"Pay while you fly"

One of the news that prevails in the media these days is the rise in oil price. I have lived in the U.S. for more than eleven years now, during which I have seen the gas price rising from just above $1 a gallon to currently about $4. One of the industries hardest hit by this increase is the airline industry, an industry known for its low profitability, or lack thereof. To remedy the situation, the airlines have come up with a new pricing strategy. Instead of bundling all components of a trip into a single price, U.S. airlines have begun to adopt the “pay-for-what-you-use” business model.

First up for charge is the headphone each passenger has to pay for if they want to enjoy the so-called in-flight entertainment but have not brought their own. Second is food, and they have now charged for the previously free box meal of sandwiches, potato chips, and a cookie. The two most recent ones are, introduced last month by American Airlines, for checked luggage and, just announced last week by U.S. Airways, for non-alcoholic beverages, including bottled water.

True, the “pay-for-what-you-use” model seems economically efficient. Technically, passengers won’t get charged for what they don’t consume, which should make for cheaper ticket prices relative to when food and drinks are included. Airlines will be compensated for something that before they had to provide for virtually all passengers. Moreover, after a while, the airlines would learn how many headsets, carbonated drinks, and so forth have to be brought on board, the knowledge of which could save them some costs. The nickel-and-dime extra charges probably will not drive away many potential fliers (although, short of major overhauling of the industry, the discussion of which I will reserve for another piece, I don’t think the airlines can be saved).

How do I personally feel about these charges? The headset and the food charges have never bothered me too much. The former is because I can always occupy myself with a book, an MP3 player, a laptop (for both work and play) and, for better or worse, a nap. The latter because airlines have never been known for their culinary prowess and I can make do by starving myself for a more appetizing meal at the destination. Baggage and beverage charges trouble me somewhat.

What passengers can be expected to travel without checked luggage? Travelers going on a long trip without their possessions shipped or stored at the destination will be obliged to pay. The already fierce competition for scarce space to store their carry-on bags will become fiercer. Soon enough, more stringent regulations on carry-on bags, possibly including a pricing system to allocate in-flight space, will be imposed.

Or passengers, who would have been on a short flight, might choose to drive instead. Say, I want to travel from Los Angeles to San Francisco. Driving would take me about six hours. Going to the airport, checking-in, going through the security checkpoint, waiting, and flight time could altogether take about the same amount of time, and while driving, I can eat whatever I want, whenever I want, and bring however much stuff I want as long as I can fit them in the trunk. Obvious disadvantages of driving are inconvenience, exhaustion, risk for traffic accident, and the opportunity cost of time that I could have spent while at the airport or on board.

And, what will emerge as the airlines start charging for beverages? With the restriction on the amount and the type of liquid each passenger can carry through the security checkpoint and on board, they might be creating an oligopoly in the beverage market for air travelers. Passengers can now either buy their drinks from food vendors at the airport, who already charge premiums for their products, or from flight attendants. (Of course, U.S. Airways says flight attendants will serve at their discretion beverages to passengers who suffer dehydration or other medical issues, but how distraught do I have to be to get free water?)

American Airlines’ new ad campaign proclaims that they know why we fly. I am not sure the airlines do.

A new approach to awarding compensation in courts

An article I wrote for Vox.org last October (http://www.voxeu.org/index.php?q=node/668)
******

Nattavudh Powdthavee, University of London

Andrew Oswald, Warwick University

In previous decades, economists were famous for ignoring everything they couldn’t measure; now they assign a monetary value to almost anything. Recent research on happiness provides a new approach to guide courts in setting financial compensation in tort cases for individuals’ losses from bereavement.

Economists are known to be able to put a monetary value to anything. For instance, the contingent valuation method – a survey-based method which asks individuals “how much compensation would you demand for the destruction of X” or “how much are you willing to pay to preserve X” – has been used to calculate monetary valuations for many of the non-marketable resources that come without immediate price-tags attached. The contingent valuation approach has been used, for example, to calculate the willingness to pay for contaminated residential property1 and the willingness to pay to prevent oil spill2.

So the question is: can judges use the same method to assign pecuniary amounts to be awarded to tort victims in situations that do not appear to have any intrinsically financial aspect such as losses from bereavement of loved ones?

