Mar 28, 2008

Statistics question

If x follows a Chi square with k degrees of freedom and y follows a Chi square with m degrees of freedom, can we say anything about the distributionf of x-y???

Unhappy seeds

I did not know that Bulgarians were big consumers of sunflower seeds. I came to know this by chance the other day, while discussing over breakfast with my classmate's girlfriend the other day. So I went on Internet and checked some data. Here is table of the top world producers.

The data are from wikipedia. I came to know that production originated along the Mississippi river, and were brought to Europe by the Spanish conquistadores. Ok, what's special about the seeds? Well, apparently there is some problem associated with their production.

From the graph there seems to be a quite strong association between the percentage of people reporting unhappiness according to the World Value Survey, and the per capita production of Sunflower Seeds. Why do we find such a correlation? I thought about some possible explanations.
  1. Psychological: the first person that comes to my mind when I think about sunflower is the supreme genius of Vincent Van Gogh, who managed to create masterpieces out of this flower. As we know, Van Gogh was not extremely happy, and suffered from lot of hardships in his life. But is it that unhappy people love sunflowers, or the reverse is true?
  2. Botanical: any type of crop requires one period for plantation, one period for harvesting. In the period in between people may very well get bored, and if someone from the World Value Survey (WVS) asks the peasants "are you happy?" what do you expect the answer will be? "Let's wait for the f** harvests and see if I am happy!!" But this of course, implies we should find unhappiness also for other type of crops (corn, soybean..)
  3. Nutritional: sunflower seeds are extremely healthy, because they have many different vitamins, linoleic acids, fibers..but they are also extremely caloric: 576 calories per 100 grams, and 50% fats. So you start eating and enjoying them, then you finish a whole pack while watching a movie, you realize that you have eaten 800 calories, you are still hungry, your boyfriend, girlfriend, husband, wive complains you are getting fat then the guy from the WVS comes and asks you "are you happy?" and imagine what the answer will be...
  4. Globalization: sunflower seeds do not have the same consideration everywhere. What I also learnt from my flatmate is in fact that, when english people go to Bulgaria and see they eat sunflower seeds they start laughing: "Oh, do you that? For us, that is bird-food!" How would you then feel if somebody from another part of the world starts laughing about your own favourite food?Maybe it's a reason to be pissed, but if the guy from the WVS asks you "are you happy?" then you say "no I am pissed!" then he says "no, you have to tell me if you are happy" "no I am not, I am pissed!" and then you are classified as unhappiness a good proxy for being pissed anyway?
What can we say to sum up the discussion? I don't favourite explanation would be,that this is just a statistical fluke. But if you find my arguments convincing, or have some other theory...we can share some sunflower seeds together!

Some intresting correlations

Corruption is the most annoying thing anyone has to live with. Not only is it the most important impediment to growth, it makes people completely unhappy. But it is not only because of corrupt socities in poor countries, it is also because of rich countries's companies bribe payers. So Transparency International, a think tank specialized on corruption, has this bribe payers index, to determine where these evil people are from. Here's my point, these people are just not educated. If you were educated, you wouldn't act in such a stupid way. Here's my correlation graph that, of course, doesn't mean anything. But it is not hopeless yet. It is still possible to be happy in this corrupt world. We just need the magic bullet:

Mar 27, 2008

The Economics of Sex And The Rise of ‘Pop Economics’

Hi all,

so the post below about Chilean orgies got me thinking whether there is an explanation – apart from Dany’s interesting political and sociological one – that Economics could offer for this phenomenon?

Unfortunately I didn’t really come up with anything specifically relevant to the Chilean situation, but during my research I did find some examples of how the framework of Economics has been used to analyse the broader topic of sex in general.

Firstly, I found this analysis of the ‘Economic Case For Promiscuity’ (the name of the article says it all really), which cites / is based on the work of Michael Kremer from Harvard. I also found this piece from the authors of Freakonomics. Even more curiously, I discovered an article which claims that back in the convict times (the 1800s) in my home country of Australia, female convicts apparently used sexual favours as a resource for exchange, trading these with their captors for a reduction in their punishments (so today I learnt something new about the history of my own country......). And then there is also the literature concerning the economic analysis of prostitution.

