Tuesday, September 11, 2007

Four Biases

Bryan Caplan talks about four potential biases in popular thinking about economics. He has written a book on the subject that I embarrassingly have not read. However, I have read journal articles and blog posts by Bryan, so I think I have the gist of his point.

However, I am begining to wonder whether or not the "baises" are simply misstatements of real economic problems.

Anti-Foreign Bias: This is the easiest to see. Economists are found of equating differences between countries to differences between households, towns or states. However, the immediate problem is that nearly everyone would choose some Kaldor-Hicks inferior position if it shifted the distribution of goods towards a member of their household. Many people would even sacrifice their own consumption to increase that of household members. Put simply, the closer you are to someone geographically the more likely you are to be an input to their utility function.

In addition there are local economies of scale. Otherwise no one would be paying Manhattan rent. It benefits you to live near other successful people. Moreover, since this is the case it is reasonable to conclude that foreigners will attempt to collude against you so that there locality will grow at the expense of yours. Fighting over attracting residents is typically a zero sum game. Even more so if we are trying to attract the most genetically gifted residents.

Anti-Market BiasI think this is probably an expression of concern over asymmetrical information and cognition costs in general. People are afraid of being screwed in the market, and they should be. Not understanding how the market works causes lots of problems for people. Economists are not afraid because they have lots of information. It seems rational to be more concerned about asymmetric information problems when your information set is quite small.

Make Work Bias I won't go into detail but if you talk to people about this carefully it usually comes out that they are concerned about the growth of the money supply in response to economic shocks. They don't realize this is their concern but it is really what they are talking about. And they are right, if the money supply isn't managed there can be increases in unemployment from demand and productivity shocks.

Pessimistic Bias I think this is a symptom of rate of time preference inconsistency. Perhaps hyperbolic discounting. Most people's live are getting worse in that their opportunity cone, opportunity set over time, is shrinking because of consistently bad choices. Bad in the sense that people wish that they had not made them.

Yes, their opportunity set grows over time but at time T it is smaller than than it would have seemed looking into the future from T-1.

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