Why So Many People Can't Make Decisions

by Shirley S. Wang

Wall Street Journal
September 27, 2010

Some people meet, fall in love and get married right away. Others can spend hours in the sock aisle at the department store, weighing the pros and cons of buying a pair of wool argyles instead of cotton striped.

Seeing the world as black and white, in which choices seem clear, or shades of gray can affect people's path in life, from jobs and relationships to which political candidate they vote for, researchers say. People who often have conflicting feelings about situations—the shades-of-gray thinkers—have more of what psychologists call ambivalence, while those who tend toward unequivocal views have less ambivalence.

High ambivalence may be useful in some situations, and low ambivalence in others, researchers say. And although people don't fall neatly into one camp or the other, in general, individuals who tend toward ambivalence do so fairly consistently across different areas of their lives.

For decades psychologists largely ignored ambivalence because they didn't think it was meaningful. The way researchers studied attitudes—by asking participants where they fell on a scale ranging from positive to negative—also made it difficult to tease apart who held conflicting opinions from those who were neutral, according to Mark Zanna, a University of Waterloo professor who studies ambivalence. (Similarly, psychologists long believed it wasn't necessary to examine men and women separately when studying the way people think.)

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Elgar Companion to Transaction Cost Economics

More from Mike Sykuta

Corporate governance: Pointers for predators

Economist
September 23, 2010

It is as if every homeowner were obliged to publish a map showing burglars the easiest way into his house and where his valuables are stored. That is how American businesses view a proposal that the Financial Accounting Standards Board (FASB) floated in July. The FASB wants to force firms to publish detailed information about what they might get sued for and how much it might cost them. This would provide a how-to guide for lawyers looking for targets. The FASB gave companies until September 20th to respond. They have done so, angrily.

Companies being sued already have to say so in financial statements. The new standards go much further. Firms would have to disclose any money set aside for potential settlements; not for each case, but for each type of case. This would reveal to tort lawyers the general area where the richest pickings might be. Such disclosures would have to be updated regularly, thus advertising any changes in a firm’s sense of its own vulnerabilities.

Worse, companies would have to keep an eye out even for the “remote” possibility of expensive litigation: for example, by watching scientific journals for findings that could later result in lawsuits. Then, once a proceeding has begun, the FASB rules would have companies reporting expert testimony on the potential liabilities they face. It would also force them to reveal, in certain circumstances, the amount of insurance they have bought to cover potential damages.

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“Mother, can I trust the government?” Stable democracies are more likely to enjoy sustained financial development

by Marc Quintyn and Geneviève Verdier

VOX
September 23, 2010

What do countries need for sustainable financial development? This column argues that protection of property rights is necessary but not sufficient. Using a sample of 160 countries from 1960 to 2005, it finds that checks and balances on power and political stability are the vital ingredients.

The epicentre of the global crisis can be traced to the world’s most developed financial systems, but few would consider this enough to challenge the broad consensus that financial development is good for economic growth. Yet despite this consensus, levels of financial development vary widely across countries (Figure 1), and many governments have failed to jumpstart their country’s financial markets.

Figure 1. Cross-country disparities in the ratio of credit to private sector GDP (2005) (each bar represents a country)

These observations have led to a decades of research on the right policies and institutional features conducive to financial development.

First, after a few decades of financial repression, financial liberalisation was considered the key to success. Industrialised countries led the reform efforts in the 1970s, followed by many middle- and low-income countries. The resulting mixed outcomes gradually made clear that liberalisation, while necessary, was not a sufficient condition for financial development and that other factors, such as the quality of institutions, might be critical to ensure success. One body of research has focused on differences in legal origin among countries but empirical results have remained inconclusive. Effective enforcement of property rights has subsequently been singled out as an institution contributing to financial development (Acemoglu and Johnson 2005) – more so than other legal institutions.

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Does culture affect long-run growth?

by Yuriy Gorodnichenko and Gérard Roland

VOX
September 21, 2010

Does culture affect long-run growth? This column argues that countries with a more individualist culture have enjoyed higher long-run growth than countries with a more collectivist culture. Individualist culture attaches social status rewards to personal achievements and thus provides not only monetary incentives for innovation but also social status rewards.

