Dan Ariely recently published a short op-ed in the NYT, arguing that excessive wages basically encourage laziness (gross simplification). Peter Foster of the FP responds. I thought it worthwhile to add my 2c have just written my most difficult exam this quarter (Advanced Game Theory) and feeling jubilant and like my opinion is worth something. My other reason for commenting is that I am currently three quarters of the way through Ariely's (audio) book Predictably Irrational, some of which I find interesting and to be of high quality, and other parts of which I think she would be left to the Department of Huh?

The reason I make the DoH comment is that I think that Ariely plays it a little bit loose with the ideas of parallelism and generalizability. What I mean here is that if you consider the experiment he talks about in the article, i.e. using people in India to mimic the working hours and payments of low, middle and high management is your sample in fact similar to that of the people who actually work in those jobs? I don't believe that the people who are the CEOs of the top companies in the world and who receive the inordinately high bonuses and salaries that they do are, in fact, like your average employee. I am not claiming that they are necessarily more intelligent, or that they have higher IQs, that could be the case. It could also be that they have way better social skills than anyone else you know, or that they need only to sleep four hours a night and get huge amounts of work done, or that they are simply more cut-throat, more ruthless and more savage with their opponents than your average Joe (the plumber). Consequently, getting a sample of average people and paying them more and they respond by working less than the medium and low paid people is odd, it is something that warrants its own explanation as an idea and argument separate to that made by Ariely. It cannot be extended to CEO, CFO, etc salary problems.

What do we need to understand for this? First, are CEOs paid less when they perform badly? Are they paid less when they did the same stupid thing that everyone else did? If they truly are miraculously talented people they should be able to see when other people are getting things wrong and they should have the guts, intellect and arguments to say 'X is getting Z wrong, so we should do Y instead of W.' CEO behavior should not simply be a case of bandwagon effects. What does this mean? More CEOs, especially in the US, should lose their jobs. They should not be given bonuses when their company performs, say, a standard deviation below the average. Moreover, during this period when a recession flows sweetly onwards and the ghosts of a possible depression haunts us, they should not be rewarding themselves, or even allowing their boards to reward them, when they should be doing everything they can to keep their jobs, keep the jobs of those below them and make their companies money. This is what normal salaries are for, not salaries that are more than 300 times the average are for. So yes CEOs could be paid less, but don't go making arguments about them being lazy, unintelligent or stupid. They're probably just greedy.

Two items on the agenda. First, the UK has introduced new legislation preventing 'forced' marriages. One would have thought that marriage in the UK would have had to be voluntary, but supposedly this was not the case - especially for families of Middle Eastern heritage. The question is, will this result in fewer marriages in those groups at which the legislation is targeted? Will it result in more antipathy towards the British Government from targeted groups because of them believing the legislation to be Anti-Islamist? I hope that antipathy doesn't rise as a consequence, but I can't see how it won't. I also don't see it dramatically altering the lives of many in the near future, the reason being that it would require intervention from someone who is a) aware of the rights of the partner but who is not complicit with the agreement which is unlikely, or b) the partner who is being forced into the marriage to be aware of their freedoms in the UK and to elect to abandon family, culture, etc in order to get out of the marriage. I am not convinced that this will happen as much as we might like to think it would.

Lastly, are there unintended consequences? For example, Man1, Man2 and Woman 1. Man 1 marries Woman 1 and it is a freely chosen arrangement, no forcing. Man 2 is jealous because he wanted Woman 1 and now lodges charges of forced marriage against Man 1. Will this, or permutations of this, occur? I hope not, but I am not convinced that it won't.

Note though that my personal stance is that the legislation is necessary to protect women's rights.

HT: MD.

Second item on the agenda: supposedly there have been responses by high income individuals the likes of which we might not have considered. Many who have mistresses, or even possibly high paid courtesans, are considering major cutbacks in their spending or abandoning their mistresses entirely. Anyway, what I realised was how this was all from a man's perspective. Do high paid female professionals not seek young virile men and support them with their large paychecks? One, the sample is problematic because there are probably dramatically more men in these high paid jobs because of under-representation of women in those high paid positions, as is still the case in the US. Moreover, and not to diminish the sexuality of women in any way, it would not surprise me if the demand by men, in general, for such services is probably significantly higher than it is for women. Moral of the story? High paid courtesans and mistresses (who are not paid, but who are bought gifts, have their apartments paid for, etc) are luxury goods - a shock to income reduces demand.

