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Economist's View: Microcredit: "Microcredit

As noted in email I've received and in comments, I have been negligent in not yet acknowledging this year's Nobel prize winner, Bangladeshi economist Muhammad Yunus, for his work on microcredit through the Grameen Bank. Here are some passages from a New Times article followed by a commentary by Hal Varian explaining the economics underlying microcredit arrangements (thanks anne):

Peace Prize to Pioneer of Loans to Poor No Bank Would Touch, by Celia W. Dugger, NY Times: A Bangladeshi economist, Muhammad Yunus, and the bank he founded 30 years ago won the Nobel Peace Prize yesterday for pioneering work in giving tiny loans to millions of poor people no commercial bank would touch — destitute widows and abandoned wives, landless laborers and rickshaw drivers, sweepers and beggars.

The Nobel Committee praised Mr. Yunus, 66, and the Grameen Bank for making microcredit ... a practical solution to combating rural poverty in Bangladesh and inspiring similar schemes across the developing world.

“Microcredit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions,” the committee said in announcing the prize."

The New Yorker: PRINTABLES: "




MIND GAMES
by JOHN CASSIDY
What neuroeconomics tells us about money and the brain.
Issue of 2006-09-18
Posted 2006-09-11

Like many people who have accumulated some savings, I invest in the stock market. Most of my retirement money is invested in mutual funds, but now and again I also buy individual stocks. My holdings include the oil company Royal Dutch Shell, the drug company GlaxoSmithKline, and the phone company British Telecommunication. I like to think that I picked these stocks because I can discern value where others can’t, but my record hardly backs this up. I invested in BT in 2001, shortly after the Nasdaq crashed, when the stock had already fallen substantially, only to watch it slide another fifty per cent. I should have sold out, but I held on, hoping for a rebound. Five years later, the stock is trading well below the price I paid for it, and I still own it.

I sometimes wonder what goes on in my head when I make stupid investment decisions. A few weeks ago, I had a chance to find out, when I took part in an experiment at New York University’s Center for Brain Imaging, in a building off Washington Square Park. In the lobby, I met Peter Sokol-Hessner, a twenty-four-year-old graduate student, who escorted me to a control room full of computers. Sokol-Hessner is completing a doctorate in psychology, but he is currently working on a research project in the emerging field of neuroeconomics, which uses state-of-the-art imaging technology to explore the neural bases of economic decision-making.

Sokol-Hessner is particularly interested in “loss aversion,” which is what I was suffering from when I refused to sell my BT stock. During the past decade or so, economists have devised a series of experiments to demonstrate just how much we dislike losing money. If you present people with an even chance of winning a hundred and fifty dollars or losing a hundred dollars, most refuse the gamble, even though it is to their advantage to accept it: if you multiply the odds of winning—fifty per cent—times a hundred and fifty dollars, minus the odds of losing—also fifty per cent—times a hundred dollars, you end up with a gain of twenty-five dollars. If you accepted this bet ten times in a row, you could expect to gain two hundred and fifty dollars. But, when people are presented with it once, a prospective return of a hundred and fifty dollars isn’t enough to compensate them for a possible loss of a hundred dollars. In fact, most people won’t accept the gamble unless the winning stake is raised to two hundred dollars."

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Aplia Econ Blog: News for Economics Students: Neuroeconomics: The Role of the Brain in Economic Decision-Making…or Why We Sometimes Make Stupid Decisions

I recently purchased tickets for a Jack Johnson concert. I’m a big fan of Jack Johnson and I was excited to get a chance to hear him live. On the night of the concert I hopped on the local train and arrived at the venue with plenty of time to spare. When the attendant asked for my tickets, I reached into my pocket and realized with horror that the tickets were gone. I searched everywhere, but to no avail. When the attendant asked me if I’d like to buy another two tickets I was offended. Why would I purchase another set of tickets? I had already paid for the initial set. I left the concert and rode the train home despondent at not seeing my favorite artist.

Economists would call this an irrational decision. Since I had already lost the tickets and could afford to pay for a replacement pair, I should have ignored the sunk costs of the old tickets and seen the concert anyway. But because I was upset about the loss of the tickets, I was unwilling to pay for the concert.

A recent article in The New Yorker by John Cassidy examines the emerging field of neuroeconomics, which examines what happens in your brain when you are faced with different types of economic decisions.

Neuroeconomists believe that different parts of the brain are responsible for different types of decision-making. When presented with enough information, the higher functioning areas of the brain take over and allow you to make rational decisions. However, when presented with too little information, lower brain functions take over leading to emotional or impulsive decisions rather than rational ones.

What does this have to do with economics? Economists have long argued that we can make economic trends or predictions because people ultimately act in rational ways when it comes to economic decisions. However, we may act irrationally in cases where we do not have enough information or in cases where there is a strong emotional component to our decision.

One example Cassidy sites is immediate gratification versus long-term gain. We all know that giving up those little impulse buys and socking that money away instead will ultimately yield a sizeable nest egg in years to come. But that is not what most people actually do. In fact, Cassidy’s article states that “half of all families end their working lives with almost no financial assets.” This would seem to fly in the face of rational economic behavior.

