Econ 490 Sections LA and LA4 Spring 2011

Perception or lack thereof regarding government-provided benefits

noreply@blogger.com (Professor Arvan) — Tue, 20 Sep 2011 11:37:00 -0500

This piece is interesting. I wonder how many in-state students at the U of I appreciate they are getting a government benefit by paying in-state tuition?

School Reform

noreply@blogger.com (Professor Arvan) — Sun, 10 Jul 2011 07:12:00 -0500

This piece is from the Sunday NY Times Magazine. It is sobering on where we are and also interesting on how Diane Ravitch has taken on the entire movement and seemingly won the battle. The emerging consensus is that the problem is harder than originally considered. That doesn't mean it's impossible, but it does mean much more effort is necessary.

Reforming the School Reformers - NYTimes.com via kwout

Semester Wrap Up and Grades

noreply@blogger.com (Professor Arvan) — Thu, 12 May 2011 15:03:00 -0500

As you folks are are finishing your papers let met say what what I plan to do.

1. I need to write up evaluations of your blog posts for the second half as I did for the first half.

2. You well get a terse write up on your paper (after getting extensive comments on the draft).

3. If you want to comment about your teammates performance (and whether they did put in sufficient effort) here is what to do. Go to Moodle. Go to Participants in the left. Find me. At the bottom, there is a button to send me a message. In the message please identify your team and then say whatever else you want about your teammates. Do not do this by email. Email is not secure and communicating personal information demands such security.

When I've got all the relevant info I will do a final grade calculation and first post those to Moodle. I will email the class when I've done that. It might take a bit more to get the grades into Banner.

This is the time of the year when professors are prone to procrastinate.

Follow up to today's class

noreply@blogger.com (Professor Arvan) — Mon, 2 May 2011 17:55:00 -0500

Here is the IMDB entry on My Left Foot, which as I mentioned in class is a compelling film to watch and an example of expertise that develops largely through self-teaching and self-expression. Incidentally, it also is a very good example of creativity coming from the weak, if you recall the hypothesis offered up by Eric Hoffer. Another example I'm aware of in this regard in the area of painting is Grandma Moses, who may still be the best known American painter and who didn't start painting till she was around 60.

Here is a different story that I didn't tell this morning. It is about Ty Cobb, the famous baseball player commenting on Babe Ruth. I can't recall the precise reference for you but I believe I read this in a biography about Cobb. The story is that Ruth learned his prodigious swing by self-teaching. He wasn't coached. Had he been coached, he almost certainly would have been told to shorten the swing, because that was the style of the times - smallball. But Ruth came up as a pitcher, not as an outfielder. The tradition was not to coach pitchers on their hitting. So Ruth could as he wanted there. He became an expert at something entirely new in a sport that wasn't so new. He made the home run the centerpiece of the game.

There is a moral to the story about deliberate practice qua self-teaching versus deliberate practice at the hands of a well known coach. Many (though not all) well known coaches tend to teach orthodoxy in the field of endeavor. Self-teaching, in contrast, is apt to produce an unorthodox approach. Orthodoxy may be what you are after with expertise. But in some cases the unorthodox can trump. When some people do become expert by self-teaching and others via professional coaching, it is interesting to ask whether their approach converge or not. When not, one might not consider the other an expert and might be right about it, and vice versa. But it is not a priori obvious which one has more of a leg to stand on.

One last point here that circles back to an early theme in the course. The economics profession has an orthodoxy to it and behavioral econ is not yet part of that orthodoxy. But the profession as a whole was shaken severely by the financial crisis. So from my point of view - I'd like to see both tracks proceed for a while as separate ways of developing expertise and not yet insist that they converge. I don't think we're ready for that.

Becoming an expert, gift exchange, and reflections on the course

noreply@blogger.com (Professor Arvan) — Wed, 27 Apr 2011 21:06:00 -0500

I'm going to give brief summaries of each paper, list some puzzles that seem to emerge from their reading, and then try to apply those ideas to my reflections about the class.

Becoming an Expert

There is a tendency to attribute perceived differences in ability to genetic differences between the individuals. One person is "smarter" or "a more natural athlete" or "a born musician." In other words, talent is thought to be innate. The evidence, however, suggests otherwise. Expertise is acquired through vast amounts of the right sort of practice. In this paper it is referred to as deliberate practice; elsewhere I've seen the alternative expression, "effortful study." To become an expert in a field one must engage in deliberate practice for an extended period of time, often thought to be about 10 years.

Early learning might happen via play and self-discovery. But at some point learning that way reaches its limit and further learning requires practice that is not play. Individuals wouldn't do the practice willingly on their own if they didn't want to improve their own skills. Learning thereafter requires coaching to do the appropriate tasks, to provide prompt and relevant feedback, and to assist with motivation. It also requires high concentration/effort from the participant. So there are time limits on how long individuals can practice each day and individuals who are on the path to becoming an expert require diversions and time to recuperate between practice sessions.

Becoming an Expert Puzzles

1. Many people do not become expert in any field. Might it be that genetic disposition is expressed simply by the the willingness to go down the path of deliberate practice to become an expert?

2. Some advocates suggest the best learning environments are immersive. For example to learn a foreign language some suggest to go to a place where nothing but that language is spoken. Immersive learning environments seemingly violate the need for diversion and recuperation time. Do both ways work?

3. Is there a way to extend the period of play, so more of the learning happens in that first stage? For example, many have observed that video games have an immersive aspect. To the extent that video games are designed to go from one level to the next and with play you become more proficient, that looks like deliberate practice. Can learning be designed like a video game so it is both immersive and fun?

