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Leigh Caldwell
London
cognitive-behavioural economist, mathematician and CEO
Interests: mathematics, bridge, behavioural economics
Recent Activity
I wonder whether the frequency and degree of promotional discounts does depend on macroeconomic factors, and if this helps provide a degree of flexibility in average market prices. Anecdotally, I would say that marketers are much more willing to engage in discounting and similar promotional tactics when they perceive economic conditions to be weak. Paradoxically, from a psychological point of view, the mystery is that prices are not MORE rigid than they are! This suggestion might provide an answer to that, if not to the converse economic question.
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Maybe this is just anecdotal, but I've kept hearing for the last 4 years that (non-financial) companies are hoarding unprecedented amounts of cash. Was this incorrect, or is the new piece of data just that the growth rate of these hoards has ticked up a bit this year? Of course, I hope you're right. It might even be worth the cost of another Tory government to get out of this stagnation.
Toggle Commented Apr 2, 2013 on Money hopes at Stumbling and Mumbling
Going back to Nick's question: "Which is more stable: the relationship between aggregate demand and the monetary base; or the relationship between aggregate demand and the overnight rate of interest?" Is it fair to say that the short-term correlation between (changes in) AD and interest is much stronger than the short-term correlation between AD and M? If AD responds more directly and quickly to interest rate changes, then interest rates will be a more appealing tool for policy. Longer-term, the reverse may well be true.
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I suspect that the signs inside may actually be more accurate. The Tower probably has a formal historical education mandate, and the signs inside will be held to the standards of accuracy of a museum. The Science Museum recently got into a little trouble for sensationalising some of its exhibits - good for marketing perhaps, but not fitting in this case its educational role. I don't think at all that marketing and education are incompatible - it's entirely possible to successfully achieve both aims. But I think we need to remember that the Tower is not just a marketing or tourist operation, but needs to maintain a high standard of historical truth as well. So it might not be a sense of shame that has led to these signs...but a desire for painstakingly accurate reporting! Maybe there really was very little torture and it's the outside advertisements that are the misleading ones...
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Thanks Mark for reminding me of Rajiv's article, which I've also been meaning to respond to for a while. My preference is for option (2) of your trilemma. More thoughts here: http://www.knowingandmaking.com/2010/12/microfoundations-of-macro-one-direction.html
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Am I misunderstanding the arithmetic... ...or isn't the best case for .07 ppm a $48bn net benefit (100-52), and the worst case -$55bn (90-35)?
Toggle Commented Dec 14, 2010 on An update to "Thousands?" at Environmental Economics
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Interesting to read your last sentence Joel, because it is a nice expression of what I wanted to say too. "...a model that argues with itself". In a sense, all equilibrium models argue with themselves: because there are always competing effects in opposite directions - that is, of course, why we get an equilibrium. And even apart from the forces which generate the equilibrium itself, the nature of the trade-offs in economics around an equilibrium point means that in any interesting question, there are very likely to be competing effects to disentangle. A well-known example is the old debate about tax rates and supply of labour: will a higher rate of tax (therefore a lower net wage received by workers) reduce the supply of labour? Purely from the viewpoint of price, it will. But from the viewpoint of income, it might not. Perhaps workers will increase their supply of labour to maintain income at a target level. Perhaps they'll reduce it because they're not being paid as much for each hour. Economic theory doesn't tell us which effect is stronger, it simply helps us identify both effects (and in this case, helps us see whether the effects derive from the average or marginal price). In Winterspeak's story, we have a similar confusion. It seems quite intuitive to suggest, as Winterspeak's commenter does, that "If you are worried about looming inflation, you're less likely to eat out. You need to preserve your diminished purchasing power for the basic necessities. You will trade down to less costly substitutes. You will repair stuff rather than buy new ones." If we consider the person in the problem to have a fixed quantity of cash and no other income, with a requirement to make ongoing expenditure on perishable goods, then this is quite a logical response. Or, imagine a pensioner with a non-indexed pension. Implicit in Nick's argument (and the mainstream macro argument) are two intertemporal simplifications, one of which must be satisfied to make the model work: that the representative agent possesses not just cash but income, which is expected to rise with inflation; and that most goods can be purchased this year and used next year. If these assumptions are not satisfied, or not satisfied enough, then it is quite possible that the effect of inflation on wealth (or lifetime income) will dominate its effect on intertemporal substitution. Again, economic theory can tell us both possibilities, but not which one is stronger. Empirical data (or sometimes common sense) is needed to answer that question. And I think Nick beats Winterspeak on common sense. At least outside of the Walrasian barter auction room...