In fact, when researchers used Magnetic Resonance Imaging (MRI) machines to scan the brains of people making economic decisions, it became clear that the prefrontal cortex, which is responsible for higher brain functions like rational decision-making processes, was more active during some types of decisions; conversely, lower portions of the brain were active in other, more emotional types of decisions.

1. Marketing is another field that is very interested in the brain’s decision-making ability. What causes us to make impulsive or emotional decisions? Why do we decide to buy that expensive new gadget when the less expensive one would clearly do the job?

2. Behavioral economists have argued over the past few decades that psychological factors should be incorporated into economic models. Do you think neuroeconomic analysis is a complementary approach to understanding human behavior, or at odds with the behavioral approach?

3. Economists have long struggled with the notion of a "utility function." Does measuring utility neurologically make sense? Do you think that with neurological analysis we can actually find out what people's utility functions are? Why or why not?

IT Conversations: Yochai Benkler

The networked economy is transforming the way we capitalize business and culture. Yochai Benkler, one of the top thinkers on commons-based approaches to managing resources, weaves together several fascinating threads to argue that decentralization and collaboration are shifting the balance of power to the people in the production of knowledge, goods and services. As new motivational structures and behaviors evolve, an economy in which resources are not owned and outputs are shared is becoming a revolutionary source of new value.

The SETI@home project is one familiar example of a distributed network of volunteers sharing extra cycles to accomplish a common goal. Surprisingly, the combined processing power of SETI also represents the fastest supercomputer we have today. Benkler expands on this paradigm to explore how millions of connected humans now form an abundant, distributed network of processing, bandwidth, storage and brain power that can be combined for common purposes in a 'decentralized, non-market' model. Peer production is bringing many tasks that used to live on the periphery into the core of advanced economies. NASA image mapping, Apache, Wikipedia, Skype and other open, peer-to-peer examples show that volunteers working without the usual sense of ownership can out-perform traditional, firm-based methods.

The shift to commons based peer production can create tensions with institutions and industries built on centralized, high capitalization methods. Hollywood and the recording industries often seek to regulate in favor of incumbent business models which see the person at the end of the supply chain as a passive consumer. This relationship can be reworked when individuals band together for collective action as consumers and citizens. Benkler closes with thoughts on political activism in the blogosphere which shows another powerful way the economy of participation can organize the commons to promote transparency, justice and freedom.

This talk was from the Participation Revolution session at Pop!Tech. The other speakers in this session were Nicholas Negroponte and Bart Decrem. The question and answer period can be heard at the end of Bart Decrem's talk.

Most “economists” aren’t: "

I’ve always thought that an economist is someone who understands opportunity cost. If there is one thing a first-year undergraduate economics course should teach, it’s an understanding of this concept. So it’s alarming to discover that most members of a sample drawn from participants in the profession’s most important conference are not, at least by my definition, economists.
Via Harry Clarke, I found this paper by Paul Ferraro and Laura Taylor (guest registration or subscription required). Ferraro and Taylor presented their volunteer subjects with this question:
Please circle the best answer to the following question:
‘You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?
(a) $0(b) $10(c) $40(d) $50.Take some time to think before looking over the fold

The correct answer is (b), the net value to you of buying a ticket and attending the Dylan concert, which is your next best alternative. This isn’t the easiest of opportunity cost questions, and, in a first-year undergraduate exam, it would distinguish those who’d really learned the concept from those who’d memorised the definition.
Still it’s not that difficult, and doesn’t involve any tricky thinking about information as in (say) the Monty Hall problem (it’s adapted from the intro textbook of Frank and Bernanke). Allowing for the fact that some people can get jobs in economics with a good technical training but no real understanding of economics[1], I’d have expected maybe 70 per cent of grad students or PhD qualified economists to get it right.
In the Ferraro and Taylor study, the proportion choosing (b) was 21.6 per cent, the least of any answer and worse than if everyone had picked at random. Since presumably some people did choose at random, this suggests that less than 20 per cent of “economists” are actually economists, at least by my definition.
fn1. I blame game theory myself, but then I always blame game theory. And opportunity cost reasoning is just as essential to game theory as to economics, even if its role is not so explicit.

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Private Provision of Public Goods: "

Preston McAfee of CalTech has written an open-source introductory economics textbook: Introductory Economic Analysis...

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Το βιβλίο είναι εδώ

Frank on Schelling: "

Robert Frank devotes his NYT Economic Scene column to the co-Nobel Prize winner (Of Hockey Players and Housing Prices). He makes an interesting observation about preferences and values that has implications for environmental valuation. The idea is that …

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Ben Bernanke, economist: "

I associate Ben Bernanke with several major contributions: 1. The theory of irreversible investment, circa 1983. Before Bernanke, Dixit, and Pindyck, models often assumed that investments could be reversed or taken back. Bernanke outlined how the …

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Ben Bernanke, economist: "

I associate Ben Bernanke with several major contributions: 1. The theory of irreversible investment, circa 1983. Before Bernanke, Dixit, and Pindyck, models often assumed that investments could be reversed or taken back. Bernanke outlined how the …

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