4. Other advocates argue that learning should be inquiry based and driven by intrinsic motivation (curiosity). This might not be play. It might be more like investigative journalism. But it doesn't sound like deliberate practice that has no reward in itself. Can one develop expertise mainly via intrinsic motivation and inquiry?

5. This one is not so much a puzzle but really a matter of definition. Who is an expert? One way to think of expertise is to contrast with a novice. (See chapter 2 of How People Learn.) A different way is to to identify the individual with an elite group. The question then is how elite is elite?

6. For people who do learn but without any intention of becoming an expert, is that type of learning qualitatively different or the same thing as learning to become an expert but with practice over shorter duration?

7. Are there meta-skills (skills that would work in more than one domain of study) one can develop to make one more willing to do the deliberate practice? If so, what do they look like? (Without answering this one here, do note that many people talk about learning to learn. So that suggests there are such meta-skills. Learning to learn is supposed to be an important consequence of an undergraduate education.)

Gift Exchange

Early in the semester we talked about eliciting cooperation in repeated prisoner's dilemma and so you might think of cooperation as gift exchange relative to the default equilibrium where both parties cheat. However, in the labor market there is more to it than just that. First it means that the actual wage exceeds the opportunity wage of the worker. (This gives the worker a surplus from the job.) Second it means that the firm acts fairly with respect to the worker's co-workers. Fairness of treatment is a big component of the deal. Third it means that the worker shows a high degree of initiative and intensity of effort on the job. That is the gift the worker gives to the firm. It is more than the firm has a right to expect. (Much more than the threshold at which the worker would be disciplined or even fired.)

In contrast to gift exchange you might consider direct payment for service rendered. Yesterday, for example, we had a guy and his crew deliver mulch for our yard. They integrated that in with the existing mulch and did some work to assure that went well and that the rest of the yard and our sidewalk wasn't messy with mulch. After the crew was done I gave them a check for the work they had done. And that was that, service for a fee without any gifts.

As Akerlof makes clear in his paper, much ongoing employment has considerable elements of gift exchange to it. The direct payment for service approach makes more sense under a limited service, limited time contract.

Gift Exchange Puzzles

1. This one is really about economists and the models they select. Why do economists have a preference in envisioning the employer-employee relationship as direct payment for service instead of as gift exchange?

2. Organizations can have different structures. Some are flat, others are hierarchical, and still others have a matrix structure where similar skills sets work together. Does the gift exchange idea work irrespective of the organization structure or does it favor a particular structure (mainly flat)? If there is a job ladder in the organization, for example, how do incentives provided by promotion compare those with gift exchange?

3. Models of gift exchange provide an explanation for scarcity of good jobs (involuntary unemployment). Models of direct payment of service couple with competitive supply of that service suggest the payment should equal the opportunity cost of the supplier and consequently that labor markets should clear (supply of labor equals demand) unless there is monopolization (unions) or artificial restraints (minimum wage) or the service rendered is highly idiosyncratic (then the payment is determined by bargaining between the parties). Are there "good jobs" out there? How does one find such a good job? Is it a matter of luck? Which model better fits how new grads think about the labor market they soon will be joining?

Maintained Hypothesis

One aspect of a good job, from the point of view of a college grad is that it provides a lot of opportunities to learn on the job and develop expertise in that area of employment. Such jobs will treat the employment relationship as gift exchange. (We will not try to prove this. It is simply a way of framing what soon to be grads should be looking for in the labor market.)

Reflections About The Class

Initial Thoughts Going In

In my previous career as a learning technology administrator, I learned about a variety of issues that seem to be plaguing Higher Education nowadays. One of those is called the Disengagement Compact, an idea developed by George Kuh, now emeritus Professor of Education at Indiana University. Kuh was the founder of something called the National Survey of Student Engagement. The disengagement compact, according to Kuh, goes something like this. On the side of the Professor/instructor - a promise is made to the students to not demand too much effort from them or make things too difficult intellectually and to give the students relatively high grades nonetheless. In return on the side of the student - a promise is made to give the instructor reasonably high teaching evaluations.

A little bit after learning about this idea, a documentary came out called Declining by Degrees that talked about this issue, rising tuition rates, and wasteful inter-campus competition in facilities and sports and possibly other areas that don't directly impact learning. (Certainly it wasn't an uplifting story, but was it realistic?) I wasn't in a position to address all the issues in my job but I thought it reasonable that we might make some efforts to address the Disengagement Compact and in my blog (which then had a pretty good readership and was syndicated elsewhere) I wrote a few different posts about it - first, this one on a pure inquiry based blog meant for students who had already taken the formal course so weren't in it for the grade, then this one about whether improving undergrad ed was a goal worthy of getting campus attention and my own attention as well, and this last one on tying these ideas into the then Campus Strategic Plan.

A book was later done to accompany the Declining by Degrees video. (Each chapter was a separate essay by a different author.) I read a good chunk of that book. A particular essay by Murray Sperber - How Undergraduate Education Became College Lite - And A Personal Apology made a strong impression on me. I had been carrying similar ideas with me for some time, but as an Econ Prof I mostly taught undergrad courses with problem sets and exams. The world was different in a writing intensive course, or what used to be writing intensive courses.