The idea that culture is a central ingredient of economic development goes back to at least Max Weber who, in his classical work The Protestant Ethic and the Spirit of Capitalism (Weber 1905), argued that the protestant ethic of Calvinism was a very powerful force behind the development of capitalism in its early phases. In our new research (Gorodnichenko and Roland, 2010), we provide both a theoretical model and empirical evidence showing that countries with a more individualist culture have more innovation, a higher level of total factor productivity and higher long-run growth than countries with a more collectivist culture.

Here are the main tenets of our theoretical formulation of the idea:

• Individualism emphasises personal freedom and achievement and therefore individualist culture awards social status to personal accomplishments such as important discoveries, innovations, or great artistic achievements. Collectivism encourages conformity and discourages individuals from standing out.

• Individualism makes collective action more difficult than collectivism as individuals pursue their own interest without internalising collective interests

In short, individualism better encourages innovation while collectivism has the advantage in coordinating production processes and in various forms of collective action.

To formalise the argument, we put these ingredients in an endogenous growth model to study the dynamic versus static elements of the trade-off. In the model, collectivism increases the overall efficiency in the economy, but these are static. Individualism meanwhile, spurs innovation and thus faster growth. Intuitively, people in an individualist culture have not only a monetary reward from innovation but also a social status reward. They are therefore willing, all other things being equal, to allocate more effort to innovative activities. The impact of this depends upon the overall setting.

• In a Malthusian economy, however, where all resources were devoted to survival consumption, the collectivist economy exhibits a higher level of output per capita.

• In a modern growth setting, the individualist culture has lower coordination capacities than a collectivist culture but its higher innovation rate leads to higher long-run growth.

This contrast can explain how countries with individualistic cultures were relatively backward before the Industrial Revolution, but overtook collectivist cultures afterwards. The model also yields an interesting relationship between culture and institutions. Under bad institutions, a predatory government can expropriate the monetary returns from innovation. However, social status and prestige cannot be expropriated. Therefore, even in societies where institutions are relatively predatory, there will be more innovation in an individualist culture because of the social status reward to innovation.

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Study breaks down divorce rates by occupation

Washington Post
September 19, 2010

If you marry the charming dancer who asks for your hand, are you more likely to wind up in divorce court than if you'd picked the sensible engineer?

That seems to be the suggestion of a recent study that explores the correlation of various occupations and rates of separation and divorce -- raising questions about the way our careers can impact our personal lives.

The study, published in the spring edition of the Journal of Police and Criminal Psychology, was co-written by Michael Aamodt, a professor emeritus at Radford University who now works as a consultant with the Washington-based DCI Consulting Group.

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See also the comment by Robin Hanson

Missouri Tells Judges Cost of Sentences

New York Times
September 18, 2010

When judges here sentence convicted criminals, a new and unusual variable is available for them to consider: what a given punishment will cost the State of Missouri.

For someone convicted of endangering the welfare of a child, for instance, a judge might now learn that a three-year prison sentence would run more than $37,000 while probation would cost $6,770. A second-degree robber, a judge could be told, would carry a price tag of less than $9,000 for five years of intensive probation, but more than $50,000 for a comparable prison sentence and parole afterward. The bill for a murderer’s 30-year prison term: $504,690.

Legal experts say no other state systematically provides such information to judges, a practice put into effect here last month by the state’s sentencing advisory commission, an appointed board that offers guidance on criminal sentencing.

The practice has touched off a sharp debate. It has been lauded nationally by a disparate group of defense lawyers and fiscal conservatives, who consider it an overdue tool that will force judges to ponder alternatives to prison more seriously.

But critics — prosecutors especially — dismiss the idea as unseemly. They say that the cost of punishment is an irrelevant consideration when deciding a criminal’s fate and that there is a risk of overlooking the larger social costs of crime.

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Toyota Settles Over California Deaths

New York Times
September 18, 2010

Toyota has reached an out-of-court settlement with relatives of a family killed when the Lexus sedan they were driving sped out of control and crashed, an accident that put a national spotlight on the sudden acceleration problems that later prompted the automaker to recall millions of vehicles.

Toyota confirmed the settlement Saturday in a statement but did not provide the amount of the settlement or any other details.

“Through mutual respect and cooperation we were able to resolve this matter without the need for litigation,” the statement said.

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Afghan Votes Come Cheap, and Often in Bulk

New York Times
September 17, 2010

Saturday’s parliamentary elections offer a unique opportunity to ascertain that price — and it is in theory a market with many buyers, as 2,500 candidates scramble for only 249 seats. Afghanistan may be a feudal society in many ways, but it is very much capitalist feudalism (as the Soviets found out to their regret).

