Tag Archives: Chicago Booth

Updates from Chicago Booth

Why policy makers should nudge more
By Alex Verkhivker – When policy makers around the world want to influence their constituents’ behavior, they have a few options. They can offer a carrot, such as a tax incentive, stipend, or other reward. They can use the legislative stick by passing a mandate or a ban.

But research suggests they should turn more often to a third tool, a “nudge,” which in many cases is the most cost-effective option.

Nudging is the word used in behavioral science for structuring policies and programs in ways that encourage, but don’t compel, particular choices. For instance, requiring people to opt out of rather than into a program, such as a retirement savings plan, might nudge them toward participating. So might reducing the paperwork necessary to enroll. more>

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updates from Chicago Booth

Why it’s so hard to simplify the tax code
By Dee Gill – Simplifying the tax code ostensibly has bipartisan backing. Both the Bush and Obama administrations advocated for simplification, in reports, as have House Speaker Paul Ryan (Republican of Wisconsin) and Senator Elizabeth Warren (Democrat of Massachusetts). But when the Senate passed a tax bill this past December, there was no postcard.

What happened? The same thing that always does, suggest researchers. While simplicity is a stated goal, complexity wins the day. Hence companies and individuals will hire accountants to wade through the latest bill, interpret the new rules, offer guidance, and help work through the inevitable corrections and amendments.

And this comes at an economic cost. Research by James Mahon and Chicago Booth’s Eric Zwick, and others, collectively indicates that the complexity leads individuals and companies to fail to take advantage of billions of dollars in offered breaks, many of them presumably intended to stimulate the economy. In this way, complexity undermines what tax incentives are purported to accomplish. more>

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Updates from Chicago Booth

Why hasn’t technology sped up productivity?
By Chad Syverson – You can think of all productivity measures as ratios of output to input. The most common one you hear about is labor productivity, or output per worker hour.

This is the one that economists have been following the longest, and we have good confidence that we measure it as well as we can. It’s also where technological progress ought to show up: these new technologies ought to let us make great new things without having to put new resources into the production of those things.

Making better things using the same amount of resources, or making the same things using fewer resources, is, in the end, where economic growth comes from. If this phenomenon is taking place, you should see it in the data reflected as productivity growth. The problem is, if you go look for it in the United States, you don’t find it. Productivity growth hasn’t stopped altogether, but since the mid-2000s, the rate of growth has fallen considerably.

These studies typically produce figures in the neighborhood of $100 billion–$200 billion in the US. That’s not pocket change, but it’s nothing compared to the $3 trillion of output that is missing because productivity growth has slowed.

So how worried should you be? If productivity growth stays where it is, you should be worried. We are going to be considerably poorer than we would be otherwise. We already are. Ten years into the slowdown, we’re each already $9,000 poorer per year. more>

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Updates from Chicago Booth

Google and Facebook have an effective duopoly on online advertising. For the average person, why is that a problem? Prices haven’t gone up. Why should we care?
By Luigi Zingales, Tyler Cowen – Most people don’t perceive that as a problem. The perceived price [for using Google or Facebook] is zero. It’s not really zero, because we are giving up our data in exchange. Google and Facebook’s market power in advertising increases the cost of advertising, which eventually will be reflected in the price of goods.

Antitrust in Europe is much more effective. Look at the price of cell phones and cell-phone services. They are a fraction of the price in the US, with better services. The EU is at the front end of enforcement of competition, while the US has become complacent. In the EU, they have a new directive requiring every bank to give customers access to their data at the customer’s request. That transfer creates competition because it reduces the friction and creates more opportunity for new entry. The monopoly that Facebook and Google have of our data, number one, prevents entry, and number two, gives them tremendous power. more>

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Updates from Chicago Booth

Why we should teach people how to lie
By Chana R. Schoenberger – Could you handle being honest—totally, brutally truthful, without even a well-intentioned falsehood to smooth over a social situation—for three days?

Most people don’t think they could, at least not without ruining their family, social, and work lives. Fibs, white lies, and half-truths (along with, perhaps, more egregious whoppers) are such an important part of our interpersonal tool kit that going without them seems next to impossible.

But Chicago Booth’s Emma Levine, along with Carnegie Mellon’s Taya R. Cohen, asked exactly that of a group of research subjects and came away with a surprising conclusion: it’s not as bad as it sounds.

The researchers asked some participants to be completely honest in every interaction, with every person in their lives, for three days, while other participants were asked simply to be kind or conscious of their words. The participants predicted that being forced into honesty would make them unhappier than if they had to be kind or just aware of what they were saying to others. They anticipated frayed relationships as a result of abandoning the lies they typically use to cover up awkward or uncomfortable situations.

