Another Nobel Surprise for Economics

October 18, 2017

by Robert J.Shiller

https://www.project-syndicate.org/commentary/richard-thaler-nobel-behavioral-economics-by-robert-j–shiller-2017-10

University of Chicago Economist Richard Thaler wins 2017 Nobel Prize in Economics

Richard Thaler (pic above) has shown in his research how to focus economic inquiry more decisively on real and important problems. His research program has been both compassionate and grounded, and he has established a research trajectory for young scholars and social engineers that marks the beginning of a real and enduring scientific revolution.

 

NEW HAVEN – The winner of this year’s Nobel Memorial Prize in Economic Sciences, Richard Thaler of the University of Chicago, is a controversial choice. Thaler is known for his lifelong pursuit of behavioral economics (and its subfield, behavioral finance), which is the study of economics (and finance) from a psychological perspective. For some in the profession, the idea that psychological research should even be part of economics has generated hostility for years.

Not from me. I find it wonderful that the Nobel Foundation chose Thaler. The economics Nobel has already been awarded to a number of people who can be classified as behavioral economists, including George Akerlof, Robert Fogel, Daniel Kahneman, Elinor Ostrom, and me. With the addition of Thaler, we now account for approximately 6% of all Nobel economics prizes ever awarded.

But many in economics and finance still believe that the best way to describe human behavior is to eschew psychology and instead model human behavior as mathematical optimization by separate and relentlessly selfish individuals, subject to budget constraints. Of course, not all economists, or even a majority, are wedded to this view, as evidenced by the fact that both Thaler and I have been elected president, in successive years, of the American Economic Association, the main professional body for economists in the United States. But many of our colleagues unquestionably are.

I first met Thaler in 1982, when he was a professor at Cornell University. I was visiting Cornell briefly, and he and I took a long walk across the campus together, discovering along the way that we had similar ideas and research goals. For 25 years, starting in 1991, he and I co-organized a series of academic conferences on behavioral economics, under the auspices of the US National Bureau of Economic Research.

Merton H. Miller–The Nobel Laureate in Economics, 1990

Over all those years, however, there has been antagonism – and even what appeared to be real animus – toward our research agenda. Thaler once told me that Merton Miller, who won the economics Nobel in 1990 (he died in 2000), would not even make eye contact when passing him in the hallway at the University of Chicago.

Miller explained his reasoning (if not his behavior) in a widely cited 1986 article called “Behavioral Rationality in Finance.” Miller conceded that sometimes people are victims of psychology, but he insisted that stories about such mistakes are “almost totally irrelevant” to finance. The concluding sentence of his review is widely quoted by his admirers: “That we abstract from all these stories in building our models is not because the stories are uninteresting but because they may be too interesting and thereby distract us from the pervasive market forces that should be our principal concern.”

MIT Economist Stephen A. Ross

 

Stephen A. Ross of MIT, another finance theorist who was a likely future Nobel laureate until he died unexpectedly in March, argued along similar lines. In his 2005 book Neoclassical Finance, he, too, eschewed psychology, preferring to build a “methodology of finance as the implication of the absence of arbitrage.” In other words, we can learn a lot about people’s behavior just from the observation that there are no ten-dollar bills lying around on public sidewalks. However psychologically bent some people are, one can bet that they will pick up the money as soon as they spot it.

Both Miller and Ross made wonderful contributions to financial theory. But their results are not the only descriptions of economic and financial forces that should interest us, and Thaler has been a major contributor to a behavioral research program that has demonstrated this.

For example, in 1981, Thaler and Santa Clara University’s Hersh Shefrin advanced an “economic theory of self-control” that describes economic phenomena in terms of people’s inability to control their impulses. Sure, people have no trouble motivating themselves to pick up a ten-dollar bill that they might find on a sidewalk. There is no self-control issue there. But they will have trouble resisting the impulse to spend it. As a result, most people save too little for their retirement years.