Nonetheless, prices are low. In northern Kunduz Province, Afghan votes cost $15 each; in eastern Ghazni Province, a vote can be bought for $18. In Kandahar, they sell their rights for as little as $1 a ballot. More commonly, the price seems to hover in the $5 to $6 range, as quoted to New York Times reporters in places like Helmand and Khost Provinces.

Even by the standards of a country rated as one of the poorest in the world, Afghans seem to be selling their votes cheap, and it is not so surprising why.

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Reports Cards for Consumers Don't Always Make the Grade

by Carl Bialik

Wall Street Journal
September 17, 2010

If the EPA adopts a proposed vehicle-grading system, there will be no easy A's. In Los Angeles, though, a restaurant might have both an A rating from health authorities and a roach infestation.

Government agencies increasingly are putting out report cards on cars, schools, restaurants and other offerings to help consumers sort among them. But such grading systems can emphasize simplicity over precision, and decisions about the criteria they use have a significant impact on results. Plus, using letter grades risks lumping together very different performers. In Los Angeles County, 98% of restaurants got A's or B's last year for health safety.

Not so at the Environmental Protection Agency. The agency recently proposed redesigned labels for new vehicles, with one option including grades ranging from D to A-plus for fuel economy and greenhouse-gas emissions. Fewer than 1% of 2010 models—17 of 2,011— would rate an A-minus or better, according to calculations by the EPA.

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Is Google a Monopolist? A Debate

Wall Street Journal
September 17, 2010

Amit Singhal of Google argues the competition is one click away. Charles Rule, an attorney whose firm represents corporations suing Google, counters that the company commands a share of search advertising in excess of 70%—the threshold for monopoly under the Sherman Act.

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Marijuana to Blame for Increased Drug Use in 2009, Government Report Says

CBS News
September 15, 2010

A new government report blames increased marijuana use for an uptick in the overall use of illicit drugs among Americans.

The annual National Survey on Drug Use and Health shows the rate of illicit drug use rose from eight percent in 2008 to 8.7 percent in 2009. The survey also found increases in the use of ecstasy and methamphetamines.

Authorities are especially concerned about use of illicit drugs by young people. The survey by the Substance Abuse and Mental Health Services Administration found 21.2 percent of young adults experimented with illegal drugs in 2009. The report says the trend "was also driven in large part by the use of marijuana."

National Drug Control Policy Director Gil Kerlikowske told CBS Radio News, young people are being exposed to "mixed messages" about marijuana including the idea that it is a medicine.

The "drug czar" said marijuana "may have properties that have medicinal values that should be tested" but he insisted it is not medicine.

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Resentment never sleeps

by Larry Ribstein

Forbes
September 15, 2010

Twenty-three years ago in Wall Street, Oliver Stone and Michael Douglas created a memorable character, Gordon Gekko, who symbolized everything that was wrong about American business. Gekko begins by making his famous case for greed, which has since entered the vernacular:

greed is good. Greed works, greed is right. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed in all its forms, greed for life, money, love, knowledge, has marked the upward surge of mankind. . .

The film then reveals the wages of greed. Gekko takes over an airline by sweet-talking the union and some insider trading, then double-crosses the workers by trying to carve up the company, and ends up headed for jail for insider trading. Along the way he explains:

[I]t’s all about bucks. It’s a zero-sum game. Somebody wins and somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another. Like magic. . . . Capitalism at its finest. The richest one percent of this country owns half the country’s wealth . . . You’ve got ninety percent of the American public out there with little or no net worth. I create nothing; I own.

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Evolutionary Psychology and the Antimarket Bias

by Toban Wiebe

Mises Daily
September 15, 2010

Economic illiteracy is widespread, but why should this be a problem? Ignorance is even more pervasive in microelectronics and computer programming, and yet computer technology is nothing short of astounding.

In most fields of study, people leave science to experts and trust the correctness of their conclusions. Not so for economics: rather than leaving the matter to economists, people hold strong positions that are plainly false. Economic ignorance by itself is not the problem. As Murray Rothbard put it,

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

If people trusted economic theory to professional economists, their economic ignorance would be as harmless as their ignorance of most other subjects.

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Israel paid Spanish pornographic web site $3,000 to relinquish Twitter name

Haaretz
September 15, 2010

The Foreign Ministry paid the Spanish owner of a pornographic website $3,000 to relinquish the Twitter username @Israel.