All this made me think a bit further about a broader question – is there any thing to which the economist’s toolbox can’t / shouldn’t be applied? Obviously the answer to this is going to be a matter of subjective taste, but is there a point where the whole exercise becomes a bit ridiculous / tasteless / morbid – for a prime example, I point to Becker and Posner’s work concerning the ‘Economics of Suicide’(which, for me at least, is pushing the envelope of good taste)? I mean, surely there would be other considerations (apart from your discount rate, the shape of your utility function, and balancing your expected utility from living with the expected utility to be gained from death) running through your mind when you are about to take your own life........there have to be some things in life which can't be solved as a dynamic optimisation problem.

Moreover, is there a difference between the imperialism of Economics as a field of research and the emergence of the phenomenon of ‘Pop Economics’, or is the latter simply symptomatic of the former? On the one hand I would argue that books / blogs like ‘Freakonomics’ and ‘The Undercover Economist’ have really opened up a Pandora’s box of fascinating research fields, highlighting the diversity of situations in which economic principles can be applied and used to enrich our understanding of what’s going on in the world around us. And this kind of Economics is also cool because it renders the ‘dismal science’ a little sexier, more accessible and less obtuse to the non – specialist reader. It has also been argued here that the emergence of the genre of ‘pop economics’ / ‘freakonomics’ even shows the maturity of Economics as an empirical science.

But on the other hand, is there an argument that, just like bad Britney Spears songs (apologies for the tautology) gave the pop music industry of the late 1990s a bad name, the emergence of ‘Pop Economics’ / ‘Freakonomics’ has trivialised the field of ‘serious Economics’ as a whole in the early 2000s?

Any thoughts?

Does Advanced Econometrics Have any Sex Appeal ?

Hello Everyone,

now that I have everyone's attention, I would like to bring up a topic that concerns anyone pursuing empirical research in their Ph.D. At one point or another we have all set down and wondered where the credibility of any econometric research is, given that once one goes beyond OLS it is possible to create almost any result.

While this topic is not as recent as the sub prime crises I think that it is worth discussing it a bit.
There is a very nice paper by Larry Summers : The Scientific Illusion in Empirical Macroeconomics. While the paper is from 1991, he brings up a very important point. Namely that most of the research applying very advanced econometrics does not really advance our thinking professionally. One really good example he gives is about the short run real effects of monetary policy. In a pioneering study Friedman and Schwartz show the real effects of monetary policy with a very simple narative study. In fact this really changed thinking about economics as a science, but do VARs have the same contribution?

I think it would have been good for me to have read this at the beginning of my Ph.D. rather than towards the end..... I do tend to agree with Summers that sometimes in empirical research, the method starts to dominate. I mean there are very, very many VAR studies for instance, but how many of them did actually contribute to the way we think about economics?

These days I tend to think that the best empirical papers will change the readers perception of the world. Look for instance at the original sin literature. Fantastic contribution with just OLS regressions.

An even older piece of research about econometrics and whether it is a science or not is also David Hendry's classic article: Econometrics: Alchemy or Science? from 1978 in Economica.

Enjoy and share your opinion about modern econometrics in applied research.

Mar 26, 2008

A few thoughts on Escalators, Scrambled Eggs, Bosnian Snipers and Teenage Orgies in Parks


In most places with escalators, there are standard stairs next to them. Brilliant! Why?

This is a perfect set up for looking at all sorts of strange human behavior like: Who takes stairs? How do people look at people, who don t take stairs? Some take the escalator to be faster, some do it to talk to others, to be seen, to look at girls. There is always a traffic jam at the end of the escalator, but not at the end of normal stairs etc..

NOW, recently I was standing for 30 minutes at a beautiful escalator/stairs setting at my favorite train station. In fact it was a short escalator, good German quality, but it didn’t work.

NOW again, most people are running towards the escalator, eyes on the floor, serious face, they get to the escalator, they might even take the first step and then...they stop abruptly, sigh, and turn to use the stairs instead.

Why is that?????

I challenge you - all you brilliant, imperialist, "with my optimization methods I can solve any phenomena, just tell me where can I log-linearize this planet and push into the eternal, holy steady state" -ECONOMISTS?

I offer you three sketchy explanations, far from complete:

1. Physically, stairs are easier to walk, maybe less effort. Escalators have a strange stair height and width. I think this is partially plausible. But I made my observations at a 10 meter escalator. There must be a deeper reason.