Yes, at least in principle. Yet answering questions like “what number of euros would compensate you for the death of your daughter” is likely to be hard for everyone, and morally offensive to many. As a result, most judges are left to their own devices in award ing compensation packages they think would make sense in court, and they do so by using rules of thumb that have no conceptual foundations based on solid, scientific findings. This often leads to judges awarding financial settlements that can seem very small compared to the shock a loss of loved one can bring. For example, the Fatal Accident Act 1976 provides a lump-sum at currently £10,000 damages for bereavement (that is, approximately €14,000), which is available only to the husband or the wife of the deceased and not to the children for a loss of a parent. In today’s term, this makes up only around 3% of the lifetime income for a successful white-collar worker.
From a scientific point of view, this raises a question of whether we can develop a systematic method for calculating a reasonable compensation package that would closely reflect the genuine damages generated by bereavement.

Our approach to answering this question focuses on the use of surveys of happiness to estimate compensation that would ceteris paribus make up for the average well-being gap between those who had experienced the loss of loved ones and the rest of the sampled population. In other words, our approach involves empirically tracing out a form of an indifference curve between money and bereavement3.

Many economists would shudder at the thought of using happiness surveys in economic analysis, let alone anything scientifically useful. Yet studies in psychology have shown self-report well-being data to be of significant validity and a good proxy for an individual’s utility4. Further, the structure of happiness regression equations -- regressions with a measure of subjective well-being as the dependent variable -- has been shown to have a consistent pattern in many countries around the world. For example, we have found important life events, such as marriage, unemployment, having children, and higher incomes, to have the same qualitative influences – in terms of signs and statistical significance – on individuals' happiness in the USA5, Europe6, South America7, and South Africa8.

In our empirical analysis, we use two different measures of subjective well-being – a seven-point-scale life satisfaction (1 = very dissatisfied … 7 = very satisfied) and a twelve-point-scale record of a person’s mental health status in the general health questionnaire (GHQ) – in the long-run British Household Panel Survey (BHPS) carried out annually by the University of Essex, UK. The BHPS is a nationally representative sample of households, which contains over 10,000 adult individuals, conducted between September and Christmas of each year since 1991. Respondents are interviewed in successive waves about their socio-economic status, attitudes, and their subjective well-being. Since its inception, BHPS has remained representative of Britain’s population.

Using the two measures of subjective well-being, we are able to estimate how much happiness can be gained on average by a higher income of X thousand euros, and how much happiness is lost by the death of loved ones. We then calculate the ratio of the two, which will give us a statistical measure of a marginal rate of substitution between the pleasure of money and the pain from the death of a loved one.

Our results may seem hard to predict by any judge’s standard. Figure 1 shows that there a significant variation in the compensation valuation between our loved ones. Losing a partner is extremely damaging to subjective well-being and requires on average a compensation package of £114,000 (€160,000) in real income to make the person feels indifferent about the situation. Death of a child, on the other hand, is equivalent to an additional income of £89,000 (€125,000) a year. The loss of a sibling has one of the smallest compensation packages at around £16,000 (€22,000).

Figure 1: Death and the Calculation of Compensatory Damages for Bereavement
Policy Implications

Many of the valuable things in our life – love, friends, health – come without price-tags attached. Our approach of estimating happiness equations is not limited only to valuing bereavements and, therefore, gives us a way of putting values on all sorts of things that we care for or even on what politicians make speeches about. Using this method, we can now put actual scientific numbers on their intuitive assessments.
Footnotes

******************
1 Simmons, R.A., and Winson-Geideman, K. (2005). Determining market perceptions of residential property buyers using contingent valuation surveys, Journal of Real Estate Research, 27(2), 193-220.
2 Carson, R.T., Mitchell, R.C., Hanemann, M., Kopp, R.J., Presser, S., and Rudd, P.A. (2003). Contingent valuation and lost passive use: Damages from the Exxon Valdez oil spill, Environmental and Resource Economics, 25(3), 257-286.
3 Oswald, A.J., and Powdthavee, N. (2007). Death, Happiness Equations, and the Calculation of Compensatory Damages. Journal of Legal Studies, forthcoming.
4 See, for example, Diener, E., Suh, E.M., Lucas, R.E., and Smith, H.L. (1999). Subjective Well-Being: Three Decades of Progress. Psychological Bulletin, 125(2), 276-302.
5 Blanchflower, D.G., and Oswald, A.J. (2004). Well-being Over Time in Britain and in the USA, Journal of Public Economics, 88, 1359-1386.
6 Alesina, A., Di Tella, R., MacCulloch, R. (2004). Inequality and Happiness: Are Europeans and Americans Different?, Journal of Public Economics, 88, 2009-2034.
7 Graham, C., and Pettinato, S. (2002). Happiness and Hardship: Opportunity and Insecurity in New Market Economies. Brookings Institution Press, Washington D.C.
8 Powdthavee, N. (2005). Unhappiness and Crime: Evidence from South Africa, Economica, 72, 531-547.