The ministry on Tuesday denied media report that it had paid the previous account holder, Israel Melendez, six figures to purchase the username.

The Spanish newspaper Publico quoted Melendez as saying he had received a sum that included "five zeroes" in the transaction.

The Foreign Ministry's Director of the Information and Internet, Chaim Shacham, told Haaretz that that the reports were blown out of proportion.

The ministry paid Melendez a total of $3,000 to relinquish the name, said Shacham, adding that the arrangement was made completely within the guidelines of Twitter's terms of service.

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Italy seizes $1.9 billion of assets as Mafia goes green

Reuters/Yahoo News
September 14, 2010

Italy Tuesday seized Mafia-linked assets worth $1.9 billion -- the biggest mob haul ever -- in an operation revealing that the crime group was trying to "go green" by laundering money through alternative energy companies.

Investigators said the assets included more than 40 companies, hundreds of parcels of land, buildings, factories, bank accounts, stocks, fast cars and luxury yachts.

Most of the seized assets were located in Sicily, home of the Cosa Nostra, and in southern Calabria, home of its sister crime organization, the 'Ndrangheta.

At the center of the investigation was Sicilian businessman Vito Nicastri, 54, a man known as the "Lord of the Wind" because of his vast holdings in alternative energy concerns, mostly wind farms.

Interior Minister Roberto Maroni called the operation "the largest seizure ever made" against the Mafia.

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Gender Pay Gap at Law Firms Not Performance-Based, Say Researchers

National Law Journal
September 14, 2010

Lower productivity is one theory as to why women partners at law firms earn less on average than their male counterparts.

But it's not true, according to research by law and business professors from Temple University and the University of Texas-Pan American. They concluded that women lawyers are just as productive as men, even though they consistently earn less.

"Our data show that women partners outperform their men counterparts," they wrote. "If these women are underpaid and undervalued in terms of rank despite their conformity to a lockstep pattern, the inequalities could be due to intentional discrimination."

The researchers performed a statistical analysis of law firm compensation at the 200 U.S. firms reporting the largest revenue between 2002 and 2007, as determined by The National Law Journal affiliate The American Lawyer. They also drew upon data about law firm diversity from Vault.com Inc. and the Minority Corporate Counsel Association. The result is what Temple law professor Marina Angel considers the largest and most detailed research sample regarding gender and pay at large U.S. firms.

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A Bill to Fight Crony Capitalism

by Steve Baker

Wall Street Journal
September 15, 2010

If you borrow a friend's painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers. British parliamentarians have an opportunity to change that today, and I hope they do.

Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank's investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust. Unless it manages to convince politicians that it is too large to fail, in which case it will be bailed out by taxpayers.

This skewed relationship between bank deposits and normal contract and property rights, combined with state interventions like the central planning of interest rates and various guarantees, is what causes boom and bust. Today I will be supporting my colleague Douglas Carswell, member of Parliament for Clacton, as he introduces a bill to phase out fractional reserve banking. Our friends in the U.S. and Europe are watching closely, for the same crony capitalism afflicts the world.

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Poverty rate paradox: Poverty rises, but FBI crime rate falls

by Patrik Jonsson

Christian Science Monitor
September 13, 2010

The much-studied links between poverty and crime rates – which helped give rise to many Great Society programs – have not materialized so far in the Great Recession. Even with 15 percent of Americans now officially poor, both violent crime and property crime continued to drop in the United States in 2009, the FBI reported Monday.

The housing crash's backwash of foreclosures and high unemployment has pushed some in the middle class and the working poor to the brink of despair and insolvency. Yet crimes reports ranging from murder to carjackings, from graft to purse-snatching, all declined during the same period, forcing social scientists to reexamine long-held assumptions about the causes of crime and how society can best battle back.

"What we're seeing now represents a real break in pattern from past relationships between economic downturns and crime increases," says Richard Rosenfeld, a criminologist at the University of Missouri, in St. Louis. "This current recession … does place constructive pressures on those of us who study crime trends to figure out what's happening amidst this serious economic downturn."

The report marks the third straight year of falling crime rates – a period that roughly overlaps with the recession.

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Models tell us more than hindsight

by Tim Harford

Financial Times
September 11, 2010

According to my esteemed colleague Gideon Rachman, economists should be swept off their thrones by historians. Economists have had far too strong a stranglehold on the levers of power, he claims. They think they are scientists. They think they can foretell the future. They are wrong: “pseudo-scientists”, “peddling brash certainties”. Historians such as Gideon and Professor Niall Ferguson, hitherto relegated to backwaters such as the FT’s op-ed page, should at last be paid a bit of attention.

