Art as investment

Fellow grad student, Bed Mandel, has a paper coming out in AER ((holy shit!)) called Art as an Investment and Conspicuous Consumption Good (pdf):

This paper provides a simple and empirically plausible model of artworks as investment vehicles. It reconciles the observation that average financial returns for collectibles are low and volatile with the theory of consumption-based asset pricing. Art assets are appealing both for their ability to transfer consumption over time and their use as signals of wealth, as in the literature on the demand for luxuries. Adding art value into utility, returns also reflect this ‘conspicuous consumption’ dividend; as a result, average financial returns are low. Risk premia for artworks are predicted to be modest or even negative.

He cites Veblan, but the best line is the last:

In a boast, a friend once told me that his art was a better investment than all other assets, including …financial securities and real estate. Accounting for his utility in telling me so, that is indeed likely.

Oh, and Prof. Kling, you’ll notice equations 5-7 are Euler equations. I defy you make the claim that Ben is just “producing stochastic calculus porn to satisfy [his] urge for mathematical masturbation.” I’d say you actually learn something about Art looking at those equations.

BTW, Ben is on the job market this year. Snap him up before its too late!

Instrumental variables and obesity: micro vs macro, FIGHT!

The restaurants==more calories assumption of the obesity paper by Gomis-Porqueras and Peralta-Alva I wrote about the other day is suspect given the findings of this paper:

But simple correlations between restaurants and overeating may conflate the impact of changes in supply and demand. People choose where and how much to eat. A key question is whether the growth in restaurant supply, in terms of both number of establishments and portion sizes, is contributing to the obesity epidemic, or whether it merely reflects changes in consumer preferences.

What’s driving the spurious correlation?

First, there is selection bias in who eats at restaurants; people who eat at restaurants also consume more calories when they eat at home. Second, when eating relatively large portions at restaurants, people tend to reduce other calorie consumption at other times during the day. After accounting for these factors, eating a meal at a restaurant is associated with only 24 additional calories.

Restaurants aren’t the cause of the obesity problem, but they’re targeted with expensive regulations:

Restricting a single source – restaurants – is therefore unlikely to affect obesity, as confirmed by our findings. This mechanism may also underlie the apparent failure of so many targeted obesity interventions (Kolata 2006). Despite their ineffectiveness, such policies have the potential to generate considerable deadweight loss. We measure the potential deadweight loss of policies targeted at restaurants and find it to be as high as $33 billion annually.

Because the Gomis-Porqueras/Peralta-Alva paper wasn’t about obesity per se, the Anderson/Matsa’s conclusions don’t really contradict it. People are going to restaurants more, but that’s not why they’re getting fatter.

Having been baptized into the DSGE faith, I’m compelled by solemn duty to uphold the tenets of the Prescottian Creed and defend macro from the heresies of the unbelievers in the Public and Labor offshoot of the Reduced Form sect. In other words, I have issues with the Anderson/Matsa paper.

The biggest issue I have is, like too many micro papers, their conclusions are much more broad than their findings. Their sample includes only a handful of States and because they use highway access as a way to measure access to restaurants (and there’s good reasons to do so), they limit their study to rural zip codes that lie within 10 miles of an interstate.

In this sub-sample, they found a positive relationship between distance to a highway and the distance to restaurants. They also found no correlation between BMI and distance from highways. Suggestive, ain’t it. They then claim to be shocked (SHOCKED!) to not have found any confounding variables that when considered might remove an underlying relationship between BMI and access to freeways. Thus, restaurants have nothing to do with obesity anywhere. QED.

I feel like there might be a missing step or two connecting their findings to their conclusion. Well, ok in their conclusion section of the paper they threw skeptics like me a bone: “Although our results apply specifically to rural consumers, the central conclusions are likely to generalize to urban consumers as well.” Given this is all they say about generalizability, its not much of a bone.

Also, they’re measuring distance from the home in this study, but where do people (or husbands or wives) work? In town, near the restaurant maybe? Maybe people that live far away from restaurants do have access to them after all.

General equilibrium and obesity

I don’t usually do this, but I thought this was a fun paper:

In this paper, we use dynamic general equilibrium theory to derive the quantitative implications of a decline in the relative monetary and time costs of food prepared away from home on the caloric intake by American households. Motivated by the empirical literature, we consider two channels that lower the relative costs of food prepared away from home. One is productivity improvements in the production of processed foods. The second is actual declines in income taxes and in the gender wage gap, which increases the opportunity cost of cooking at home from scratch. Households respond optimally to this decline in relative costs by consuming more food prepared away from home.

