The Irrational Regret of Automatic Withholding

Ladies and Gentlemen, I present you the following:

Today, I found out that my tax filing status was never changed after my divorce. This means I haven't been paying enough and now the government wants its money. FML

source

 A proletarian gripe, yes. But it's a sentiment pretty widely shared. If you have ever taught a principles course, ask yourself how often you've had to explain the permanent income hypothesis to students. Consider how much effort you've expended trying to shoo away the notion that IRS withholding is pretty close to the worst sort of savings scheme outside of payday lending. Now consider how many students out there never bothered to show up to your classroom in the first place.

Now take a moment to think just how easy it might be to hoodwink a democracy.

I am curious how stubborn a tick this automatic withholding it. Some programs cannot easily be dislodged once in place, thanks to popular support. IRS policy seems at first blush to lack popular support, yet I think it enjoys just enough indifference among the people that multipartisan support by elites is sufficient to ensure its longevity.

Standard Contract Renegotiation: Marriage Edition

There is no de jure default prenuptial contract in the United States. But there is indeed a de facto contract. One with terms and agreements that get awfully onerous the deeper you get into the fine print. Mind you, I don't mean that the terms of a rancorous separation are considerably onerous on men. That a largely common-law court lags rapid social change (in this case, the enormous influx of women into the formal workforce) should surprise no one. No, what I mean is that becoming mired in a family court dispute is dead-wasteful. Every hearing, every plea, every supplication to the bench carries the opportunity cost of missed wages, missed picnics in the park, missed life. And this is in addition to all the explicit court and attorney fees. Divorce is big business.

Much like the taxi cartels of the land, family courts ought to be vulnerable to disruption by nimble, low-overhead competition. Apologies for dragging out a worn meme, but where's the Uber, but for the dissolution of marriage? A standardized, opt-out pre-nup a la Thaler/Sunstein seems like it should be a slam-dunk. What's not to love about freeing up courthouse resources and liberating people during a difficult period of transition?

Some possibilities:

1. Prospect Theory. Newlyweds overestimate the bliss they'll obtain from a lifetime of marriage and underestimate the costs and deadweight losses of divorce. They also overestimate the probability their marriage will survive.
2. Defection. Courts are predisposed to honor prenuptial agreements, but widespread adoption of new default prenup terms is out-of-sample. I don't know how likely it would actually be for courts to declare such agreements invalid, but such risks should make potential customers think twice.
3. Signaling. The dreadful inefficiency of the present system serves a purpose not all that different from an engagement ring: I am exposing myself to this excruciating downside risk; see how serious I am over here, pumpkin? If this is an important enough signal, any efficiency gains from a standardized pre-nup should be captured elsewhere. Instead of 2 months' salary for a polished stone, maybe it's 6. TANSTAAFL.
4. Transitional gains. Perhaps there truly is a preferable equilibrium that doesn't rely on an albatross in a black smock and powdered wig. But if it's a stag hunt game, being the oddball who solicits this new product signals unacceptable nonconformity. Given the preposterous peacockery of the modern Western wedding ceremony, there is at least some evidence that fear of violating the expectations of tying the knot can produce wasteful behavior.
5. Inertia. Mom and dad didn't get a pre-nup. Neither are we. It ain't in the heuristic toolkit.

In the grip of my periodic melancholy, I fancy that point #1 up there is the only thing preserving the institution of marriage for the median American. If folks were perhaps a bit more rational, they might reconsider how strong their instincts for regret aversion should be.

Gordon Tullock's famous advice for transitional gains traps is: "don't set any." In this case, one wasn't set. It just sort of crept up. How to break an emergent state monopoly? Tough question.

No Science Required

Though I'm not fully convinced this isn't a hoax (Snopes here), an oddity-of-mankind story has been lately circulating the periphery of my info-bubble.

Jewel Shuping claims to have convinced a mental health professional to permanently blind her with drain cleaner to the eyes. "Body Integrity Identity Disorder" drove her to it. She identifies as blind, so she took steps to better match her physical condition with her identity.

Allegedly.

I'll spare you links to comments of folks comparing this to FGM or transsexualism, but I'm sure you can well imagine. This sort of story is sui generis, so the details of it can't reliably be used for extrapolation. Still, it's interesting to think about how strong the risk of regret would have to be to propose different interventions. To your humble pedestrian outsider here, this seems more like a case where a responsible therapist would prescribe medication or something.

Then again, I've argued in favor of lifting bans on euthanasia. Who am I to say that this woman's ability to see did not impose on her undue suffering?

Then yet again, it seems pretty trivial to obtain effective prosthetic assistance without having to resort to mutilation. Opaque contact lenses exist, right?