In pondering how to respond, I suffered an acute shortage of brash certainty. Gideon is quite right about the importance of history. When it comes to economics, however, the chief source of brash certainties appears to be Gideon, who wouldn’t know an economic model if it paraded down a catwalk at him.

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David Cameron seeks to 'Nudge' people in right direction

Daily Telegraph
September 10, 2010

The Prime Minister invited Mr Thaler, an American economist, to Downing Street last week to discuss his thoughts on how to influence people's behaviour without pushing them.

Mr Thaler worked with Mr Cameron's "behavioural insight team" to help them in their task of making savings within two years by influencing people to change their behaviour, it was reported.

Mr Cameron believes the ideas put forward in Nudge, a 2008 bestseller, are compatible with the policies of his "Big Society", the Financial Times reported.

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Limiting Psychological Damage From Debt Collections

Wall Street Journal
September 9, 2010

When Joe Bonadio negotiated a 69% reduction in $54,000 of credit card debt this year, his most valuable tool was a caller ID box with ring controller made by JF Technical Developing Co.

By blocking his telephone’s ring on designated numbers, the device kept the financially strapped musician from Mt. Vernon, NY, in peace while representatives from the country’s three biggest banks barraged him with 40 to 50 automated calls a day.

Although Bonadio is happy to have cleared his debts with Citibank, Chase and Bank of America, what he learned of the banks’ methods left him bitter.

“They know what’s going to drive you nuts and that you are going to give them $60 just to shut the phone up,” he said. “I’m not a religious person, but it is as if Satan said, ‘I want to be on earth,’ and God asked him ‘What are you going to be?’ And he said, ‘I’m going to be a bank.’”

Millions of Americans forced into the same situation since the financial crisis are similarly disillusioned.

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Cough It Up

by James Ledbetter

Slate
September 8, 2010

State governments don't get a lot of fiscal good news these days, so it was surprising this week when the state of Connecticut announced that a recent $1-a-pack tax increase on cigarettes raised $5 million more than the state had projected. As economists would predict, the daunting total of a $3-a-pack tax in Connecticut—the fourth highest burden in the country—did reduce the sale of cigarettes. Some smokers reacted to the tax by quitting, with others finding different ways around the tax.

But the surprising fact is that not that many quit smoking or evaded the tax—not enough, anyway, to cause the state to collect less in cigarette taxes than it would have without the hike. This experience is not unique to Connecticut. Over the last decade or so, several states and jurisdictions have experimented with massive cigarette tax increases, as much as 100 percent or more over the existing rate. California, for example, still has a relatively low state cigarette tax, but in January 1999, it ballooned from 37 cents a pack to 87 cents. In 2002, New York City raised the tax on a pack of cigarettes from 8 cents to $1.50, an astronomical hike of nearly 1,800 percent.

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Free the food truck

by Edward L. Glaeser

Boston Globe
September 9, 2010

Economists like myself often present themselves as dispassionate data-driven analysts, but I can maintain no such detachment toward the cause of the food truck. When I came to Cambridge 20 years, I was sustained by the kung pao chicken provided by a Chinese food truck parked outside of my office. Now, I want to give back and join the movement to free the food truck from the fetters of unfortunate regulation.

Over the last month — while so many of us were idling away August — Boston became a hub of food truck action. On Aug. 8, Mayor Menino ate pickles at the Food Truck Festival, where hundreds lined up for Speed’s hot dogs and Big Moe’s M&M Ribs. The city has issued a “Food Truck Challenge,’’ where would-be vendors compete for space on City Hall Plaza. City Council President Michael Ross has also become an ardent food truck advocate, and he presided over a City Council hearing last week on easing the regulatory barriers to food trucks.

Why do food trucks matter? In the 19th century, the world was poor and people chose their cities because of wages, which often reflected productive advantages, like waterways or coal mines. As Americans became wealthier, they increasingly chose their locations because of quality of life rather than wages, and that initially pulled people to the simple pleasures of greenery, safety, and year-round warmth found in the sunbelt and the suburbs.

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The Science of Cooperation

Elinor Ostrom interviewed by Fran Korten, from Yes!

