jobs coming down the mountain with two tablets, iPad one and iPad two, and the result is that we now have a culture of iPod, iPhone, iTune, i, i, i.

“When you’re an individualist, egocentric culture and you only care about ‘i’, you don’t do terribly well.”

He went on: “What does a consumer ethic do? It makes you aware all the time of the things you don’t have instead of thanking God for all the things you do have.

“If in a consumer society, through all the advertising and subtly seductive approaches to it, you’ve got an iPhone but you haven’t got a fourth generation one, the consumer society is in fact the most efficient mechanism ever devised for the creation and distribution of unhappiness.”

Help us, Rabbi! Tell us what to do!

In an attempt to highlight the link between faith and happiness, Lord Sacks pointed out that on the Jewish day of rest, the Shabbat, the devout spend time with their families rather than spending money in shops.

The Chief Rabbi, who has represented Britain’s 300,000 Jews since 1991 and is due to step down in 2013, said: “Therefore the answer to the consumer society is the world of faith, which the Jews call the world of Shabbat, where you can’t shop and you can’t spend and you spend your time with things that matter, with family…”

You might have thought that people could independently decide to spend time on things that matter, even without faith in invisible super-beings and infallible holy books, but apparently not. The Rabbi’s God will tell you what matters and when to spend time on it, and you will obey; that is the straight and narrow path to happiness. And don’t forget to thank God for everything he’s so generously given you — I hear there are children in Africa who can’t even afford an iPod Nano!

By the way, just to be clear, the Rabbi didn’t mean to imply that we’d be better off without all those “i, i, i” consumer gadgets:

A spokesman for Lord Sacks said later: “The Chief Rabbi meant no criticism of either Steve Jobs personally or the contribution Apple has made to the development of technology in the 21st century.

“He admires both and indeed uses an iPhone and an iPad on a daily basis. The Chief Rabbi was simply pointing out the potential dangers of consumerism when taken too far.”

I’m sure the Lord’s iPhone is an older generation one — and his faith helps him resist the urge to upgrade.

(via Butterflies & Wheels)

## Blind to their own blindnessOctober 29, 2011

Posted by Ezra Resnick in Economics, Reason.
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In an excerpt from his new book, Thinking, Fast and Slow, Daniel Kahneman discusses “the illusion of validity”: not only do people (even professionals) make confident predictions in situations where they really don’t have enough information to do so; they continue to feel and act as if their predictions are valid even when they have been made aware that their past predictions performed little better than random guesses.

We are prone to think that the world is more regular and predictable than it really is, because our memory automatically and continuously maintains a story about what is going on, and because the rules of memory tend to make that story as coherent as possible and to suppress alternatives. Fast thinking is not prone to doubt.

The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.

One area which is especially prone to unfounded confidence is the stock market. Kahneman recounts how, in preparation for an invited talk at a firm of financial advisers, he analyzed their investment outcomes over a period of eight years. The firm naturally considered its advisers to be skilled professionals, and awarded annual bonuses based on performance. But Kahneman found that the year-to-year correlation in the ranking of advisers was basically zero — the kind of results you would expect from a dice-rolling contest. There was no long term consistency that would indicate differences in ability among advisers; the firm was rewarding luck as if it were skill. And of course, they continued to do so even after Kahneman presented his findings.

This doesn’t mean we should distrust all professionals. According to Kahneman, it is possible to develop true expertise in fields that provide good feedback on mistakes in a sufficiently regular environment, like medicine. But in general, we should not take expressions of high confidence at face value:

people come up with coherent stories and confident predictions even when they know little or nothing. Overconfidence arises because people are often blind to their own blindness.

So, now that you know about the illusion of validity, will you avoid it? Probably not. Kahneman predicts:

The confidence you will experience in your future judgments will not be diminished by what you just read, even if you believe every word.

## Everybody has a shareJune 8, 2011

Posted by Ezra Resnick in Economics, Humor.

In chapter 22 of Joseph Heller’s Catch-22, mess officer Lieutenant Milo Minderbinder finally explains to Yossarian why he buys eggs for seven cents apiece in Malta and sells them to the mess halls in his syndicate for five cents apiece:

‘I do it to make a profit.’

‘But how can you make a profit? You lose two cents an egg.’

‘But I make a profit of three and a quarter cents an egg by selling them for four and a quarter cents an egg to the people in Malta I buy them from for seven cents an egg. Of course, I don’t make the profit. The syndicate makes the profit. And everybody has a share.’

Yossarian felt he was beginning to understand. ‘And the people you sell the eggs to at four and a quarter cents apiece make a profit of two and three quarter cents apiece when they sell them back to you at seven cents apiece. Is that right? Why don’t you sell the eggs directly to you and eliminate the people you buy them from?’

‘Because I’m the people I buy them from,’ Milo explained. ‘I make a profit of three and a quarter cents apiece when I sell them to me and a profit of two and three quarter cents apiece when I buy them back from me. That’s a total profit of six cents an egg. I lose only two cents an egg when I sell them to the mess halls at five cents apiece, and that’s how I can make a profit buying eggs for seven cents apiece and selling them for five cents apiece. I pay only one cent apiece at the hen when I buy them in Sicily.’

‘In Malta,’ Yossarian corrected. ‘You buy your eggs in Malta, not Sicily.’

Milo chortled proudly. ‘I don’t buy eggs in Malta,’ he confessed… ‘I buy them in Sicily for one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents apiece when people come to Malta looking for them.’

‘Why do people come to Malta for eggs when they’re so expensive there?’

‘Because they’ve always done it that way.’

‘Why don’t they look for eggs in Sicily?’

‘Because they’ve never done it that way.’

‘Now I really don’t understand. Why don’t you sell your mess halls the eggs for seven cents apiece instead of for five cents apiece?’

‘Because my mess halls would have no need for me then. Anyone can buy seven-cents-apiece eggs for seven cents apiece.’

‘Why don’t they bypass you and buy the eggs directly from you in Malta at four and a quarter cents apiece?’

‘Because I wouldn’t sell it to them.’

‘Why wouldn’t you sell it to them?’

‘Because then there wouldn’t be as much room for profit. At least this way I can make a bit for myself as a middleman.’

‘Then you do make a profit for yourself,’ Yossarian declared.

‘Of course I do. But it all goes to the syndicate. And everybody has a share…’