Semester Wrap Up and Grades

As you folks are are finishing your papers let met say what what I plan to do.

1. I need to write up evaluations of your blog posts for the second half as I did for the first half.

2. You well get a terse write up on your paper (after getting extensive comments on the draft).

3. If you want to comment about your teammates performance (and whether they did put in sufficient effort) here is what to do. Go to Moodle. Go to Participants in the left. Find me. At the bottom, there is a button to send me a message. In the message please identify your team and then say whatever else you want about your teammates. Do not do this by email. Email is not secure and communicating personal information demands such security.

When I've got all the relevant info I will do a final grade calculation and first post those to Moodle. I will email the class when I've done that. It might take a bit more to get the grades into Banner.

This is the time of the year when professors are prone to procrastinate.

Follow up to today's class

Here is the IMDB entry on My Left Foot, which as I mentioned in class is a compelling film to watch and an example of expertise that develops largely through self-teaching and self-expression. Incidentally, it also is a very good example of creativity coming from the weak, if you recall the hypothesis offered up by Eric Hoffer. Another example I'm aware of in this regard in the area of painting is Grandma Moses, who may still be the best known American painter and who didn't start painting till she was around 60.

Here is a different story that I didn't tell this morning. It is about Ty Cobb, the famous baseball player commenting on Babe Ruth. I can't recall the precise reference for you but I believe I read this in a biography about Cobb. The story is that Ruth learned his prodigious swing by self-teaching. He wasn't coached. Had he been coached, he almost certainly would have been told to shorten the swing, because that was the style of the times - smallball. But Ruth came up as a pitcher, not as an outfielder. The tradition was not to coach pitchers on their hitting. So Ruth could as he wanted there. He became an expert at something entirely new in a sport that wasn't so new. He made the home run the centerpiece of the game.

There is a moral to the story about deliberate practice qua self-teaching versus deliberate practice at the hands of a well known coach. Many (though not all) well known coaches tend to teach orthodoxy in the field of endeavor. Self-teaching, in contrast, is apt to produce an unorthodox approach. Orthodoxy may be what you are after with expertise. But in some cases the unorthodox can trump. When some people do become expert by self-teaching and others via professional coaching, it is interesting to ask whether their approach converge or not. When not, one might not consider the other an expert and might be right about it, and vice versa. But it is not a priori obvious which one has more of a leg to stand on.

One last point here that circles back to an early theme in the course. The economics profession has an orthodoxy to it and behavioral econ is not yet part of that orthodoxy. But the profession as a whole was shaken severely by the financial crisis. So from my point of view - I'd like to see both tracks proceed for a while as separate ways of developing expertise and not yet insist that they converge. I don't think we're ready for that.

Becoming an expert, gift exchange, and reflections on the course

I'm going to give brief summaries of each paper, list some puzzles that seem to emerge from their reading, and then try to apply those ideas to my reflections about the class.

Becoming an Expert

There is a tendency to attribute perceived differences in ability to genetic differences between the individuals. One person is "smarter" or "a more natural athlete" or "a born musician." In other words, talent is thought to be innate. The evidence, however, suggests otherwise. Expertise is acquired through vast amounts of the right sort of practice. In this paper it is referred to as deliberate practice; elsewhere I've seen the alternative expression, "effortful study." To become an expert in a field one must engage in deliberate practice for an extended period of time, often thought to be about 10 years.

Early learning might happen via play and self-discovery. But at some point learning that way reaches its limit and further learning requires practice that is not play. Individuals wouldn't do the practice willingly on their own if they didn't want to improve their own skills. Learning thereafter requires coaching to do the appropriate tasks, to provide prompt and relevant feedback, and to assist with motivation. It also requires high concentration/effort from the participant. So there are time limits on how long individuals can practice each day and individuals who are on the path to becoming an expert require diversions and time to recuperate between practice sessions.

Becoming an Expert Puzzles

1. Many people do not become expert in any field. Might it be that genetic disposition is expressed simply by the the willingness to go down the path of deliberate practice to become an expert?

2. Some advocates suggest the best learning environments are immersive. For example to learn a foreign language some suggest to go to a place where nothing but that language is spoken. Immersive learning environments seemingly violate the need for diversion and recuperation time. Do both ways work?

3. Is there a way to extend the period of play, so more of the learning happens in that first stage? For example, many have observed that video games have an immersive aspect. To the extent that video games are designed to go from one level to the next and with play you become more proficient, that looks like deliberate practice. Can learning be designed like a video game so it is both immersive and fun?

4. Other advocates argue that learning should be inquiry based and driven by intrinsic motivation (curiosity). This might not be play. It might be more like investigative journalism. But it doesn't sound like deliberate practice that has no reward in itself. Can one develop expertise mainly via intrinsic motivation and inquiry?

5. This one is not so much a puzzle but really a matter of definition. Who is an expert? One way to think of expertise is to contrast with a novice. (See chapter 2 of How People Learn.) A different way is to to identify the individual with an elite group. The question then is how elite is elite?

6. For people who do learn but without any intention of becoming an expert, is that type of learning qualitatively different or the same thing as learning to become an expert but with practice over shorter duration?

7. Are there meta-skills (skills that would work in more than one domain of study) one can develop to make one more willing to do the deliberate practice? If so, what do they look like? (Without answering this one here, do note that many people talk about learning to learn. So that suggests there are such meta-skills. Learning to learn is supposed to be an important consequence of an undergraduate education.)

Gift Exchange

Early in the semester we talked about eliciting cooperation in repeated prisoner's dilemma and so you might think of cooperation as gift exchange relative to the default equilibrium where both parties cheat. However, in the labor market there is more to it than just that. First it means that the actual wage exceeds the opportunity wage of the worker. (This gives the worker a surplus from the job.) Second it means that the firm acts fairly with respect to the worker's co-workers. Fairness of treatment is a big component of the deal. Third it means that the worker shows a high degree of initiative and intensity of effort on the job. That is the gift the worker gives to the firm. It is more than the firm has a right to expect. (Much more than the threshold at which the worker would be disciplined or even fired.)