2. Emotionally, neurobiological etc. it feels awkward to walk on. We expect escalators to be moving. In fact we are very convinced about that. If they don t, our brain is irritated. Our usual automatic behavior, associations, feelings, perception of the world are mixed up. We are lost.
So instead of trying something innovative, we take the classic stairs. And that’s why there are always back up stairs next to escalators.
Note, this feeling is intensified by point 1., these standard stripe patterns and the hollow sound of escalator stairs. I can assure you. I walked up and down 30 times. It does feel peculiar 28 times. Believe me. It s a new stair experience. You really have to get used to it. By the way, for me the pure effort is only marginally higher than using normal stairs. And the greatest thing. You kind of feel drunk and shaky the first times! Try it!

3. Socially, escalators have been invented NOT to walk. In some countries and settings like shopping malls, you get a strange look, when you walk on them. This again causes a feeling of awkwardness.

A propos, I have brilliant controlled experiment to test any of these explanations. Next time at the airport, keep your eyes open for these business people conveyor belts, or endless treadmills. Make them stop and see what happens. For instance, the effort argument can be checked.

Now some serious stuff!

Scrambled Eggs

Why do people use oil, or butter to fry scrambled eggs? Instead put a table spoon of water in the really hot pan. Then do the usual scrambling. These will be your best eggs ever! Heavenly, moist texture. And guys! your girlfriends will be impressed by your fat free cooking. Don’t forget the bacon though. I think this is a real cooking revolution. I read that in some science fiction novel, which I don’t remember the title of.

I think we culturally, historically, socially associate butter and pans, not water and pans. Economically, we would save. I asked my grandparents, but even in war times they would never use water. Water, are you kidding me? It’s like butter and bread, pasta and tomatoes, Rigot and rats...classic combinations.

Bosnian Snipers

Me too, I remember landing under sniper fire in Geneva once....

What is the rationale behind Clinton lying that stupidly? Tell me, please!! Certainly she is not stupid....I can offer no explanation. My observation is that people tend to remember, what did not happen. Because what normally happens is normal. Watching all these exciting action movies and so on, you, me, and Clinton think life is too boring. Then unconsciously you integrate cool stuff, like Bosnian snipers, extraterrestrials, drug dealers, pink bunny suites and so on. It’s human, even economists do it.

An Increase of Teenage Orgies in Chile’s Parks

Salvi told me about this. I have no clue about it. This was just to attract some cheap attention.

By the way, all you macro guys: This is a perfect recipe to finally make people to read your abstracts and papers. Put a title like: "Real Wage Rigidities, Oil Shocks and Sex, Drugs and Rock n Roll in a New Keynesian Model"

Mar 24, 2008

Easterly on development

William Easterly has two new accessible articles. One in the American Economic Review, on institutions and economic development, and another one on what should a perfect aid agency be, in the refreshing Journal of Economic Perspectives. I have to admit I really enjoy reading the latter journal. As its website mention, it “attempts to fill a gap between the general interest press and most other academic economics journals”. It does this by offering “readers an accessible source for state-of-the-art economic thinking” that is easy to read.

Anyway, back to development. Institutions, as many instrumental variables have proved, cause growth and development. In other words, fix your institutions and you’ll grow. But how do you impose good institutions? Bottom-up or from the top-down? This is what Easterly tries to address (not answer, of course) in his AER paper. He concludes, as expected, that no clear answer exists. The imposition of a new set of laws by top-down shock therapy? Think of Russia and forget about it. It can indeed have nasty, destructive effects. So what about a bottom-up process, such as giving subsistence farmers land titles, as suggested by De Soto? Well, as Easterly explains, it didn’t really work in Africa, and that’s because these are of no use when there’s no rule of law. So doesn’t this mean we should start with imposing the rule of law, from the top? Oh no, I forgot, that doesn’t work.

In his other paper he complains about the poor quality data on foreign aid and about the fact that so much money goes to corrupt countries. He also complain that “aid tying, the use of food aid-in-kind, and the heavy use of technical assistance persist in many aid agencies, despite decades of complaints about these channels being ineffective”. As for which are the best agencies, he writes that “development banks tend to be closest to best practices for aid, the UN agencies perform worst along each dimension, and the bilaterals are spread out all along in between”.

To me, the UN development agencies do look incompetent. He explains why by writing mockingly: "UN announces new agency to combat excessive bureaucracy in foreign aid"

(thanks for the link Cam)

Mar 21, 2008

Bailing Out Part II

As a follow up to my previous post on 'Bailing Out', watch crazy Jim Cramer try to defend his advice on Bear Sterns:

You can see his original comments below:

The Economist Magazine this week also has some really interesting articles concerning the whole issue: here, here and here.