Economists need to know about such mistakes that people repeatedly make. During a long subsequent career, involving work with UCLA’s Shlomo Benartzi and others, Thaler has proposed mechanisms that will, as he and Harvard Law School’s Cass Sunstein put it in their book Nudge, change the “choice architecture” of these decisions. The same people, with the same self-control problems, could be enabled to make better decisions.

Improving people’s saving behavior is not a small or insignificant matter. To some extent, it is a matter of life or death, and, more pervasively, it determines whether we achieve fulfillment and satisfaction in life.

Thaler has shown in his research how to focus economic inquiry more decisively on real and important problems. His research program has been both compassionate and grounded, and he has established a research trajectory for young scholars and social engineers that marks the beginning of a real and enduring scientific revolution. I couldn’t be more pleased for him – or for the profession.

Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof.

Australia-Philippines Relationship Status: “It’s Complicated”

Number 364 | December 14, 2016

ANALYSIS

by Charmaine Deogracias and Orrie Johan

The Philippines and Australia fought side by side in the 1944-1945 campaign that liberated the Philippines from Japanese occupation. After the war, both countries forged alliances with the United States, as Australia and an independent Philippines became increasingly friendly. Today, with their overlapping and proliferating security partnerships, Australia and the Philippines have built on seven decades of bilateral ties to become comprehensive partners.

The two countries share an interest in the continued security and stability of the region and in freedom of navigation of the seas. The rising strength of China also looms large in the security calculus of each country. Both are trying to navigate the vast economic benefits and security concerns that China’s rise presents in the region, and this focus has brought the two countries much closer together. A major difference between the two is that the Philippines has a territorial dispute with China in the South China Sea while Australia does not.  This means that for a time Australia was more worried than the Philippines about being entrapped into a war against China. Now that friendly relations between China and the Philippines have been restored under Philippine President Rodrigo Duterte, who vowed to rely on China economically, there is greater convergence with Australian interests in avoiding conflict with China. But Philippines-Australia relations are now being undermined by the new Philippine government’s allergic reaction to human rights and resulting criticisms by Australian and U.S. governments. Relations are also affected by Duterte’s skepticism of Australian and U.S. resolve in supporting the Philippines, and by Australia’s concerns about a shift by Duterte away from the U.S. and towards China. These trends pose major challenges for Philippines-Australia relations and risk causing them to deteriorate.

Australia’s Cautious Bilateralism

Australia has chosen to respond to the risk of increased regional instability by pursuing closer ties with many of its neighbors in the region, including with the Philippines. Until recently, Australia relied on its close alliance with the U.S. for its security and did not pursue strong security relationships with many other countries in the region. China’s growing challenge to U.S. predominance in the Asia-Pacific has led Australia to shift its approach by bolstering its ties with other regional powers, such as Japan and India.

This trend was strongly encouraged by the U.S., which under the Obama administration has advocated a similar approach to others throughout the region to help develop an Asia-Pacific Principled Security Network and boost regional stability. However, this approach has also become more attractive for Australia because of concerns that the U.S. could reduce its regional presence or even surrender its regional leadership role in the long-term, given growing opposition to international engagement within the United States. In such a scenario, strong Australian ties with other countries in the region could provide additional leverage in future interactions with China.

Among these bilateral partnerships, Australia’s relationship with the Philippines has been one of its fastest growing. Bilateral security cooperation began in earnest in 2005 when the Australian government expressed interest in assisting the Philippines with counterterrorism challenges. The relationship has since deepened to include a Status of Visiting Forces Agreement (SOVFA), which went into force in 2012.

Australia now conducts joint military drills with the Philippines, and has participated in the annual Philippines-U.S. Balikatan exercises since 2014. Australia has also supported the Philippines’ right to pursue an international arbitration tribunal’s judgement on its disputes with China in the South China Sea, over Chinese objections. However, despite these major bilateral advances, there have been signs that Australia is less willing than the Philippines to consolidate strong ties. Australia chose to sign a comprehensive partnership with the Philippines rather than the stronger strategic partnership that the Philippines sought, even as it chose to ink such an agreement with Singapore.

