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naked vs. undercover economist

Friday 15 July, 2011

The Chicago Council on Global Affairs Young Professionals hosted another hip function THE UNDERCOVER ECONOMIST MEETS THE NAKED ECONOMIST  Alas no bodies were bared.  Charles Wheelan was back at it again, while Tim Harford was plugging his new book on how complex problems are solved.  His toaster project, to build a toaster from scratch in the forest, symbolizes how complex our lives have become.  He also noted that there are 10B distinct bar codes for products sold just in Chicago’s economy.  But all problems can’t be solved by markets, which are not necessarily the sum of businesses run by smart people, rather a result of lots of trial & error, which creates it’s own selection mechanism.  As innovative as the printing press was, Gutenburg went bankrupt because of the bible:  it’s 1st profit came only when he printed papal documents for the catholics.  To fix a problem, you need to experiment & make many failures, but society doesn’t value it.  Denying failure & the psychology of it is a bad process.  For poker players, the most dangerous time for them is right after their 1st loss, when they tend to double up.  Stock investors tend to hold on to losing shares too.  We suffer from loss aversion when we won’t admit even small losses.  Students experiment & fail safely.    Failure is inevitable, so get used to it, but fix it fast.

Wheelan noted that Harford’s book crosses interdisciplinary lines & drills down on what works & what doesn’t.  It’s important to understand when markets don’t work.  For example, recognize the public costs of driving when observing the private costs differ from the public costs of climate change.  Car fleets should run @ 24 miles/gallon because there is currently no incentive to get better gas mileage than that.  Regardless, all economists, myself included, argue for a carbon tax.

Panel Q&A

  • Hindsight is 20/20 in reinterpreting the past.  Make little bets on your career & all might not work out, but it should be much more interesting.
  • All Wall Street firms made bad bets which led to the financial crisis, & there were no small bets.  Now there is no room for failure.  Banks can & will fail-whistle-blowers are important to exploit errors.
  • Google inspires a culture that encourages innovation & failure.

Open Q&A

  • It’s not helpful to think of whether knowledge comes from the enlightened or collective thought, rather “What should you know when you need to know it?”
  • We don’t know if risk-averse financial institutions recognize resource misallocations.  “Black swans” (not Natalie Portman)  are high impact events with low probabilities that are based on few data  points.  We need more modular safety gates which decouple the dominoes in finance.
  • Innovation transfer happens better in health care than in many other industries.  Professors are practicing clinicians & their journals create a tight evidence loop.
  • There is no bottom line measurement of success in education.  Kids learn at different rates & we don’t really know who’s doing well & who’s not.
  • Creative people are often simply stubborn, impossible to intimidate, & indomitable.  Entrepreneurs are more likely to be delusional.

 

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