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ualizing their choices and i suspect that most people do not anticipate that they typically made mistakes ordering lunch homo economicus does a pretty good job ordering lunch commuting to work etc this is not to say that economic man doesn t make mistakes or overlook things this is inevitable and surely happens often in the real world the question you have to ask yourself is do you think people typically make something close to the best choices or do you think people typically make severe mistakes in their economic decisions if you agree with the former then you are thinking like a mainstream economist noah seems to think that because people make mistakes or because we can t know the true mathematical objective functions that this appeal to optimal behavior is misguided to me it seems like noah is not criticizing economic man so much as he is criticizing economic straw man in the article he arrives at this startling conclusion writing if really good pool players made 100 of their shots there wouldn t be pool tournaments it would be no fun because whoever went first would always win but in fact there are pool tournaments so expert pool players do in fact miss shocking i know how could we have not seen this economists do not assume that people don t make mistakes though in fairness it is not completely obvious how to analytically model mistakes i can think of exactly zero economists who think that all behavior is optimal from some omniscient omnipotent point of view i certainly don t believe this i regularly play online chess and i always overlook moves that are to my advantage or moves my opponent could play that would be really bad for me this doesn t in any way suggest that my behavior isn t guided by my own self interest or that my move isn t what i think is my best option given the current position moreover i would think that in chess starting from the point of view of making choosing one of the better moves available would often provide a good guide to actual game play this is almost certainly true for professional and semi professional players imagine if you will actually trying to construct a model of pool playing specifically let s consider 9 ball in 9 ball the balls are sunk in order unless the 9 goes in on the break this greatly reduces the strategic nature of the game and makes it more like the players know which shot they want to hit and now there is simply the task of actually making the shot if i were to approach such a problem which might actually be interesting from a behavioral economics point of view i might adopt the following approach suppose the best shot could be described by a vector s s would include spin speed power angle etc a perfect player would simply take a shot given by s we could think about a real world player as taking a shot that might include an error e the spin will be a little off the angle will be off a bit too and so forth so any one actual shot could be given by s e you might think that the best players typically make small errors while inexperienced players would make bigger errors i would think this would be a pretty good description of actual pool but note i would absolutely begin with the idealized shot s the shot made by homo economicus noah also makes a big deal about the fact that we don t know the objective the fact that we typically don t know the objective is not necessarily a problem if an economist looks at a game being played where she isn t familiar with the rules then she will still tend to treat the moves she observes as though they are guided by some latent objective and you might guess that after looking at such behavior for a while the economist might be able to deduce the objective even if she doesn t have advanced knowledge of it in short i have always felt and i continue to feel that friedman s pool player is an excellent way to convey how economists approach their subject only if we were to insist that people really were computerized robots or vulcans always making perfectly optimal logical choices with regard to some easily described mathematical objective would this analogy present a problem in fact it s only a problem for the economic straw man so until noah comes up with some more serious objections i m going to keep this analogy on my go to list of explanations for basic economics in the meantime let me leave you with this opening quote from the color of money a player can make eight trick shots in a row blow the 9 and lose on the other hand a player can get the 9 in on the break if the balls are spread right and win which is to say that luck plays a plays a part in 9 ball but for some players luck itself is an art 13 comments august 2 2015 by chris house is big data the answer to all our problems noah smith recently commented on a malcom gladwell talk in which he gladwell expressed doubts about the promise of big data when people use the term big data they are often referring to datasets that are built from digital data streams like google searches the twitter feed and so forth but it can also refer simply to large datasets that were previously too cumbersome for researchers to access easily in any case gladwell says that this newfound data availability is not our salvation he also claims that this data might be a curse noah devotes most of his comment to countering gladwell s claims i m actually not a huge malcom gladwell fan and like noah i basically disagree with the idea that having more data could be a problem for us more data must be better ok there is the snowden issue and government invasions of privacy more generally but let s leave those problems aside i don t think that kind of intrusive survelance is what either gladwell or noah has in mind there are some aspects of big data that i ve been thinking about for a little while that seem at least somewhat relevant to gladwell s argument and noah s post many researchers and many economists in particular see big data as a huge benefit to their field indeed some view the arrival of these new datasets as a transformative event in social science speaking for myself only i have some doubts that this new data will be as much of a benefit as many are predicting in economics many researchers are being drawn to these datasets without having a direct purpose or plan in mind to me this is most concerning with graduate students who are under lots of pressure and sometimes hold out hope that a huge dataset will be like the holy grail for an underdeveloped research portfolio after waiting to obtain their data the graduate students typically are let down when they realize that the data doesn t really address the questions they were interested in or that the data needs to be cleaned and arranged into a useable form which takes a tremendous amount of work or that they were hoping that the dataset would present an obvious killer question or killer instrument and the data fails to deliver another thing that pops up all too frequently is the idea that a bigger dataset is automatically superior simply because it has many observations this is often clearly not the case and it s painful to see this realization fall upon a researcher sometimes during their presentations to take a really obvious example suppose you are interested in whether extensions of unemployment benefits reduce labor supply by causing people to search more while they are still getting the payments a dataset with state level unemployment rate data over the period 