Refuge & Regret: Construal Level Theory in Syria

Syrian refugees are near, the Cuban boatlift is far.

Construal level theory tells us that the further something is from us in time and space, the less likely we are to spot deformities, details, and defects. But with distance we are better able to identify patterns, shapes, and trends. My excellent friend Robin Hanson summarizes here, but also has a great deal more to say on the subject.

The 20th century (am I the only person who struggles mightily to resist capitalizing that?) is dismally full of refugee crises. A lot of them were African: Congo, Angola, Eritrea, Somalia, Liberia, Rwanda/Burundi, Sudan & al. These were tragic, but largely invisible to typical Americans, except perhaps as passing human interest stories, quickly forgotten in the noise of the celebrity scandal du jour. Some of them directly involved US concerns, as a great deal of displaced people ended up in the Land of the Free. Remember the Salvadoran Civil War spanning the Carter administration? Something like half a million Salvadorans ended up settling here. And that's just little itty-bitty El Salvador. The Mariel boatlift totaled over 100k Cubans over the course of 1980. Vietnamese refugees  and their descendants following the end of the war account for roughly a million and a half of today's Americans. Khmer Rouge survivors stateside number roughly 300,000.

Are these regrettable? I was alive (though admittedly quite young, so my memory may be fuzzy) for several of these episodes, so I recall some of the contrary sentiment. In near mode, a refugee crisis sparks panic in recipient countries. How shall we feed them? Where shall we put them? What about medical care? Educating their kids? If anything, the opening act of Scarface (1983) didn't do sufficient justice to the dire living conditions of newly-arrived Cubans in Florida. 30+ years later, Cuban Americans are known a lot more for great music and the third-best sandwiches in the lower 48 than for crime-ridden encampments and Castro's nasty empty-the-prisons-and-put-'em-boats prank. I don't have the polling data, but I'd put money on the likelihood that a majority of Americans would have a favorable view of the US accepting Cuban refugees in retrospect.

Indeed, I suspect that the historical refugee crises most survey respondents would regret are the ones we turned away. How many European Jews might we have spared the grisliest of fates if we'd have opened the shores in 1939? What if in 1994 we'd have airlifted ethnic Tutsi here? It is indeed better to regret something you have done than to regret something you haven't done, particularly when the latter is soaked in the blood of the innocent.

So up close, the challenges of accepting loads and loads of refugees look insurmountable. From a distance, they seem petty compared to the horrors of the alternatives. Which perspective is more accurate? Which is more useful? Which is better for ourselves and our humanity?

Fleeing violence is not nor has ever been euvoluntary. Heed well the type and severity of the ex post regret incurred when considering the sort of response you favor.

Sweat Loaf: Abortion Edition

Daddy?
Yes, son.
What does regret mean?
Well son, the funny thing about regret is that it's better to regret something you have done than to regret something that you haven't done.
And by the way, if you see your mom this weekend, will you be sure and tell her...
SATAN SATAN SATAN!!!!

Though it's a throwaway into to a weird cover of a Black Sabbath classic, the Butthole Surfers included a little wisdom there in Locust Abortion Technician. The Guardian agrees.

ATSRTWT

Source study here.

Maybe. It sort of depends on what is meant by "doing something." Is the relevant act the procedure, or is it the alternative of delivering the child?

At any rate, whether or not women regret having an abortion or not is quite unlikely to change anyone's mind. Abortion opponents already greatly discount the psychological comfort of the mother compared to the foregone life of the child.

If there's anything in the recent news that should help change minds, it's the video of the ad hoc Planned Parenthood investigation. It came as a great relief that the ban on fetal tissue research had expired, but I didn't know that the shipping and handling prices were so low. $30-100 per sample? That's the kind of bargain that goes at least a little way to combat the tragedy of a life never lived. Better that the tissue to towards life-saving treatments than ends up incinerated, yes?

And yes, commentary on the treatment of medical procedures is bound to be ghoulish. It always is. Have lunch with a hospital nurse sometime. Aborted fetal tissue is no different.

Walking on Air

Click here. Scroll up for the conversation, and the photographic evidence.

The short version: Brad Anderson is the Greatest Living American Hero. I posted a nonsense cocktail recipe as a joke on Twitter, and he actually followed the instructions to the letter. He drank the whole thing and livetweeted the photo evidence.

The recipe (and why it's relevant for this blog) for the "Instant Regret":

In a collins glass, mix equal parts:
sweet vermouth
heavy whipping cream
ketchup
Midori
silver tequila

 garnish with hash browns

The 140 character limit cut off the remainder of the instructions, which were to serve on a bed of chilled mayonnaise and chase with olive-soaked havarti.

