Author Archive
Neuroeconomics and Methodological Individualism
| Peter Klein |
Methodological individualists, following Schumpeter (1908), hold that aggregates like firms, societies, nations, etc. should be modeled as organizations or ecosystems composed of smaller decision-making units. But the reduction has to stop somewhere — it can’t be turtles all the way down (the Matrix-within-the-Matrix problem). Economists typically define the individual actor as the relevant unit of analysis; we don’t go further down to the level of, say, the gene (see Nicolai’s earlier discussion of the “driver’s seat fallacy”).
Neuroeconomics — the latest advance of the behavioralist revolution — rejects the conventional perspective, however. Isabelle Brocas and Juan Carrillo conclude their recent useful summary of neuroeconomic research by likening individuals to organizations:
Neuroeconomic theory will soon play a crucial role in the building of new reliable theories capable of explaining and predicting individual behaviour and strategic choices. The main message is that the individual is not one coherent body. The brain is a multi-system entity (with conflicting objectives, restricted information, etc.) and therefore the decision-maker must be modelled as an organisation. We conclude with an analogy. Before the so-called modern theory of the firm, organisations were modelled as individual players characterised by an input-output production function. The systematic study of interactions between agents and decision processes within organisations (acknowledging informational asymmetries, incentive problems, restricted communications channels, hierarchical structures, etc.) led to novel economic insights. Applying a similar methodology to study individual decision-making is, in our view, the most fruitful way to understand the bounds of rationality.
Hmmm, I admit that my brain often has trouble motivating other parts of my body to achieve the brain’s objectives, but I’ve never thought of these as agency costs. And I suppose that leprosy — in which the nervous system fails to communicate information about damage to bodily extremities to the brain – could be described as a failure to make effective use of dispersed specific knowledge. But I don’t quite see the value added.
More generally, my own view is that neuroeconomics represents a potentially interesting branch of applied psychology, but has little to do with economics per se. Economics is about the logical relationships between means and ends, not the psychology of preferences and beliefs. But mine is a minority view.
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IRB Flames
| Peter Klein |
Zachary Schrag’s excellent Institutional Review Blog highlights the discussion on a recent Chronicle post about IRBs. As you can imagine, most of the comments are from frustrated researchers who see the campus IRB as their enemy, not their ally. Sample: “At my current institution, humanities scholars are subject to an IRB that only makes sense for scientists collecting blood and doing life-threatening experiments on small children.” Zach points out that a few comments defend the local IRB, but these comments “are vaguer and less eloquent,” and “none tells a story of an IRB review that proved necessary.”
I suspect that some of this researcher frustration can be alleviated by recognizing that IRBs exist not to protect research subjects, but to protect the university. The IRB’s goal is to prevent the university from being sued or otherwise losing Federal funding. Protecting research subjects, improving research methods, and contributing to the growth of knowledge are incidental.
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Miscellaneous Conference and Paper Links
| Peter Klein |
SSRN has a new Philosophy and Methodology of Economics working-paper series, sponsored by the International Network for Economic Method.
Here’s a CFP for a Special Issue of the E-conomics e-Journal on the Social Returns to Higher Education, R&D and Innovation.
You can watch a live stream of this weekend’s SEJ Special Issue Conference on Knowledge Spillovers & Strategic Entrepreneurship.
The registration and accommodations section of the ISNIE 2010 website is now open.
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A Real Hostage Model
| Peter Klein |
Forget Williamson (1983). Check out Randall Morck and Fan Yang’s analysis of the 19th-century banks Shanxi, China. These banks featured a dual-class equity structure and, to mitigate agency problems created by entrenched insiders, not only gave insiders few voting rights, but also allowed outsiders to enslave insiders’ wives and children and hold their relatives as hostages. As Morck and Yang observe, with dry humor: “Modern civil libertarians might question some of these governance innovations, but others provide lessons to modern corporations, regulators, and lawmakers.”
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Recommendation Letters
| Peter Klein |
Like most academics, I often write recommendation letters for students and colleagues, and sometimes ask for them myself. There’s an art to getting a good recommendation letter, much of it nicely summarized by Jodi Glickman Brown on her HBR blog. In short, 1) highlight [the writer’s] qualifications, 2) provide a template, and 3) offer a “no questions asked” policy. I’d add a conceptual note: Consider the recommendation letter an additional channel for information, beyond those the letter-reader will already have. Letters that simply repeat information contained in the candidate’s CV, academic transcripts, writing samples, application forms, and the like do not add value Ask yourself what you want the reader to know about you that isn’t otherwise be obvious from the rest of your dossier. The letter is your opportunity to get this information out. But the letter-writer has to know what you have in mind.