The reason for this appears to be that Australia has historically avoided escalating tensions in the region and chosen to refrain from pursuing a strategic partnership or alliance with the Philippines due to concerns that such an action could undermine stability in the South China Sea or force Australia into a conflict with China.

The Philippines’ Pivot to China 

Given the foreign policy shifts that Duterte is seeking, Australia’s calibrated form of security engagement with the Philippines is the kind that Duterte favors for now. His independent foreign policy is shaping up to have Russia as an ally, China as an economic partner, and have Japan compete with China to provide economic benefits and regional security for the Philippines.

Duterte would prefer to keep the status quo with the US alliance and the Australian comprehensive partnership, but their criticisms of his controversial anti-drug campaign will complicate this. Australia and the U.S. have provided a great deal of support to the Philippine military but Duterte has questioned Australian and U.S. resolve against China. He also criticized the US and Australia for meddling in Filipino affairs by condemning his anti-drug campaign that has so far resulted in over 3,000 extra-judicial killings. But his anti-U.S. sentiments are more deep-seated for personal and ideological reasons.

Changing the rhetoric on the South China Sea issue post-arbitration ruling, Duterte has chosen to take a more conciliatory approach in resolving territorial disputes with China and is poised to settle the contentious issue of sovereignty bilaterally. He has not sought a complete overhaul of his predecessor’s policies, as he expressed willingness to maintain close ties with Japan, which has become concerned at Duterte’s talk of radical shifts by the Philippines towards China. He is open to joint military exercises with Japan, but has redirected the focus of bilateral drills with U.S. armed forces from maritime security to humanitarian assistance and counterterrorism, and scrapped naval drills such as amphibious landings and boat raids altogether.

Duterte has not yet spoken of abandoning Australia or reducing the already low scale military exercises with it the way he has about the United States. But the fact is that Australia’s criticisms of Duterte’s extra-judicial domestic policies and controversial comments have put Australia on Duterte’s watch list alongside the European Union and the United Nations. It appears that under Duterte, Australian ambivalence towards stronger ties with the Philippines is beginning to be reciprocated.

Until recently, the main factor complicating Australia-Philippines relations was a divergence in attitudes to the risk of conflict against China. While that is no longer the case, differences over the Duterte administration’s policy approaches are now the primary obstacle to strengthening Australia-Philippines ties. These concerns will prevent the bilateral relationship from improving and may even undermine it in the future.

About the Authors

Charmaine Deogracias is  a journalist writing for Vera Files in the Philippines. She can be reached at charmdeogracias@gmail.com.

Orrie Johan is a researcher at the East-West Center in Washington. He recently obtained a master’s degree in Security Studies from Georgetown University. He can be contacted at orrie.johan@gmail.com

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.

The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

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Princeton don Angus Deaton wins the 2015 Nobel Prize in Economics

October 13, 2015

Some background on  Princeton don Angus Deaton, the 2015 Nobel Laureate in Economics (www.wsj.com):

Before the work of French economist Thomas Piketty transformed the U.S. political discussion on income inequality last year, Princeton economist Angus Deaton devised important new ways of measuring household consumption, living standards and poverty that shaped the current political economy debate.

Those contributions earned Mr. Deaton the Nobel Memorial Prize for Economic Sciences on Monday (October 12, 2015) from the Royal Swedish Academy of Sciences. The academy said Mr. Deaton’s contributions to the study of individual consumption had provided crucial insights for policy makers addressing economic welfare and poverty reduction.

Mr. Deaton, a week shy of his 70th birthday, was born in Scotland and is a dual citizen of the United Kingdom and the United States. He earned his Ph.D. at Cambridge University and moved to the U.S. in 1983 to teach at Princeton University.

The Nobel committee highlighted three key questions that Mr. Deaton’s research had informed:

• How do consumers distribute their spending?
• How much do individuals save and spend their own income?
• How should poverty be measured?