HT: GMB.

I didn't think it was that hifalutin, hoity-toity, nampy-pamby, academicky, nerdy... But, then again I am an economist and we regularly make bad assumptions.

Ed Glaeser, in his recent piece in the NYT, talks about how,

Hard-line economists argue that Detroit lost its way decades ago, and that government support for this industry will be worse than wasteful.

One of my courses this quarter was dedicated to decision theory and behavioral economics. Decision Theory has its roots in the axiomatisation proposed by Von Neumann and Morgenstern and is based on 'objective' probabilities, such as a fair coin flip in their Theory of Games and Economic Behavior. Savage proposed an alternative in his Foundations of Statistics that incorporated the notion of subjective probabilities based on individuals having their own perception of the likelihood of events. Anscombe and Aumann later synthesised these two theories to devise a theory that included both subjective and objective probabilities. Nevertheless, the goal for all of this the Expected Utilty Representation of a Utility Function, i.e. representing a utility such that it can be decomposed into the probability of obtaining specific utility amounts and that this can be done in an additively separable manner (this is less complex than it sounds).

However, the problem is that humans often don't behave consistent with the axioms of Von Neumann and Morgenstern, Savage, or Anscombe and Aumann. Allais showed this in his 1952 paper. Kahneman and Tversky (K&T), two psychologists who shifted into economic choice theory, also did work on this in 1979 and subsequently. Previously, I had 'studied' their theory, called 'prospect theory' previously from textbooks, but had not read their original 1979 paper. It is part of our compulsory reading list for this course and so I recently read it. K&T used many surveys to try to come up with an idea of how people responded to risk, to uncertainty over outcomes. In orthodox economic theory an amount of money should be 'state neutral', i.e. you should treat 500 currency units (CUs) in the same manner regardless of whether you are going to gain that money or lose it. However, their evidence indicates that people treat losses and gains differently. People are 'risk-averse' over gains, but 'risk-loving' over losses. I will go over this in a moment.

Take the following example. You are given the choice between R450 for certain or a lottery which involves a 50% chance of winning R1000 and a 50% of getting nothing. The expected value of the lottery (the sum of the probability multiplied by the amount to be won) is R500, which is strictly greater than R450. A 'rational' person should therefore choose the lottery. However, people seem to prefer the situation in which they gain the money for certain. People are therefore 'risk-averse' over gains.

Now take another example. You are offered the following choice. You either lose R3000 for certain, or you face a lottery in which you lose R4000 with 80% probability or lose nothing, R0, with probability 20%. The expected loss of the lottery is R3200. A 'rational' person would thus choose the certain loss. However, empirically, people choose the second option in which they face a lottery rather than the certain loss. People are therefore 'risk-loving' over losses.

These conclusions are in direct conflict with orthodox decision theory. Now, I think that VNM, Savage and A&A provide graceful mathematical depictions of potential behavior. However, they postulate humans with decision capabilities and computational abilities the likes of which I believe are truly miraculous. Savage, for example, talks about being able to partition sets of events into smaller sets of equiprobable events in order for them to be able to rank different sets of events, this would require a super-machine, or a person who is entirely unlike me in their decision capabilities.

K&T's theories should also be seen as largely descriptive. They have taken data and constructed a model that would represent behavior that is consistent with the behave that they observe when people make decisions. This area of decision theory has seen several developments in recent times with Gilboa being the champion of its development, I don't know if I can comprehend Gilboa's math, but hey I'll try and I'll let you know one day... For now it's good to know though that economic theory is doing its best to construct models that use assumptions that are closer to the actual behavior of people, rather than abstract and incorrect postulates of (in)human conduct.

I thought I'd mention briefly some of the reasons I decided against playing rugby here in Italy. First, I thought that I was misunderstanding the political positions and locations of certain individuals because of poor Italian. I also misunderstood several other things, which I will mention in a moment. Initially I stopped playing because I was injured and I had too much work with the PhD. Later, I decided not to return because of politics and racism. Oh well...