And here's why Mr. Anderson is the Greatest Living American Hero: the "beverage" is called the Instant Regret, and he quaffed it regardless. Right there on the label, it's clearly not euvoluntary. Did he care? No. He knew the hazards and he defied them anyway, thumbing his nose at an overcautious nanny culture. His suffering became for one bright, brief, shining moment the immense pleasure of anyone there to witness his heroics.

The lessons are twofold. First, it is better to regret something you have done than to regret something you haven't done. And second, pernicious regret arises under conditions of information asymmetry, not from information incompleteness. Brad knew what he was doing. And so I doff my hat. Well done, sir. Well done.

Also, I invite you all to think of the general equilibrium of ubiquitous warning labels. There's really no good way using text alone to signal the severity of risk or the nature of the conditional probability involved (not in a way that makes much sense to a semi-numerate public anyway).

Warning labels suffer a pooling equilibrium problem: t/f? Explain.

The Ecstasy of the Bees

The Federal Government frets about dwindling honeybee populations. Monoculture, dwindling habitat, micro-predators, and possibly nicotine-based pesticides may contribute to empty colonies nationwide.

Agriculture in the US isn't exactly command-and-control, but the big corn-producing state legislators have upheld the longstanding tacit pact that it'll never not be heavily politicized. Subsidies to farmers (which though the magic of cross-elasticity of demand are actually subsidies to Archer-Daniels Midland and Monsanto) ensure that enormous swaths of the heartland are dedicated to just a few varieties of soy, corn, and wheat. Put another way, it's agricultural policy in the first place that contributes to the problem, and perhaps a good step towards relieving the symptom of fewer bees is to end the corrupt, addictive habit of allowing Congress to interfere with farming.

I'm also sort of curious to what extent the DoT, HUD & al will be responsible for maintaining wildflower populations in proposed greensward areas. Are we going to see a new marigold czar come out of this?

I agree that apiary management is vital to crop health. That's kind of obvious. What's less obvious is that unelected bureaucrats with no skin in the game are better poised than farmers to make commercial decisions on their behalf. The costs of a nationwide foul brood brought on by government mismanagement are too awful to contemplate. Let's hope that if the worst happens, we might all live to regret it.

A Ragged Bill of Sale

When the otherwise meretricious, obsequious DoJ releases a report that basically confirms everything Radley Balko's been working on for the past several years, I worry. If that's all the news that's fit to print, imagine the emanations and penumbras.Just how much was redacted?

The jurisprudence of anti-trust legislation is something like this: protected monopolies can get away with treating customers abhorrently because shoppers have no recourse, no alternatives. Therefore, some sort of state oversight is required to prevent abuse.

Nowhere is this analysis more apt than in the monopoly provision of violence. If your local PD is an overbearing nuisance, there's precious little you can do about it. They enjoy powerful de facto if not robust de jure protection against both criminal and civil action. Unless you're willing (and unconstrained by wealth limitations) to move to another jurisdiction, you are obliged to accept the transaction that the constituency has made on your behalf. Your regrets are immaterial, even if your family pet lies in a shallow backyard grave, even if your grandfather was gunned down in the middle of a no-knock raid at the wrong address, even if your toddler was seared by a flashbang grenade.

DoJ oversight is one technology to prevent the abuse of local tax- and forfeiture-funded banditry. But it ain't the only one.

Also of interest, picture for a moment the iterated game theory here. How does the sovereign benefit from this report? Consider carefully your answer.

De Gustibus non est Disputandum

I lack the moral authority to tell strangers how they should modify their appearance.

Something tells me this gentleman may regret his decision someday (NSFW?).

He can surgically alter his face to resemble a comic book villain, but he may not sell his kidney.

Interesting.

Marriage: Private Good, Public Institution

Two friends recently wed. When I first met Pamela, her surname was the same as mine. She was kind enough to grant me the rare luxury of shortening her name to "Pam" for the sake of the rhyming scheme. As of earlier this week, she and BH have merged to form the Voltron we now call #TeamByrmela.

Okay, maybe it's just me that does that.

At any rate, congratulations you guys. And a well-timed one, as Justin Wolfers has been getting some really good press over his latest (impeccable, as always) empirical work on the role of the divorce regime as it relates to marriage stability. The tl;dr version: divorce rates have tanked. People who choose to marry these days tend to stay married. Of course, people have been delaying marriage and having kids out of wedlock and all that stuff. But for those folks who do tie the knot, they seem to be better at forward induction. There are fewer social pressures to wed hastily, therefore the rate of euvoluntary marriage is greater. That's fantastic news, so long as you're in a euvoluntary marriage.