As an administrator, my teaching was done as an overload rather than as a service to the department, so I taught what I wanted - all small seminar classes. I did a Discovery class once - that went so-so. The next time I tried a CHP class and that went really well. So I continued to teach CHP classes when I did teach. The last time, it wasn't an Econ class but rather a class called Designing for Effective Change. In some ways it went extremely well. In other ways it was a bust. So it is with experiments when you teach. It was the first time I tried to have students blog. That part seemed to go well.

So I was intrigued by the idea of whether any of the good parts of that course could be carried over to a regular size class of students in an upper level Econ course. On the mode of instruction in the class, it was driven by that thinking. Could the seminar style approach used in CHP be tweaked and then used in the regular class and could it be done to address the Disengagement Compact issues?

On the content of the course, I didn't have a particular agenda in mind other than that as an administrator my formal economics background served me less well than having a very strong ethic of collegiality and wanting to freely discuss ideas with both staff who worked for me and faculty we helped with the teaching. So I somehow wanted to have this class benefit from that administrator experience and much of the readings were selected based on seeing some cross pollination of these ideas. Then a few of the readings were selected simply because they seemed necessary to prepare for Nudge.

The Nudge book itself was selected by somewhat different criteria. Truthfully, I didn't like it that much myself when I read it. But I had some good success in that CHP seminar by having the students read books that were recent best sellers so I thought that approach might work here too. It is very hard for me in advance to know what will resonate with students and what won't. The other thought is that one book from the previous class called The Fifth Discipline had as a core idea a notion the author, Peter Senge, called Leverage - coming up with small changes that have big impact. The core idea of Nudge, though not identical, seemed quite similar. The Fifth Discipline was a success in that prior class. With Nudge I had a similar idea and it was about Behavioral Econ. That's how I based the choice.

Early Unanticipated Stress

Sometimes I can be a princess with the pea and let even trifles disturb me. Other times I can be pretty hearty and shrug off rather serious challenges and simply make do as best as I can. At the beginning of the semester it was mainly the former. There were three issues that cropped up almost immediately. The first was the turnover in the class. This is a course intended for majors and in some way was meant to function as a capstone class (though it was open to anybody). I did expect turnover in my other class, Econ 302, where there are multiple sections of the course. I didn't expect it here. It interfered with getting the groups to function early on and it served to distract me from setting a good tone.

The next was the auditorium seating and that while all of you could see me and I could see all of you, you couldn't see each other. So when I did Q&A at the beginning of the semester, everyone seemed like the were answering me and ignoring entirely what any student said previously. We had no flow at all and thus this didn't work like a seminar in that respect.

The third was the construction noise. I ragged about that with a friend who said I should request another classroom. But I had gotten my way on when the class was held. Schedule-wise the Econ Department was good to me. So I didn't try to move rooms. I do understand that with the Lincoln Hall construction classrooms the size of ours have become scarcer at prime times of the day. But still, I was asking myself about the Campus Commitment to learning that they could allow classes to be held in a building with ongoing construction. When I was in College of Business and BIF was open for teaching but still not completed, the rule was that work on BIF had to be after 5PM.

The Blogging

I was surprised by the very first set of posts based on the reading on Procrastination. The frankness before we had gotten to know each other was knew to me. Many of the CHP students were quite shy online, especially initially. But further, the way students depicted the schoolwork was so different from how I thought about. To bring some connection to the above, I viewed (and still view) the blogging as a kind of deliberate practice. I also view doing term papers and in class presentations that way. There is growth in the doing if done with care and concentration. The deliberate practice is the main aspect of what's going on, in my view. Many of the students, however, seemed to regard all of this as hurdles to get over and disregard the personal growth aspect of the activities entirely.

Put a different way, an engaged student would see these things as promoting growth. A disengaged student would view them as hurdles. The engaged student might then think of the classroom as a kind of gift exchange (my comments on the blog posts being the gift that flows in the other direction). A disengaged student views this as a service rendered for payment - an acceptable grade in the course in this case.

There is then the issue of whether I gave sufficient direction/coaching on how to do the blogging well. The answer is to produce connection in posts between the current readings and your experience (we did not that bad in this dimension though the same examples seemed to crop up repeatedly) other connections between the current reading and things you've read elsewhere (a handful of people gamely tried to do this but most did not) and for later topics trying to build connections between the current reading and previous readings in this class (I don't recall anyone doing this). Further, this should be done in a coherent narrative. That much was explained at the outset. Perhaps constant reminders were necessary - nudges if you will. On that I was lax.

There is then the issue of what if you don't have those outside readings to connect to at your fingertips? My response (you may be thinking - you've got to be kidding me, this is too much to ask) is to do the outside readings then and there. Use the class readings as a launch point and read other stuff that seems related that you discover. For the type of learning we're after in this class, developing a habit of doing that as a matter of course is one of the meta-skills I mentioned above.

I will say that commenting on team blogs is much different than commenting on the individual blogs I did in the CHP class, because there I had a sense of an ongoing dialog with the student from post to post. Not until the team had a done its class presentation did I even match the writer with the person in a way that could give me that sense of ongoing dialog.

Class Attendance

I don't know when this happened exactly but after two or three weeks class attendance started to drift down. Let me go through the list of possible causes.

One is senioritis. I understand that. Students in this category have their attention elsewhere. If I do a class in the future even remotely like ours, I will try to teach it in the fall.

Another is disengagement, students who truly are disengaged in most of the courses they take on campus though they aren't yet seniors.

A third is discouragement I created (through inexperience with the subject or my reaction to the environment) through the early class sessions or the reading selections. I have a sense I disappointed a good number of students with the approach. I regret creating such disappointment. In you own posting you might comment on this a bit. (Please be gentle. I do have feelings.)