Why are Americans getting fatter? Because they’re eating out more and eating at restaurants leads to more intake of calories. Why are they eating out more? A little bit of it is the increasing availability of cheap restaurant food (like Micky D’s), but mostly its because of increasing opportunity costs. Income taxes have gone down making it more profitable to work outside the home so people don’t have time to cook. Also, gender wage disparities have decreased. Equalization of pay between the genders means women find working to be more profitable than making dinner for the family. Men aren’t picking up the slack; the lazy bastards do a whopping 11-15 minutes a day of food preparation in the home.

BTW, Americans have been basically sedentary since the 70’s so this can’t explain increasing obesity since then.

UPDATE: It just occurred to me that Megan didn’t bring up opportunity costs when discussing NYC’s effect on diet in her latest divalog. They talked about peer effects (which may be how agents find the dynamic equilibrium). I wonder why NYC is an exception to the story told in this paper. Maybe the high calorie/eating out connection is broken at high income levels. This makes sense because “good” restaurant food is probably a normal good. This would have a mitigating effect on the results of the paper.

The paper really shows a relationship between eating out and opportunity costs. The claims about obesity stand (and probably fall… at least a bit) on the assumption that eating out always means eating more calories.

Devastating disproof of homo economicus

Line jumping. This is the reason economics — objective maximizing, incentive following rational agent-based analysis — is terrible at explaining human behavior. Some guy gets pissed off because some ass-clown cut in line and suddenly homo economicus can be thrown out the window?

I’m generally receptive to the other social sciences’ concern with norms and such, but this is just ridiculous. Economics, and its h.e. fiction, isn’t meant to explain particular cases of human behavior; economists attempt to explain whole patterns of behavior. Start with the assumption that people respond to incentives and you can get a long ways in explain those patterns.

But its not just patterns being explained. I suppose the sociologist’s observation that there’s a “don’t jump lines in particular ways in particular circumstances” norm and that norm is enforced even when its not in agents’ immediate best interests to do so constitutes a pattern. I’m tempted to say economists only look at significant patterns of behavior, but who are we to say what is significant. That said, there’s a certain scope to economic patterns that seems to be larger, in some sense, than those patterns of behavior studied in anthropology or sociology. Perhaps I’m being a little self-serving in this belief, though.

I’m also tempted to say economists, in contrast to the other social sciences, study patterns that are context independent. To do economics all you have to do is assume people follow incentives, show incentives exist and then verify the expected behavior matches that of h.e. This doesn’t seem true in the other disciplines where frame (psychology), culture (anthropology) or group context (sociology) matter a lot.

Of course, there exist norms that underpin the economy. The propensity to trade, to trust, etc allow for the existence of markets in the first place. But studying the foundations of markets doesn’t preclude the study of the markets themselves.

Chemistry is physics yet physicists don’t do chemistry. Chemist persist in their fiction of discreet atoms and they’ve done pretty good science doing so. Economists might be able to hack together some good science with their fiction too.

Over… stim… ulation…

Eliezer Yudkowsky is talking about one of my favorite ideas on this blog… morality as preference! and in the form of Socratic dialog no less!

Subhan: “I suggest that when the pie-requester says to you, ‘It is right for me to get some pie’, this asserts that you want the pie-requester to get a slice.”

Obert: “Why should I need to be told what I want?”

Subhan: “You take a needlessly restrictive view of wanting, Obert; I am not setting out to reduce humans to creatures of animal instinct. Your wants include those desires you label ‘moral values’, such as wanting the hungry to be fed -”

Obert: “And you see no distinction between my desire to feed the hungry, and my desire to eat all the delicious pie myself?”

Subhan: “No! They are both desires – backed by different emotions, perhaps, but both desires. To continue, the pie-requester hopes that you have a desire to feed the hungry, and so says, ‘It is right that I should get a slice of this pie’, to remind you of your own desire. We do not automatically know all the consequences of our own wants; we are not logically omniscient.”

Here’s the second part where EY says his own views don’t fit either interlocutor’s so in particular he doesn’t believe morals are merely preferences. I await, with bated breath, part three!

And then — and then! — we have Prof. Delong going after the “Walmart reduced prices of things poor people buy relative to things rich people buy and so in real terms inequality didn’t much increase in the last decade” crowd (aka Broda and Romalis). And he does so not in his usual “I’m a social democrat following marching orders” mode but in his “damn good economist” mode.

When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.

He then provides this theoretical paper which I take to be validation of my own dissertation topic and the Invisible College giving me a pass on my virtual oral exam.

The basic idea is that Stolper-Samualson is broken if you consider people share in the ownership of factors of production… there doesn’t have to be losers from trade if there’s extensive enough sharing of ownership. Where have you heard that before, I wonder.

Those are your moral preferences, Megan, not mine

Ms. McArdle says:

I think that a state which commits cold-blooded murder is a brutalized state, and I have a visceral horror at the idea of putting a man in a cage and declaring to him the day that he will die. The process of executing criminals damages the moral fiber of all who are engaged in it, including the voters, a cost far in excess of the benefit to be gained from either deterrance or retribution.