Eric Clapton versus Bob Dylan concert: The Answer

Ok, to follow the logic, given that normally you'd pay £50 for a Bob Dylan concert but it only costs £40 that night, you'd be saving £50-£40 = £10.

So, if Eric Clapton is the only substitute that night, you wouldn't go and watch him if his ticket costs more than £10.

In other words, the opportunity cost of going to see Eric Clapton is £10.

......

I guess the point I've been trying to make is that, when this question was posed by economists Paul Ferraro and Laura Taylor to a group of 270 economic students, only 7.4% could give the correct answer. Given that there were only 4 multiple choices, there was a 25% chance of getting it right. Yet it does show that some knowledge of economics may be a bad thing if it wasn't taught properly.

We often go into economic classes and see lots of graphs with blue and red swiggly lines that just don't make much sense to us. However, the way Bob Frank teaches - narrative teaching, i.e. bringing real life situation into play and use economics to explain it - can really revolutionalise how the science of economics should be taught!

Eric Clapton versus Bob Dylan concert: The Question

A simple question taken from a very interesting book by Bob H Frank for everyone; doesn't matter whether you're an economist or not.

You've received a free promotional ticket to Eric Clapton concert which has no resale value. On the same night and at the same time, however, there is also a Bob Dylan concert. Bob Dylan is the only artist you'd ever consider going to listen to that night (apart from Eric Clapton, that is). On a normal day, you'd be willing to pay £50 for his ticket. The price of the Bob Dylan ticket for that night is actually £40.

Taken all of these information together, what is the opportunity cost - i.e. the cost of giving up the opportunity of doing one thing or consuming one thing and not the other - of going to see Eric Clapton concert? Is it:

A) £10

B) £40

C) £50

D) Zero.

Give yourself 5 minutes to think about this and post your answers in the comment below. No cheating now!

I'll reveal the answer in my next post...

Lesbian as an Identity: Is there a legal entitlement to geographic appellations?

In order not to turn this blog into a romantic discussion, here is a new interesting issue, albeit it still does not depart from the issue of relationship too far, at least in term of definition.

The issue concerns a great legal question regarding the existance of geographic appellations: Is the term "lesbian" something that the residents of Lesbos, Greece have a legal entitlement to prevent others from misusing? The Associate Press has the story:

A Greek court has been asked to draw the line between the natives of the Aegean Sea island of Lesbos and the world's gay women. Three islanders from Lesbos - home of the ancient poet Sappho, who praised love between women - have taken a gay rights group to court for using the word lesbian in its name. One of the plaintiffs said Wednesday that the name of the association, Homosexual and Lesbian Community of Greece, "insults the identity" of the people of Lesbos, who are also known as Lesbians. "My sister can't say she is a Lesbian," said Dimitris Lambrou. "Our geographical designation has been usurped by certain ladies who have no connection whatsoever with Lesbos," he said. The three plaintiffs are seeking to have the group barred from using "lesbian" in its name and filed a lawsuit on April 10.... The Homosexual and Lesbian Community of Greece could not be reached for comment.


Rules regarding name which is linked to the particular geographical regions are common in trade areas. Under intellectual property law, the term ‘Geographical Indicator’ prescribes the extent to which one is entitled to use the name of the specific region which has some connections with the product in question, while at the same time preventing the same product produced outside the particular region from such usage. The most common examples of such GI are ‘Champagne’ and ‘Dijon Mustard’ – even though the latter is becoming a generic name even within the EU nowadays. I have not been aware before that the same concept can be applied to the common term like ‘lesbian’. It is interesting to see how the court will address this but my hint is that the court may decide to introduce some innovative grounds to preliminarily dismiss the case to avoid considering this complex issue.

The search for ‘soulmate’ …. with constraints!