Not having taught a regular size undergraduate class in quite a while, I believe I made several young instructor mistakes. Among them was appearing defensive from time to time. I was.

A fourth possible explanation, and something that really hasn't happened to me before in teaching, is that a gulf in political views may have created a sense that the class was cover to articulate a paternalistic agenda. Some of the underlying issues came up today during the Objections presentation. The particular example makes the point about as strongly as it can be made. I believe that in the presence of obvious negative externalities there should be strong regulation that proscribes the behavior. No nudges. Strong regulation instead. The externality with drunk driving is obvious. It should be against the law and violations should be severely punished. Paternalism which is intended to be good for the person but where there is no apparent externality is a much harder case. When it is the one and not the other is not always as transparent as it is with drunk driving. Perhaps it would have been better for the class if we did the Objections chapter first, instead of last. It would have put the issue front and center and then, perhaps, we could have put it to rest. Some of you might not agree with my position, but that shouldn't block you from learning in the class.

I did, like any new instructor, initially take the drop in attendance as a personal rebuke. It certainly seemed to limit the possibility of achieving my initial goals. After spring break, however, a funny thing happened. I began to find it liberating. Those who did come (not always the same but there was a solid core of students) constituted numbers where it was more like a seminar. Further, the last several class sessions seemed much more enjoyable to me. We did have reasonably good discussion and progressed through the ideas.

Wrap Up

It is good to get preconceptions as I had going into the class to confront real experience even if there are some ego bruises in the process of doing that. I've written this post (too long but I hope otherwise informative) as a way to try to encourage your own serious reflection on the readings and tying them into the way the class unfolded for you.

Comments on Today's Session

noreply@blogger.com (Professor Arvan) — Mon, 25 Apr 2011 15:11:00 -0500

In preparing for our Wednesday class on Objections, I read a few online book reviews of Nudge. From those I garnered that regardless of your views on the recommendations in the chapter on Privatizing Marriage, we should be able to agree that those recommendations are not nudges. The recommendations represent large changes from the current arrangement.

So one wonders why that chapter was included in the book. I don't know Sunstein and Thaler, but I have no problem imagining them being very enthusiastic for their own recommendations as I often get infatuated with ideas I come up with on my own. Then since they were doing this collaboration, shoehorning the ideas into the book might not be too much of a stretch. An editor is supposed to filter out author indiscretions, but when the book is likely to be popular and the authors can go to a different publisher, the authors retain some control.

On my initial reading of the book, it didn't occur to me that the suggestions in this chapter were not nudges. I am not sure what I would have done about it, but quite possibly nothing. That getting married is a time when homo economics is on vacation makes it a relevant topic for the class. In my case, and as a trained economist I am mainly rational about things, when I was dating my not yet then wife, I told her money grows on trees. Even though we still love each other very much, that wasn't a very shrewd thing to say and we both know that now.

That members of the class disagree about the recommendations in the chapter is not surprising. We've had disagreements before, mainly on whether paternalism is acceptable and if so when, also on whether government can be trusted to deliver the goods. The disagreements today were of a different nature. I didn't anticipate that outcome. I wonder if others in the class did, which would put you a few steps ahead of me.

Presentation by Fight Club

noreply@blogger.com (Professor Arvan) — Sun, 24 Apr 2011 17:30:00 -0500

Here is the presentation on Objections to Nudge.

About the readings

noreply@blogger.com (Professor Arvan) — Sun, 24 Apr 2011 16:50:00 -0500

Note that we aren't doing, Chapter 16 "A Dozen Nudges" in class. We are doing Chapter 17 "Objections" on Wednesday. If you haven't commented yet, you might post about that chapter.

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I did a quick Google search on Marriage and Income Distribution. One of the references was this working paper for which, the introduction begins with the observation that income and marriage are positively correlated. I will leave you to draw any further conclusions from that observation, but we should spend some time on it tomorrow.

Men Drinking in College - A Theory to Explain Why

noreply@blogger.com (Professor Arvan) — Fri, 22 Apr 2011 08:53:00 -0500

Since the topic has come up more than once in class and in th blogging, I thought you might find this one interesting.

1089 Why College Men Drink: Alcohol, Adventure, and the Paradox of Masculinity via kwout

Presentation by Team Cadenza

noreply@blogger.com (Professor Arvan) — Thu, 21 Apr 2011 20:04:00 -0500

Here is the presentation on Privatizing Marriage.

Follow up on today's class and where we are going next

noreply@blogger.com (Professor Arvan) — Wed, 20 Apr 2011 16:20:00 -0500

I thought it was a good session today, with a fairly lively discussion. I omitted discussing one obvious thing - in the mode of Econ 102. If the underlying issue with health care cost is that doctors qua entrepreneurs with their own private practice are aggressively ordering procedures to enhance their own revenue, then an increase in the supply of doctors would be the standard intro econ textbook remedy. How would that increase in supply come about? One way would be to encourage foreign doctors to immigrate to the U.S. They might also be the ones who would take the "salary jobs" that would offer an alternative to the doctor as entrepreneur model. (In fact I believe this is already happening, but in what volume I do not know.) Being aggressive about this as a policy matter may have all sorts of politics associated with it that makes the suggestion untenable. But looking at this as a straight economic issue we do teach that expanding supply lowers the market price. So at a minimum we needed to get that idea on the table.

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Next week is our last on Nudge. We will be covering the chapters on Privatizing Marriage and Objections. Both should be lively discussions.