In contrast to gift exchange you might consider direct payment for service rendered. Yesterday, for example, we had a guy and his crew deliver mulch for our yard. They integrated that in with the existing mulch and did some work to assure that went well and that the rest of the yard and our sidewalk wasn't messy with mulch. After the crew was done I gave them a check for the work they had done. And that was that, service for a fee without any gifts.

As Akerlof makes clear in his paper, much ongoing employment has considerable elements of gift exchange to it. The direct payment for service approach makes more sense under a limited service, limited time contract.

Gift Exchange Puzzles

1. This one is really about economists and the models they select. Why do economists have a preference in envisioning the employer-employee relationship as direct payment for service instead of as gift exchange?

2. Organizations can have different structures. Some are flat, others are hierarchical, and still others have a matrix structure where similar skills sets work together. Does the gift exchange idea work irrespective of the organization structure or does it favor a particular structure (mainly flat)? If there is a job ladder in the organization, for example, how do incentives provided by promotion compare those with gift exchange?

3. Models of gift exchange provide an explanation for scarcity of good jobs (involuntary unemployment). Models of direct payment of service couple with competitive supply of that service suggest the payment should equal the opportunity cost of the supplier and consequently that labor markets should clear (supply of labor equals demand) unless there is monopolization (unions) or artificial restraints (minimum wage) or the service rendered is highly idiosyncratic (then the payment is determined by bargaining between the parties). Are there "good jobs" out there? How does one find such a good job? Is it a matter of luck? Which model better fits how new grads think about the labor market they soon will be joining?

Maintained Hypothesis

One aspect of a good job, from the point of view of a college grad is that it provides a lot of opportunities to learn on the job and develop expertise in that area of employment. Such jobs will treat the employment relationship as gift exchange. (We will not try to prove this. It is simply a way of framing what soon to be grads should be looking for in the labor market.)

Reflections About The Class

Initial Thoughts Going In

In my previous career as a learning technology administrator, I learned about a variety of issues that seem to be plaguing Higher Education nowadays. One of those is called the Disengagement Compact, an idea developed by George Kuh, now emeritus Professor of Education at Indiana University. Kuh was the founder of something called the National Survey of Student Engagement. The disengagement compact, according to Kuh, goes something like this. On the side of the Professor/instructor - a promise is made to the students to not demand too much effort from them or make things too difficult intellectually and to give the students relatively high grades nonetheless. In return on the side of the student - a promise is made to give the instructor reasonably high teaching evaluations.

A little bit after learning about this idea, a documentary came out called Declining by Degrees that talked about this issue, rising tuition rates, and wasteful inter-campus competition in facilities and sports and possibly other areas that don't directly impact learning. (Certainly it wasn't an uplifting story, but was it realistic?) I wasn't in a position to address all the issues in my job but I thought it reasonable that we might make some efforts to address the Disengagement Compact and in my blog (which then had a pretty good readership and was syndicated elsewhere) I wrote a few different posts about it - first, this one on a pure inquiry based blog meant for students who had already taken the formal course so weren't in it for the grade, then this one about whether improving undergrad ed was a goal worthy of getting campus attention and my own attention as well, and this last one on tying these ideas into the then Campus Strategic Plan.

A book was later done to accompany the Declining by Degrees video. (Each chapter was a separate essay by a different author.) I read a good chunk of that book. A particular essay by Murray Sperber - How Undergraduate Education Became College Lite - And A Personal Apology made a strong impression on me. I had been carrying similar ideas with me for some time, but as an Econ Prof I mostly taught undergrad courses with problem sets and exams. The world was different in a writing intensive course, or what used to be writing intensive courses.

As an administrator, my teaching was done as an overload rather than as a service to the department, so I taught what I wanted - all small seminar classes. I did a Discovery class once - that went so-so. The next time I tried a CHP class and that went really well. So I continued to teach CHP classes when I did teach. The last time, it wasn't an Econ class but rather a class called Designing for Effective Change. In some ways it went extremely well. In other ways it was a bust. So it is with experiments when you teach. It was the first time I tried to have students blog. That part seemed to go well.

So I was intrigued by the idea of whether any of the good parts of that course could be carried over to a regular size class of students in an upper level Econ course. On the mode of instruction in the class, it was driven by that thinking. Could the seminar style approach used in CHP be tweaked and then used in the regular class and could it be done to address the Disengagement Compact issues?

On the content of the course, I didn't have a particular agenda in mind other than that as an administrator my formal economics background served me less well than having a very strong ethic of collegiality and wanting to freely discuss ideas with both staff who worked for me and faculty we helped with the teaching. So I somehow wanted to have this class benefit from that administrator experience and much of the readings were selected based on seeing some cross pollination of these ideas. Then a few of the readings were selected simply because they seemed necessary to prepare for Nudge.

The Nudge book itself was selected by somewhat different criteria. Truthfully, I didn't like it that much myself when I read it. But I had some good success in that CHP seminar by having the students read books that were recent best sellers so I thought that approach might work here too. It is very hard for me in advance to know what will resonate with students and what won't. The other thought is that one book from the previous class called The Fifth Discipline had as a core idea a notion the author, Peter Senge, called Leverage - coming up with small changes that have big impact. The core idea of Nudge, though not identical, seemed quite similar. The Fifth Discipline was a success in that prior class. With Nudge I had a similar idea and it was about Behavioral Econ. That's how I based the choice.