Why does she feel the need to speak for the rest of us on what damages our moral fiber? Moral fiber can’t be observed and its a pretty subjective thing. If I don’t think my moral fiber is being damaged, but Megan does, who’s right?

Besides, I’m pretty sure executioners don’t see it her way or at least they’ve weighed the moral cost of doing their deed against its (monetary) benefits and found executing to be in their best interests. Who is she to tell them their preferences are wrong?

If executioners can do this calculation, then the rest of us can. It may be for Megan the costs are greater than the benefits to such a degree that she’s willing to move to a jurisdiction without capital punishment. For some of us, there may be no moral cost just emotional benefits of revenge killing or maybe we feel the deterrence effect of capital punish outweighs the moral costs.

There’s an interesting third group of people for which the moral costs do outweigh the benefits of executions, but not by so much that its worth it to take on the fixed costs of moving to a different jurisdiction. There’s probably quite a few people who don’t like the death penalty but don’t think its worth it to move to Canada. It seems the extent of the political economic market is a problem for these folks. The market, perhaps due to policy restrictions (i.e. the monopoly of current governments), just doesn’t provide enough varieties of jurisdiction.

The funny thing is Megan actually fits in this third group. The cost to her outweigh the benefits but she’s not willing to pay for a change in jurisdiction. Apparently, she finds it more cost effective to try and brow-beat the rest of us into changing our moral preferences.

More reasons why we should treat morals as ethical preferences

Economists don’t know where preferences come from. They might come from god or culture or genes. Whatever. We don’t care. ((Or we do but we’re just not paid to care.))

If preferences are more or less constant within individuals over relatively short periods of time, it doesn’t matter where they come from. If people optimize over preferences today, resulting in some behavior, they will behave the same way tomorrow when optimizing over the same preferences ((Yes, framing matters. But there’s a fix for this: just extend the product space to include frames… I like apples on Tuesday, but oranges on Wednesday; I prefer apple-Tuesdays and orange-Wednesdays.)). The pragmatic case for taking preferences as the primitive objects of analysis is just that they’re so powerful at predicting behavior and doing policy analysis.

Treating morals as preferences over how one wants other people to act sidesteps moral reasoning (i.e. consideration of what are the correct morals) and allows for analysis to focus on predicting behavior or on policy issues.

Moral reasoning is important and I’m not saying it shouldn’t be done. As Haidt points out, though, it is often done by white upper-middle class liberals and as such reflects the moral intuitions of that particular sub-culture. The universe of moral intuitions is much broader and, more importantly, some of those non-white, non-upper middle class, non-liberal moral intuitions are held by people that don’t feel the need to rationalize or vocalize moral intuitions. Why should extra weight be given to those moral intuitions that happen to have been articulated best?

In any case, the point is that moral reasoning is tangential to many of the policy issues we’re interested in such as the optimal size of moral communities. Why not abstract away from the issues moral reasoning raises if given the opportunity?

PS – I know that I’ve been a bit cryptic on some of these topics. I’m a little busy ramping up to teach a course this summer and finishing my first chapter in my dissertation (fingers crossed). I hope to circle back to these issues, fleshing out them when I do.


This is not why people are opposed to free trade:

When factories move abroad, however, the shift is perceived to be due to poorer labour conditions, laxer environmental standards, and lower wages in the competing nation. This seems akin to breaking the rules, and is the source of anti-trade passion on the issue.

The Economist

The reason people don’t get up in arms about technological advances even though they do with trade-induced changes in labor demand is because technological advances are usually diffuse in time and space. Computers, for example, impacted almost every job in the economy. Today over 60% of workers use one on the job. The invention of computers and their subsequent diffusion in the economy put people like my Mom, a file clerk at a doctors office in the 80’s, “out of work” ((She wasn’t laid off or anything, she just got a job across the street and the doctor’s office didn’t have to hire a replacement.)) and it also reduced the demand for jobs like book keepers and secretaries. These changes didn’t happen suddenly and some sectors of the economy are still reorganizing work around computers.

Removing a trade barrier, on the other hand, has almost immediate, concentrated effect. Reducing steel tariffs results in the next orders of steel being to suppliers over seas. Steel workers lose their jobs and they do so all at once when the factory goes idle.

Why should people care about sudden and concentrated disruptions in the demand for labor, but not diffuse ones? Its easy to come up with psychological just-so stories (e.g. people just don’t like sudden shocks or they’re unable to discern more gradual changes). Just like their evolutionary psychology cousins, these stories are ultimately unsatisfying. You can explain any behavior by appealing to preferences.

