Category: Behavioural Econ

Do you see Obama as Black or White?

[Tirta Susilo is a PhD student in psychology, and a co-author of mine on a recent study, published in (appropriately enough) the Journal of Economic Psychology. Tirta has written a guest-post on some fascinating new research about skin colour and politics.]

Earlier this year Andrew Leigh and I observed that skin colour can predict vote share: in a Northern Territory election, darker-skinned candidates won more votes in predominantly darker-skinned electorates, while lighter-skinned candidates fared better in predominantly lighter-skinned electorates. Our finding argues that, in the absence of complete political information, voters might use skin colour to help them cast the ballot.

But how do voters actually perceive skin colour? Is voters’ perception of skin colour veridical? Or do political leaning biased voters’ perception of skin colour in a systematic way? This question was recently examined in a study by psychologists Eugene Caruso, Nicole Mead, and Emily Balcetis.

Continue reading “Do you see Obama as Black or White?”

Conversation with Ariel Kalil

Ariel Kalil is a Professor of Public Policy at the Harris School, University of Chicago. She is a developmental psychologist by training, and her work links developmental psychology with economics, e.g., the effect of parental job loss on child development. I had a conversation with Ariel about her work and thought it would be of great interest to our readers.

Kwang: Congrats on the NY Times feature last week. Not many social scientists make it to the front page. How do you feel about that?

Ariel: It was very exciting! It was fun having friends e-mail to tell me they’d read the article on their train ride that morning. What I was especially happy about was that the reporter got the story right. He was a very curious and thorough guy, and we spent a lot of time on the phone and exchanging e-mails over the past few weeks. He read all of my original papers carefully, and came up with some very good questions for me. And the families that he interviewed had stories to offer that really illuminated some of the quantitative findings from my work.

Kwang: Tell me a little more about your work. What are main themes you’ve researched and what motivates you to pursue these questions?

Ariel: I’m interested in how socio-economic conditions are associated with families’ well-being and children’s development. So, I’m interested in parents’ mental health and their interactions with one another and their children, and I’m interested in children’s behavior and academic performance. In many instances, there is a link between, say, family income or families’ employment experiences and these outcomes. I care, as all economists do, about whether these links are causal. But, in thinking more like a developmental psychologist, I am also interested in “getting inside the black box” to understand why these links exist, and what kinds of individual differences shape how strong these links are for different types of children and families. I’ve always been interested in applying social science to real world problems. The idea that my work might someday shape public policy that could help improve the lives of families and children is very motivating!

Kwang: In the paper featured last week by the NY Times, you show that young people are badly affected when their parents lose their jobs, and that this is true in single parent and dual parent families [paper]. Could you tell us more about these effects and what you think drives the differences between single mothers and dual-parent families? Between male and female parents becoming unemployed?

Ariel: I think there are likely different factors at play for single parent vs. dual-parent households when jobs are lost. First, these families look a lot different from one another in terms of a whole set of demographic characteristics. So, in some sense, it’s a bit difficult to compare the two kinds of families. One of the biggest and most obvious differences is that when a single mother loses a job, the family has typically lost its only breadwinner. These families are likely to already be strained economically, and to have few (if any) people in their set of friends and relatives who can help them out. In many cases, a job loss sets off a cascade of adverse events that can be hard to stop, such as getting evicted or having to move in with others to save housing expenses, and this might disrupt child care arrangements or where kids go to school, and so on. There is just a lot more instability in these families related to the families’ economic circumstances.

In dual-parent families, I think the situation is a little different, and, at least in the short term, I think the impact on well-being and child outcomes has less to do with the economic impact of the job loss than the psychological one; for instance, in the way that parents relate to one another and to their children. For example, most dual-parent families have two earners, and so the family hasn’t lost all of its income at once. And many of these families also have some resources they can draw on, either savings or help from other family members. The immediate economic threat may not be quite as great. Also, in the families from whom I’ve collected data, I’ve found that parents will typically try to cut back on other things before they cut back on spending for their children, so the kids are often spared disruptions in their daily lives. In these families I think the adverse impacts that we see have a lot more to do with stress and anxiety, which we know can be very damaging to family relationships and ultimately to children’s development. And I think a big factor in the current recession is how long it’s taking people to find new jobs. The number of “long-term unemployed” is at an all-time high, and parents are very worried. We may eventually see more of these families exhausting their savings, losing their homes and encountering the same kinds of hardships that single-parent families have been more likely to face.