Consider the following distribution:

The right tail has always been good to go. They marry, they stay married, they have decent jobs, live in good neighborhoods, obtain good educations, contribute plentifully to their retirement accounts, get regular checkups, and eat kale. The left tail has always been doomed, and the evidence for that is in the dismal failure of longstanding New Deal and Great Society programs to eradicate measured poverty. Life in the left tail is characterized by periodic joblessness, substance abuse, negative savings rates, unplanned reproduction, you know—pretty much most of the chronic gripes you hear from social conservatives.

But the grey area is what's contentious here. Wolfers is picking up a tendency for these folks to (marginally) postpone marriage until they've found a better match. No hasty marriage at 19 means no messy divorce at 35. My hunch is that the reasons for this are some admixture of both cultural and regime reform. There's less social stigma to being unwed, and that's related, probably by both cause and effect, to the advent of no-fault divorce.

The benefits of a good, stable marriage are unquestionable. The folks in the right tail have better lifetime earnings, more satisfaction, and usually a legacy they take pride in (see some of Double-D's posts on end of life regret for counterexamples). If the folks in the middle of the distribution would simply be more prudent and diligent about participating earnestly in the marriage market, they would find that the discounted present value of a successful marriage far outweigh the costs of obtaining one.

The empirical question is this: how receptive to treatment is that "if"? As Wolfers and Stevenson have noted in other research, the costs of at-fault regimes include higher rates of domestic violence and spousal suicide. Yikes. Restoring the old regime would hit the left side of the gray zone pretty hard.

There are maybe some tax incentives that could encourage the grey zone to shrink, at least a little, and probably only on the right side. But having one mortgage instead of two is already a pretty strong financial incentive, ne c'est pas?

So what remains? The institution of marriage is a public good: it has all the characteristics of a non-rival, non-excludable good. Individual marriages, contrarily, are precious private goods. Typically, when we want to encourage good behavior without the downsides of relying on coercion, we default to rhetoric, to persuasion. In the misty days of my youth, we watched felicitous families on television like The Waltons, or the Cunninghams, or the Ingalls clan out there in that little house on the... I dunno what to call it... savanna I suppose... veldt maybe. As I grew older, Ward Cleaver gave way to Al Bundy. TV families stopped being aspirational and became more cynical. Long time readers might accurately predict that I prefer cynicism in my own entertainment fare, given my cruel and unforgiving temperament, but if Deirdre McCloskey and Virginia Postrel are right, we get more of what we respect, we get more of what we glamourize. Perhaps we'd see more stable marriages out there if viewers would consume more content that raised the relative status of durable marriage.

A public service, if you will, in support of a euvoluntary institution.

Just watch out for hammy tropes though. Audiences know when they're being preached to, and they don't much like it.

I See You Shiver With Procrastin...

via Adam the G., Heath and Anderson on the dragging of one's heels. I assume, Adam, that you ran across this on the References page for this paper on gamification and eudaimonia. I assume further that you, as did I, got the heebie-jeebies from the phrase "eudaimonic design," appalled perhaps by the idea that eudaimonia could be the product of [central] conscious design rather than the messily informed trial and error conducted by ordinary men and women who have virtuous intent but imperfect will. I am sure, my dear Adam, that you share my conclusion that humans are learning creatures, striving towards improvement, but stumbling along the way, and ever bound by the shackles of opportunity cost.

So I also assume that you share with me a somewhat subtle understanding of what opportunity cost really means, and in the case of procrastination, what it implies. I assume that you, like me, don't conflate pen-and-ink game theoretical predictions with contextual decision calculus made in the face of a mighty array of tempting choices. I assume that we two fellows are of like mind on the topic of prudence: that it is the routine exercise of this virtue that strengthens it and that without such exercise it tends towards flab in the median human.

Procrastination provokes ex post regret. Therefore procrastination is not euvoluntary. Never put off till tomorrow what you can do today. The "Protestant work ethic" is characterized by its antipathy toward sloth. Be thrifty, be industrious, create capital. Don't be lazy, don't give in to the pleasure of sin. The ant survives the winter; the grasshopper freezes to death (without the charity of those more prudent).

Procrastination sure seems irrational. It's nuts to give up big future gains just so you can be content to sit back, maybe watch a little Mork and Mindy on channel 57. Maybe kick back a cool Coors 16-ouncer. And yeah, maybe that means that the dishes pile up in the sink (to pick one of the benign examples from the H&A paper) or maybe that tumor in your colon grows another few centimeters (to pick a less-benign example from the paper), but hyperbolic discounting is just one way to model this decision. Maybe it's satisfactory enough for analytical purposes, but analysis has an unsettling tendency to show up uninvited, particularly in policy settings, where Calculation Problems and Public Choice Issues have already taken up residence. Put another way, procrastination is a private problem, and overcoming it requires private solutions. Consider instead that we might model procrastination not as a failure to properly consider the future, but rather as choice paralysis or even as a profit opportunity for a clever entrepreneur to reap rewards in a missing market.