Early Unanticipated Stress

Sometimes I can be a princess with the pea and let even trifles disturb me. Other times I can be pretty hearty and shrug off rather serious challenges and simply make do as best as I can. At the beginning of the semester it was mainly the former. There were three issues that cropped up almost immediately. The first was the turnover in the class. This is a course intended for majors and in some way was meant to function as a capstone class (though it was open to anybody). I did expect turnover in my other class, Econ 302, where there are multiple sections of the course. I didn't expect it here. It interfered with getting the groups to function early on and it served to distract me from setting a good tone.

The next was the auditorium seating and that while all of you could see me and I could see all of you, you couldn't see each other. So when I did Q&A at the beginning of the semester, everyone seemed like the were answering me and ignoring entirely what any student said previously. We had no flow at all and thus this didn't work like a seminar in that respect.

The third was the construction noise. I ragged about that with a friend who said I should request another classroom. But I had gotten my way on when the class was held. Schedule-wise the Econ Department was good to me. So I didn't try to move rooms. I do understand that with the Lincoln Hall construction classrooms the size of ours have become scarcer at prime times of the day. But still, I was asking myself about the Campus Commitment to learning that they could allow classes to be held in a building with ongoing construction. When I was in College of Business and BIF was open for teaching but still not completed, the rule was that work on BIF had to be after 5PM.

The Blogging

I was surprised by the very first set of posts based on the reading on Procrastination. The frankness before we had gotten to know each other was knew to me. Many of the CHP students were quite shy online, especially initially. But further, the way students depicted the schoolwork was so different from how I thought about. To bring some connection to the above, I viewed (and still view) the blogging as a kind of deliberate practice. I also view doing term papers and in class presentations that way. There is growth in the doing if done with care and concentration. The deliberate practice is the main aspect of what's going on, in my view. Many of the students, however, seemed to regard all of this as hurdles to get over and disregard the personal growth aspect of the activities entirely.

Put a different way, an engaged student would see these things as promoting growth. A disengaged student would view them as hurdles. The engaged student might then think of the classroom as a kind of gift exchange (my comments on the blog posts being the gift that flows in the other direction). A disengaged student views this as a service rendered for payment - an acceptable grade in the course in this case.

There is then the issue of whether I gave sufficient direction/coaching on how to do the blogging well. The answer is to produce connection in posts between the current readings and your experience (we did not that bad in this dimension though the same examples seemed to crop up repeatedly) other connections between the current reading and things you've read elsewhere (a handful of people gamely tried to do this but most did not) and for later topics trying to build connections between the current reading and previous readings in this class (I don't recall anyone doing this). Further, this should be done in a coherent narrative. That much was explained at the outset. Perhaps constant reminders were necessary - nudges if you will. On that I was lax.

There is then the issue of what if you don't have those outside readings to connect to at your fingertips? My response (you may be thinking - you've got to be kidding me, this is too much to ask) is to do the outside readings then and there. Use the class readings as a launch point and read other stuff that seems related that you discover. For the type of learning we're after in this class, developing a habit of doing that as a matter of course is one of the meta-skills I mentioned above.

I will say that commenting on team blogs is much different than commenting on the individual blogs I did in the CHP class, because there I had a sense of an ongoing dialog with the student from post to post. Not until the team had a done its class presentation did I even match the writer with the person in a way that could give me that sense of ongoing dialog.

Class Attendance

I don't know when this happened exactly but after two or three weeks class attendance started to drift down. Let me go through the list of possible causes.

One is senioritis. I understand that. Students in this category have their attention elsewhere. If I do a class in the future even remotely like ours, I will try to teach it in the fall.

Another is disengagement, students who truly are disengaged in most of the courses they take on campus though they aren't yet seniors.

A third is discouragement I created (through inexperience with the subject or my reaction to the environment) through the early class sessions or the reading selections. I have a sense I disappointed a good number of students with the approach. I regret creating such disappointment. In you own posting you might comment on this a bit. (Please be gentle. I do have feelings.)

Not having taught a regular size undergraduate class in quite a while, I believe I made several young instructor mistakes. Among them was appearing defensive from time to time. I was.

A fourth possible explanation, and something that really hasn't happened to me before in teaching, is that a gulf in political views may have created a sense that the class was cover to articulate a paternalistic agenda. Some of the underlying issues came up today during the Objections presentation. The particular example makes the point about as strongly as it can be made. I believe that in the presence of obvious negative externalities there should be strong regulation that proscribes the behavior. No nudges. Strong regulation instead. The externality with drunk driving is obvious. It should be against the law and violations should be severely punished. Paternalism which is intended to be good for the person but where there is no apparent externality is a much harder case. When it is the one and not the other is not always as transparent as it is with drunk driving. Perhaps it would have been better for the class if we did the Objections chapter first, instead of last. It would have put the issue front and center and then, perhaps, we could have put it to rest. Some of you might not agree with my position, but that shouldn't block you from learning in the class.

I did, like any new instructor, initially take the drop in attendance as a personal rebuke. It certainly seemed to limit the possibility of achieving my initial goals. After spring break, however, a funny thing happened. I began to find it liberating. Those who did come (not always the same but there was a solid core of students) constituted numbers where it was more like a seminar. Further, the last several class sessions seemed much more enjoyable to me. We did have reasonably good discussion and progressed through the ideas.

Wrap Up

It is good to get preconceptions as I had going into the class to confront real experience even if there are some ego bruises in the process of doing that. I've written this post (too long but I hope otherwise informative) as a way to try to encourage your own serious reflection on the readings and tying them into the way the class unfolded for you.

Follow up on today's class and where we are going next

I thought it was a good session today, with a fairly lively discussion. I omitted discussing one obvious thing - in the mode of Econ 102. If the underlying issue with health care cost is that doctors qua entrepreneurs with their own private practice are aggressively ordering procedures to enhance their own revenue, then an increase in the supply of doctors would be the standard intro econ textbook remedy. How would that increase in supply come about? One way would be to encourage foreign doctors to immigrate to the U.S. They might also be the ones who would take the "salary jobs" that would offer an alternative to the doctor as entrepreneur model. (In fact I believe this is already happening, but in what volume I do not know.) Being aggressive about this as a policy matter may have all sorts of politics associated with it that makes the suggestion untenable. But looking at this as a straight economic issue we do teach that expanding supply lowers the market price. So at a minimum we needed to get that idea on the table.