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Well, my first thought was a combination of non-financial preferences, agency problems and bounded rationality in calculation of utility: essentially, a head office greenness decree to make its executives feel better about themselves. The small financial payback being no more than a convenient rationalisation of an emotional decision. But then I saw the following story, and thought: aha, costly signalling. http://www.dispatch.com/live/content/business/stories/2008/10/26/car_dealers.ART_ART_10-26-08_D1_EMBM7JM.html The story is about one of Byers' local competitors closing down. With two dealers on a street, there's probably no profit for either of them. Once one wins the game of chicken and the other closes down, it's profitable. And how best to face down a borderline competitor? Why not invest $3.5 million in upgrading your dealerships to prove that you ain't going nowhere. No matter how negative the ROI on this project, it may be a rational strategy if it makes your rival throw in the towel.
Toggle Commented Oct 29, 2010 on Local power at Environmental Economics
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Fascinating. "This is most true for departments in subjects that economists' prejudices tell us are less likely think like economists. All the usual suspects took a long time to figure out the Summer Incentive Plan and respond to it." I love this idea of (forcible) expertise-sharing across departments. Are there any associate deans from the English department cooking up a scheme to make the economists learn how to write and speak better? (you, I think, don't need this help but plenty of economists do)
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Looks like Krugman is thinking along the same lines as my correspondent Bill Spight: http://www.knowingandmaking.com/2010/10/are-british-natural-austerians.html
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I suspect that not all private bonds are equal...or at least, some are more equal than others. What's more, I think not all sovereign commitments are equal. My suspicion is that eurozone countries have carefully delineated their liabilities. The Irish government, for example, has at least two kinds of debt: government bonds, representing formal sovereign commitments; and guarantees of bank liabilities, representing a political commitment to stand behind the debts of their banks. If the government were really to run out of money, you can bet they'd abandon the bank guarantees before defaulting on their own bonds. This would be much easier to present to the markets as "not a real default", thus allowing the government still to borrow in future. If this hypothesis is correct, we should see different correlations in different parts of the private sector. The spreads on bank debts would be highly correlated to those on government debt - indeed they would be magnified, as a small rise in risk of Irish default would translate into a much larger rise in the risk of Anglo-Irish Bank default. But the spreads on the bonds of an Irish industrial company should have a much weaker link to the creditworthiness of its government. Of course there will still be some link, since Irish factories are presumably partly funded by Irish banks; and thus a banking crisis would affect industry's ability to repay debts too. It would be possible, but not easy, for Irish Potato Mining Ltd to refinance via a German bank after the crisis. So with a given rise in Irish government spreads, we'd expect to see a smaller rise in Irish non-financial interest rates, but a larger rise in Irish finance sector interest. How does this apply to the Canadian case? Are there Canadian provincial banks? Within the EU there are few genuinely transnational companies, either in or out of the finance sector. I suspect Canada has a much more integrated national market.
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Fair enough, sorry for misinterpreting!
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I've noticed a couple of surprising comments from the authors of this blog recently. Today, Frances: "What's nudging?" A week or two ago, Nick: "I'm not familiar with Dan Ariely" I had assumed that behavioural economics was now sufficiently mainstream that these would be common knowledge - at least among economics professors. Apparently not. No personal slight intended, by the way - this is illustrative of the still-low status of behavioural econ, not anything about you two!