Look people, traditional technologies for overcoming procrastination exist, and they include sermonizing, peer pressure, nagging, folklore, inspirational speeches & al. But for reasons too numerous (and uncertain) to list here, they've lately become increasingly obsolete. A more modern tech would include gamifying. After all, how do you get players to continue clicking in an otherwise unrewarding MMO? Meter out little dopamine rewards stretched out as time progresses. If the ordinary procrastinator can make the performance of unpleasant tasks immediately rewarding, they can convert dull, onerous work into a pleasurable little voluntary addiction, one they can walk away from at a moment's notice with no hard feelings.

It is important therefore to distinguish anti-procrastination gamification from state-run choice architecture. In both cases, the EE condition fought is regret. The difference is clear from a virtue ethics standpoint: by voluntarily opting into gamifying anti-procrastination, the player intends on his own behalf to oblige himself to pursue his eudaimonia; if he decides ex post that his earlier decision was a mistake, he has no one to blame but himself; his regret creates no public strife. If, contrarily, a bureaucrat has modified his choice set for him, his inconvenience will, rightly or wrongly, be directed at agents of the state, at the gently coercive choice czar appointed to be the Jiminy Cricket to his Pinocchio. With a sufficiently large constituency, this would introduce more long-tail risk than I think is prudent for a nation. Add to this the nearly intractable knowledge problem faced by the bureaucrat (how to distinguish deleterious procrastination from welfare-enhancing choice at a great distance) and the pernicious risk of regulatory capture by people whose interest lie in their own pocketbooks rather than in the public trust.

Given the heritage of Western Civilization, I think many of my readers could be pressed to agree that procrastination as described in the Heath and Anderson paper is a vice rather than a virtue. I hope that upon reflection, my same readers will agree that the sensible, prudent solution to the erosion of the traditional checks on procrastination is to allow new technologies to emerge from the maelstrom of ideas and be tested in an environment where bad ideas can be rejected and discarded. It is not in the nature of the typical government-run program to dissolve in response to the failure of obtaining favorable results.

Related remarks here.

..ation

Thick as Thieves

Regular readers of EE know that Kiesling and Giberson at Knowledge Problem rank very near the top of my list for all-time fave bloggers. Their specialty is the economics of energy heavily informed by public choice. For me, a former nuclear power plant operator and present public choice enthusiast, their work is a perfect blend of the old and the new.This splendid tradition continues with a post yesterday on the philosophy underpinning the regulatory approach taken in utility provision.

You might marvel that anyone could find regulatory theory compelling, but try to take the long view for a moment. You occupy an extremely remarkable time in history. You live in an amazingly well-lit, pleasantly air-conditioned, luxuriously cushioned, outlandishly informed period in the course of human events. The mere fact that a small sliver of the population is able to dig minerals out of the ground and convert them into commonplace creature comforts that would have gobsmacked Solomon himself is miraculous. Humanity got tired of huddling in caves away from the fury of the deities of thunder and said, "you know what? Let's use those blinding columns of the rage of the heavens to look at funny pictures of cats." We live in an age where electricity is boring.

Anyway, because of historical accident, electricity generation and distribution ended up resembling other utilities (water, eg): centralized generation and single-grid parallel distribution. We've mostly got big ol' power plants that make the electricity, transmission gear that send it out, and load centers that consume it. And according to standard (Samuelsonian) economics, the monopoly that naturally arises from this threatens the public weal by potentially charging more for their services than a competitive provider would. The ability of a monopoly to charge higher prices is tied very closely to consumers' alternative arrangements: if the consequences of buying no electricity are extremely unpleasant, the electric company can get away with charging an arm and a leg. To avoid this unpleasant firm-customer relationship, the utility regulatory board is chartered with estimating the cost of power production and setting the price accordingly. In the language of EE, utility pricing regulations exist to prevent the exploitation of BATNA disparity.