UTNE Reader
September-October 2010

Elinor Ostrom was an unusual choice for the 2009 Nobel Memorial Prize in Economic Sciences. She is the first woman to receive the prize, and her doctorate is in political science, not economics (though she considers herself a political economist). And while standard economics focuses on competition, her work is about cooperation.

Ostrom’s influential book Governing the Commons: The Evolution of Institutions for Collective Action was published in 1990. But her research on common property goes back to the 1960s, when she wrote her dissertation on groundwater in California. In 1973 she and her husband, Vincent Ostrom, founded the Workshop in Political Theory and Policy Analysis at Indiana University, which has produced hundreds of studies of the ways in which communities self-organize to solve common problems.

Fran Korten, Yes! magazine’s publisher, interviewed Ostrom shortly after Ostrom received the Nobel Prize.

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Are Young Women Earning More Than Their Boyfriends?

by Heather Boushey

Slate
September 7, 2010

The news last week was that if you're a young woman without children, you have a shot at making more money than your boyfriend. "Young, single, childless women out-earn male counterparts," says USA Today; "Workplace Salaries: At Last, Women on Top" says Time.

I always enjoy it when the media rediscover a trend: Equality is here! But digging a bit deeper into the data tells a more nuanced tale. Even if you can make more than the cute guy you saw at the bar last weekend, you may not out-earn the colleague sitting in the next cubicle. And, alas, it's the second comparison that really matters.

There are two ways to look at the gender pay gap. The first way is to ask whether equally skilled men and women in comparable jobs are paid the same. That's the way to gauge workplace fairness. Do women with similar credentials in similar jobs earn as much as the men they work with? It's in this context that the answer remains no.

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From Russia, With Smokes

Wall Street Journal
Editorial
September 7, 2010

Russian Finance Minister Alexei Kudrin has alighted on a bright new idea to balance the nation's books while improving his countrymen's overall health: "If you smoke a pack of cigarettes, that means you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates," he said last week. "People should understand: Those who drink, those who smoke are doing more to help the state."

Mr. Kudrin was referring to a government decision from June to more than double the excise taxes on cigarettes and booze by 2013. The idea of a sin tax is hardly new: Governments the world over spin such taxes as a way of raising revenue and improving health at the same time. But Mr. Kudrin is, as far as we know, the first finance minister honest enough to admit that the only way for the government to raise the desired revenue is for the people to continue to partake of the proscribed (or more expensive) fruit. You can't have one without the other.

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After $75,000, Money Can't Buy Day-to-Day Happiness

Bloomberg BusinessWeek
September 6, 2010

Money can help buy happiness -- at least if you're bringing in about $75,000 a year, new research shows.

While happiness increases along with annual household incomes up to about $75,000, beyond that, earning more money has no effect on day-to-day contentment, according to the study.

But that doesn't mean you should give up trying to get that promotion. While making more won't help your emotional state on any given day, people who had household incomes above $75,000 were more apt to say they were satisfied overall with their life.

Those who made, say, $120,000 reported more satisfaction with their lives and had a higher assessment of their life overall than those who made less, while those who made $160,000 evaluated their lives even better still.

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See also "What Salary Buys Happiness in Your City?" (Wall Street Journal, 7/9/2010)

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Mistress Ordered to Pay $5.8 Million

Eyewitness New
September 7, 2010

They took vows to love, honor, and obey, but when she was several months pregnant and her husband's former high school classmate came to visit-- his vows went out the window.

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Behavioral law and economics

More Gangs, Less Crime

by Russell S. Sobel

EconLib
September 6, 2010

Street gangs, such as the famous Crips and Bloods, are often viewed as a cause of crime and violence. Popular media coverage on TV and in the newspapers often portrays the brutal activities of such gangs. This is understandable for the simple reason that areas with more violent crime also have more youth street gangs. The implication would seem clear: to reduce crime, just break up gangs.

However, an article I recently coauthored with Brian J. Osoba, "Youth Gangs as Pseudo-Governments: Implications for Violent Crime," calls this conventional wisdom into question. Our analysis suggests not that gangs cause violence, but that violence causes gangs. In other words, gangs form in response to government's failure to protect youths against violence. The surprising implication of our insight is that efforts to reduce gang activity could actually increase violent crime.