This all became even clearer for me recently when a Roman friend of mine described his experiences playing rugby. He'd played a bit as a kid when in Brussels and decided to take it up in Rome, he told me how the players tell one another, when in a ruck or scrum when trying to obtain the ball to 'Caccia il negro', which translates literally as 'hunt the nigger', in fact the ball is often just referred to as 'il negro'. I recalled my own teammates saying this but I didn't understand at that point in time because my Italian was barely sufficient to say my name, let along understood colloquial racist slurs.

On top of this, the beliefs South Africans have about 'right wing' Afrikaners and Rugby is nothing compared to the fascists I met when playing rugby, and the fascist tendencies that my friend described to me of the team he tried to play with (and subsequently left). Absolute belief that Mussolini was dead right, swastika tattoos, immigrant haters (though they don't mind blonde, white English or US immigrants) and more. Crazy times.

Anyway, so if you thought SA had problems with racism and rugby, or politics and rugby, think again. Yes, it is occasionally bad in SA, but at least you don't hear about South African Afrikaans teams saying 'hunt the k***'. Ah... Europe.

Take a look at this post by Daniel Hamermesh at the Freakonomics Blog. The second comment, by a lady named Rachel argues for the introduction of material incentives, i.e. payment, for sperm in the UK. Such incentives are already in place in the US and, as far as I know, involve drug screening and, obviously, screening for STDs.

Another comment, further down the page mirrors the comment that I made earlier in reference to payment for organs and the Tittmus problem. As a consequence of introducing payments for blood altruists were crowded out and drug users tried to use the system to get money. After several blunders this was corrected for and donors went through stricter screening procedures.

Anyway, the point is that I think that probably, in the case of sperm where there is a clause that allows the child to find out the identity of their donor-parent when they are 18 (a historical anonymity clause was repealed) they system could allow for improvements in the number of individuals who donate, assuming that the Titmuss related altruists are not crowded out by the introduction of material incentives and that the screening protocols result in no addicts and STD carriers donating sperm.

One of the other commenters noted how sperm donations have gone up regardless of the introduction of the new clause. I would not claim the new clause was causative in any way. However, there are still several thousand people who fall short of getting sperm for their babes. Crazy times.

Would I consider donating sperm? I don't know. I'd have to ask my wife's opinion on the potential of having a child with my genetic material whom I had not conceived with her potentially arriving on the scene in 18 or so years time. Might material incentives help? Well, it depends on how big they are? Also, do they just want sperm, or do they want high quality nerdy sperm (if I may be so bold, lol)? If so then maybe I should donate. Still unresolved though. It's those little touches of altruism...

Obviously one of the things I was assuming in my first post was that material incentives (money) will result in increased supply of organs by individuals. This may be an incorrect assumption.

For example, Richard Titmuss did research on blood donations in the UK and showed that the introduction of payments reduced donations, i.e. overall supply. Which means that the mechanism to be implemented needs to have a nuanced design such that it does not crowd-out donations that are already occurring because of altruism. Instead it should, somehow, maintain these altruistic incentives while also allowing those who would be positively incentivised to donate because of material incentives to enter into the market.

I am not sure how to do this as of yet. But I still think it is something to which we should aspire. Far too many people are dying and, until we can artificially construct new organs (one day...), offering material incentives is one option that just has not been explored. There are many ways to offer payments if you are worried about it being callous, and I believe it can be done in a way that allows for longer life for those who want it and increases in welfare for those who needed the money in the first place.

Another article to look at on the problem of the introduction of material incentives is Sam Bowles' recent article, on which I blogged here.

We have a voluntary extra-curricular reading group here at Siena organise by one of the young assistant professors, Giulio Zanella. The idea is that we should each present a paper approximately once every couple of months, while ensuring that we read the papers that others present. We generally present for about 1-1 1/2 hours and then try to chat about the paper for the 30 minutes following that.

Anyway, this past Tuesday I presented a recent paper by Ernst Fehr and Lorenz Goette, "Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment." There are two purposes to the paper:

1. to demonstrate that there is a negative effort response to an increase in wage rates, even though there is an overall increase in wage supply
2. to explain that the loss-averse workers among those in the sample of experimental subjects are those whose actions resulted in the negative wage-effort relationship.