David Gerard

Author: David Gerard

Kicking Off I&E Week

Here’s a question from the recent economics 450 test that you might want to consider part or all of:

Discuss what people mean by entrepreneurship and explain how it fits into the theory of the firm. Things you might discuss:

  • What is an entrepreneur?  How is it different than being a manager?
  • Do entrepreneurs usually work for themselves?  What does that mean?
  • Is asset ownership necessary? Is that part of working for themselves?

Part of the inspiration from that question comes from an interesting piece by Foss and Klein from a few years back.

Not coincidentally, the economics department generally is pondering these very questions as we try to figure out our curriculum offerings.

Stay tuned.

Smile!

This seems to need no explanation.   I wonder if you could do the same analysis from the annual Lawrence faculty picture?

Smile Intensity in Photographs Predicts Longevity

Ernest Abel & Michael Kruger
Psychological Science, forthcoming

“Photographs were taken from the Baseball Register for 1952 (Spink, Rickart, & Abramovich, 1952). We restricted our analysis to players who debuted prior to 1950, and we included only photographs in which the player appeared to be looking at the viewer…Players with Duchenne smiles were half as likely to die in any year compared with nonsmilers, HR = 0.50, p = .006…In this model, smile intensity accounted for 35% of the explained variability in survival”

Vive la Freshman Studies

Leave it to reality television to resurrect the Stanley Milgram experiments in front of a live studio audience.

The game involved contestants posing questions to another “player”, who was actually an actor, and punishing him with 460 volts of electricity when he answered incorrectly.

Eventually the man’s cries of “Let me go” fell silent, and he appeared to have died.

Not knowing that their screaming victim was an actor, the apparently reluctant contestants followed the orders of the presenter, as well as chants of “Punishment” from a studio audience who also believed the game was real.

The programme’s producer and a team of psychologists recruited 80 volunteers, telling them they were taking part in a pilot for a new television show.

Well, I think that speaks for itself.

Econometric Madness

A lot of people have been stopping me in the halls asking, Is there any way we could somehow use a Markov-Chain model to help with March Madness tournament picks?

Well, folks, it’s your lucky day.

Paul Kvam and Joel Sokol out of Georgia Tech  published a piece in Naval Research Logistics a few years back explaining a simple three-parameter model. (In the event that the Mudd doesn’t have an old copy laying around, you can read it here).

For those of you without time to crunch the numbers yourself, you might check out the handy LRMC Information Page.  Last year I went with the “Pure” LRMC, but this year I’m feeling a little Bayesian.

The authors claim — and there appears to be something to their claim — that their model does a better job than the experts and competing methods (e.g., seeds, RPI, rankings).   And here’s a shocker — they have Kansas over Duke in the final (like it took a genius to come up with that).  On the other hand, they have BYU as their #4 team, so I will bet the farm on that one watch that game with interest.

The Big Shorts for Spring, Introducing Michael Lewis

Michael Lewis is one of our generation’s most influential business writers, having penned the Wall Street classic Liar’s Poker (even I read that one), the professional sports classic Moneyball (hey, I read that one, too), along with assorted other gems on the would-be masters of the universe (here’s a page-turner about Iceland ).

Why am I telling you this?  Well, because his new book, The Big Short has arrived, and with it the obligatory lengthy excerpt at Vanity Fair.

Please let me know what you think.

Oh, for good measure, here’s what he reads.

Take a Deep Breath

Good news on the clean air front — it’s getting cleaner.   In fact, it’s been getting cleaner for a long, long time.   Don’t believe me?  Well, then go check out the new EPA Air Quality Trends that was released earlier this week.  Of the six criteria pollutants (NOx, SOx, CO, PM, O3, and Pb), the trend is continually downward.  Hazardous air pollutants (HAPs) are also on their way down.  That’s despite a growing population, growing vehicle fleet, and (until recently) a growing economy.

Almost makes me want to go out and eat a big hand full of dirt.

Almost.

The Times They Are A-Changin’

I just made my way over to Briggs because I have a 20-page paper due, and I am, like, totally stressed out about it.**  I was wondering why there were students milling around outside, and it turns out that they were victims of the time change — the building is supposed to open at 1, but evidently security didn’t push its clock forward yet.

At any rate, this brought to mind some calculations my colleague Paul Fischbeck and I made about the changes in pedestrian risks associated with daylight savings. The moral of the story — watch yourself crossing the street, especially when it’s dark outside.

There are some interesting regulatory policy implications of the time change. If you are interested, here are my thoughts posted at the Organizations & Markets blog last year.

**Well, not, like, totally.

Happiness is a Scarce Resource

You new majors have probably been wondering why you have been a little more cheerful, had a bit more bounce in your step, a little extra rational exuberance, so to speak.

The answer, my friend, is that economics students are generally a happy bunch.

At least in Germany:

Justus Haucap, of Heinrich Heine University of Düsseldorf, and Ulrich Heimeshoff, of the University of Bochum, surveyed 918 students of economics and other social sciences in 2005, then estimated how studying each of the different fields affected individual life satisfaction…. The news is good — for economics students, anyhow… [T]he researchers identified a positive relationship between the study of economics and individual well-being.