The explanation for this seeming paradox derives from well-established economic theories on how and why governments evolve from situations of anarchy. That literature suggests that within a society without law and order, individuals are under constant threat of being victims of aggression and crime, and small "gangs" evolve to provide protection services to people. By forming groups, people who cannot protect themselves individually can be more secure; an attack on a single member would result in group retaliation. In other words, individuals form gangs for the same reason that national governments form mutual defense alliances such as NATO.

Applying this concept to street gangs suggests that gangs evolve in response to a high level of pre-existing violence in communities. More important, it suggests that the net effect of gangs is to reduce the level of violence—i.e., if the gangs did not exist, there would be more violent crime. In the end, the threat of gang retaliation prevents some violent crimes that would have otherwise taken place.

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Johann Graf Lambsdorff, "The Institutional Economics of Corruption and Reform: Theory, Evidence and Policy"

Corruption has been a feature of public institutions for centuries yet only relatively recently has it been made the subject of sustained scientific analysis. Lambsdorff shows how insights from institutional economics can be used to develop a better understanding of why corruption occurs and the best policies to combat it. He argues that rather than being deterred by penalties, corrupt actors are more influenced by other factors such as the opportunism of their criminal counterparts and the danger of acquiring an unreliable reputation. This suggests a novel strategy for fighting corruption similar to the invisible hand that governs competitive markets. This strategy - the 'invisible foot' - shows that the unreliability of corrupt counterparts induces honesty and good governance even in the absence of good intentions. Combining theoretical research with state-of-the-art empirical investigations, this book will be an invaluable resource for researchers and policy-makers concerned with anti-corruption reform.

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Islam, institutions and economic development

Eric Chaney interviewed by Romesh Vaitilingam

VOX
3 September 2010

Eric Chaney of Harvard University talks to Romesh Vaitilingam about his research on the evolution of institutions in the Islamic world and the relationship with economic development. Among other things, they discuss the rise and fall of Muslim science; and the balance of power between ‘church’ and ‘state’ in times of catastrophe. The interview was recorded at the annual congress of the European Economic Association in Glasgow in August 2010.

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The Household: Informal Order around the Hearth

Some people dwell alone, many in family-based households, and an adventuresome few in communes. The Household is the first book to systematically lay bare the internal dynamics of these and other home arrangements. Legal underpinnings, social considerations, and economic constraints all influence how household participants select their homemates and govern their interactions around the hearth. Robert Ellickson applies transaction cost economics, sociological theory, and legal analysis to explore issues such as the sharing of household output, the control of domestic misconduct, and the ownership of dwelling units.

Drawing on a broad range of historical and statistical sources, Ellickson contrasts family-based households with the more complex arrangements in medieval English castles, Israeli kibbutzim, and contemporary cohousing communities. He shows that most individuals, when structuring their home relationships, pursue a strategy of consorting with intimates. This, he asserts, facilitates informal coordination and tends ultimately to enhance the quality of domestic interactions. He challenges utopian critics who seek to enlarge the scale of the household and legal advocates who urge household members to rely more on written contracts and lawsuits. Ellickson argues that these commentators fail to appreciate the great advantages in the home setting of informally associating with a handful of trusted intimates.

The Household is a must-read for sociologists, economists, lawyers, and anyone interested in the fundamentals of domestic life.

Robert C. Ellickson is the Walter E. Meyer Professor of Property and Urban Law at Yale Law School. His books include Order without Law: How Neighbors Settle Disputes.

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Intellectual-property battles: Patent lather

Economist
September 2, 2010

Deep-fried beer may sound scrumptious, but is it patentable? Mark Zable, an inventive Texan, thinks it is. To protect his novel production process, which involves encasing the alcohol in batter and dunking it in a fryer, he recently applied for a patent. He wants to profit if others exploit his beery brainwave.

Without patents to protect their creations, inventors would have little incentive to invent. But some Americans fret that patent protection has grown too strong. The system breeds so many lawsuits, they worry, that it throttles the innovation it is supposed to promote.

Consider a suit filed on August 27th by Interval Licensing, a firm owned by Paul Allen, a co-founder of Microsoft. It targets everyone who is anyone in Silicon Valley, including Google, Apple, eBay, Yahoo! and Facebook. (But not Microsoft.)

It involves four patents covering inventions that improve an internet user’s online experience, such as suggestions for further reading related to a news article and pop-up features that display share prices. Interval claims these were pioneered at Mr Allen’s now defunct Silicon Valley research laboratory and then patented between 2000 and 2004. It accuses each of its targets of violating one or more of the patents.