The academy described the academic contributions that Mr. Deaton made to economics, including models that challenged existing methods for how to measure consumer demand for goods and that improved the understanding of how individual consumption levels vary in ways that can’t be seen in aggregate.

Here’s one good example that the academy draws attention to in its summary of his work that provides a flavor of his contributions to the field:

For a long time, economists have labored with the idea that a country may become stuck in a poverty trap. Low incomes can result in such low calorie intake that people cannot work at full capacity—thus their incomes remain low, and so does their calorie intake. The question of poverty traps is important in designing international assistance to the poorest countries. If assistance is geared towards encouraging economic growth, but increasing income still does not lead to noticeably increased calorie intake, there is an argument for reorienting assistance towards direct food aid. Deaton’s research on the relationship between income and calorie intake has shed important light on this issue: increased income does indeed lead to more calories being consumed. On the other hand, the evidence does not support the hypothesis that malnutrition explains poverty. In other words, malnutrition is largely the consequence of a low income, not vice versa.

In recent years, Mr. Deaton has focused more attention on measuring and reducing global poverty, along with income inequality, while providing a particular emphasis on India and Africa.

He publishes a biannual column on developments in U.S. political economy and wrote a 2013 book on inequality. Those writings have covered a wide range of topics that include the need for regional price measurements, the risks of too much regulation in academia, the dark side of extreme income inequality that corrodes basic state institutions like the courts, and the failures of foreign aid to improve outcomes for the poor. One report on the minimum wage debate and the way it has divided the economics profession was written nearly 20 years ago, but the themes in it have aged little.

Angus Deaton of Princeton wins the 2015 Nobel Prize in Economics

By Jeff Guo

@The Washington Post

Angus Deaton, a Professor at Princeton, has won the Nobel Prize in economics for his research into how people rich and poor make decisions about what to buy and how much to save.

“I’ve always been interested in what makes lives better for people and how they behave,” Deaton said Monday morning in a phone interview with the Post. Deaton’s research has made diverse contributions to the study of consumer spending, with particular attention to the world’s poorest.

The Nobel Prize committee recognized Deaton for his “analysis of consumption, poverty, and welfare” — a broad phrase to describe a broad body of research.

“His work covers a wide spectrum, from the deepest implications of theory to the grittiest detail of measurement,” the panel of Swedish economists wrote in its announcement of the prize.

“I always thought that because I’d worked on so many different things they would tend to pass me over,” Deaton joked. “But they did a wonderful job of sort of cobbling it all together and making it sound really integrated,” he said.

Deaton’s research into theories of consumption and survey techniques changed how economists think as well as how they conduct their research. His early work helped bridge the divide between those who study the choices of individuals and those who study the greater economic forces that stir countries.

In recent decades, he has spent much of his time using those ideas to investigate poverty in developing nations, especially India and South Africa. The prize Monday brings attention to the increasingly vigorous field of development economics.

“I’m so delighted, not just for myself, but that this sort of work is being recognized,” Deaton said by phone at a press event Monday.

Asked about the refugee crisis sweeping Europe, Deaton expressed sympathy for those who have been uprooted by poverty and war. “What we’re seeing now is the result of hundreds of years of unequal development in the rich world, which has left a lot of the world behind,” he said.

Deaton’s efforts surveying poor households — measuring malnutrition, living standards, and whether parents discriminate between boys and girls — has helped economists better understand those who live on less than a dollar a day. Through his research, often with the World Bank, he has been a first-hand witness to the decline of extreme poverty in recent decades.

At the press event Monday, Deaton expressed optimism about continued progress — but reminded the audience that several hundred million people still live in “something close to destitution.”

“You have to remember that we’re not out of the woods yet,” he said. “For many, many people in the world, things are very bad indeed.”

The Nobel prize in economics comes with an award of about $976,000, and most winners have been American. Edinburgh-born Deaton has joint British and U.S. citizenship. In 2014, economist Jean Tirole of France won the prize for research into market power and regulation.