Read all about it.

For those of you looking for a boost of good cheer, look no further than right here.

The Bad Seed?

As students of 450 know, not all nonstandard contracts are designed to establish or maintain market power. That, indeed, is one of the central messages of Oliver Williamson’s work:

Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante

This is useful to keep in mind as we watch the antitrust suit against seed-giant Monsanto that is unfolding in America’s heartland. The case speaks to managerial v. entrepreneurial capitalism, contracting for innovation, and the role of a non-standard contract.
Continue reading The Bad Seed?

Course Evaluations “Opportunity”

No kidding, we really care what you have to say.    It helps us to gauge how we’re doing, make specific improvements to a course, and make improvements to our teaching generally.  In the spirit of Bjorklunden weekend, consider it an opportunity!

Here’s the Provost again:

DearLawrence Student,

It is time to do the end of term course evaluations. This term, we will be continuing the on-line course evaluation procedure. T he instructions for completing the forms are at the bottom of this note. The on-line course forms will be available from MARCH 5 (at 5:00pm) TO MARCH 23.

These course evaluations are very important to course instructors, and I hope you will take the time to fill them out carefully. Faculty use them to make changes in courses that will benefit your education. They are a significant part of Lawrence’s efforts to make certain we have the strongest possible academic program– and that strength is good for everybody.

One change this term is that whenever you log on to Voyager you will be immediately directed to the evaluation site. This is being done to help remind you of the importance of completing the evaluations.

Thanks for your help.

David Burrows
Provost and Dean of the Faculty

“in this, the most efficient of all possible worlds”

Following this past weekend’s performance of Candide on campus (with our own Alex Gmeinder in the leading role), I was reminded of this sight gag in a set of slides by Professor Richard Langlois of the University of Connecticut.

For those of you not in Economics 450, that’s recent Nobel Prize winner, Oliver Williamson, pictured delivering a lecture.  Professor Langlois appears to be chiding him about the rather strong efficiency implications of transaction cost economics.

You can read the full explanation at the Organizations & Markets blog.

Should You Take Out a Student Loan, Or Issue Equity?

BACK BY POPULAR DEMAND!!!

Great post over at Cheep Talk about Kjerstin Erickson, who is selling a 6% stake in her lifetime income for $600,000.

Think of Kjerstin as a self-managed firm.  She could issue debt or equity.  The Modigliani-Miller theorem explains why most people in Kjerstin’s position choose to issue debt.  Her income is taxed, but interest on debt is often tax-deductible.

But a key difference between Kjerstin and a firm is that you if you acquire Kjerstin you cannot fire the manager.  So your capital structure is also your managerial incentive scheme.  Debt makes Kjerstin a risk-lover:  she gets all the upside after paying off her debts and her downside is limited because she can just default.  With equity she owns 94% of her earnings no matter what they are.

Why don’t Lawrence and other colleges and universities ask for an equity stake rather than providing student loans?  Evidently, economists from Milton Friedman to James Tobin have advocated such a system and it seems to work only too well.  Hence the beneficiaries opportunistically opting out of the deal.

Ah, well.

The End is Near

Many students find the end of the term the ideal time to break up with that not-so-special person they’ve been seeing.   Maybe your returns to scale in the relationship are constant or even decreasing.  Or maybe you really don’t have that much specific capital invested in the relationship (K is low).  Or, perhaps, you’ve found a relatively higher redeployment value for your affections.   If that’s the case, transaction cost theory suggests that you might consider outsourcing your break up.

That’s right, a mere $10, will get you into a “basic break up,” with escalating rates based on increasing specificity (engagement, divorce), but, interestingly, not based on increasing complexity.

Huh.

Economics Tea, Today at 4

Today marks the last regular season Economics TeaBA before the start of our playoffs — the finals’ week TBA.   We will discuss what happened at the investment summit (including the performance of the triumphant winning team of Molly Ingram, Rana Marks, and two people who are not in my Econ 300 class), and find out if there are any takeaway messages.

We can also tell you about courses for next term and for next year, who will be on leave, the I&E reading group, what it means to be an entrepreneur, and ideas for improving the quality of the chocolate chip cookies (pay more?).

See you in the Fishbowl around 4.

Price Discrimination, Girl Scout Cookie Edition

The Girl Scouts are in the news again, this time for ruthlessly exercising market power:

Girl Scout cookies sell for different prices in different areas. The going price is either $3.50 or $4.00 depending on where you live. Local Girl Scout councils are actually allowed to set any price they want…

Well, perhaps not ruthless.  The author incorrectly titles it “price gouging,” when in fact it is simply a form of third-degree price discrimination, I suppose.   I would be interested in seeing data on different prices across different markets.  Do you think the different elasticities of demand stem from differences in income? Differences in tastes?  Differences in close substitutes?  Why isn’t there entry to wipe away the excess profits? I could spend the rest of the day thinking about this (and probably will).