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Next week is our last on Nudge. We will be covering the chapters on Privatizing Marriage and Objections. Both should be lively discussions.

The last week of class I plan to do as follows. On Monday we will read/discuss both Akerlof's Gift Exchange paper and this paper by Ericsson et. al. on Deliberate Practice. I will try to provide a bit of motivation below, then more next week when you are closer to reading those pieces. On Wednesday I want to apply those ideas to our class as we do a debrief. I hope you will blog a bit on both of those. My post next week should give you a sense of where this is heading.

Now for the motivation. In ongoing exchange that happens over time much of that (interior to the firm or organization) happens via a "trust relationship." Gift exchange is, in essence, the economic model of trust relationship. Much of what you get in the relationship should be viewed as a surplus or a rent. Both parties in the relationship understand that. We've seen this notion before, in Akerlof's Nobel lecture talking about efficiency wages, and in Simon's Nobel lecture where he talks about eliciting performance in organizations.

Akerlof in the Gift Exchange paper applies the idea to industrial work. I want to reconsider the idea in the context of knowledge work. With knowledge work, a good part of the motivation of the worker comes from their own learning. In turn, a lot of effective learning comes in the form of "Deliberate Practice." Deliberate Practice means taking effort to learn things just out of reach until that becomes routine and then going a step or two beyond that in an ongoing cycle. Video games where you go from a beginner level to higher levels have a built in deliberate practice aspect to them. It can both be fun - mastering the next step - and challenging - unsure that you can conquer what's ahead when it looks difficult. So I'd like to put that sort of learning into the workplace and talking about the economic incentives that would make it work well. I then want to argue that jobs so structured are the type we'd all like to have. But I also want to suggest that such structuring of the job has challenges to it. Earlier I encouraged people to watch a Daniel Pink video. I think he gets into a bit of a trap with what he presents. So we need to discuss that trap too.

Drafts of papers

I announced this in class yesterday but I will repeat here because not everyone was there. For those teams that have already presented, it is time to be getting your first draft of your paper to me for my reactions and suggestions. Please make that a priority in your efforts as we get into the last quarter of the semester.

Some Follow Up on Credit Markets and Today's Presentation

Interest rates were indeed quite high in the late 1970s - early 1980s, but the practice is usually to distinguish between nominal interest rates and real interest rates with the latter equal to former less the rate of inflation. Real rates were quite low in this period (which is typical for an economy in recession). When I was in grad school my classmates and I would often talk at lunchtime about whether the real rates were negative and if that is even possible (it is) and what that would mean. At a macroeconomics level economic growth requires a positive real rate. You can work through the rest. I mention this because the table that was presented for 30 year mortgage rates presented nominal rates only.

One of the things we didn't talk about today is refinancing. It warrants a mention. The underlying economic question is when there is a long term loan and there is a risk that interest rates will vary during the term of loan, who bears the risk? In the case of a fixed rate loan, borrowers make out if the interest rates rise in the future but still during the term of the loan. One might think that it is the lenders who make out when interest rates fall, and if the variation in rates is small, that is true. But with larger declines in the interest rates borrowers might refinance. That means paying off the old loan in full and taking out a new loan (incurring the various origination charges with that) and securing a lower rate in the process. With refinancing a possibility the lender for original loan can't expect to make out when interest rates fall substantially, the same way that borrowers make out when interest rates rise. But now some caveats on that.

Every mortgage I've ever had has allowed prepayment in full at any time during the term of the mortgage without penalty. I take that to be the norm for mortgages with borrowers considered a safe bet to repay the loan. But some mortgages have stiff pre-payment penalties. The ones which have early teaser rates but rates rising in the future may be in that category. This is a way for those lenders to assure they get back the interest they gave away with the teaser rate (and then some). There is nothing fundamentally wrong with pre-payment penalties providing the borrowers understand them and their function.

There is also a second issue about whether the individual can qualify for refinancing (has the requisite income and other desiderata). For many of the troubled mortgages that resulted after the burst of the housing bubble, quite a few of the homeowners couldn't refinance under the existing rules, even as market interest rates declined substantially as the Fed tried to pump money into the economy.

Because of the crisis, one might argue that the typical rules should have been suspended to allow these homeowners to refinance as an alternative to having the bank foreclose on them. There is a very provocative Op-Ed piece in today's New York Times by the former special inspector general for the TARP program, Neil M. Barofsky. Since he just stepped down from that position one can imagine there's quite a lot of inside baseball behind the decision to write that Op-Ed piece. It needs to be interpreted as such. Nonetheless, the message is interesting to read. TARP was supposed to encourage these bad mortgages to be renegotiated, but in may cases it didn't do that.

Let met close with a point about education for using credit wisely. There is a significant question about what is possible in this regard from the point of view of timing the education versus when the need to know arises. If you have classes on this too early, before you are using a credit card with consistency, the education may go for naught. My guess is that the right time for most of you would be between the Freshman and Sophomore years or when people move out of the dorms and get off meal plans. I wonder if a purely voluntary training specifically aimed at using a credit card while staying on a tight budget might have lots of takers. I don't know. It seems to me an interesting possibility. It also occurred to me after listening to you discuss not monitoring your credit card spending, and what I suggest here may be difficult to implement because of the security that's needed, but a smartphone app that popped up once a day with your recent credit card spending might do the trick. If having that were a way to attract customers, the credit card companies themselves might offer it.

Comments/Observations on Issues Raised in Today's Session

Here I want to take up some points that were raised by Adam in the discussion of the Naive Investing chapter. Some of these may be controversial (regulate or not). Others I take to just be common sense. Either way I welcome feedback - publicly as a comment to this post or privately by email if you prefer.