The last week of class I plan to do as follows. On Monday we will read/discuss both Akerlof's Gift Exchange paper and this paper by Ericsson et. al. on Deliberate Practice. I will try to provide a bit of motivation below, then more next week when you are closer to reading those pieces. On Wednesday I want to apply those ideas to our class as we do a debrief. I hope you will blog a bit on both of those. My post next week should give you a sense of where this is heading.

Now for the motivation. In ongoing exchange that happens over time much of that (interior to the firm or organization) happens via a "trust relationship." Gift exchange is, in essence, the economic model of trust relationship. Much of what you get in the relationship should be viewed as a surplus or a rent. Both parties in the relationship understand that. We've seen this notion before, in Akerlof's Nobel lecture talking about efficiency wages, and in Simon's Nobel lecture where he talks about eliciting performance in organizations.

Akerlof in the Gift Exchange paper applies the idea to industrial work. I want to reconsider the idea in the context of knowledge work. With knowledge work, a good part of the motivation of the worker comes from their own learning. In turn, a lot of effective learning comes in the form of "Deliberate Practice." Deliberate Practice means taking effort to learn things just out of reach until that becomes routine and then going a step or two beyond that in an ongoing cycle. Video games where you go from a beginner level to higher levels have a built in deliberate practice aspect to them. It can both be fun - mastering the next step - and challenging - unsure that you can conquer what's ahead when it looks difficult. So I'd like to put that sort of learning into the workplace and talking about the economic incentives that would make it work well. I then want to argue that jobs so structured are the type we'd all like to have. But I also want to suggest that such structuring of the job has challenges to it. Earlier I encouraged people to watch a Daniel Pink video. I think he gets into a bit of a trap with what he presents. So we need to discuss that trap too.

School Choice Presentation

noreply@blogger.com (Professor Arvan) — Thu, 14 Apr 2011 17:18:00 -0500

This is the Presentation from the Lipshitz Continuum on Improving School Choice.

A week from tomorrow on Malpractice Insurance a la Nudge

noreply@blogger.com (Professor Arvan) — Tue, 12 Apr 2011 08:21:00 -0500

I will be leading the discussion on: Should Patients Be Forced to Buy Lottery Tickets. In addition to that chapter, I would like you to read this very engaging essay by Atul Gawande, The Cost Conundrum. Gawande is an M.D., not an economist. (He is also a winner of one of the MacArthur Genius Awards.) I believe you will find this piece extraordinarily interesting and give you a different perspective on the issue.

I will not produce a PowerPoint for this session, but below I will provide a brief essay as fodder for the discussion. Part of this is to note that Thaler and Sunstein have some good nuggets to extract, but the picture is incomplete. The Gawande reading should help to fill that in. Also, in places Thaler and Sunstein say things I disagree with and I'd like to put that into some context.

I believe it is helpful to parse health care as follows.

Initiation - This can be either regular "maintenance" a la an oil change for your car or it can be patient initiated because of some problem. Our health care system can be critiqued that there is too little maintenance - the uninsured don't. But it is broader than that, since lifestyle matters. So even insured people who lead an unhealthy lifestyle are under investing in maintenance.

Post Initiation we can divide further into these categories: Diagnosis, Treatment, Repair.

Diagnosis - If this happens as part of maintenance we need to include in this category, "you are in good health." The alternative is "you have problem x." In thinking about malpractice, one issue is whether mis-diagnosis is a big deal or not. Diagnosis is typically done by physical exam, or by having tests (blood tests, x-ray, ekg, etc.) but is also done on occasion by having a procedure (an exploratory operation or a colonoscopy for example). The different modes of diagnosis have differing costs and a question is whether based on the urgency of the purported initial problem one goes for expensive modes first or if one tries the least cost ones initially and then move to more expensive modes only when the early ones produce inconclusive results.

Treatment - Usually this is by drugs or by therapy. So again considering malpractice, there is a question of mis-treatment. Drugs can produce harmful side effects. It is not unusual for a doctor to monitor progress under a given treatment and change the recommended treatment based on what is observed. This is also the issue of whether patients take the treatment or not. Some possible reasons for not taking the treatment are: (a) it is painful, (b) it is time consuming, (c) doing so denies personal freedoms, and (d) the patient forgets. There might be an additional economic reason - the out-of-pocket expense the patient experiences from taking the treatment.

Ignoring the economic reason for a moment because it is probably not in the doctor's sphere of control, there is a question of whether the doctor can influence the patient into taking the treatment by addressing (a) - (d) above and if doctors vary in their abilities to do this. Another piece by Gawande, The Bell Curve, offers a fascinating story about patients with Cystic Fibrosis and the wide variation in outcomes based on differing approaches to treatment. We will not discuss this piece because there isn't enough time to do so, but in relation to Thaler and Sunstein we can raise the relevant question of whether it is malpractice to rely on under-performing treatments. This speaks to question that they raise about whether medicine becomes too conservative. It turns out the high performing treatments are largely experimental and go beyond what is in the published literature.

Repair - Here we are thinking about surgery that is not diagnostic and procedures (like childbirth) that may not involve surgery strictly considered but that take place in a hospital. When one thinks about malpractice this is typically the category that people have in their minds, so to modify the definition in Nudge, malpractice is the negligence during surgery.

