Archive for the ‘Social Science’ Category
50 U.S. states with different policies provide much data which can be used to determine the best policy on a given issue. But it is difficult to keep track of what is going on in each state. Even if you have a dataset covering outcomes in each state, it is often difficult to find out exactly what policy each state followed in a given year. Finding this out sometimes requires digging through the records of every state legislature for every year being considered.
But for many issues other people have already done the digging, so all you need to do is find their work. For instance, the National Council of State Legislatures keeps track of policy changes for many issues. In my research however it seems like they missed some things and don’t explain what some bills actually did very well. On the more narrow field of privatization policy, the Reason foundation has a very good annual report on policy changes at the federal, state and local levels.
I would love to know about other organizations that do the work of tracking changes in state policy.
Written by James Bailey
April 21, 2010 at 1:00 pm
Posted in Social Science
A common idea in the social sciences is that two wrongs can make a right, when errors cancel each other out. So we have the Median Voter theorem, the Efficient Market Hypothesis, the Wisdom of Crowds.
Some aspiring rationalists have worried that the same process takes place not only in large groups of people, but within the head of a single individual.
Why worry about this? It would mean that correcting for a single bias could bring you further from the truth, by leaving a corresponding bias in the opposite direction unchecked.
This precise thing seems to have happened with behavioral finance. In the post that started the Great Macro Flame War, Paul Krugman said that the study of behavioral finance should be a major part of the future agenda for macroeconomics. But Brad Delong, Krugman’s ally in this debate and in general, recently admitted in “Recent Economic Thought as an Interrupted Three-Cornered Cage Match” that it was behavioral finance that led him astray and prevented him from seeing the oncoming crisis. He says on page 8 that “it did not seem to be such a bad thing to raise the market’s risk tolerance- the behavioral financiers like Richard Thaler and Matthew Rabin tell me that investors are, by and large, much too fearful”. Now, of course, it does seem like a pretty bad thing. There were biases in the other direction that were not corrected for, especially the low capital ratios of major Wall Street investment banks.
I suppose there are two lessons from this. First, behavioral finance is not going to solve all the problems of macroeconomics any time soon. Second, when making a change to a complex system- like your beliefs, or the economy- one must consider all the possible effects. An economist thinking along these lines may have been able to save the day by preventing the SEC from removing capital requirements on the shadow banking system in 2004, though in this case political failures would probably have overwhelmed better economics anyway.