My apology for the unromantic title I give to such a romantic subject. In fact, during my writing here, I indeed plan to make an exploration on this topic and transform it to the least romantic analysis possible.

Yes, soulmate is made. But to a large extent, soulmate is found.

Man and women do not just sit and wait at home or go shopping to a ‘soulmate’ factory to have their soulmate manufactured. They look for that person.

Yes, they search.

However, the degree of searching varies accordingly to their culture and the wave of history.

It may not be the exact same way as when we look for the perfect job, but the men and women of this century are amazingly active when it comes to looking for love.

In the job market, if it is a competitive one- meaning that there is a vast number of workers and employers, nobody has the upper hand when it comes to selecting the right match. When every worker is closely homogeneous, the match is arguably rather random, for the fact that an employer is better off whomever they hire. Everybody who find his match is happy.

True, romance cannot be that simple. True, the love-finding market is not at all either that random or perfectly competitive.

In particular, go back a couple of century ago, it would be somewhat difficult to say that BOTH men and women were equally active at the search for love. On the other hand, it would be mostly men who did the search, while ‘the soulmate’ product was put passively on the shelves. ‘Male’ customers had the bargaining power to select his match. It would not be too wrong if we go as far as to resemble this situation to the ‘monopsony’ market. Men differentiated themselves through various degree of social positions, education level and professional rank whilst most of the ‘ladies’ product, apart from the social hierarchy where she was born into, were closely uniform. The match would be the one that made the person with more bargaining power-men- better off. In another non-romantic sense, the women he picked would be the one that was able to maximise not only his own utility function, but also the household function. (Becker:1973)

What about the romance market now?

Women have become a lot more differentiated than before. Education, careers and other social aspects that come with it make the ladies as distinct as the gentlemen. Women gained in the level of bargaining in the love-matching market.

However……

One main constraint persists. Even though women benefit from the pills and modern contraception a great deal, they remain the losers in the battle against the biological clock. Therefore, in a love market where men become relative less differentiated, one the one hand, these twentieth century women gain in their bargaining power to find the most perfect match. On the other hand, in the assumed world where everyone has ‘baby’ in their marriage production function, the women’s level of patience in the soulmate search game is decreasing in an increasing rate. Time constraint limits the time for the love search.

In a job market, facing the parallel constraint of time, workers thus settle for the job that maybe not perfectly fit but satisfies their reservation wage.

And so to conclude it in the least possible romantic way, due to this constraint, the soulmate may not even be Mr. Right, but Mr. Right-Now, for the reason that household production can begin its engine!!!

------------------------------------------------------------------------------------------------

Reference

S. Levitt& S. Dubner: Freakonomics (2005)
Gary Becker: The Theory of Marriage (1973)
Tim Harford: The Logic of Life
Carrie Bradshaw :"Sex and the City"

Soulmates: made or found?

“Soulmate” is definitely a dreamy and romantic idea to most. Whether it is believable, however, depends on how it is defined. One of the popular definitions of the term ‘soulmate’ is that there’s one person out there that is destined for each and every one of us, i.e. there’s a Miss A out there for a Mr. B. Given this definition, I can say with much certainty that the odd that these two people will find each other is not very good. How can you find that one person from the six billions of them out there? Even if you limit yourself to your own city of residence, the odd is still against you. There are about 4 million people in Los Angeles. Assuming the gender proportion is about 50-50 and that you are interested in finding a soulmate of different gender than you, the odd is still about 1 in 2 millions.

Moreover, when you meet a person, how do you know that he/she is your soulmate? Given the above definition, you can conclude that the person is your soulmate only if you believe that there’s no one else out there who fits you more perfectly, or if you expect that there’s no one else with whom you can be more deeply in love. How can you commit if you expect a better match? A counterfactual proof – proof by contradiction – may work. Break up with that person. If you still long for him/her afterwards or if you can’t find anyone who better suits you, then he/she must be your soulmate. The proving process could be painful but it’s definitely a way.

If it is unlikely that you would find your soulmate and it is not easy to prove whether you have actually found one, how can people claim so?

I believe that there’s a group of people* – not just one – whom you get along with or relate yourself to more conveniently than the rest of the world. To quote a friend of mine, it is a group of people who “operate at the same wavelength.” But, no matter how well you and the other person suit each other, there’s no perfect fit. There are times when adjustments are needed, sacrifices made, and deals negotiated. Through these adjustments and negotiations, a partnership is formed and tightened until the two people accepts each other and cannot imagine adjusting or sacrificing to anyone else.