Let's next consider outcomes (and here keep in mind the Gould piece on the Streak of Streaks). People have expectations going in about the consequences of treatment and repair as well as about the correctness of diagnosis. When they are unpleasantly surprised - a worse outcome than anticipated - they demand an explanation and are often quite angry because of the outcome. The cause may simply be bad luck, not malpractice, but how is the patient and the patient's family to determine that? One wonders whether the media influence the thought process that happens then, for example via movies like The Verdict.

I believe that Thaler and Sunstein are thinking about Repair only when they make their recommendation to buy the insurance with the largest deductible and it is in that case too where the doctor's premiums for malpractice insurance are highest. But they also seem to have in mind the doctor as a solo practitioner.

The main lesson from the Gawande piece, in my view, is that team production is best practice in medicine and that as a general matter team production will push health care toward treatment and away from repair, but then lower doctor incomes because the big bucks are in repair. When you do have team production where presumably the doctors co-insure, the question then is whether you still want to follow Thaler and Suntein in having patients forego their right to sue up front so they can have lower health care insurance premiums. I'm not sure on that one. It seems to me that to show negligence in the team production case would require "the mistake(s)" to be more egregious and if that is correct perhaps that is sufficient without eliminating the right to sue altogether.

Drafts of papers

noreply@blogger.com (Professor Arvan) — Tue, 12 Apr 2011 08:12:00 -0500

I announced this in class yesterday but I will repeat here because not everyone was there. For those teams that have already presented, it is time to be getting your first draft of your paper to me for my reactions and suggestions. Please make that a priority in your efforts as we get into the last quarter of the semester.

The "Market" for Organ Transplants

noreply@blogger.com (Professor Arvan) — Sun, 10 Apr 2011 09:51:00 -0500

Here's the PowerPoint Presentation from Giants of Economics.

Check Out Economics in the News

noreply@blogger.com (Professor Arvan) — Tue, 5 Apr 2011 20:06:00 -0500

My last post in Econ in the News is of a Dave Leonhardt analysis about the Republican proposal for Medicare and the intergenerational politics that underlies the plan. One of the interesting items in it is the magnitude of the subsidy that is in Medicare (the excess of what the typical senior citizen gets in dollar benefits from Medicare less what they've contributed over time via the payroll tax). It is huge. (And note Medicare itself doesn't cover the full health care costs.) Also note that senior citizens vote at a very high rate.

Prescription Drugs and Medicare

noreply@blogger.com (Professor Arvan) — Mon, 4 Apr 2011 21:34:00 -0500

Here is the presentation from Team Illini.

Quite an interesting read

noreply@blogger.com (Professor Arvan) — Mon, 4 Apr 2011 09:35:00 -0500

Levin sketches a conservative vision of the future in depth and with considerable thought. One wonders whether nudges will be part of it. One also wonders what his feelings are about the ugly parts of capitalism - they preying on the weak and ill informed. Those omissions notwithstanding, it does make for a good read.

Beyond the Welfare State > Publications > National Affairs via kwout

Slides on Privatizing Social Security

noreply@blogger.com (Professor Arvan) — Fri, 1 Apr 2011 17:57:00 -0500

Here are Team Echo's slides.

Some Follow Up on Credit Markets and Today's Presentation

noreply@blogger.com (Professor Arvan) — Wed, 30 Mar 2011 15:18:00 -0500

Interest rates were indeed quite high in the late 1970s - early 1980s, but the practice is usually to distinguish between nominal interest rates and real interest rates with the latter equal to former less the rate of inflation. Real rates were quite low in this period (which is typical for an economy in recession). When I was in grad school my classmates and I would often talk at lunchtime about whether the real rates were negative and if that is even possible (it is) and what that would mean. At a macroeconomics level economic growth requires a positive real rate. You can work through the rest. I mention this because the table that was presented for 30 year mortgage rates presented nominal rates only.

One of the things we didn't talk about today is refinancing. It warrants a mention. The underlying economic question is when there is a long term loan and there is a risk that interest rates will vary during the term of loan, who bears the risk? In the case of a fixed rate loan, borrowers make out if the interest rates rise in the future but still during the term of the loan. One might think that it is the lenders who make out when interest rates fall, and if the variation in rates is small, that is true. But with larger declines in the interest rates borrowers might refinance. That means paying off the old loan in full and taking out a new loan (incurring the various origination charges with that) and securing a lower rate in the process. With refinancing a possibility the lender for original loan can't expect to make out when interest rates fall substantially, the same way that borrowers make out when interest rates rise. But now some caveats on that.

Every mortgage I've ever had has allowed prepayment in full at any time during the term of the mortgage without penalty. I take that to be the norm for mortgages with borrowers considered a safe bet to repay the loan. But some mortgages have stiff pre-payment penalties. The ones which have early teaser rates but rates rising in the future may be in that category. This is a way for those lenders to assure they get back the interest they gave away with the teaser rate (and then some). There is nothing fundamentally wrong with pre-payment penalties providing the borrowers understand them and their function.

There is also a second issue about whether the individual can qualify for refinancing (has the requisite income and other desiderata). For many of the troubled mortgages that resulted after the burst of the housing bubble, quite a few of the homeowners couldn't refinance under the existing rules, even as market interest rates declined substantially as the Fed tried to pump money into the economy.

Because of the crisis, one might argue that the typical rules should have been suspended to allow these homeowners to refinance as an alternative to having the bank foreclose on them. There is a very provocative Op-Ed piece in today's New York Times by the former special inspector general for the TARP program, Neil M. Barofsky. Since he just stepped down from that position one can imagine there's quite a lot of inside baseball behind the decision to write that Op-Ed piece. It needs to be interpreted as such. Nonetheless, the message is interesting to read. TARP was supposed to encourage these bad mortgages to be renegotiated, but in may cases it didn't do that.