On the time profile of the riskiness of the portfolio

Let me use a metaphor to start on this topic. It is a standard idiom to get right back on the horse after falling off. For kids, in particular, you don't want the pain from failure to harden. On the other hand, if a kid is beginning to learn to ride the kid should start out on a gentle pony, not a bucking bronco. The latter is a good challenge for an experienced cowboy. For the rest of us, it is suicide.

If you are an otherwise experienced investor then it is definitely a true statement that when you are younger you should be taking more risk, because there is more growth potential in that. However, if you are not yet an experienced investor it may be prudent to take a rather safe approach to portfolio selection, try to ensure that early investments do pan out, and build confidence based on that experience. As you learn, your tolerance for taking risk will likely increase. You may then experience a failure in your investments but can better take that in stride and keep at the general approach.

On your own risk attitudes

There is a question of whether you know your own attitudes toward risk. Presumably different people of the same age and general size of the portfolio will nonetheless have different degrees of risk in their portfolio because of their own risk preferences. But how do you know what your risk preference is?

I recall a line from the version of A Random Walk Down Wall Street by Burton Malkiel that I read as an Assistant Professor back in the 1980s, to the effect...

...If your investments are keeping you from sleeping at night, your portfolio is too risky.

I subscribe to that point of view, though I've now reached the age where many things keep me up at night, so the test has lost some of its power. It would be nice if there was a different sort of test for a portfolio that is too safe. I don't have a cutesy story for that but I will say you really only learn about your risk aversion after having lost something. It is very hard to understand your sense of risk in prospect without having been previously burned.

On the government provision thing versus laissez-faire

1. I do have the sense that many of you are bursting on this issue. That's fine. It can serve as motivation. But I would ask please the following based on the sense of this Churchill quote.

“It has been said that democracy is the worst form of government except all the others that have been tried.”

In other words, regulation may very well have issues with it. Adam discussed the capture theory in that regard. Below I will provide some other arguments against. Laissez-Faire, however, may also have issues with it. The book discusses disreputable brokers fleecing ignorant investors. Sometimes medicine is a good thing. Other times the cure is worse than the disease. To determine which is which, you have to look at both scenarios, not just one. It's hard to do that, but it is what we should be doing in this class.

2. There is no getting around that you are students at a Public (i.e., government provided) University and that those of you who are in-state residents are also receiving a rather large subsidy on the cost of your education even as you may be paying substantial amounts in tuition and fees. There is also no doubt that the University is a heavily regulated environment operating under Federal regulations like FERPA (my sense of which is that most people view the goals of this as laudable and that mainly we should work to abide by the regulation), State of Illinois regulations like the mandatory filing of conflict of interest statements (again, sensible in my view) and the mandatory annual ethics training (which I believe to be heavy handed and largely redundant for experienced employees), and its own internal regulations like having an add and drop date for course registrations. Presumably you are here because it dominates the other alternatives that presented themselves to you. So this is one case where you seem to be voting for government provision.

3. There are many different ways to regulate economic activity. One is by altering the tax code and creating "tax preferences." For example, there is the mortgage interest deduction. Another relevant example is that income put into approved retirement vehicles can be tax deferred. Personally, I am the beneficiary of both of these. But I want to note that these incentives, irrespective of their other effects, have an income redistribution consequence where the rich are the primary beneficiaries. Richer people take out bigger mortgages so get a bigger deduction. While IRAs and 401K plans have upper limits, people of modest income might not contribute at all in the absence of tax incentive, while people of higher income will surely save some of it so the effect may merely be to move savings around to get the biggest tax benefit and not change overall saving.

On the other hand, people may view already established tax incentives as a more benign form of regulation than having a government agency regulate the activities. So in class today the argument was put as either for or against, but there may be differences in degree. Some of you might be ok with tax incentives but not OK with putting your trust in the SEC.

4. Here let's focus on some specific financial regulation. One is Deposit Insurance provided by the FDIC. For savers this guarantees their account balances when put into insured accounts. For lenders, to qualify for government insurance there is regulation on reserve requirements. These lenders must keep some assets to back up the loans. Note that the existence of this type of regulation may bias investors toward safer assets. A reason to keep your money in a bank instead of under your mattress is the deposit insurance. But you might also keep your money in the bank instead of putting it into other non-insured securities. One argument for deposit insurance is to deter bank panics. My sense is that it has been largely successful that way. Another argument for deposit insurance is to provide a baseline "safe" asset in the system. (Note that if the interest isn't indexed to inflation, these assets aren't fully safe from risk but they are safe from the default risk we discussed in class today.) I believe this to be a relatively uncontroversial regulation.

Let me turn to one where there is/was more controversy, the repeal of the Glass-Steagall Act. I should make two disclaimers here. One, I'm not an expert on Banking or Finance. Two, I thought it was wrong to repeal the act. Now back to the story. In general regulation proscribes certain behaviors. When a regulated entity (like a bank) feels overly restricted by the regulation, the natural reaction is to lobby to undo the regulation. In this case it is interesting to note that Glass-Steagall was finally done in while Clinton was President. But it was a long time in the making. My interpretation of banking is as a two pronged activity - one is pure intermediation - people save in their checking accounts, savings accounts, and CDs, and those funds are lent out for mortgages and small business loans. In aggregate the activity can be pretty safe, especially if the bank as intermediary acts as an honest cop on which loans should be made. The other prong is much more speculative lending - investment banking - primarily for providing capital to startups, which desperately need the cash but which will have a high failure rate. There is no question that investment banking provides an important function, but the reward for making these type of loans has to be large when they do pay off because of the downside risk. So it is more like equity financing, but before the startups are ready for that. Glass-Steagall kept these activities separate. Under its repeal, they were integrated.