Bonnes Vacances!

Mar 20, 2008

The subprime primer

Still struggling to understand the (in)famous crisis that Stiglitz has described as the worse since the Great Depression? Here is a perfect illustration on how the smart guys in Wall Street and the innocent consumerists spirit are ruining everyone life:

Mar 18, 2008

Bailing Out?

Hi all,

so yesterday Krugman had a thought provoking analysis of the whole bailout / moral hazard issue involved in the subprime crisis, arguing that in the US a taxpayer funded bailout of the financial system is as good as inevitable. And it got me thinking - how can we prevent these kinds of financial meltdowns, which in the end have a huge opportunity cost borne by society as a whole, from happening in the first place?

I mean, every 10 or 20 years or so, it seems as if financial markets suffer from a collective amnesia, whereby they forget how bad things were as a result of the last crisis (e.g. the US Savings and Loans Crisis in the 1980s), and go absolutely nuts in the chase for the easy buck. This, combined with their apparent belief during these episodes that the laws of financial gravity have been suspended - that returns can only go to heaven and that the good times will roll forever - seems to be a recurring recipe for disaster.

Whose fault is it - the shonky financial analysts and brokers who recommend / trade these dodgy products? I mean, obviously not all financial analysts and brokers are wheeling and dealing, but there must be at least a 'few bad apples'. For an example of 'brilliant' financial advice, check out this gem from CNBC stock analyst Jim Cramer in relation to Bear Stearns:

.........and if you missed Cramer going crazy about Bear Sterns and the role of the Fed / Bernanke last year, you can catch it here:

Or is it the fault of policymakers, who create an environment full of perverse incentives, within which these kinds of activities are allowed to flourish? If this is the case, how can we better align incentives to reduce the opportunity for this kind of thing to occur? And surely there is also some kind of responsibility to fully disclose to consumers the insane risks involved in getting mixed up in these dicey deals, that there is a good chance that they could endup on the street when things turn bad?

Or do we simply accept that financial meltdowns are a periodic fact of life and necessary in order to shakeout the markets, episodes of 'creative destruction' a la Schumpeter?

Krugman in his article makes the obvious point that a public bailout is of course preferable than the alternative of standing idly by and watching the financial system implode. But given that prevention has to be better than the cure, surely there has to be a better way to deal with financial meltdowns than simply having the public pick up the tab at the end, when there are plenty more productive uses that the money could be put towards.

Thoughts anyone?


Mar 13, 2008

Happy Economics or which measure is right?

A good economist should always be open to new ideas and try to minimize his/her prejudice towards other economists’ argument. A sentence, that probably applies to any other discipline. To my disgrace I have to admit that when it comes to the “Economics of Happiness” I have a hard time adhering to this rule (as Pierre-Louis might recall). The general argument that supports the maximization of happiness as opposed to, say GDP, is based on the assumption that well-being derives from many factors not only income. And if the study of economics has as ultimate goal the well being of people, economic modeling/empirics should take account of other factors. The most important implication of such a line of argument is that there may be a conflict between maximizing well being and maximizing GDP (though higher GDP is found to be increasing happiness, these empirical findings do not preclude a possible conflict between the two).

My first reaction to this logic was something like this:
Happiness, to me, is a very subjective concept per se. As such, I find it extremely difficult to imagine a reasonable formalization of it that allows us to work with this concept analytically.
Being a subjective concept, I question myself how one may go about measuring happiness properly. For some people it is just a healthy and long life for others it includes things like having found the sense of life. So how am I to judge which person is happier by asking them questions and more importantly what are the policy implications, if happiness is achieved for different people in a different way?

I did not think about these issues for a while until my father, a teacher for geography, called me and asked me about the ingredients of the GDP measures we – economists - use when comparing various countries’ level of development. I gave him the “usual” explanation pointing to the importance of PPP adjusted values etc. Being unsatisfied with my answer, he asked me whether GDP values include the shadow economy. To my shame, I had no answer! Being a theoretical rather than empirical economist and certainly no statistician, I tried to excuse my non-knowledge. Nevertheless, I recalled the unprecedented increase in Greece’s GDP announced in 2006, due to the revaluation of the shadow economy (as a “side product” the budget deficit in % of GDP declined significantly). However, I was not sure whether any GDP value that we have at hand includes the shadow economy. Looking at various national measures I did not find a generally accepted way of how to incorporate shadow economy estimates.