But, and it's a big but, this is not the only approach to regulation. Contrast monopoly fetters with regulatory agencies like the Consumer Products Safety Commission. Here's the front matter from the statutory authority for the CPSC:

SEC. 2. [15 U.S.C. § 2051] (a) The Congress finds that—
(1) an unacceptable number of consumer products which present unreasonable risks of injury are distributed in commerce;
(2) complexities of consumer products and the diverse nature and abilities of consumers using them frequently result in an inability of users to anticipate risks and to safeguard themselves adequately;
(3) the public should be protected against unreasonable risks of injury associated with consumer products;
(4) control by State and local governments of unreasonable risks of injury associated with consumer products is inadequate and may be burdensome to manufacturers;
(5) existing Federal authority to protect consumers from exposure to consumer products presenting unreasonable risks of injury is inadequate; and
(6) regulation of consumer products the distribution or use of which affects interstate or foreign commerce is necessary to carry out this Act.

That ain't BATNA disparity, people. It's regret aversion. And it's a guiding principle for the regulation of dynamic industries. It's also the soil in which the precautionary principle grows.

Here's the fun bit that Lynne is asking: what happens when the regulated industry changes from static to dynamic? That is, the institutions that support protections against monopoly rent extraction may not be suitable for an industry looking to adopt new technologies.

Luckily, there's already a pretty good example of a regulatory apparatus that's already gone through (or is going through) a similar transition. Banking and finance were industries where "production is represented by a known cost function with a given capital-labor ratio; that function is the representation of the firm and of its technology" prior to, say, the collapse of Bretton-Woods. Loan originators didn't sell off bundled securities, F. Black and M. Scholes had yet to publish their 1973 paper on options pricing, and you knew what you were getting with the sleepy, predictable 6-3 spread in a Savings and Loan (my younger readers will know the old S&L moniker under the more modern name of "Credit Union"). Well, something happened (some things, actually: plural) that transformed the staid, dull-as-dishwater banking industry into the hydra it is today. Exotic derivatives, loan sales, currency arbitrage, and a phalanx of regulatory agencies to deal with it all now dominate the money side of commerce. Where there were once periodic recessions, we now inhabit a world shared by scary terms like "systematic risk" and "too big to fail."

It'll be interesting to see if the disorderly transition in finance and banking will presage utilities' move towards more rooftop solar, smart metering, and the like. I'm curious if part of the mess that led to events like the S&L crisis or the failure of LTCM (or Enron for that matter) were precipitated by an ill-timed shift in regulatory philosophy. The political kayfabe of the Reagan administration was "deregulate, deregulate, deregulate," but the details surrounding deregulation matter greatly. Was it simply a matter of eliminating flight price controls, as with the Civil Aeronautics Authority, or was it something that disrupted the fundamental cost structure of mortgages? "Deregulation" is just a shibboleth, you guys.

My prediction, if you can call it that, is that any institutional changes that happen in utility regulation should at least consider reviewing the purpose of having a regulatory authority in the first place. If customers are more easily able to share load, then protecting consumers against rapacious pricing is no longer a chief concern. If there is a greater potential for fraud as new electricity generation and delivery is the imminent threat, then the charter authorizing regulatory boards should reflect that.

If we must have regulatory agencies, then it is prudent to align their incentives and their function to best match the interests of the public. Just imagine what would happen if the ruin brought on by the events of 2008 would have centered on power generation and distribution rather than a cabal of oily bankers in Manhattan.

Plato's Divine Maxim: Vapor in the Wind

(via Reason) On June 18 2014, Senator John Davison "Jay" Rockefeller (D-WV) addressed the dire issue of "Aggressive E-Cigarette Marketing and Potential Consequences for Youth."

ATSWTWT

Well, perhaps you shouldn't watch the whole thing. It's two and a half hours of Senate testimony. I'm sure you can find marginally more productive things with which to occupy yourself.

Okay then. According to Senator Rockefeller, it's bad to convince kids to purchase electronic cigarette products. I think the worry is that the kids will then consume these products and become addicted, leading to health problems later in life.

Let's assume for the moment that the good Senator from the great state of West Virginia has conducted a thorough critical review of the relevant medical literature and has come to this conclusion without a hint of bias. Assume also that the standard public choice problems of incumbent firms seeking to protect political rents by shouldering out upstart rivals by way of offering special inside information to political elites who are legally exempt from insider trading statutes does not apply in this case and that Hume's warning against a sovereign that seeks to encrease his dominions offers no useful guidance here. Assume, in other words, no knavery.

What policy follows? From the majority statement: "beyond the flavors identified in our report, refillable nicotine liquid that is marketed can be found in flavors that include 'Bazooka Joe,' 'Gummy Bears,' and 'Chocolate Toot See.'” Are these flavors less euvoluntary than "Grandpa's Phlegmy Lucky Strike Cough" or "Bottom of a Crusty Ashtray"? Even if candy-flavored nicotine is intentionally aimed at children (and smokeless tobacco has had flavored variants in their products for decades with little public outcry), shouldn't a careful analysis include consideration of likely alternatives? Remember your Demsetz: the task of analysis is to compare alternative real institutions against each other rather than against an imaginary ersatz world. Pretending that kids would simply abstain from behavior that parents and legislators disapprove of thanks to regulatory efforts is the very essence of the nirvana fallacy. Moreover, product bans, speech restraints, and enforcement efforts almost never properly consider the full extent of the public costs. Consider that every federal and state inspector hired to interfere with the sale of electronic cigarettes gives up the opportunity to participate in the productive economy.