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Best Acknowledgements Section in an Academic Book
| Peter Klein |
From the preface to James Scott’s The Art of Not Being Governed: An Anarchist History of Upland Southeast Asia (which I heard about from Drake Bennett, via LRC):
There is a large number of colleagues who, having better things to do with their time, nevertheless read part or all of the manuscript and gave me their frank advice. I hope they see, here and there, evidence of their impact as I bobbed and weaved my way to a more nuanced and defensible argument. They include, in no particular order, . . . [a list of 60 names follows]. Wait! I have secreted in this list four colleagues who failed to send their comments. You know who you are. For shame! If, on the other hand, you collapsed trying to carry the manuscript from the printer to your desk, my apologies.
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A Hayekian Story About Taxis
| Peter Klein |
No, not taxis, but taxis. You know the old story about colleges placing paved footpaths along the paths already worn down by students, relying on “spontaneous order” to select the best routes across campus? Here’s a similar story involving New York City taxicabs. This New York Times infographic tracks taxi traffic and pick-up/drop-off locations across Manhattan throughout a typical week. You can see where traffic clusters during the weekly commute, on Saturday night, and so on. If the city were going to improve certain roads, build taxi stands, re-time traffic signals, and the like, these data could allow for a sort of Hayekian solution. (Via Cliff Kuang, who provides interesting commentary as usual, including this link to a similar San Francisco project.)
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Outsourcing TAs?
| Peter Klein |
An interesting make-or-buy decision for colleges and universities. Best line, from Roosevelt University B-school dean Terry Friel: “Faculty have this opinion that grading is their job, . . . but then they’ll turn right around and give papers to graduate teaching assistants. . . . What’s the difference in grading work online and grading it online from India?”
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Westhoff’s The Economics of Food
| Peter Klein |
Congratulations to my colleague Pat Westhoff for his new book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices (Financial Times Press, 2010). A highly readable account of food markets and food and agricultural policy. Includes some wise words about forecasting:
One thing FAPRI has learned over the years is that people who make and use market projections need a good sense of perspective — and humor. In a rapidly changing world, even the best projections have a very short shelf life. The economic models used to develop the projections necessarily rely on a long series of assumptions, and at least some of these assumptions always prove to be incorrect when viewed with 20-20 hindsight. . . .
For all these reasons, this book uses market projections by FAPRI and other institutions simply to illustrate important points, rather than to predict what will actually happen. If there is one lesson readers should take away from this book, it is that analysts who say they know exactly who food prices will evolve in the future are misleading their audience or fooling themselves.
Update (20 April 2010): While stranded in Germany waiting for a flight home, Pat wrote an item for Freakonomics.
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Behavioral Corporate Strategy
| Peter Klein |
I’m not a huge fan of behavioral economics, though I obviously recognize its substantial and growing influence in economics, finance, entrepreneurship, and potentially, strategy. Many academics and commentators see the financial crisis as a vindication for behavioral economics research. Behavioral reasoning underlies the New Paternalism. I see the importance and implications of behavioral economics as overstated — the literature typically focuses on straw-man versions of “rationality” and largely ignores the effect of biases and heuristics on political decision-making — but it raises interesting issues in applied psychology.
My old friend Dan Lovallo has a nice piece (with Olivier Sibony) in the new McKinsey Quarterly making “The Case for Behavioral Strategy.” (It’s gated, but registration is free.) They make good arguments for applying behavioral insights into corporate decision making. The basic claim is that “we need new norms for activities such as managing meetings . . . , gathering data, discussing analogies, and stimulating debate that together can diminish the impact of cognitive biases on critical decisions. To support those new norms, we also need a simple language for recognizing and discussing biases, one that is grounded in the reality of corporate life, as opposed to the sometimes-arcane language of academia.” I agree, and urge you to check it out.
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An Industry Lobbyist’s Definition of “Efficiency”
| Peter Klein |
Gordon Smith, head of the US National Association of Broadcasters (not the good Gordon Smith), explains his understanding of “efficiency”:
In calling for broadcast TV spectrum to be reallocated for mobile broadband use, [Gary] Shapiro falsely suggests that TV broadcasters are “inefficient” users of spectrum. We are not. In fact, when compared with Internet-enabled handheld devices — the primary beneficiaries of Mr. Shapiro’s spectrum plan — TV broadcasters are far more efficient.
Indeed, every single American could turn on his TV set right now without placing any additional capacity strain on the airwaves. You can’t be more efficient than that.
Right. Massive excess capacity, near-zero consumer demand . . . perfect efficiency! (File under economic illiteracy, or maybe public choice.)