Let met close with a point about education for using credit wisely. There is a significant question about what is possible in this regard from the point of view of timing the education versus when the need to know arises. If you have classes on this too early, before you are using a credit card with consistency, the education may go for naught. My guess is that the right time for most of you would be between the Freshman and Sophomore years or when people move out of the dorms and get off meal plans. I wonder if a purely voluntary training specifically aimed at using a credit card while staying on a tight budget might have lots of takers. I don't know. It seems to me an interesting possibility. It also occurred to me after listening to you discuss not monitoring your credit card spending, and what I suggest here may be difficult to implement because of the security that's needed, but a smartphone app that popped up once a day with your recent credit card spending might do the trick. If having that were a way to attract customers, the credit card companies themselves might offer it.

Comments/Observations on Issues Raised in Today's Session

noreply@blogger.com (Professor Arvan) — Mon, 28 Mar 2011 15:39:00 -0500

Here I want to take up some points that were raised by Adam in the discussion of the Naive Investing chapter. Some of these may be controversial (regulate or not). Others I take to just be common sense. Either way I welcome feedback - publicly as a comment to this post or privately by email if you prefer.

On the time profile of the riskiness of the portfolio

Let me use a metaphor to start on this topic. It is a standard idiom to get right back on the horse after falling off. For kids, in particular, you don't want the pain from failure to harden. On the other hand, if a kid is beginning to learn to ride the kid should start out on a gentle pony, not a bucking bronco. The latter is a good challenge for an experienced cowboy. For the rest of us, it is suicide.

If you are an otherwise experienced investor then it is definitely a true statement that when you are younger you should be taking more risk, because there is more growth potential in that. However, if you are not yet an experienced investor it may be prudent to take a rather safe approach to portfolio selection, try to ensure that early investments do pan out, and build confidence based on that experience. As you learn, your tolerance for taking risk will likely increase. You may then experience a failure in your investments but can better take that in stride and keep at the general approach.

On your own risk attitudes

There is a question of whether you know your own attitudes toward risk. Presumably different people of the same age and general size of the portfolio will nonetheless have different degrees of risk in their portfolio because of their own risk preferences. But how do you know what your risk preference is?

I recall a line from the version of A Random Walk Down Wall Street by Burton Malkiel that I read as an Assistant Professor back in the 1980s, to the effect...

...If your investments are keeping you from sleeping at night, your portfolio is too risky.

I subscribe to that point of view, though I've now reached the age where many things keep me up at night, so the test has lost some of its power. It would be nice if there was a different sort of test for a portfolio that is too safe. I don't have a cutesy story for that but I will say you really only learn about your risk aversion after having lost something. It is very hard to understand your sense of risk in prospect without having been previously burned.

On the government provision thing versus laissez-faire

1. I do have the sense that many of you are bursting on this issue. That's fine. It can serve as motivation. But I would ask please the following based on the sense of this Churchill quote.

“It has been said that democracy is the worst form of government except all the others that have been tried.”

In other words, regulation may very well have issues with it. Adam discussed the capture theory in that regard. Below I will provide some other arguments against. Laissez-Faire, however, may also have issues with it. The book discusses disreputable brokers fleecing ignorant investors. Sometimes medicine is a good thing. Other times the cure is worse than the disease. To determine which is which, you have to look at both scenarios, not just one. It's hard to do that, but it is what we should be doing in this class.

2. There is no getting around that you are students at a Public (i.e., government provided) University and that those of you who are in-state residents are also receiving a rather large subsidy on the cost of your education even as you may be paying substantial amounts in tuition and fees. There is also no doubt that the University is a heavily regulated environment operating under Federal regulations like FERPA (my sense of which is that most people view the goals of this as laudable and that mainly we should work to abide by the regulation), State of Illinois regulations like the mandatory filing of conflict of interest statements (again, sensible in my view) and the mandatory annual ethics training (which I believe to be heavy handed and largely redundant for experienced employees), and its own internal regulations like having an add and drop date for course registrations. Presumably you are here because it dominates the other alternatives that presented themselves to you. So this is one case where you seem to be voting for government provision.

3. There are many different ways to regulate economic activity. One is by altering the tax code and creating "tax preferences." For example, there is the mortgage interest deduction. Another relevant example is that income put into approved retirement vehicles can be tax deferred. Personally, I am the beneficiary of both of these. But I want to note that these incentives, irrespective of their other effects, have an income redistribution consequence where the rich are the primary beneficiaries. Richer people take out bigger mortgages so get a bigger deduction. While IRAs and 401K plans have upper limits, people of modest income might not contribute at all in the absence of tax incentive, while people of higher income will surely save some of it so the effect may merely be to move savings around to get the biggest tax benefit and not change overall saving.

On the other hand, people may view already established tax incentives as a more benign form of regulation than having a government agency regulate the activities. So in class today the argument was put as either for or against, but there may be differences in degree. Some of you might be ok with tax incentives but not OK with putting your trust in the SEC.