The different impact when fathers and mothers lose jobs is a really interesting one. In our work, we have consistently found that the negative impact of fathers’ job losses is greater. And this is not simply because fathers’ earnings losses are greater than mothers’ (in fact, in the US, in 40% of dual-earner households women are the primary earners). This is an interesting puzzle that I’d like to try to figure out; unfortunately the data are not readily available on this particular issue!

First, I think that “stereotypical” gender roles are still alive and well in many families and that the idea of being the “breadwinner” is still very important to many men and that is may be a bigger psychological blow to them when they lose their job. Second, working women occupy a variety of roles – we see in time use data that women still do the lion’s share of caring for children and tasks around the house (cooking, cleaning, etc), even when they are employed full-time. It turns out that working mothers cut back on their sleep and leisure time to do all of these things. So it may be that during periods of unemployment these women spend their time at home more effectively than a similarly unemployed man – because they were already occupying those roles anyway. Also, in the families from whom I’ve collected data, there seems to be more strife over figuring out what fathers’ “roles” are going to be during a period of unemployment. Many fathers viewed spending 40 hours per week in an outplacement office or a networking group searching for a new job as a full-time job, whereas many of their working wives thought they could usefully be spending more of that time helping out around the house or with the children. And that created a lot of conflict, which I think is rooted at least in part in “societal” or individual views about how the responsibilities of running a family should be divided between mothers and fathers.

Continue reading “Conversation with Ariel Kalil”

Genetic testing and insurance

Genetic testing and knowledge of predisposition does not impact on your ability to get health insurance coverage in Australia. However, it might impact on getting life and disability insurance or in renewing sickness and accident insurance. In a paper published in the Medical Journal of Australia, researchers noted that when those offered tests for genetic predisposition to bowel cancer were told of the potential insurance implications, the number taking up those tests dropped significantly (perhaps as high as 50 percent reduction). This has implications for the incentive to utilise such tests and then to have preventative treatment. Here is a video explanation.

Personally, I think that the sample size is small (although the results are significant) and this wasn’t a randomised trial so something might have changed. Also, since it is getting new policies that are relevant it would be interesting to ask patients if they had policies or not as a critical control. After all, if I was told of this, I’d get a policy and then get the test — that is, for the policies I wanted where it was not alterable on renewal.

Fallacy watch

One fallacy that often emerges goes like this: agents aren’t rational all of the time, therefore, any analysis based on them being rational is wrong. It is a fallacy because a lack of rationality is actually highly circumstances-dependent and so finding an instance of it does not translate generally. For instance, Sunstein and Thaler’s ‘Nudge’ suggests that there are circumstances in which small changes can matter alot. But they are cautious to emphasis that this does not necessarily happen when a decision has large immediate financial impacts for someone.

[DDET Read more]

Today Ross Gittins commits this fallacy in arguing for stamp duty on home transactions. The traditional economic wisdom is that such taxes which are non-trivial sum of money in many states, reduce buyers’ willingness to pay for property and so reduce the number of transactions at any given point of time. How much? That is an empirical matter and from what I can gather then effects are real.

The trouble with this advice, however, is that like all neoclassical analysis, it’s based on an erroneous model of human behaviour that assumes the choices we make are always carefully calculated to maximise our material wellbeing.

For the past 20 or 30 years, behavioural economists have been pointing out to conventional economists all the flaws in their assumption that people are always rational, but this seems to have had zero impact on the happy analysis of the tax economists.