2005 2014 might actually be able to speak to this question in contrast a dataset with 100 million daily individual observations for a year isn t going to help you at all if there is no variation in unemployment benefit policy in that year sure it s impressive that you can get such a dataset but it isn t useful for your research question sometimes in seminars the presenter will intentionally advertise the scope of the dataset in a futile effort to impress the audience it never works it s similar to a related unsuccessful tactic of trying to impress the audience by telling them how long it takes your computer to solve a complicated dynamic programming problem stuff like this comes up all the time i was in a seminar where a researcher was using individual household level consumption data to test the permanent income hypothesis pih the dataset was quite nice but the consumption measure combined both durable and nondurable goods and unfortunately the pih applies only to nondurable consumption spending when the researcher was asked why he or she used the individual data rather than aggregate data which does break out nondurable consumption his her response was simply that he she felt that individual data was better than aggregate data firm level data is another pet peeve of mine i can t tell you the number of times i ve heard people say that the reason that we should use firm level data is because this is just what people do these days firm level data is particularly noteworthy because one of the classic issues in economics deals with the nature of a firm itself the straight neoclassical perspective is that the notion of a firm is not particularly well defined two mechanic shops that operate independently would appear as two firms in a typical dataset but if the owner of one of the shops sells it to the other owner these firms would suddenly become a single observation this problem reminds me of a quote by frank zappa the most important thing in art is the frame without this humble appliance you can t know where the art stops and the real world begins a similar thing occurs with firm level data we have a bunch of underlying behavior and then there are these arbitrary frames placed around groups of activity we call these arbitrary groupings firms arbitrary combinations or breakdowns like this surely play a large role in dictating the nature of firm level data in the end it s not clear how many real observations we actually have in these datasets in the past i ve been fortunate enough to work with some students who used hand collected data 1 data like this is almost always fairly small in comparison with real time data or administrative data despite this apparent size disadvantage self collected data has some advantages that are worth emphasizing first the researcher will necessarily know much more about the way the data was collected second the data can be collected with the explicit aim of addressing a specifically targetted research question third building the data from the ground up invites the researcher to confront particular observations that might be noteworthy for one reason or another in fact i often encourage graduate students to look in depth at individual observations to build their understanding of the data this will likely not happen with enormous datasets again this is not to say that more data is in anyway a disadvantage however like any input into the research process the choice of data should be given some thought a similar thing came up perhaps 15 years ago when more and more powerful computers allowed us to expand the set of models we could analyze this was greeted as a moment of liberation by some economists but soon the moment of bliss gave way to reality adding a couple more state variables wasn t going to change the field just because the model is solved a bit more accurately and faster won t expand our understanding by leaps and bounds better no doubt a panacea not at all the real constraints on economics research have always been and continue to be a shortage of ideas and creativity successfully pushing the boundaries of our understanding requires creative insights coupled with accurate quantitative modelling and good data and empirical work the kinds of insights i m talking about won t be found just lying around in any dataset not matter how big it is 1 one of my favorite examples of such data work is by ed knotek who collected a small dataset on prices of goods that were sold in convenience stores but also sold in large supermarkets see convenient prices and price rigidity cross sectional evidence review of economics and statistics 2011 15 comments may 26 2015 by chris house warren buffet fighting income inequality with the eitc warren buffet s article in the wall street journal reminds me of some posts i wrote a while back on fighting income inequality his article contains a lot of wisdom some excerpts the poor are most definitely not poor because the rich are rich nor are the rich undeserving most of them have contributed brilliant innovations or managerial expertise to america s well being we all live far better because of henry ford steve jobs sam walton and the like he writes that an expansion of the minimum wage to 15 dollars per hour would almost certainly reduce employment in a major way crushing many workers possessing only basic skills smaller increases though obviously welcome will still leave many hardworking americans mired in poverty the better answer is a major and carefully crafted expansion of the earned income tax credit eitc i agree entirely and so would milton friedman unlike the minimum wage which draws money from an abstract group of individuals some of whom are not high income earners the eitc draws funds from the broad u s tax base which in turn draws more heavily from upper income individuals unlike the minimum wage the eitc can be directed at low income households rather than low wage individuals many of whom are simply teenagers working summer jobs unlike the minimum wage which discouraged employment the eitc encourages employment buffet also proposes some common sense modifications to the eitc which i would welcome in addition to reducing fraud there should be widespread publicity that workers can receive free and convenient filing help an annual payment is now the rule monthly installments would make more sense since they would discourage people from taking out loans while waiting for their refunds to come through the main problems with such an expansion of the eitc are political taking a serious swing at reducing income inequality would require a lot of money republican s will likely oppose it because it is socialist or some nonsense i m sure that many democrats would be very receptive to an aggressive expansion like buffet alludes to but the cost in political capital might be too great for a politician to pay 9 comments may 22 2015 by chris house paul romer s rant paul romer has decided that it is time to air some grievances in a widely discussed recent article in the aer papers and proceedings volume he calls out some prominent macroeconomists for the alleged crime of mathiness several blog commenters have offered their interpretations of the main thrust of romer s thesis i admit that after reading the article i am not entirely sure what romer means by mathiness noah smith interprets mathiness as the result of using math in a sloppy way to support preferred theories in his follow up article in bloomberg noah says much of the blame...