5. I promised some other arguments against regulation or at least against further regulation. Here are three.

a) Regulations are hard to remove once they are in place, but the context may change. So even a well-conceived regulation that was appropriate when written may eventually not make sense yet it persists because there is some beneficiary from it and no general outcry against. I'd put the mortgage deduction in this category, for example. Knowing this is apt to happen, it may make sense not to regulate at the outset.

b) We're not that smart or the law of unintended consequences. The Peltzman paper we read makes this point. Intent in design is far from the same thing as consequence. Usually intent is laudable. Consequence may be much less so.

c) The political process may muck things up. The expression half a loaf is better than none simply may not be true with regard to regulation. A strong regulation or total laissez-faire may each be preferred to a weak regulation, which ends up producing the worst of both possible worlds. If true, but political compromise causes weak regulation, one can be for laissez-faire as the best possible outcome.

On an entirely different note, I feel much better now than I did this morning, where I was much better than yesterday. So I hope to engage the future teams more than I did in today's session, but even better would be to see the class do that on its own.

In praise of tightwad dads

I enjoyed much of the in class discussion today. I want to make a couple of observations that weren't brought up in the discussion, a possible suggestion, and a reading you might consider.

One of the issues with economic reality, as distinct from economic models, is that there are many types of income and cost risks that are not insurable, so you self-insure as best as you can. In the two-minute version of Modigliani's life-cycle model that Brian presented, we didn't get to one of those risks that may be hard to insure against, which is length of life (income needs are greater if you live that much longer). If your assets are entirely in the form of annuities that expire at end of life, such as social security, that provides such insurance. Most of us, however, will keep some substantial amount of our wealth in non-annuity form. Then you can undershoot or overshoot on how much to save for retirement. If you overshoot, presumably that adds to the estate and gets distributed to the heirs, not a terrible outcome in most cases. If you undershoot, the outcome can be much grimmer.

So the thought is that the adult children might provide such self-insurance and do so by saving for their parent's retirement. (Have some joint or trust account and give annual gifts into that account.) This might very well substantially increase the kid's motive to save. And with that let me bring in the title of this post and the notion that the dads in particular but probably both parents are tightwads. If that is so, then the typical moral hazard problem probably won't be manifest - the parents won't spend out of these funds unless they really need to do so. And if they don't need it, they bequest that saving back to you after they pass away (and if it is a concern, not to your siblings who perhaps didn't contribute likewise). In the meantime they've turned you into tightwad kids, which may be the best gift they could give you.

This would all happen naturally if the extended family lived under one roof. It may seem less natural when the family is scattered, but there is no reason it shouldn't happen even then.

And with that let me return to academic concerns and mention Samuelson's famous paper on An Exact Consumption-Loan Model.... which developed an analytic framework called an overlapping generations model and provided a theoretic rationale to pay-as-you systems like Social Security, where the younger generation makes a payment to the older generation that improves overall welfare, provided the next and each subsequent generation does likewise. (The model is deceptively simple. The math is quite hard because there are an infinite number of consumers and an infinite number of goods in the model .) There is no government in the model. The payment could happen because it becomes a social norm to do so. My suggestion above, meant seriously, makes sense if your kids (that most of you don't yet have) will do likewise for you when they come of age.

My tweak on Samuelson is that it's the income insurance that's needed, not the overall level of saving to be changed, but that if you did the one as I suggest you would create a nudge for the other and overall saving rates would rise. Something to ponder as we head into the holiday.

Have a good spring break.

Leading the herd

Before we get too locked into a pattern that every succeeding session will imitate, I want to make a few observations.

(1) It is good that we are getting class participation in the sessions and that students in the audience are bringing their experiences to bear on that. However, once a point has been made one echo on that point is ok. Multiple echoes are not adding further. Time is scarce. Yesterday we didn't cover all that the team planned to present. So members of the audience need to make a judgment about whether what they want to say is a contribution to the discussion. Please use your good judgment on that.

(2) I have asked each team to prepare a presentation online in advance of their session so members of the class can be prepared. I didn't intend for that online presentation to be used during the session. It's not that you can't use it. That's still your choice. But I'm sure everyone is familiar with the phrase - death by PowerPoint. The slides can take over in the minds of the presenters and they begin to feel impelled to do everything that is on them, regardless of the circumstances in the class session. Presenters might instead use hard copy notes. Or they might show a little bit on the screen, but otherwise not rely on it for the entire session. (There is the other issue that to make the screen viewable, the lights in the front should be dimmed to the presenter is in the dark.)

(3) The posts and comments that teams make are also obviously a way of preparing for the session. There is then the question of whether those should end up driving the session or only be a sidebar. My sense this is it has to be a judgment call by the team leading the session, but it is a call that should be made in advance. So teams should have a game plan going in on that.

(4) Prior commenting on the posts by the presenting team is a good thing to do. We read in different ways depending on the purpose. Reading slower and more deliberately with reflection while we read is obviously more time consuming, but one gets a much better sense of what is there that way. Commenting on the posts is a way to encourage that sort of deliberateness and I believe also encourage the participation of other members of the class.

Observations on yesterday's class and moving forward

In addition to the chapters in Nudge please read the piece by Arthur Okun - the Invisible Handshake and the Inflationary Process. We will discuss this next Wednesday. But in your blogging, contain your posts to what is in Nudge. That is to be fair to the teams who are making presentations.

I was pleased with how much interaction there was in yesterday's class session. Invariably I find myself making comparisons between you guys and what I remember of myself at your age. Either I led a sheltered life or in the process of time I've duly forgotten many of my youthful indiscretions. In any event, that the class opened up in the session was nice to see. A Great Group of Economists should be applauded for successfully encouraging that end.

Now some suggestions for the class as a whole and for teams making presentations in the future.

