The “Nobel” prize for economics was announced today – received by three economists for their research in labor economics and search theory (very poignant).

One of them is actually a behavioral economist, and I looked up his book Behavioral Economics and its Applications on Amazon.  Here is what I came across:

Do the math – How absurd! 25 cents for a $44 book.  When, if you look right next to this ad, people are selling the book used for significantly more:

Why would anyone use Amazon buyback?

The irony of this being on a behavioral economist’s book page…

I’ve been cultivating an interest in monetary policy, and yes, it can be a bit bland.  Why not spice it up with behavioral economics?

A year or so ago I came across Inflation Targeting by Bernanke et al.  What I found interesting was the look at the overall market/public response to the German Bundesbank’s press releases after policy meetings.  If the Bank was not on target with inflation, Bernanke et al found that people respond better if the Bank had given a pinpointed estimate and was subsequently off target, rather than an inflationary range target.  The belief is if the Bank can’t hit its intended range, then it does not know what it’s doing.  But if it does not hit a specific number, then people are more forgiving.

It’s as if the Bank was playing darts with a large dart board versus a dime.  What, you can’t hit that target?  What a lousy arm.

The interesting thing is, the Bank could give an inflation target range of 2 – 3%, or a pinpoint 2.5%, and people would still be more forgiving of missing the pinpoint if numbers turned out to be 4%, even though the middle point of the range is equal to the pinpoint.

Hop across the pond back to the US, and people/markets have lost faith in the Federal Reserve as seen by the ongoing debates in DC and Wall Street.  How can we restore trust in our powerful reserve system?  Perhaps it’s similar to the Bundesbank’s understanding of how information is presented to the public.

I came across an interesting article yesterday from AdAge that documented a conversation with Dan Ariely, author of the popular behavioral economics book Predictably Irrational.  I’d like to see some combination of behavioral economics & marketing introduced to the FRB’s public releases.  One of Dr. Ariely’s comments regarding the loss of trust for a company & revenge:

Revenge is a useful thing because revenge allows for trust. If your computer crashes, you might get upset but you wouldn’t feel the same need for revenge as when a human being betrays your trust. The anger that can be caused by bad customer service is really kind of incredible. That’s the first thing that companies just need to understand. Things can quickly deteriorate to a level to which there’s no return. You can really calm people very easily if you do it at the right moment.

Replace “customer service” to “economic leadership” and “companies” with “the federal reserve” and I think there might be something there.

Bare with me, a series of questions: If the public/markets react poorly to the Fed’s leadership in trying to get us out of a recession, how is that going to be taken out on the economy itself?  If people distrust the Fed’s efforts, people must have a poor outlook, which must be seen still in restricting spending, use of credit, banks’ not lending, etc.  How does people’s mistrust affect the economy?  Does it interrupt monetary policy’s effectiveness?  Is there anything recursive going on to affect the progression of monetary policy?  Can we instill trust like that from the people of Germany (might I remind you the strength of the German’s economy…)?  How will faith affect the progression & effectiveness of monetary policy?

Are these questions viable…

This long week has zapped my creative thinking.

It’s been a _long_ while since I’ve posted.  Slowly, but surely, the writing bug has gotten to me.

An opinion article on the NYT has circled around the econ blogosphere: Economics Behaving Badly. It’s an interesting article that sort of legitimizes behavioral economics while putting it in its place.   The following quote summarizes it pretty well:

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.

But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.

A lot of popular reading in economics is a stem off of behavioral economics, e.g. Freakonomics, More Sex is Safer Sex, Naked Economics (hmm, interesting set of titles there).  I’ve started to loath this sort of reading as it’s merely showing study after study of correlations yet asserting causation.

One thing a behavioral economist might say, going along with the aforementioned example in the quote, is in order to encourage consumers to stop smoking, increase the taxes on smoking (or perhaps, subsidy cessation tools).  But I have to ask, it is an expensive habit but does the expense really encourage people to stop smoking?  I ask this honestly because I’m not sure if money would be the first reason rather than health.

Man, I’m way too zonked to go any further.