4. Here let's focus on some specific financial regulation. One is Deposit Insurance provided by the FDIC. For savers this guarantees their account balances when put into insured accounts. For lenders, to qualify for government insurance there is regulation on reserve requirements. These lenders must keep some assets to back up the loans. Note that the existence of this type of regulation may bias investors toward safer assets. A reason to keep your money in a bank instead of under your mattress is the deposit insurance. But you might also keep your money in the bank instead of putting it into other non-insured securities. One argument for deposit insurance is to deter bank panics. My sense is that it has been largely successful that way. Another argument for deposit insurance is to provide a baseline "safe" asset in the system. (Note that if the interest isn't indexed to inflation, these assets aren't fully safe from risk but they are safe from the default risk we discussed in class today.) I believe this to be a relatively uncontroversial regulation.

Let me turn to one where there is/was more controversy, the repeal of the Glass-Steagall Act. I should make two disclaimers here. One, I'm not an expert on Banking or Finance. Two, I thought it was wrong to repeal the act. Now back to the story. In general regulation proscribes certain behaviors. When a regulated entity (like a bank) feels overly restricted by the regulation, the natural reaction is to lobby to undo the regulation. In this case it is interesting to note that Glass-Steagall was finally done in while Clinton was President. But it was a long time in the making. My interpretation of banking is as a two pronged activity - one is pure intermediation - people save in their checking accounts, savings accounts, and CDs, and those funds are lent out for mortgages and small business loans. In aggregate the activity can be pretty safe, especially if the bank as intermediary acts as an honest cop on which loans should be made. The other prong is much more speculative lending - investment banking - primarily for providing capital to startups, which desperately need the cash but which will have a high failure rate. There is no question that investment banking provides an important function, but the reward for making these type of loans has to be large when they do pay off because of the downside risk. So it is more like equity financing, but before the startups are ready for that. Glass-Steagall kept these activities separate. Under its repeal, they were integrated.

5. I promised some other arguments against regulation or at least against further regulation. Here are three.

a) Regulations are hard to remove once they are in place, but the context may change. So even a well-conceived regulation that was appropriate when written may eventually not make sense yet it persists because there is some beneficiary from it and no general outcry against. I'd put the mortgage deduction in this category, for example. Knowing this is apt to happen, it may make sense not to regulate at the outset.

b) We're not that smart or the law of unintended consequences. The Peltzman paper we read makes this point. Intent in design is far from the same thing as consequence. Usually intent is laudable. Consequence may be much less so.

c) The political process may muck things up. The expression half a loaf is better than none simply may not be true with regard to regulation. A strong regulation or total laissez-faire may each be preferred to a weak regulation, which ends up producing the worst of both possible worlds. If true, but political compromise causes weak regulation, one can be for laissez-faire as the best possible outcome.

On an entirely different note, I feel much better now than I did this morning, where I was much better than yesterday. So I hope to engage the future teams more than I did in today's session, but even better would be to see the class do that on its own.

More on Term Paper

noreply@blogger.com (Professor Arvan) — Mon, 28 Mar 2011 07:03:00 -0500

Teams are required to produce a paper - the syllabus says between 3000 and 4000 words, which I will translate to between 6 and 10 pages, single space within paragraphs, line space between paragraphs. There are a few different goals for these papers.

One is to take points raised in the class discussion and follow up on them. In that sense this is to be an annotated record of what we did in class and then to go beyond that by reframing the issues as you see fit.

Another is to ask whether economists who are not behavioralists have discussed the issue and if so what are their points. If not economists, is there a different scholarly literature you can point to that has discussed the matter? You can also look for pieces in more popular outlets, but I first want to know about scholarly work. So here you need to do reading outside the book on the subject of your chapter. Please cite these readings and then tie in what they say to what is said in the chapter.

Finally, this is your chance to write at some length on whether you agree or disagree with the arguments in the chapter. You must give justification for your point of view. I will be quite unsympathetic to pot shots taken without reasoned argument behind it. However, if you give argument, you may endorse or take issue with the points in the chapter. I'm agnostic on which way you go with this stuff.

With these as goals you are to produce a coherent narrative. Part of the assessment of the piece is whether you do that.

I expect a draft that you send me as an email attachment which I can comment on before you submit your final version. The final version is due during Final exam week. I would like you to post that to your team blog. It will then stand as a record for the class. I will comment on it in Moodle and provide the assessment there.

The last time you can submit is Friday, May 13 at 11 AM. There are no exceptions to this deadline. I hope the deadline doesn't bind for any team.

The New Guys PowerPoint on Credit Markets

noreply@blogger.com (Professor Arvan) — Mon, 28 Mar 2011 06:20:00 -0500

Here is the link to the PowerPoint presentation for Wednesday's class session. One of the questions you should ask yourself when reading facts about cost differences in loans across different types of consumers is: what is the underlying explanation? One explanation is that this is out and out discrimination by predatory lenders. A different explanation is this is a compensating differential for increased default risk that lenders take on. (There is also a question with the latter whether it should be in the up front fees or in a spread in the interest rates borrowers get.) With that, you can ask whether a nudge is needed or not.

Could this happen in the U.S.?

noreply@blogger.com (Professor Arvan) — Mon, 28 Mar 2011 05:39:00 -0500

What would it take for self-imposed restraint at the individual level to become cool?

Post-Tsunami Japan Turns Away From Excess - NYTimes.com via kwout

Interesting "Debate" about Income Inequality

noreply@blogger.com (Professor Arvan) — Thu, 24 Mar 2011 07:13:00 -0500

The quote below is by one of the authors of a study on Americans (under) perception of income inequality. The debate, which is really a variety of perspectives on the issue, follow the release of the study. Note the relationship between issues of income inequality and the low savings rate that we have been discussing in class.

Living Beyond Your Means When You're Not Rich - Room for Debate - NYTimes.com via kwout