The making of soulmates might not sound as romantic as the finding of one but it sure is more likely to happen and can be proved by induction. You work with one person until you can conclude whether he or she is your soulmate.

Soulmates are made, not found.

(*The size of such group depends on one’s specifications. A Brad Pitt or an Angelina Jolie is rarer to come by. If you want someone with an MBA degree, I have recently read that there are about 500,000 of them on earth.)

P.S. I was writing the first draft of this essay right before a friend of mine announced to me that she’s getting married to someone she believes is the right one for her. I would like to dedicate this essay to the couple.

What's luxury for?

When people visit me in Los Angeles, one of the attractions I take them to is Rodeo Drive, the center of all luxurious brand names in Beverly Hills. (For movie buffs, the street has been parodied in Shrek II, and it’s where Julia Roberts was refused service in Pretty Woman.) Few of my guests actually spend money there; most of them just walk around for spectacular window displays and, if they are curious enough to walk into the stores, touches of luxury. A friend of mine, with no real intention of buying, went into the Versace store and was astonished by a $3000 jacket – costing more than two months of my rent. He asked me for an economic explanation of how a jacket that doesn’t seem very special can be so highly priced. At the time, I told him that the name Versace, even though is not shown on the jacket, is enough to differentiate it from a seemingly similar $100 jacket at Gap.

A few weeks ago, however, I had a pleasure of speaking to a freelance stylist who has worked at several photo shoots in Thailand. The topic of luxury goods again came up. He insisted that a $500 Prada shirt is superior to other regular shirts. It is made of better fabric – some fashion houses sign contracts with textile manufacturers for exclusive use of particular textiles. Prada’s craftsmanship and quality are well-regarded; with Prada’s reputation, you know that the shirt is perfection. True, but one can look pretty good in a tailor-made shirt in Bangkok for $40 or a $60 Banana Republic shirt without having to worry whether the perfect shirt would be damaged from the next imperfect laundry.

What then motivates people to spend on luxury goods? An MBA friend of mine and his team conducted a survey on potential product lines, say, furniture and home furnishings, for Louis Vuitton. Reputation, quality, design, and craftsmanship are certainly parts of the story but also cited in the survey is the feeling of superiority and better self-image as a result of owning, wearing, or carrying brand-name products. The finding is a testament to the theory of social comparison. One compares him- or herself to others, gains utility if he or she feels superior to others, and is willing to pay extra in exchange for that utility gain.

Brand-name stores exploit this need for social comparison in their creation product lines and their pricing strategy. People may hesitate to cough up a few thousand dollars for a big-ticket item but they are willing to spill a quarter of that amount for smaller ones. According to Barry Schwartz, from whom I took the Introduction of Psychology class during my freshman year of college, a $100 keychain at Tiffany no longer feels expensive, compared to a $10,000 bracelet one has eyed but couldn’t afford. The keychain is not necessarily worth that much and we don’t necessarily need the keychain, but it may be all the luxuries we can afford.

The desire for luxury has recently spawned a new line of business catering to people who can’t afford to buy luxury goods. They can now rent the pieces on a daily or a weekly basis. Ironically, they sometimes end up paying more than retail prices of the goods themselves. It seems irrational but, at least, there’s a luxury behind it.

Women's liberation: What's in it for men?

Just to stay on a similar subject to the post I posted last week, I came across today a very interesting NBER paper by Matthias Doepke and Michèle Tertilt on "Women's liberation: What's in it for men?". Basically they argue that it was actually men who voted in favour for women's rights. So, if that was the case, why did men do that!?!

Here's an excerpt from their innovative paper:

"...from a man’s perspective, there is a tradeoff between the rights of his own wife versus the rights of other men’s wives. Improvements in married women’s legal rights increase women’s bargaining power relative to their husbands within the household. Since husbands have nothing to gain from an increase in their wives’ bargaining power at their own expense, men ideally want their own wives to have no rights. But men might stand to gain from other women having rights.

We focus on two channels that give men a stake in the rights of other men’s wives. First, men are altruistic towards their own children, half of which are daughters. Men prefer their daughters to have a strong bargaining position vis-`a-vis their sons-in-law...