The economic explanation is this: there is some time cost to bitching ((this is a technical term)). Bitching is unproductive and it takes resources. If there was no cost to bitching, that’s all people would do. There’s a possibility, though, if one bitches, they’ll get attention (in the form of political coddling of one form or other). So if a labor demand shift is short and severe, the costs of bitching are out-weighed by its expected benefits.

Notice I didn’t have to appeal to collective action.

The Economist’s psychological explanation is a little different; people care about “fairness.” This seems even more unlikely to be driving the opposition to trade than the just-so psychology cited above. Its not clear why some demand shifts would be unfair and some fair except if one appeals to just-so-ness. In any case, people may care about “fairness” (even though this hasn’t been experimentally proven), but in explaining economic phenomenon we should exhaust pure economic explanations before we resort to psychological ones.

The optimal size of a moral community

If abortion is universally wrong, then it doesn’t matter what one’s beliefs about it are, its always wrong everywhere ((This post is slightly adapted from a post I made to a discussion group)). Some argue for Federalism and they say people could move to the jurisdiction that has an ethical system parsimonious to their individual beliefs. If abortion is universally evil then its not clear how moving jurisdictions changes that. Do we have the obligation to oppose evil acts (what else are ethics for but to force particular behaviors in others?) ONLY when they occur in our particular jurisdiction? Federalism is incompatible with all ethics being universal.

Now, what if ethics aren’t universal truths but just preferences over moral outcomes? For example, I might prefer abortion to be considered by my community to be morally wrong (over morally right or morally ambivalent) or I might prefer helping the weak to be considered morally right. Abortion isn’t universally evil and helping the weak isn’t universally good; I just prefer my community to believe abortion is wrong and helping the weak, right. This suggests, like other types of preferences and in contrast to universal ethical laws, preferences over morals can differ between people. In fact, Federalism only makes sense when you believe ethical preferences can differ between people. The possibility of different ethical rules for different sets of people can only exist if there’s heterogeneity of preferences over moral outcomes ((abstracting from differences in wealth between communities… some ethical rules, like “just” war, may be inferior goods)). If there were no differences in preferences, there wouldn’t be the need for Federalism. The world government would just busy itself recording universal moral laws into the world constitution.

There are problems with Federalism, though. If different States can have different rules reflecting the variety of ethical preferences between States, then counties within States can have different rules reflecting the variety of ethical preferences between counties. And if counties need different rules, then so do cities. And if cities do then so do neighborhoods, households and finally individual people. People have different preferences over abortion, so if you’re ok with States having different rules about abortion, then you’re ok with individuals having different rules about it. In other words, States are as arbitrary a choice of moral community as the nation is and so an argument for Federalism can be used to argue for even greater granularity in the size of moral communities. In the limit, arguments for Federalism are arguments for individual ethics.

Take something that is clearly a moral preference rather than universal moral law; abortion for instance. As I said above, arguments for letting States, rather than the nation, decide the issue can be used to argue individuals, rather than communities, should decide the issue. So abortion is a decision for the individual woman to make. The problem here is that people that feel strongly against abortion are harmed deeply by its occurrence. This is in the nature of moral preferences. We feel very strongly when our preferences aren’t met, even by strangers; there are negative externalities generated by people that don’t follow our preferred ethics. Now, on the flip side, the woman having the abortion obviously gets some benefit from doing so otherwise she wouldn’t have the operation done and clearly she doesn’t find it unethical.

The point of the ethical community on the abortion issue is to balance the negative externalities of abortions with the benefits to women who get the procedure done. The larger the ethical community the more people who are forced to act according to its ethics and the lower the negative externalities. In other words, the benefits of living in the community increase as the size of the community increases. On the flip side of the coin, the more people in the community the more likely any one member’s ethical preferences will come in conflict with the community’s. Thus, there’s a trade-off between size and respecting individuals’ preferences. The optimal size of the ethical community is the size of the community where the costs are exactly balanced by the benefits. For some issues, e.g. slavery, this optimal size is the nation and for other issues, e.g. age of consent, its the State. There may be other issues for which the optimal community size is the city, the individual or even the whole world.

One problem with this analysis is that people tend to see their ethical preferences as universal ethical truths. I don’t just prefer abortions to be thought of as wrong, I know they’re wrong! Pragmatically though, I know that this *can’t* be a universal ethical truth because I know other people have different beliefs about abortion and I know views on abortion have changed over the ages. That said, I can’t help but feel like abortions are universally wrong ((Thanks to the Catholic Church for this one.)).

It seems, though, that this belief that our preferences reflect universal truth is important for binding ethical communities together. If the function of ethical communities is to force behavior on people (via physical force or just shunning), then its seems like the belief that ethical preferences are universal truths makes it easier for people to enforce those ethics. I imagine it would be hard for one to physically prevent women from getting abortions if they didn’t think those women were violating some universal law but just optimizing their preferences.