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Better credit card rules for consumers

Washington Post
Editorial
September 1, 2010

August brought the phase-in of the last new credit card regulations under the Credit Card Accountability, Responsibility and Disclosure Act, also known as the Credit CARD Act, which was passed by Congress and signed by President Obama more than a year ago. Among other things, the new rules ban credit card companies from charging fees that are larger than the infraction: If you miss a $20 payment, the maximum penalty is $20. Thus, the finishing touches are on a revamped credit card regulatory structure that will also require issuers to apply any payment over the minimum due to the highest interest portion of a customer's debt and make it harder for companies to market plastic to students under 21. Between 1989 and 2006, total credit card charges increased from $69 billion a year to more than $1.8 trillion. But now, those go-go days are over.

Critics call the CARD Act a nanny-state infringement on economic freedom whose negative impact on the economy has only begun to be felt. If credit card issuers can't recoup the costs of extending credit to more marginal card users, they will have no choice but to raise interest rates on everyone else. And, sure enough, the average rate on credit card debt has risen to 14.7 percent -- a post-2001 high -- when other interest rates, such as the 30-year home mortgage rate, are falling. No wonder consumer spending is sluggish. It's another made-in-Washington setback for the recovery.

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The Foundations of a Market Economy: Contract, Consent, Coercion

by Yulie Foka-Kavalieraki and Aristides N. Hatzis
University of Athens – Department of Philosophy and History of Science

European View, vol. 9, no. 1, pp. 29-37, June 2009


Abstract:
This article shows how contracts are the institutional foundation of a market economy. Contracts create wealth, allocate risk and are based on consent. There is no perfect competition and the markets are characterized by a number of failures; therefore, contracts are not perfect. However, the existence of these failures does not undermine the importance of contract and consent. A common critique of the market economy is that most transactions are based on some form of coercion. The authors try to address this misconception by showing that a contract is the result of coercion not in cases where a choice is hard for a party but when it offers a choice the party does not want to have.


Keywords: Contract, Consent, Coercion, Market economy, Market failures, Rationality, Perfect competition, Uncertainty


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What I Believe (about Markets and Morals): A Reply to Jerry Coyne & My Critics

by Michael Shermer

Huffington Post
August 31, 2010

In his endearingly titled blog, "Michael, we hardly knew ye," the venerable evolutionary biologist and slayer of creationist dragons Jerry Coyne (author of Why Evolution is True) wonders if I've gone 'round the bend over capitalism and sold my skeptical soul to the Templeton Foundation, the alleged evil subsidizers of religious and capitalist propaganda. Allow me to set the record straight (again) for all my critics out there (and in reading the comments to Jerry's blog there's more than I thought, and many of them are darned right caustic!).

First, on the Templeton Foundation, I was invited to write a monthly column for their new magazine, Big Questions Online, and as with my work for them in years past, I'm allowed to write just about anything I like. It is interesting that Jerry and his commentators would hone in on this, my second column, ignoring my first column, which was a stinging rebuke of religion in general and Deepak Chopra's New Age spirituality in particular. No one could possibly read my list comparing God 1.0 to God 2.0 (omnipresent--nonlocal; fully man/fully God--wave/particle duality; miracle--wave function collapse, etc.) and conclude that I'm the pay of a religious propaganda machine. And if that doesn't seal the deal for ya, the God critique was originally my second column, but the BQO editors liked it so much that they bumped it up to number 1, and it was, in fact, the most popular article on the site for the entire month. So there!

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Roots of Gamblers' Fallacies and Other Superstitions: Causes of Seemingly Irrational Human Decision-Making

Science Daily
August 31, 2010

Gamblers who think they have a "hot hand," only to end up walking away with a loss, may nonetheless be making "rational" decisions, according to new research from University of Minnesota psychologists. The study finds that because humans are making decisions based on how we think the world works, if erroneous beliefs are held, it can result in behavior that looks distinctly irrational.

This research, forthcoming in the Proceedings of the National Academy of Sciences (PNAS) "Early Edition," examines the roots of a seemingly irrational human decision strategy that occurs in so-called binary choice tasks, which has perplexed researchers in economics, psychology and neuroscience for decades. In these tasks, subjects are repeatedly asked to choose between two options, with one option having a higher probability of being correct than the other (imagine a biased coin that will land on heads 70 percent of trials, and tails on 30 percent of trials). While the right strategy is to always pick the higher probability option, subjects instead choose the options in proportion to the probability of it being correct.

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