Second, in our model an improved bargaining position for wives translates, among other things, into increased investments in children’s human capital. A father prefers his children to find high-quality mates, and therefore stands to gain from increasing the power of his children’s future mothers-in-law.

We argue that this tradeoff between the rights of a man’s own wife versus those of other men’s wives has shifted over time, because of a changing role of human capital. When the return to education increases, finding well-educated spouses for one’s children becomes a more important concern. Similarly, a rising return to education also increases fathers’ concern about the rights of their daughters, because the daughter’s marital bargaining power matters for the grandchildren’s education. According to our theory, the ultimate cause of the expansion of women’s was technological change that increased the demand for human capital. This change elevated the importance of children’s education, it increased men’s incentives to expand women’s bargaining power, and it ultimately induced men to voluntarily extend rights to
women rights."

Clever sausages!!!

Daughter, Father, and Voting Behaviour

Are our behaviours the reflection mirror of our parents'? Does the causality only run one way (i.e. from parents to children)? Or can there be a reversed causality that runs from us to our parents?

There are now two interesting studies on how having daughters can significantly affect parents' voting behaviours (one by Ebonya Washington - recently published in the American Economic Review) and the other was by me and Andrew Oswald of the University of Warwick.

More generally, our papers found that having more daughters make you more leftwing in your political stance.

Why is that?

The gist is this. First, men earn more than women, on average. In other words, there's pay discrimination by gender in the world. On the other hand, women by nature would prefer more public goods (i.e. streetlights after dark, better healthcare system, etc.) than men do.

Imagine there are only two political parties in the world.

• One is a rightwing party ("Because I'm conservative, I'll give you less of public goods but in return I'll also ask for less taxes from you").
• The other is a leftwing party ("Because I'm liberal, pay me lots of taxes and in return I'll provide you with lots of public goods").

In a stylized world, men would prefer the rightwing party than the leftwing party ("I'm a man - I earn a lot and don't really want to pay taxes as I don't really need public goods") than women.

However, by having daughter the man is likely to take his daughter's best interests into account ("I don't want my daughters to grow up in an unfair world!") and as a result shift his political stance from right to left.

I doubt that this case will apply generally in countries where popularism rather than right versus left dominates (like in Thailand, for example)...

Would you be happier if you were richer?

Would you be happier if you were richer?

Now, if somebody had asked you that question most of you probably wouldn't even need more than a second to respond with an answer 'Well, Duh! Of course I'll be happier if I am richer!'

Fair enough. How about would you be miserable if you were disabled?

Again, what a stupid question.

We have it fixed in our brains that winning lottery = happiness and becoming disabled = unhappiness even without having to experience it before. We use our pre-feelings as a rule of thumb for how we should be feeling if we win a lottery or becoming disabled. We also use it to try and second guess other peoples' experiences as well. When prompted to answer how happy do we think lottery winners and paraplegic are with their lives, we'll first imagine ourselves winning the lottery or becoming disabled and then give our answers accordingly.

But research on lottery winners and paraplegics have shown that their levels of happiness are in fact not that much different from the control groups. In other words, lottery winners are not much happier than those who did not win the lottery, whilst the disabled are not much unhappier compared to those who are not disabled.

What explains the gap between what is predicted (paraplegic should be miserable!) and what is actually measured then?

Well, as explained by Daniel Kahneman and David Schkade (1998), lottery winners and paraplegic have many experiences that are not directly related to their special status. Once the situation they find themselves is no longer novel, people in these circumstances usually think of other things, such as the food they eat or the gossip they hear. However, a judge who tries to imagine the life of a lottery winner or a paraplegic will naturally focus attention on the special circumstances of these cases and, as a result, tend to exaggerate the importance of such events. They called this mismatch in the allocation of attention the focusing illusion.

Focusing illusion is very common, mind you. We normally imagine that we'll be much happier if we were richer because the allocation of our attention is on using the money rather than actually earning it. This leads to us slaving ourselves away today for richer tomorrow. But when we get there, we usually find what we thought we were looking for slightly - if not largely - disappointing...

Reference

Schkade, D.A., and Kahneman, D. (1998). Does living in California make people happy? A focusing illusion in judgements of life satisfaction. Psychological Science, 9(5), 340-346.

Has the most important sector been ignored by economists?

