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    The Marshmallow Test and Financial Reform

    Jun 27 • Behavioral Economics, Financial Markets, Labor, Regulation • 101 Views

    Is it possible that the marshmallow test relates to financial reform? As described in a 2009 New Yorker article by Jonah Lehrer and a WNYC Radio Lab podcast, a marshmallow test given to 4 year olds might predict adult behavior.

    40 years ago, psychologist Walter Mischel began studying gratification by giving young children a choice. A child and a single marshmallow were left in a room. The child could have one marshmallow now or two later. 500 children were tested. Mischel concluded that at 4 years old, certain children can resist temptation. Some could last 20 minutes while others capitulated immediately. The average resistance time was 7 or 8 minutes. (Researchers also used chocolate bars and Oreo cookies.)

    Years later, in a follow-up study, Mischel discovered that the SAT scores of children who held out for 15 or 20 minutes were 210 points higher than those who lasted only 30 seconds. Returning to the same people 40 years later, he found that the high delayers had better jobs and were skinnier.

    Looking at other studies, Lehrer again found a connection between our “hard wiring” and our behavior. In his book, How We Decide, discussing the connection between our “decision making apparatus” and our financial behavior, he suggests that an unaffordable McMansion bought through a subprime mortgage could be increasingly attractive if the potential loss is long term and the gratification is current.

    The Economic Lesson

    And this is where we can return to financial reform. If the intersection of neurological and psychological research does indeed point to certain people having certain innately unhealthy tendencies, how much should government protect them and everyone else?

     

     

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    Can the Post Office Deliver?

    Jun 26 • Businesses, Government • 119 Views

    Having just read a Washington Post article about the U.S. Postal Service (USPS), I started thinking about its future. But first, its past:

    While we have had postal services since the 1600s, Ben Franklin transformed the system. Appointed Deputy Postmaster for the Colonies by the British, he established our first home mail delivery system, diminished to a single day the letter delivery time between New York and Philadelphia, and to 6 days between Philadelphia and Boston. When Franklin was fired by the British for his rebellious political activity, the postal system was making a profit.

    Not today.

    Although it has a monopoly on letter delivery and mailboxes, still, the USPS lost a total of $12 billion during the past 3 years. As explained in a Teaching Company lecture, they face competition from UPS and FedEx, from email, faxes, and texts. Their salaries average 30% higher than the private sector, they have massive pension and retirement obligations, and their productivity lags behind national averages.

    While Congress has begun hearings on Postal Service problems, it appears unlikely that they will select any solutions that New Zealand and Germany have successfully implemented. Congress could divide the system into separate privately or publicly owned, profit seeking corporations or just eliminate all monopoly protection. To cut costs, they could stop Saturday delivery. As 80% of its expenses, labor could be cut. (Only Wal-Mart employs more people than the USPS.) 

    Having had nothing to do with the USPS, perhaps the title of the movie “You’ve Got Mail” sums it all up. 

    The Economic Lesson

    Hoping to preserve the status quo, some people have said that the Postal Service is a natural monopoly. Most economists disagree. Having a natural monopoly means that one firm is more efficient than a competitive market structure with many firms. Until new technology transformed the industry and government broke up AT&T, the U.S. phone system was called a natural monopoly. 

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    Environmental Emissions

    Jun 25 • Environment, Regulation • 111 Views

    A letter in “The Mail” section of a recent New Yorker tells us about a funny error on the cover of the May 17, 2010 issue. Mainly portraying emissions from vehicles, factories, and cows, the cover focuses on our environmental problems. According to the letter writer, though, the illustrator, “..has the ‘ends’ mixed up.” The cow “releases only trace amounts of gas through its rectum [as drawn]…; the hundreds of quarts of methane it contributes to the atmosphere each day are belched.”

    Thinking about the cover, I recalled pending Congressional legislation that concerns emissions. Through the “Electric Vehicle Deployment Act of 2010,” the Congress proposes that we minimize auto emissions and oil consumption. The 77 page (pending) law includes a $10 million prize for creating a 500 mile battery and a process for establishing between 5 and 15 “deployment communities”.

    I wonder whether government R & D support should be so specific. Should federal dollars go to institutions rather than a precisely described result? Aren’t the best ideas generated when we encourage a more open ended approach?

    The Economic Lesson

    Through an opportunity cost chart, we could determine the benefits of targeting one technology and the benefits of an attractive alternative approach. Knowing that choosing is refusing, hopefully our legislators use cost/benefit analysis.

     

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    State Deficits and Jaws Charts

    Jun 24 • Government • 125 Views

    As a prospective buyer, Daily Show reporter Jason Jones went to check out the Arizona State Capitol Building when he heard it was for sale for $735 million. Once sold, the capitol would then be leased back to the state for $60 million a year. Why sell it? Because Arizona has a $3.4 billion budget gap.The problem, though, is that the solution is short term. It is a temporary fix that leaves all fundamental spending and revenue issues untouched. 

    Other states facing similar crises have devised equally short term solutions. Several are trying to sell prisons. Hawaii has shortened its school week. States have postponed paying workers until the fiscal year ends to avoid recording current spending.

    New York’s Lieutenant Governor Ravitch, appointed by Governor Paterson to deal with his state’s budget crisis, explained that while cities can declare bankruptcy, states cannot. Consequently, states lack a “triggering event” that would force businesses, labor, and political groups to compromise.

    The result is a graph that Ravitch calls a “jaws chart”. On a “jaws chart,” a line representing state revenue is rising very gradually while the line showing state spending is much steeper. The two together look like the shark in Jaws with his mouth open. 

    The Economic Lesson

    There is a difference between a debt and a deficit. The debt refers to the total amount owed by the municipality or the federal government. The deficit is the amount by which spending exceeds revenues during one fiscal year.

     

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    World Cup Soccer and Stock Markets

    Jun 23 • Financial Markets • 97 Views

    Referring to a basic investing strategy, Vanguard founder, Jack Bogle said, “Buy and hold forever”. If you disagree, though, you might want to hear about the impact of World Cup soccer on stock markets.

    In a recent academic study, researchers found that team losses cause stock market declines. With more important games precipitating steeper plunges, a team loss during a World Cup elimination stage resulted in its home stock market dropping close to .5%. The reason, the study’s authors say, is investor mood. By contrast, winning has no impact.

    Academics also have identified a correlation between rising stock markets and Ramadan, St. Patrick’s Day, and Rosh Hashanah (but not Yom Kippur). A fourth study found that morning sunshine brings a higher stock market close.

    Might I suggest a new investing strategy?

    The Economic Lesson

    While the complexities of investing lead me to question these studies, they do take me to behavioral economics. In 2002, Daniel Kahneman won the Nobel Prize in economics for his work in behavioral economics. Concluding that we were not always as rational as some economists believed, he examined a cognitive side to our behavior that created unexpected economic results.

     

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