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I did think this comment from Green was a strange one. If the government wants to best use its AAA rating, it should pay suppliers EARLY, not late. If it pays suppliers later, they will have to finance the credit themselves, and (in a competitive market) charge the cost to the taxpayer. Since companies' cost of credit is higher than the government's, this will cost the public more than if the bills were paid on time.
happyjuggler: Mankiw's current rates might be limited by competition from his perfect substitutes: other textbook-writing, former CEA-staffing economists. If taxes go up, presumably the competition's rates will go up as well as his, and therefore Stephen's hypothesis can be true without implying that Mankiw could still raise today's rate.
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Growing GDP faster, probably. This is a graph of healthcare spend as a proportion of GDP. As Sebastien says, the line goes up during recessions. Not because healthcare spending increases, but because GDP - the denominator - falls. No doubt HMOs and other mechanisms had an influence in the 90s, whether as a result of Clinton policy or just market forces, I don't know.
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Mario: "Keynes...does turn certain virtues (like saving) into vices -- from an economic or consequentialist perspective. What is particularly disturbing is that from a long-run perspective surely saving is a 'virtue.'" But surely it's not. Investment is a 'virtue', not saving as such. In fact, one person's saving is someone else's debt, so in itself the act of saving is entirely neutral: http://www.knowingandmaking.com/2010/09/saving-vice-or-virtue.html
Toggle Commented Sep 30, 2010 on The Newspeak of Paul Krugman at Coordination Problem
"It's very unusual for economists to find love with each other," he said. Really? I thought the only person who'd put up with an economist is another economist. Krugman and Wells, Yellen and Akerlof, Stevenson and Wolfers. Do we need to do an actual regression to prove this point or will random anecdotal data points do?
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Well done guys - in my too-long-to-read-consistently list of blogs, this is one of the half dozen whose new articles I always visit. Despite never having visited Canada and having no direct involvement in its economy, I find the topics mostly interesting, and always interestingly analysed. I have learned a ton from Nick in particular, with his great modelling style and enlightening thought experiments. After 2 years of blogging with up-and-down traffic levels, it's reassuring and inspiring to see one of my favourite blogs having achieved the level of influence (and traffic) it deserves. Maybe one day I'll be able to rebase my visitor numbers to an arbitrary index and imply an impressively large following...oh wait, I can do that NOW! Another econometric lesson learned from the masters.
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A speculation: some kind of "endowment effect" where the first image they look at is assigned a higher value, so that the second image is more likely to be sacrificed. If subjects are predominantly looking from left to right, this would explain the effect. As you are looking at eye tracking, I imagine this is something you are investigating - does the looking behaviour support this hypothesis? Or does this effect still remain even after controlling for whether people first look at the left or the right image? From this comment: "Leaving people's actual looking behavior aside, I found a very powerful effect" I wasn't sure whether you were controlling for that.
Stable preferences are definitely one of the more dangerous simplifications of the rational model of decision-making. These kind of experiments, and many other behavioural results (not all involving chemical modification!), have shown that preferences can easily be influenced by context and by various factors. However, as far as I know, there has been no serious attempt to incorporate this into economic models. Within psychology (in the judgment & decision-making subfield) researchers do typically try to construct low-level decision-making models which explain some of these results - however they do not really aggregate these models to look at their economic consequences. So we don't really know whether (for example) a partial equilibrium will easily become unstable because of changing preferences, or whether social welfare really is maximised under a system of complete markets where agents do not know their own future preferences. As you point out, this is a really important area to understand for people in marketing, so there is every reason why we would want to construct better models to explore it. Some researchers are working on this area under the banner of "cognitive economics" (Marco Novarese for example, and me) but it isn't yet a widespread field. I do think that better mathematical modelling of real ("irrational") behaviour is the natural next step for behavioural economists, but lots of the old guard of that field (Thaler and De Bondt at least) don't agree with me. I think their attitude is that it's unrealistic to think we'll be able to model phenomena like this, and we should instead learn to better accept the limits and caveats of economic modelling.
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Jay: "empirically, I see no evidence of price level indeterminacy." You can't see price level indeterminacy empirically, by definition. Indeterminacy means that the model cannot predict price levels. It's nothing to do with the real world. Then again, perhaps we can empirically see that nobody has a model to predict price levels. That's not quite the same.
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