Class as a whole

• When the class does participate vigorously that makes it easier for the team that is leading the discussion and they are more prone to relax while doing that. So understand there is an implied obligation on the audience during these team presentations.
• I've struggled with this all term and maybe it is too hard to get much on this, but it would be very good if after one student has made his or her point for a subsequent comment to be in the form of follow up, building on what came before.
• The language yesterday got "colorful" as people described their experiences. Please remember we are in a classroom, not a hangout.

Teams leading the discussion

• Please have one member of the team take notes during the presentation. This can rotate among team members as other team members lead on their section. The goal is to create a written record of the session.
• When communicating with me by email please copy your teammates in the message.
• Please remember that your are trying for a balance with the discussion - getting the class to open up is part of it, getting the students to reflect on the economics in the chapter you are covering is the other part.

Thanks for your attention.

Prof. Arvan

Follow up to today's class

Absent minded is my norm but today I was more discombobulated than usual. I misplaced my keys and only found a spare a few minutes before our class. And I was a little distraught about the exam in my other class. That resulted in some things I failed to mention that I'd really like you to consider.

1. Nudges you do to yourself. The idea, to use some economic jargon, is that while you are in the cold state you do things to make hot state things you want to deter have higher marginal cost and likewise for things you want to encourage you do things to lower their marginal cost (or raise their marginal benefit). One personal example is getting regular exercise. In the warm months it is much easier since I like to walk. In the cold months I kind of dread the treadmill and the stationary bike, so what I do is buy DVDs of shows/movies I think I will like and deliberately put them on the player in the exercise room. It works....more often than not. I could really use the DVD for season 3 of Breaking Bad.

2. Nudges in our class. The blogging definitely has an aspect of a nudge. Part of the aim with that was to influence (a) that you've done the reading and (b) you try to consider the reading more deeply in terms of incorporating ideas from elsewhere that were not assigned. I am extraordinarily interested in whether that method as nudge has been at least partially effective in your view. I'm also interested in ways that might be done better. You can give feedback on that by commenting on this post, emailing me about it, or writing about it in our own blog.

3. Having the Nudgers learn. This isn't in the book, as far as I can recall. My own view is that one needs to have an iterative approach in implementing anything that is new --- try something, look at the outcome, make an assessment of what works and what doesn't, tweak and repeat the cycle. Then preferably try the same thing in a different environment or get other people to try it to see how robust it is. This is the approach I've learned over the years from trying to implement technology into instruction.

4. Treating symptoms rather than causes. This is potentially quite a serious problem with nudging. Here I will discuss it only with one particular example because it may come up in other dimensions in later presentations on the book. I may have mentioned a biography of Mickey Mantle I read recently, called The Last Boy. Later in the spring if you are looking for a present for Father's Day, that might be a good choice. I wrote a blog post about it not too long ago on my regular blog. Mantle was perhaps the most talented baseball player ever, but he was also a horrible alcoholic. The author of the book makes a good case that Mantle was terribly confused about his own health regarding what was genetically determined and what was of his own making. But late in the book there is a convincing case made that Mantle had huge emotional pain from some childhood experiences that justified the pain, so the drinking could be seen as a reaction to that. He needed therapy. He didn't get therapy at all, till near his death.

More generally, if we as potential designers of nudges only observe other people's behavior but don't understand their inner motives, we might be quite guilty of treating symptoms only - with the possible consequence that we make matters worse by masking the real issues.

Ran out of time and forgot something too

Some things to follow up with the class session today.

1. The schedule for the Nudge presentations.

2. Tying Mill's idea of ownership as incentive to Akerlof's discussion of efficiency wage theory.

On this point it is interesting to observe that in the current labor market many firms are expanding their workforce with temps rather than with full time employees.

3. This is the video with Daniel Pink's voice. You will enjoy it. It is very slickly produced. Whether it is good economics is a different matter. But it does make the point that sharecropping incentives applied to modern work are not effective. I agree on that point.

4. There were one or two survey responses that indicated the level of the course is not high enough and there is not enough to read. There may be one or two other students who didn't complete the survey who feel the same way. So here is a potential accommodation.

There are two doctoral students in the class from the Accounting department who are taking the course for graduate credit, and to do that they are doing outside readings that are more at a graduate course level. I've asked them and you are welcome to join their reading group if you'd like. This would be for your interest only. It is not a requirement for our class and I don't intend to give you course credit for an independent study. But it should get you exposed to more sophisticated readings intended for a professional economist audience rather than for the broader public.

If this interests you please let me know in the next day or two.

One Post a Week and Different Readings for Next Week

I've concluded that doing a post for the week is going to improve things - my life if not yours. Then I'll read 490 posts over the weekend and 302 posts on Tuesday and not quite be as overwhelmed as I am now. Also you might be more thoughtful on your posts this way. So the original post will be due Friday night and the comments on Sunday.

To get on track you'll have to do a little more reading the rest of this week, but it shouldn't be too bad and I hope you will enjoy the change.

I'm also changing the content I had planned. Nudge isn't just about that people can have their behavior change by what classical economists would term insignificant changes in the economic environment. It is also about, maybe mainly about, the desirability of making such changes. So I want to get people critically ready for this.

So on Monday we will do straight paternalism and when it is that the State can and should compel people to do things and when the State should back off. We'll read two pieces on this track about education and compulsory schooling. First we'll read the piece by Amy Gutman, an unabashedly Liberal piece arguing the pro side of paternalism. Then we will read the opinion of written by the Chief Justice on the Supreme Court Case Wisconsin Versus Yoder, which I believe you'll find quite interesting in its arguments.

On Wednesday we'll read Sam Peltzman's piece on auto safety regulation. This is implicitly an argument against government regulation, not because paternalism is bad per se, but rather because of "the law of unintended consequences" and regulation may not produce the intended effects at all.

I do want you to see both types of arguments before we get into Nudge.

Will Wonders Never Cease?