Then again, perhaps I'm looking at this the wrong way. Let's think in terms of comparative advantage and the Coase theorem. Assume that parents don't want their children using these nicotine products for the few years while they have custody. Assume further that these parents are insufficiently competent to prevent their kids from obtaining and consuming these products. The marginal costs of organizing to restrict advertising and sales are lowest in politics. Convening a Senate hearing is plausibly cheaper than parents organizing for a vociferous campaign of public censure (again, under the assumption that the value of Sen. Rockefeller et al's time is sufficiently low). So why shouldn't parents take full advantage of the services their tax dollars purchase and subcontract a portion of their ordinary responsibilities? Isn't Helen Lovejoy political economy simply a matter of low-cost provision of parenting duties? Why are the politically protected rents enjoyed by incumbent tobacco firms morally relevant? What matters is keeping nicotine vapor out of the hands of tender, innocent children. You know, just like the way that Schedule I keeps marijuana away from teenagers.

Invoking "children" is a natural defense against Plato's Divine Maxim (never to use violence to his country no more than to his parents). Obviously, the sovereign shouldn't treat kids with the same jurisprudential consideration as adults. So how can the armchair political analyst distinguish between a legitimate concern for minors and a mere political fig leaf? For me, I slightly alter Plato's Divine Maxim thus: would I be willing to completely prevent my parents from conducting an exchange to slightly increase the probability my kid wouldn't conduct the same exchange? Nota bene, I assume that on average, my parents will tend to be more law-abiding and conformist than my daughter. For e-cigarettes? Paternalist please. If you're going to let parents opt out of vaccinating their infants against communicable diseases, you sure as heck have no standing to ban vaping. Jenny McCarthy's preposterous drivel is a far greater threat to public health than smoking substitutes. Drag her in front of a subcommittee and then maybe we can have a little chat about how America's parents are justified in assigning their nicotine prevention and cessation duties over to the greatest deliberative body in the world.

Addiction

"Addiction" is one of those expansive words that mean different things to different disciplines. Here's how Psychology Today defines it:

Addiction is a condition that results when a person ingests a substance (alcohol, cocaine, nicotine) or engages in an activity (gambling) that can be pleasurable but the continued use of which becomes compulsive and interferes with ordinary life responsibilities, such as work or relationships, or health. Users may not be aware that their behavior is out of control and causing problems for themselves and others.

Economists tremble at the lack of relative prices in this description and would insist on a mismatch of utility and cost in downstream consumption events (Becker and Murphy wrote the flagship paper on the topic). We here at EE are awfully fond of the no ex post regret condition to purposely eliminate exchange in addictive substances as candidates for euvoluntary exchange.

But could there be too much tooth in that bite? Is it possible for someone to rationally (and I mean "rationally" in the colloquial sense, not merely in the strict economists' use of the word) choose to take the first step down the road to addiction? In other words, contrast ex ante regret expectations with ex post regret expression. In 21st century America, you'd have to have been raised in the middle of a swamp by manatees to not know that smoking cigarettes is addictive, and not particularly good for your health to boot. Yet, people still routinely pick up the habit, de novo, against all available public medical advice and common sense.

Nor is it the case that heroin's well-deserved reputation for shortening one's expected lifespan is a great secret kept well-hidden from the scrying eyes of would-be junkies. Yet, surprisingly, people still shoot up from time to time. It seems as if that, even with all available rational-mind information (Kahneman's rider, rather than the elephant), people still still choose the coffin nail, or the spike, or the bottle, or the pill.

So perhaps the important question is not "is addiction euvoluntary," but rather, "what institutions might make addictive behaviors more euvoluntary?" In the black markets that arise to feed addictions, merchants may not necessarily have good incentives to monitor the quality of their wares (there are exceptions to this rule, as Andrea noted in her podcast appearance). Under prohibition, the severity and frequency of ex post regret should be expected to increase. The salient question for euvoluntary exchangeurs is whether or not there is any change to the ex ante regret calculus under legalization, and whether or not the associated tradeoff is worth it.

Note here that the empirical literature helps only so far. The tradeoff question is ultimately a value judgement. And justice is a tricky virtue, even under the most favorable circumstances.