So besides the notorious difficulties that arise through the computation of PPP weights (see the IMF for a recent revision which lead to a decrease in World growth), the question as to how the shadow economy should be a part of GDP causes another big trouble. Just consider two country’s of equal population with equal prices. Assume that our measure of GDP includes the shadow economy and country A has a GDP of 8 trillion $ and country B a GDP of 7 trillion $. In country A 2 trillion $ are generated in the shadow economy and in country B 0.5 trillion $ are generated in the shadow economy. Which country is better off? Most people would probably answer country A. Let us assume our measure does not include the shadow economy. Clearly, not knowing about the shadow economy, all of us would say that country B is better off. This is a trivial example. However, the shares of the shadow economies are not unreasonable.
The point I want to make is the following: Even when agreeing on measuring GDP only in terms of the “official” economy, we can not derive that well being as measured by purchasing power is necessarily well reflected by this measure. On the other hand, if we agree on a way of how to include the shadow economy, we have the trouble of deciding whether a unit generated in the shadow economy is worth as much as a unit generated in the “official” economy.
On top of all this, most national measures of GDP vary in the way in which the shadow economy is included in the GDP estimates.

What is the link between the talk to my father and the discussion I had with Pierre-Louis? Well, given that the comparison based on GDP is also a very shaky concept and it is hard to choose between the use of two shaky concepts, I decided to give more credit to the “Economics of Happiness” than I did so far. One might say this is a marginal change, but isn’t it all about that?


Mar 12, 2008

Krugman Paper

Hey all,

for a break from our research, check out here an (old) paper from Krugman that I recently came across. Below is the abstract of the paper:

'This paper extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer travelling with the goods than to the stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved.'



Mar 6, 2008

Let's all get inspired

Allright I'm gonna be the one that breaks the silence. I mean come on people, this has got to be an inspiration source of research motivation, not another abandoned project. So what is it? No one had anything interesting to write about? This might actually be the case. Yes indeed it is highly likely.

We were a bunch of economics students last week at the projection of Life and Debt and we were asked at the end what we thought of the situation in Jamaica and what happened there with the IMF. We had nothing to say. I have to admit I had absolutely no idea. Was it the IMF's fault? Were its structural adjustment loans a deadly weapon? We, as economics students, should have an opinion about this. I don't. I never was taught anything about this and I haven't read anything convincing either. But at the same time I think that when economics professors teach us that everybody is wrong except economists, we get scared to have false opinions, so we end up with no opinion. Y'all know what I mean?

We were then asked if it was possible that the WTO, by promoting free trade, was making the same mistake the IMF did with its conditional loans. We had no idea. I mean, if we thought free trade was good, we didn't want to say too much, probably scared of being wrong on something. The truth about free trade is that we don't know. Who wins? Who loses? Who knows? That's what empirics say, and even Krugman is back at it with a new working paper (on trade and wages in the US). Of course, trade theory has many answers but, as Markusen would say, "give me anything you want and I'll build a model to prove it" On this, read this.

Anyway, here's some things you might be interested in. In this new book, Stephen A. Marglin argues that market relationships erode community. I agree. Here's an extract.

"In the past, for example, when a farm family experienced a setback--say the barn burned down--neighbors pitched in. Now a farmer whose barn burns down turns, not to his neighbors, but to his insurance company. Insurance may be a more efficient way to organize resources than a community barn raising, but the deep social and human ties that are constitutive of community are weakened by the shift from reciprocity to market relations".

If we subtitute social capital with formal institutions aren't we gonna destroy humankind? Sometime I do believe I'm becoming stupid by applying economic theory ot my personal life dilemas...

So Tim Harford has a new book, "The logic of life". Thomas C. Schelling, 2005 Nobel Laureate in Economics liked it:"This is a terrific read. It’s one those books that forever changes the way you look at things. It proves economics is not a subject for dull textbooks; but is really a way of thinking that can shed light on all aspects of life." Apprently, it explains that racists, drug addicts, revolutionaries and rats – comply with economic logic, always taking account of future costs and benefits, even if they don’t quite realise it.

Finally, here's a preview of the unoffical t-shirts and hoodies you will be able to purchase soon.

OH! and most importantly, see you all next Monday at Bain des Paquis for the department's annual fondue dinner! Bring 30 chf cash!