But being honest didn’t torpedo subjects’ friendships, family connections, or jobs.

“The experience of being honest is far more pleasurable, leads to greater levels of social connection, and does less relational harm than individuals expect,” Levine and Cohen write. more>

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Updates from Chicago Booth

Never mind the 1 percent Let’s talk about the 0.01 percent
By Howard R. Gold – Since the Great Recession, America’s wealthiest 1 percent have been demonized as fat cats who have grown ever richer while the middle class has stagnated. While protesters have called for the 1 percent to be taxed more heavily, economists have been digging into data to develop a better understanding of who the top earners are.

These economists have been seeking to measure income inequality and wealth inequality, and to understand the nature of the 1 percent’s income and assets.

But the data also reveal disparities within the 1 percent. The 1 percent, it turns out, have their own 1 percent. more>

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Updates from Chicago Booth

Lost money? Reinvest!
By Erik Kobayashi-Solomon – Investors sometimes play a psychological trick on themselves when they lose money, research suggests—and that mental accounting trick may help improve their investment performance.

According to Cary D. Frydman and David H. Solomon at the University of Southern California and Chicago Booth’s Samuel Hartzmark, investors who sell a losing investment often avoid the psychological pain by immediately reinvesting in another stock. By doing so, instead of thinking of the action as realizing a loss, they frame it as rolling capital into a related investment. The reference point used to compute gains and losses is linked to the amount paid for the original asset.

That mental accounting trick may help them avoid an often-made mistake. A key insight of behavioral finance is that investors, to avoid the pain of realizing a loss, fall prey to the disposition effect: they tend to be more likely to sell winners than losers. But the act of reinvesting makes investors more willing to sell a losing stock and realize a loss sooner. more>

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Updates from Chicago Booth

15 middle-class jobs that can’t be automated—a CBR thought experiment
By Howard R. Gold – A much-publicized 2013 study by Oxford University researchers Carl Benedikt Frey and Michael A. Osborne estimates that “about 47 percent of total US employment is at risk” from advances in computerization, particularly machine learning, robotics, and artificial intelligence. Using US Bureau of Labor Statistics data, Frey and Osborne rated 702 occupations on a scale of 0 to 100 percent for risk of displacement by emerging computer technologies. Workers in heavily blue-collar industries such as production, construction, transportation, maintenance and repair, and farming and fisheries face the highest risk, along with white-collar employees in service and sales.

The job categories at lowest risk, according to Frey and Osborne: management; computer, engineering, and science; education, legal, arts, and media; and, of course, health care. The latter accounted for half of the 20 occupations to which Frey and Osborne give the lowest probability of replacement by computerization.

Core skills such as “originality,” “social perceptiveness,” “assisting and caring for others,” “persuasion,” and ”negotiation” are the most difficult for computers to replicate, Frey and Osborne determine. (For more, see “If robots take our jobs, will they make it up to us?” July 2017.) more>

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Updates from Chicago Booth

What has happened over the past 40 years in the United States, particularly in cities?
By Veronica Guerrieri – It is well known that the US has experienced a large increase in income inequality, which, in my view, is one of the biggest problems of the US economy. At the same time, there has been an increase in neighborhood segregation, especially in larger cities: the rich are more and more concentrated in rich neighborhoods and the poor in poor neighborhoods. Alessandra Fogli of the Federal Reserve Bank of Minneapolis and I document a strong correlation between inequality and residential segregation.

The data show that cities with more segregation have a bigger education gap between the children of rich and poor families—and have less intergenerational mobility, which measures how hard it is to become rich if your parents are poor. In rich neighborhoods, it’s easier for kids to get a good education, and the return on education is higher. There are better schools, parents invest more in after-school activities, and there are stronger peers. This means that segregation amplifies inequality. At the same time, inequality increases segregation because richer people are happy to pay more to live in better neighborhoods. more> https://goo.gl/Qxi1wD

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Updates from Chicago Booth

How to split equity without drawing blood
By Mike Moyer – We live in a world where entrepreneurs and early-stage company participants get taken advantage of so frequently that we hardly notice. Bad equity deals are the rule, not the exception. Fairness is rare.

The intent for fairness is there in the way equity is split among business partners, but the practice of fairness is not. This is a correctable problem.

When a person contributes to a start-up company and does not get paid for her contribution, she is putting her contribution at risk with the hopes of getting a future reward. And, while the timing and the amount of the future reward is unknowable, the amount of the contributions at risk is knowable. It is equal to the fair market value of the contributions.

Because it’s impossible to know when or even if the rewards will ever come, we can never know how much people must put at risk to get the rewards. Every contribution, therefore, is essentially a bet on the future of the company, and nobody knows when the betting will end. more> https://goo.gl/F3ELyY

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