During my usual morning routine of newspaper reading and coffee sipping on the way to work, I came across an interesting article and it got me curious. Noeleen Heyzer, the UN Under-Secretary-General and Executive Secretary for UN-ESCAP put forward the point that “over these past decades, agriculture has been neglected” by policy makers in East Asia & the Pacific region. (Bangkok Post, March 28) Her arguments are founded as followed. Despite being the sector that embraces a very large chunk of the employment of many countries’ economy, the macroeconomic & growth policies, especially the ones aiming to eradicate poverty, has not given the attention to the agriculture sector as it really deserves. Her main statement is that for the development policies to work, big men sitting in the Cabinet & academia should come together and give “Agriculture” a revolutionary facelift.

So, why did I become curious? I began to wonder if indeed Agriculture has been neglected by people at the Top, does the same phenomenon persist at the bottom. And by bottom, I mean students of Economics discipline and academia working in the field of Economics. I set 2 assumptions for this brief investigation of mine. First, surrounding circumstance& current trends in everyday life play quite a strong part in students’ choice of academic interests. They tend to select degree, programme or study options based on what are ‘in’ at the time. Second, the supply of education i.e. the availability of courses and books is demand-driven.

Has Agriculture also been ignored by economists and economic students in this sense? My quick finding shows some results.

As a field of study, agricultural economics is offered as an option course in nearly all of public universities in Thailand. However, out of 33 universities, only 3 of them offer a full programme in Agricultural Economics. Only for Chulalongkorn University that I have the number for the enrolment rate, and it reveals that merely 16 senior year students (of 200) took a class in Agricultural Economics in 2007, compared to 120 in International Economics, 96 in Public Economics and 68 in Development Economics.


A quick visit to amazon.com gives me some fascinating stats. First, there are not as many books on Agricultural Economics available in the online market. In the past 2 decades, books on Agricultural Economics published during these periods has not only been the fewest, but also declining in quantity. However, a quick page-flip in a book on Development Economics will show that, Agricultural Economics is reduced to become an integrated chapter on Rural Economics. So, perhaps, one should congratulate the current popularity of Development Economics as a good sign for the revival of Agricultural Economics? That, I would not argue.

My last tour on the web was to do a blunt check on the popularity of Agriculture, as a discipline in Economics in the virtual world. So I checked out google.com. The number of hits from the search for “Agricultural Economics” came back as 4%, out of the total number of search for all other discipline in Economics that I can think of. And for that, Business Economics takes the lion share of 34%, and 24% for Political Economy.

All in all, does my investigation support Noeleen Heyzer that a Revolution is urgently needed for the field of Agriculture, at least in Economics? This, I leave it for you to decide.

Punitive Damages in private suit: justice or injustice?

In order not to get into a hot debate on the newly decided US Supreme Court case on Medellin regarding a long dispute in US’s violation to provide consular access to foreigners and a relationship between domestic court and ICJ (lots of discussion can be found on http://www.opiniojuris.org/), I have found something of interesting and, of course, less controversial.

In 1985, Kurt Parrott, a 15-year old, was thrown from his motorcycle in Opelika, Alabama. The buckle of his helmet failed, and he died when his bare head hit the pavement. Mr. Parrott’s mother sued the Italian company that made the helmet, and an Alabama court awarded her 1$ million!

Of course, the company refused to pay thus the Parrott family sought to collect the damage in Italy. However, their attempt was rejected by the Italian Supreme Court.

The court reasoned its decision that the notion of punitive damages within a common law country is so offensive to Italian notions of justice that it would not in any circumstance enforce the Alabama judgment. Moreover as the court further explained, private lawsuits brought by injured people should have only one goal – compensation for an actual loss. Allowing separate awards meant to punish the defendant is a terrible idea. The idea of punishment should be dealt only by the criminal justice system, which has elaborate due process protections and disinterested prosecutors.

The court even emphasized that it is not fair for the defendant to obtain a windfall award beyond what they actually have lost. Furthermore, the system of ad hoc jury is even considered a poor substitute for the considered judgments of government safety regulators. (Source: New York Times)

This judgment seems to directly attack the basic root of the notion of punitive damage in a private suit. Of course, punitive damages have deep roots in American and English common law even though their nature has changed over time. Justice Stevens of the US Supreme Court wrote in 2001: “Until well into the 19th century, punitive damages frequently operated to compensate for intangible injuries like pain and suffering or emotional distress”. These days, it has been used to send out messages to large corporations, and to reward successful plaintiffs with all the costs they have lost – including all court fees.