For you 450 readers, perhaps there is an arbitrage opportunity out there for a would-be (Kirznerian) entrepreneur.

I am definitely going to check the price before I commit to Girl Scout cookies for the Economics TeaBA.

Speaking of the TeaBA, see you Monday at 4.

Reminder: LSB Investments Summit Today

There is no bigger LSB supporter than trustee Bob Perille ‘80, who is spearheading today’s LSB investments summit.   Mr. Perille is the managing director at Shamrock Capital and a very sharp cat, indeed.   That should be reason enough to come out today.

But, of course, there’s more.   Mr. Perille will be joined by Alan Allweiss ‘77, Dan Howell ‘74, and Bryan Torcivia ’81.   That’s a lot of talent in one room.

The Summit starts at 3:30 over in the Hurvis room.

Here is Prof. Galambos’ original post on the matter.

Two Pieces on Nathan Myrhvold

If innovation is of interest to you, you might consider reading up on Nathan Myrhvold.   My mention of Josh Lerner’s new book in the previous post prompted me to think of Mr. Myrhvold, whose latest scheme is to acquire thousands and thousands of patents. What that will do to US innovation and competitiveness is anyone’s guess.   (Of course, your guess is probably more meaningful if you actually know something about the economics and policy dimensions of innovative activities).

Here’s a short profile in the New York Times and a longer piece written by Malcolm Gladwell for The New Yorker.

Gladwell has written a couple of pieces on innovation and entrepreneurship over the past year or two.   He even rediscovered some Schumpeterian ideas in a piece from a few weeks back.

No shortage of ideas, that’s for sure.

Too Much of a Good Thing

In preparation for this weekend’s big LSB Investments Summit, it might be useful to ask the question:  Is venture capital a big waste?

Well, that might be overstating it a bit, but the potential profitability of venture capital is the topic of James Surowiecki’s new piece in MIT’s Technology Review.   He diagnoses the problem of there being too much VC money out there, and the glut is putting a big crimp in the side of an industry that once produced monster profits.   On the other hand, shouldn’t we expect that a profitable industry would attract entry, driving (economic) profits to zero? (Hint: yes).    Is that a bad thing or a good thing?

Those interested in diving deep into this subject should consult Josh Lerner’s new book, Boulevard of Broken Dreams:  Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It.

Of course, I strongly endorse you reading up and peppering this weekend’s panel with questions, prefaced with things like, “I read in the recent Technology Review that…” and “Do you agree with Josh Lerner that…”

UPDATE: Here’s Lerner interviewed at Vox.

Food for Thought, Students Going Bananas

This question came up in class the other day — are you peeling your bananas wrong?   As usual, the Armchair Economist Steven Landsburg has something to say about the matter:

My friend Petal peels her bananas from the bottom. Well, it’s the top, actually, since bananas grow upside down. Come to think of it, that’s not quite right either—bananas grow the way they grow, which should be right-side up by definition, even if we think of them as upside down. So let me start over. Petal peels her bananas from the end without the stem.

Petal’s method is counterintuitive and thus instantly appealing to economists, who love nothing more than to overturn conventional wisdom. Multiple experiments (well, two experiments, actually, since we only had two bananas) quickly convinced a majority of the department that Petal’s way is—surprisingly—easier than the traditional method, though the econometricians thought you’d need to test at least 30 bananas to report that result with confidence. The labor economists immediately resolved to apply for a grant.

Still not convinced?  Well, you aren’t alone.  But the peel-from-the-bottom case is a compelling one:

In the anti-Petal camp, we have the theorists who argue that peeling from the stem end must be optimal because that’s what people do. But Petal counters—and indeed this is her clincher argument—that monkeys do it her way (though I think it would be more accurate to say that she does it the monkeys’ way) and monkeys are the real experts.

If such knotty problems interest you, you should consider taking Econ 300 with me this fall.   In fact, you should consider it anyway.

Food for Thought or Thought for Food?

Looking for a conversation starter?  Perhaps you should take a sample off this menu from Alex Tabarrok over at Marginal Revolution:

Suppose that you are a cow philosopher contemplating the welfare of cows.  In the world today there are about 1.3 billion of your compatriots.  It would be a fine thing for cows if all cows were well treated and if none were slaughtered for food.  Nevertheless, being a clever cow, you understand that it’s the demand for beef that brings cows to life.  How do you regard such a trade off?

If each cow brought to life adds even some small bit of cow utility to the grand total of cow welfare must not beef eaters be lauded, at least if they are hungry enough?  Or is the pro beef-eater argument simply repugnant?

Should a cow behind a haystack of ignorance choose the world with the highest expectation of utility?  In which case, a world of many cows each destined for slaughter could well be preferable to one with many fewer but happier cows.

Or is it wrong to compare the zero of non-existence with existence?  Should a cow philosopher focus on making cows happy or on making happy cows?  If the former, would one (or two) supremely happy cows not be best?

As I tell all my students — cows are more like gold and buffalo are more like oil.