Amazingly enough, we seem to have the sites for all the teams and if you wish to view the other blogs in a reader, here is an OPML file that you can import for this purpose. We also seem to have exactly 60 students at present, which just so happens to divide by 4. (Yippee!!!) However, we currently have two teams with 3 students and one team of 2 students. So I will be doing some shifting around of students so all teams have 4 and we have 15 teams in total. For the post due tonight and comments tomorrow, stay the old way. I will contact the relevant teams tomorrow and we'll make the changes on Wednesday so we can effectively assign the chapters in Nudge.

If the roster remains this way for the rest of the semester with the team structure intact, that will make me extremely happy. It has been difficult to keep up with all the changes in enrollment and team membership.

Assigning chapters from Nudge this Wednesday

We need to get going on the course project. So this Wednesday we will allocate chapters of Nudge to teams. I want to do this on Wednesday so your team has time to consider its preference. Here are the various things you should know about this.

• I will present Chapter 1 on Biases and Blunders on February 28, a Monday. The first team will present Chapter 2 on Resisting Temptation in the next class. That will be on Wednesday March 2. Thereafter for each class we will do one chapter per class session. This will take us till near the end of the term.
• I'm expecting, at the moment, that each presentation/discussion will take about a half hour. However, I'm really pulling that out of thin are. I certainly don't want to cut off discussion if it is going strong. But at the moment I'm anticipating we read other things too while we do Nudge and I will do the other things.
• Teams should be producing a presentation in advance of the class discussion for students to review so more of the time in class is spent on the discussion.
• Teams doing the presentation should be reading the blog posts of other teams on that chapter. Comments on those posts are encouraged, though not required.
• Teams will write a paper after the session is over. More details on the paper will be forthcoming.
• I will coach the team so it has help in getting ready.
• I will start meeting with the first two teams immediately after we do this allocation.

I don't know how this will work in terms of engaging the class. It worked very well when I did this in a seminar but here we are a much larger audience and the class is still learning to hit its stride. Later teams will have the advantage that perhaps we'll know better how to pull this off, but more will be expected of them as a consequence. Early teams will have to perform where there still is some making it up as we go along. I hope they will set a high bar for those who follow.

Recalibrating

Because of the cancelled class on Wednesday and the optional online session, I'm going to see if I can review some of the ideas from the Gould piece without making it redundant for those who attended online. We will do this before getting into the discussion of fairness.

For that purpose -

a) This is the PowerPoint I used last Wednesday.

b) If you wanted to do the math, and we'll do a little tomorrow, you'd like to come up with an estimate on the probability of getting a hit in a single game. If you had that, then you can compute the likelihood of getting a streak. Really the right thing to do would be to go through the box scores for several seasons and track how many games the player went hitless versus how many games the player appeared in, and then see if you can correlate that with batting average. (The troubling thing is that a walk is equivalent to an out for the purpose of computing a streak.) I found a site that attempts to do this - it estimates the probability of going hitless for DiMaggio at 20%. I wasn't altogether happy with the calculation as it impacts the likelihood of a streak, because on those days were the player only gets one or two official at bats, the streak is much more likely to end, and he didn't seem to account for that. Nevertheless, you can see the sort of computation made.

c) I wrote a blog post, built another simulation, and made a movie about it to try to connect the dots more and to explain the teaching issues from my point of view. We'll review some of this tomorrow. It is a little weird writing a reflective piece about teaching while the course is still going on, but that's what the University cancelling classes will do. So beit.

Contingency Planning for Wednesday

A few years back I had a rather serious fall that required surgery and extensive rehab afterward. Mostly for that reason, I absolutely hate the freezing rain/sleet/hail that is in the forecast. So if it is treacherous outside we may not do a face to face class session on Wednesday. I will make that call either late Tuesday night or early Wednesday morning, depending on the situation then.

I had been thinking of doing an online session as an alternative. It would be optional, because if you don't have the equipment to make it then you can't participate and so I can't require it. I'm investigating possibilities. When I learn more I will let you know. I may then do a quick survey to gauge interest.

In the late 1980s, Champaign had a severe ice storm. Some parts of town were without power for a week. Obviously if I lose power at my home or lose the network an online class is not possible. Let's hope we don't have that problem, but I did buy flashlights today when I went shopping after my other class.

Please take care of yourselves.

Team N Contact Me ASAP

I know we made a new group at the end of class yesterday but I don't have who you are. I believe there were 3 of you - all guys. Could one of you email immediately with who the team members are? Thanks.

Take a look at the left sidebar

Teams are beginning to send me links of their blogs. The class site is taking shape!

Initial Steps for Teams

1. Pick a team name. I will give you the first letter and you will have to work with that. I want the teams to array in alphabetical order in an easy way.

2. Determine whether your team will blog openly or do so privately in Moodle. Friendly persuasion is okay but no coercion. This is not majority rule. If one member of the team strongly wants to blog privately, that's what the team will do. There is a right to privacy.

3. If you will blog openly, build a blog for that and make sure each member of the team is a member of that blog. Each student should make a test post. I suggest the content of that post to be a tiny bit about your pseudonym. (Do a search to learn a little bit about the person. Link to the reference in your post.) When you've done that, email me with the blog url so I can put it into the list of student blogs.

If you will blog privately, email the name of your team and I will set up the blog in Moodle. Once it is set up each member of the team should make a test post as above.

4. Share contact info with your teammates so they know how to get in touch with you and vice versa.

5. Determine a regular team meeting time. I suggest a regular location as well though you may have to be a little flexible with where to meet.

6. Determine a pattern of work responsibility. Your team is responsible for two posts per week (one for each class session) and comments on those. On a team of four, the typical teammate will be posting once ever other week and commenting three times every two weeks.

7. Make a bond that you will do the relevant reading before the team meetings. You will get nothing out of the meetings otherwise. The meetings are mainly to talk through what you will be writing about and to react to comments from me and perhaps other classmates on prior posts.