Still, the possibility of a court awarding a huge amount of punitive awards consistently scares anyone. In 1995, a Mississippi court awarded $400 million punitive award against a Canadian company headlined newspapers and spurred huge tensions between Canada and the US for years.

Given that the decision as to the amount of the punitive damage award is entirely discretional – specific to each case and context, could there be any line to be drawn between a proper legitimate amount and an out-of-reality award?

At least, this sort of question seems heartless to Ms. Glebosky, Kurt’s mother. “A million-dollar award is really nothing. It is really not enough punish any large company in this day and age, and it certainly does not bring back Kurt.”

The Economics of Irrationality: Relativism

The first time I met Dan Ariely was about half a year ago at Harvard when both of us were attending ‘Happiness, Adaptation, and Prediction’ conference together. I had absolutely no idea who he was or what he does. All I knew was that he had a very visible scar on his face, which, I later learned, came from a horrible magnesium flare accident when he was still a young student in Israel.

He was very sharp – not surprisingly for an Alfred P. Sloan Professor of Behavioural Economics at MIT – and witty, and I thoroughly enjoyed his presentation (it was primarily an account of how his scar still has an attentional impact on his experiences today). And I was pleasantly surprised to find out just last week that he has recently published a book on the economics of irrationality, which he elegantly called Predictably Irrational: The Hidden Forces that Shape Our Decisions.

There are many interesting topics in this book, including the Cost of Social Norms, the Cost of Zero Cost, and even the Influence of Arousal. But what I find most interesting in Dan’s book is the role of ‘anything relative’ on our seemingly rational decisions. To give Dan’s own example, imagine that we want to subscribe to the Economist magazine. There are three subscription options we could choose from, and these are:

1) $55 – online version
2) $125 – print version
3) $125 – online and print version

So, which of these options would you choose?

If you’re like most of Dan’s students, you would have picked the 3rd option ($125 – online and print version). Some of you will probably choose option one ($55 – online version). But I would bet any money that none of you would have gone for the 2nd option ($125 – online and print version). Now, you might think that’s a rational thing to do, and you’re probably right – given the three options. You’ve probably thought in your head that comparing between the three the third option seems like the best option as it is definitely better than the 2nd option (who in their right mind would pay $125 to get a print version when you can pay exactly the same amount to get both!). The 1st option may seem good too for some, but it’s still quite difficult to compare it with the 2nd option (online only versus print only, hmm…). Given the price difference, it is also difficult to compare between the 1st option and the 3rd option – we are just not sure whether one option is better than the other. All we definitely know for certain is that the 3rd option is a better option than the 2nd option, and so it seems like a good reason to think that a $125 for online and print version is the best overall.

Is this a rational decision? You might think so. Economic theory would have suggested that if the 3rd option is preferred to the 2nd and the 1st, then that preference will always remain in that order, all else equal. But what happen if the Economist decides to remove the 2nd option from your choice together? Well, that’s what Dan did with his second class of students – he removed the 2nd option, or the option that he called the decoy option.

Now, an amazing thing happens. Almost 70% of his students prefer the ‘$55 – online only version’ than the ‘$125 – online and print version’ (this compares to the 84% who preferred the online and print version than the online version only when there is a decoy option present). That doesn’t seem very rational to me.

And what’s more amazing is that this kind of phenomenal keeps appearing everywhere in our daily lives. We go to restaurants and find that we don’t normally buy the most expensive food on the menu (that is, if you’re not one to always splash your cash unnecessarily) but more likely to buy the second most expensive food on the menu. We go into a mall to find many shops displaying ridiculously expensive set of clothes that we would never buy, but we go in anyway to buy the cheaper ones in the shop. We go to nightclubs and find ourselves much more attracted to somebody who comes with a slightly uglier version of himself or herself than somebody who’s equally attractive but alone. We vote (well, actually, don’t get me started there)…

The truth is it is not a rational decision, but it is a predictable one at that. The problem is all the market people also know this (hence, putting up very expensive food to drive up sales for the 2nd most expensive one, etc.) and most of us would happily go along with that. I’ll let you decide, however, how massive this problem it actually is.