Monthly Archives: October 2015

Feeling like you’re an expert can make you closed-minded

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I just came across this article on Research Digest which explores the relationship between expertise and closed-mindedness.  It is definitely worth a read but it got me thinking about decision making.

The article expresses that there could indeed be a strong link between people who feel that they are experts in a field and the dogmatism they provide.  A recent study in the Journal of Experimental Social Psychology published the findings.

So my first thought was does this occur in economics or finance?  We assume that agents are experts in things like ranking their own choices for utility.  Do these dogmatic feelings carry over to here?  I’m sure they do to some degree.  And if this is the case, how does an economist model this behavior?

We use habit persistent utility functions, but what about misidentified preferences?  Generally, our assumptions on preferences require them to be complete, reflexive, and transitive.  This last assumption should hold for “rational” individuals.  It would be interesting to include the dogmatic behavior of agents to see if any tractable results rise to the surface.

A more macro view of this behavior would be to see how individuals in the finance sector absorb information.  Does expertise breed closed-mindedness in this arena?  My intuition says yes.  I believe that there is some persistence to beliefs rooted in some dogma surrounding each institution.  Again, It would be interesting to see how, if at all, this could be measured through econometrics.

Cognitive Biases

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This infographic has been floating around for the past few months.  It explains common cognitive biases that push decision makers away from rationality.

In my MBA classes, we often debate the idea of rationality when agents make decisions.  Students still believe that ideas such as the efficient market hypothesis still exist, even though there is clear evidence contradicting the idea that rationality is an empirically sound assumption.

What I like about this chart is that students should be able to clearly see where their own biases reside.  I find myself struggling to always overcome these biases even though I should know better when making decisions, and I assume students are share that sentiment.

What I wish this chart did was include some of the recent econometric advancements which contribute to irrationality so that students can see how to model deviations from rationality.

 

Uber and its surge in market share

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In my MBA class we discussed at length the advantages and disadvantages for Uber being a First Mover (or Second Mover to taxis) in the ride share market.

The economics section of fivethirtyeight recently posted an article detailing Uber’s fight for market share in Manhattan.

Some of the takeaways from the article are that:

  • The net change in NYC pickups has remained relatively unchanged over the past year, indicating that Uber is eroding the market share of yellow cabs in NYC
  • What is striking is that Uber is aggressively picking up market share in Manhattan, essentially replacing the loss in yellow cab pickups to the tune of 4 million rides
  • Uber is adding rides to just about every borough of NYC they have increased the number of rides from 2 million 2014 (from April to June) to 8 million in 2015 (from April to June)

To say this is impressive is an understatement.

My students correctly predicted many of the pitfalls faced by the first mover (second to taxis) in the ride sharing market, but their optimism wasn’t as robust.

The Job Outlook is Grim. Everywhere.

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In a recent article from BloombergBusiness, we get a very sobering view on what the job outlook is like for young people around the globe.

Here are some draw dropping facts:

  • People aged 15-29 are twice as likely to be unemployed as adults, ACROSS REGIONS OR CONTINENTS
  • The world will need to create 600 million (yes, million) new jobs just so the situation doesn’t get worse
  • The youth unemployment rate is projected to be 13.1% in 2015 compared to just 4.5% for adults

So why are we seeing such staggering numbers of unemployed youths?  Employers are citing that the necessary skills to engage in everyday business are not being developed.  Again this is GLOBAL problem.

There are many reasons why this is a very real concern for all governments and this article summarizes the most dire,

“Social costs are ever mounting as well,” the report said, citing youth-led uprisings in many Arab countries and the rise of economic insurgency and youth extremism. “What we see is a generation in economic crisis.”

Along with climate change and water rights issues, the global youth unemployment crisis should be a priority for policy makers.

It’s all about who you know

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The Washington Post recently posted an article describing what your neighbor knows rather than what you know.

A quick puzzle to tell whether you know what people are thinking

Their example requires you to observe a fictional town and the connections between the population.  What becomes apparent is that popular opinion may be biased in some way.  The network in this example shows that the majority believe their the minority.  This is a very real perception that many people in our society posit.

I think that the article said it best when they state that: “our sliver of local knowledge, can lead us to the false conclusion.”

This article speaks to how agents make decisions in the economy and this is very far from the idea of rational expectations.  Behavioral economics is beginning to explore these deviations from traditional methodology and with articles such as this, I believe that even macroeconomics will benefit from the change.

Incentivising your work-staff: a case study

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Although this article from Fortune was published over the summer it highlights an important economic concept: incentives.

No tipping policy

The “no tipping policy” introduced by Bar Macro institutes a new incentive structure for the staff by providing profit sharing, health care, stable wages, vacation days, etc…

The immediate effect was an increase in revenue of 26% and decline in costs of 8%

Is this really a surprise though?  We teach our MBA students that efficiency wages, profit sharing, and fringe benefits are important motivators for workers.  It cuts down on turnover, shirking, and general inefficiency.

So is this model sustainable in the food service industry?  I would argue that it is but only for certain restaurants.  Since, tipping is generally an ineffective method of judging service it would take an owner dedicated to their customers and employees to institute such a policy.