Third Searle Center Entrepreneurship Symposium
| Peter Klein |
The schedule is up for the Third Annual Searle Research Symposium on the Economics and Law of the Entrepreneur, 17-18 June 2010 in Chicago. Registration information is here. I participated in the 2008 version and enjoyed it very much.
Top Recruiting Classes
| Peter Klein |
Memphis, Ohio State, and North Carolina have the top-ranked US college basketball recruiting classes for 2010. But how about the Berkeley economics department’s 1963 recruiting class? As I learned this weekend, department head Andreas Papandreou hired five brand-new assistant professors that year: Dan McFadden, Oliver Williamson, Sid Winter, Peter Diamond, and David Laidler. Not a bad haul!
Mundaneum: The Google of 1910
| Peter Klein |
Fascinating article by Molly Springfield in Triple Canopy on the Mundaneum, an effort by two Belgian lawyers to collect and classify all the world’s information, using notecards and an innovative filing system. Information scientist Paul Otlet “was the first to imagine all the world’s knowledge as one vast ‘web,’ connected by ‘links’ and accessed remotely through desktop screens, and because of this he can be seen as the kooky grandfather of the Internet.” Unfortunately, the analog technology of the early twentieth century was not up to the task. (Here’s the wiki on the Mundaneum, which incidentally might make a good title for my next book.)
See also: The Victorian Internet by Tom Standage.
Posner on Institutions and Organizations, Round Two
| Peter Klein |
Remember the infamous Posner-Coase-Williamson exchange from JITE, 1993? Posner dismissed the New Institutional Economics as a derivative form of Posnerian law and economics, prompting unhappy replies from Coase and Williamson. Here’s Coase:
Posner [1993, 79] says that the first part of his paper describes “the conception of the field [the new institutional economics] held by Ronald Coase.” Reading this part of his paper recalled to my mind Horace Walpole’s opening remarks in his book on King Richard the Third: “So incompetent has the generality of historians been for the province that they have undertaken, that it is almost a question, whether, if the dead of past ages could revive, they would be able to reconnoitre the events of their own times, as transmitted to us by ignorance and misrepresentation” (Walpole [1768, 1]). I have only one foot through the door but should the final yank come before this piece is published, Horace Walpole’s words would apply exactly to Posner’s highly inaccurate account of my views.
Adds Williamson, wryly: “Richard Posner is a prolific writer and distinguished jurist. He is frequently asked to speak with wisdom and authority on many issues. Whether he hits the mark or misses varies with his depth of knowledge and understanding of those issues. . . . I content that Posner’s [1993] commentary mainly misses.”
Now Geoff Hodgson has produced a reboot: a long essay by Posner in the Journal of Institutional Economics titled “From the New Institutional Economics to Organization Economics: with Applications to Corporate Governance, Government Agencies, and Legal Institutions,” with replies from Jürgen Backhaus, Bruno Frey, Lin Ostrom, John Roberts, Tom Ulen, and several others (but not Coase or Williamson!). Posner focuses almost exclusively on the principal-agent problem, perhaps unaware that information, delegation, coordination, and adaptation are also important issues in organizational economics. His main conclusion seems to be that both private firms and public agencies are equally inefficient. Interesting reading, to be sure (and much better than Posner’s solipsistic essay on his conversion to Keynesianism, inexplicably published by the New Republic).
Share with First-Year MBA Students
| Peter Klein |
Mark Goetz’s new wallpaper (via Lynne Kiesling). Cory Doctorow translates: “Militant arm of the infoviz movement gets serious about PowerPoint.”
New Issue of EJPE
| Peter Klein |
The new issue of the Erasmus Journal for Philosophy and Economics has several interesting items. Here’s Sen on Adam Smith:
In ethics, Smith’s concept of an impartial spectator who is able to view our situation from a critical distance has much to contribute to a fuller understanding of the requirements of justice, particularly through an understanding of impartiality as going beyond the interests and concerns of a local contracting group. Smith’s open, realization-focussed and comparative approach to evaluation contrasts with what I call the “transcendental institutionalism” popular in contemporary political philosophy and associated particularly with the work of John Rawls.
An essay on Gerard Debreu’s methodology looks promising, along with several of the book reviews. Check it out!
A New Organizational Chart
| Peter Klein |
Fodder for dozens of future PhD dissertations, no doubt! (Click to enlarge.)
Too Blue for You
| Peter Klein |
I’m partial to Klein Blue, but some of you may prefer Prussian Blue — apparently the first Crayola color to be renamed, as US kids had no idea who or what a “Prussian” could be. See this very cool online essay (via William Bostwick).
Organizations and Markets 
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