There is so much to deal with here it is not funny. First of all, zero influence? Starting with Sunstein and Thaler onwards it seems that tax is one of the major areas where behavioural economics has mattered. Think about this example for one. Second, Gittins argues that because people are spending so much money they don’t care about the tax. I don’t know where the evidence for this is but consider the sales strategy for new properties ‘off the plan to avoid stamp duty.’ That works because people care. Third, just because a land tax is politically unacceptable does not mean stamp duty is good and efficient even if it is a nice little earner for state governments.

Fourth, just because stamp duty might matter does not mean that anyone thinks it is the most important thing for every circumstance. So this statement really misses the mark.

Similarly, only an economist would be stupid enough to imagine conveyancing duty is a significant factor in explaining an executive’s reluctance to uproot their spouse and school-age children and move them to another capital city.

And, finally, in a similar fashion, no one is talking about encouraging mobility the only issue is not discouraging it. Ross Gittins seems to believe that it is not possible to move back to your social network but only away from them. Taxes may well discourage the former while preventing the latter. Which is socially beneficial depends on your perspective.

When it comes down to it, there is no evidence that behavioural economics as a clear and formal theory translates into housing markets through this route. Gittins cites no study or theory that suggests this to be the case only a bunch of unrelated stuff and ranting out economists. Indeed, it is precisely the blind application of general theory that behavioural economists are so against and so Gittins commits these same sins in spades.

[/DDET]

Germany’s New Year Birth Event 2007

On the 1st January, 2007, Germany made a significant change to the payments it made upon the birth of a child. Prior to that, they had a means tested payment of between 5,400 and 7,200 Euros paid over 12-24 months. After that date, a payment of 67% of the mother’s pay would be made for 12 months with additional bits if the father took time off too. Of course, it was capped and so the payment was between 300 and 1800 Euros per month for 12 months. Some would actually lose under the scheme but working mothers, especially those in higher paid jobs, would gain.

So there likely existed families who would gain 25,200 Euros if they had a child in the January rather than December. Not surprisingly, German news reported lots of attempts to delay births in the last week of 2006. This is, of course, familiar to Australians where similar things occurred for just a $3,000 marginal payment. Now, the hard data is in and a new paper by Marcus Tamm looks at it using the same methodology as I did with Andrew Leigh.

He finds that about 8 percent of births were shifted as a result of the policy change and he has more data on the characteristics of the babies and mothers and so could observe shifts of 13 percent for working mothers. Interestingly, that is less than the 16% shift we observed in Australia but the policy change and its application were far more transparent. In addition, the German payment varies with time off work, etc., so while for some the benefits would be salient that isn’t otherwise the case. Nonetheless, as in the Australian case, there is statistical evidence that some births were delayed over 2 weeks from mid-December.

More interesting are the findings on health outcomes. Tamm confirms that birth delay appears to cause higher birth weight just as it did in Australia. But he also examined the impact on the probability of still births (something we could not do due to a lack of sufficient data). The proportion of still births in the first week of January were 50 percent lower than expected (a statistically significant result). So delay was associated with an improved health outcome on that front. I expect that the numbers on still births are pretty low but this was enough for Tamm to report it but the mechanism for this is unclear and let’s face it, controversial as the whole thing here was a deviation from ordinary medical practice. This confirms what I have long suspected that, whatever else these policy timing issues might be, they are an opportunity to study what happens to health outcomes in the face of non-medical variation in timing and in this case, duration of pregnancy.

What if taxpayers don’t know everything?

(Crossposted at Andrew Leigh)

One of the most interesting fields in public economics these days is behavioural public finance, which starts from the idea that maybe (just maybe) our standard assumption that every taxpayer has perfect information about the tax system is a little overstated. If true, it suggests that perhaps we can induce behavioural changes not by changing policy parameters, but by changing the information available to people. Here’s a clever example:

Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients
Raj Chetty and Emmanuel Saez
This paper tests whether providing information about the Earned Income Tax Credit (EITC) affects EITC recipients’ labor supply and earnings decisions. We conducted a randomized experiment with 43,000 EITC recipients at H&R Block in which tax preparers gave simple, personalized information about the EITC schedule to half of their clients. Tracking subsequent earnings, we find substantial heterogeneity in treatment effects across the 1,461 tax professionals who assisted the clients involved in the experiment. Half of the tax professionals, whom we term "compliers", induce treated clients to increase their EITC refunds by choosing an earnings level closer to the peak of the EITC schedule. Clients treated by complying tax professionals are 10% less likely to have very low incomes than control group clients. The remaining tax preparers generate insignificant changes in EITC amounts but increase the probability that their clients have incomes high enough to reach the phase-out region. Treatment effects are larger for the self-employed, but are also substantial among wage earners, suggesting that information provision induced real labor supply responses. When compared with other policy instruments, information has large effects: complying tax preparers generate the same labor supply response along the intensive margin as a 33% expansion of the EITC program, while non-complying tax preparers induce the same response as a 5% tax rate cut.

Behavioural public finance has surely got to be important when it comes to the byzantine Australian tax-transfer system. However, I’m not sure how well it sits with the idea that tax experts need to spend more time listening to the wisdom of practical people.

Business Confidence

One of the better known surveys of business confidence is NAB Business Confidence index which is part of their monthly business survey. I have a few gripes about how it is used and reported and an interesting observation about how you should respond if you are ever surveyed.

Continue reading “Business Confidence”

Working with procrastinators

Recently, I have begun work on a new paper entitled “Procrastination in Teams.” The idea is to take a behavioural economics model of procrastination and work out what happens when procrastinators are matched with non-procrastinators. Continue reading “Working with procrastinators”

Means testing the baby bonus

I had vowed to not say another word on the baby bonus but the renewed speculation that something might be done has drawn me out. The talk now is of means testing it. As Andrew Leigh notes, this would have to be done with plenty of care but nonetheless would be a good step forward.

So let me recount how this might be done.

(ii) the government moves the bonus as a tax rebate rather than a straight out payment.

(iii) then the government puts a gradient on the baby bonus based on income level reducing it to $3,000 for the highest income earners (on the same basis as other child-based payouts) with a straight line based on income back to $4,000 for those paying no tax;

(iv) then, from 1st July, 2009, it starts reducing the income threshold.

Money yada yada yada happiness

Everyone these days seems to be talking about happiness but no one seems to know what to do about it. The big hope has always been that we could buy happiness with money. But, for many years, it seemed that you couldn’t do that and instead you could buy yourself more happiness than others; the so-called Easterlin paradox. Today, however, are reports on a new paper by Betsey Stevenson and Justin Wolfers that those finds may have been wrong and that more recent data — that looks like it is also more solid data — suggests that money is all it is cracked up to be. (Don’t want to read, here is the video).

This graphic tells it all. But it is really only confirming what Tim and Debbie were telling us 20 years ago (as mentioned in a previous post).

Debbie: What’s wrong is that you don’t realize that it’s not you that’s, um, destitute, right. It’s the so-called “haves” of this world who are destitute.
Tim: I know.
Debbie: Spiritually destitute. Right. While someone such as you who has a really secure position in the unemployment industry, right, um, should view your dole cheque, right, not as a source of social insecurity, but as a ticket to spiritual awareness.
Tim: I do, I do, I do.
Debbie: Like, I really feel, um, I really feel sorry for the so-called haves, with their jacuzis, and their inground swimming pools, and their Doncaster mansions, um, their Mercs and their Porsches, their Christian Diors and their Christian Barnards. Like, are they really happy. Like, I ask you, are they really happy?
Tim: Well they look pretty happy to me Debbie. Like, the other day, right, like I saw this amazing guy in a Mercedes-Benz type situation, right. And he had this amazing glamorous blond model-type person in the Mercedes-Benz situation, and they were towing a yacht, and they both looked really happy.

Here is the link to the site which includes a video of that part.

My personal view is that the problem with happiness surveys is that people may not be too good at evaluating their own happiness and perhaps they should be asked about the happiness of people they know.

[Update: At Game Theorist, “Children yada yada yada happiness”]