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Kevin is one of the best research-explainers in the econ blogosphere, and his Nobel explainer posts have always been uniformly excellent. In fact, his criticisms are pretty classic anti-behavioral stuff - mostly the same arguments Thaler talks about in his memoir. The invisible hand-wave First, a random weird thing. Much of my skepticism is similar to how Fama thinks about behavioral finance: That branch of it has been incredibly useful.
Behavioral finance has struggled though not entirely failed to explain most of these anomalies in terms of psychology, especially in terms of insights drawn from experimental psychology. But in terms of empirical evidence, behavioral finance is pretty solid. Anyway, that might be a sidetrack. This is a dismissal that Thaler refers to as " the invisible hand wave ". The justifications typically given for this assumption - for example, the idea that irrational people will be competed out of the market - are typically vague and unsupported.
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But for some reason, some economists have very strong priors that nothing of this sort goes on in the real world, and that the emergent properties of markets approximate individual rationality. Ethical concerns Kevin, like many critics of Thalerian behavioral economics, raises ethical concerns about the practice of "nudging": There are, indeed, very real problems with behavioral welfare economics.
But the same is true of standard welfare economics. Should we treat utilities as cardinal, and sum them to get our welfare function, when analyzing a typical non-behavioral model? Should we sum the utilities nonlinearly? Should we consider only the worst-off individual in society, as John Rawls might have us do?
Those are nontrivial questions. And they apply to pretty much every economic policy question in existence. But for some reason, Kevin chooses to raise ethical concerns only for behavioral econ. Kevin seems to be very very very worried about paternalism, and generally pretty cavalier about inequality. I actually have no idea what Kevin believes in. But hopefully the Nobel committee tries to make its awards based on the positive rather than normative considerations.
After all, the physics Nobel often goes to scientists whose discoveries could be used to make weapons, right? The invisible hand-wave, again Kevin writes: Thaler has very convincingly shown that behavioral biases can affect real world behavior, and that understanding those biases means two policies which are identical from the perspective of a homo economicus model can have very different effects.
For example, I can think of many simple nudges to get you or I to play better basketball. But when it comes to Michael Jordan, the first order effects are surely how well he takes cares of his health, the teammates he has around him, and so on.
This argument makes little sense to me. Also, why should we assume that non-Michael-Jordans can quickly or completely learn heuristics that make nudges unnecessary?
If that were true, why would players even have coaches? It seems like another case of the invisible hand wave.
This grammar overcorrection is my one weakness. The natural alternative, of course, is to have agents outsource the difficult parts of the decision, to investment managers or the like. No surprise that robo-advisors, index funds, and personal banking have all become more important as defined contribution plans have become more common!
If we worry about behavioral biases, we ought worry especially about market imperfections that prevent the existence of designated agents who handle the difficult decisions for us.
Assuming that a market for third-party advice will take care of behavioral problems seems like both a big leap and a mistake. How confident are we that someone who treats opt-in and opt-out pensions differently is going to get good value for that huge and opaque expenditure? Also, suppose that financial advisers really do earn their keep, i. If the market for financial advice is efficient, and financial advice is all about countering your own behavioral biases, that means that behavioral biases are so severe that their impact is worth a fifth of your lifetime wealth!
If a cheap little nudge could make all of that vast expenditure unnecessary - i. Endowment effects and money pumps Kevin writes: Indeed, it is not unusual in a study to find a ratio of three times or greater between the willingness to pay and willingness to accept amount. Do we really think I can regularly get you to pay twice as much by loaning you the mug for free for a month?
I guess that is true External validity of lab effects Everyone knows external validity of laboratory findings is a big problem for experimental economics and psychology, and biology Also problematic is ecological validity - even if a lab effect consistently exists in the real world, it might not matter quantitatively compared to other stuff. External and ecological validity do present big challenges for behaviorists who want to take insights from the lab and use them to predict real-world outcomes.
But Kevin chooses some highly questionable examples to illustrate the problem. Many of the students gave half! This experiment has been repeated many, many times, with similar effects. Does this mean economists are naive to neglect the social preferences of humans? People are endowed with money and gifts all the time.
They essentially never give any of it to random strangers — I feel confident assuming you, the reader, have never been handed some bills on the sidewalk by an officeworker who just got a big bonus! Worse, the context of the experiment matters a ton see John List on this point. Indeed, despite hundreds of lab experiments on dictator games, I feel far more confident predicting real world behavior following windfalls if we use a parsimonious homo economicus model than if we use the results of dictator games.
Does Kevin seriously think that any behaviorist believes that dictator games imply that people walk around giving away half of any gifts they receive? That makes no sense at all. What would it even mean for a person on the street to behave analogously to a person in a dictator game? As John List says, context matters. Wage negotiations at a company are different than family gift exchanges, which are different from financial windfalls, which are different from randomly being handed money on the street.
Norms in these situations are different. To me, this is clearly not a reason to assume that norms and values only matter in the lab, and that real-world people always behave perfectly selfishly. Why does Bill Gates give away so much of his money?
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Why do people give money to some beggars and buskers but not to others? Do these behaviors bear any similarity to how people behave when asking for or handing out raises in the workplace? Do they bear any similarity to the way people haggle over the price of a car or a house?
Kevin follows this up with what seems like another bad example: But how important is this in the aggregate? Take the Engel curve. Budget shares devoted to food fall with income. This is widely established historically and in the cross section.
Where is the mental account? Farber AER even challenges the canonical account of taxi drivers working just enough hours to make their targeted income. As in the dictator game and the endowment effect, there is a gap between what is real, psychologically, and what is consequential enough to be first-order in our economic understanding of the world.
That makes no sense to me. Gas is a substantial monthly expense. The compounded rate of return on your stock portfolio can make a huge difference to your lifetime consumption. Even if mental accounting mattered only for these two things, it would matter in the aggregate.
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