Asymmetric Information: Caveat Venditor?

Most people would say that if the buyer knows of a defect that makes the asking price (in effect) fraudulent, then he should disclose that information.  Of course if the defect if obvious, or should be obvious to a competent observer, that's a different story.

But suppose it's a negative defect, or in other words a huge bonus value, and it's the buyer who knows?

For example, was the buyer obliged to reveal that this object was worth at least 100 times the asking price? 

Are Anti-Abortion Payments Exploitation?

Angie C sends us a story on Save Unborn Life, an organization that pays expectant mothers to refrain from terminating their pregnancies.

Save Unborn Life exists for the sole purpose of offering abortion-minded women money to bring their babies to term. After a meeting with Merriott, Hope was offered $3,000 not to go through with the abortion, which was scheduled for the next day. She immediately accepted the offer.

The anecdote in the piece is stuffed to the gills with woe. BATNA despair on full display.

I wonder if anyone would be willing to defend the position that SUL is exploiting women to forward their agenda. Ordinarily, the clash over abortion is mostly sound and fury, with plenty of speech but few real resources on the line. This is different: this pro-life group works not through coercive political channels, but by market(ish) incentives. But poor young unwed mothers are still in dire straits. There's no disengaging that bit of moral intuition.

The pro-choice folks I know lean in the direction of seeing the downside of state coercion on (at least this one particular) highly contextual personal decisions. I think they'd be okay with private subsidies to poor folks struggling to make ends meet. It'd be nice if many of them (again, the ones I know personally) would take this insight and apply it more broadly, but that's neither here nor there for now.

And it's not just BATNA engaged:

Merriott said that SUL also encourages poor women to sign up for federal assistance programs such as Medicaid and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), and that adoption is often the best option for women who cannot afford to care for their children. But SUL’s main objective, she made clear, was to save one life from death and another from a lifetime of regret.

Regret too.

And I'd again encourage you to think about Basic Income.

PS: could this be an enforceable contract? I don't mean in a legal sense, but in a practical sense. SUL probably wouldn't be able to recoup in the event of a breach. How marginal are abortion decisions, on average?

Death before Dishonor

I've posted before on how we might parse regret aversion to get at a finer understanding of the intersection between information asymmetry and systematically biased beliefs. It occurs to me that purely instrumental ex post estimates of the outcomes of a market exchange are insufficient to judge its ex ante wisdom.

Most routine exchanges are purely instrumental. I get no special symbolic pleasure from buying lunch (though since Whole Foods is the nearest grocer's from my workplace, I often see folks who probably do), nor do I see my automobile as anything but a practical machine to sweep my meat and bones along the shimmering highways of this fair land.

Something yesterday encouraged me to rethink my approach to the automobile question. Mrs. W and I were walking our not quite two year old daughter out to the park when we overheard a teenage boy informing, in no uncertain terms, his teenage friend about how he was going to (I beg your indulgence if this isn't an exact quote), "put a fucking nitro kit all up in this bitch, son." It occurred to me that perhaps this young man had yet to adopt a more placid, reflective relationship with his motorcar.

Apart from a very brief moment of intemperate pique at the boy's juvenile ineloquence, I wondered at what instrumental purpose a nitrous kit in a cheap secondhand commuter vehicle could possibly serve. Yes yes, I know de gustibus non est disputandum, but drenched as I am by a stroll off the end of the EE pier, it seemed to me that perhaps that the young man in question was under the sway of a flavor of regret aversion bound in a courage sentiment. For those of us who have been young men ourselves at one time or another, we understand the urge to avoid being perceived as callow or cowardly. If that means having your wallet on a chain or a bunch of tattoos or a bit of a drinking problem, or in this case, a preposterous after-market modification to a Camry, does this count as the same sort of regret aversion or flaccid "coercion" that we're trying to get at in the sidebar conditions?

If there is some sort of social compulsion to conduct trades to support signaling, whether it's to look tough to a crew of teenage boys or to fit in with the neighborhood sewing circle (do those still exist?), should we consider that euvoluntary?

My first-blush reaction is to say yes. Here's why. Social signals must be costly to be effective. The very costliness is part of the value of the signal. Bronze age tribes didn't sacrifice oxen willy-nilly; oxen were wealth. Similarly, if you want to show that you're a prudent captain of industry, the expense of a tailored suit is part of its value. If finely tailored suits ran for the same price as a gas station hot dog, I predict that business folk would signal conscientiousness on other margins.

You can't earn honor by playing Call of Duty. IRL combat has no respawn.

And multiple margins of substitution mean that vendors can't really sustain true exploitation. If suits became as expensive as aircraft carriers, I'd expect corporate dress codes to change. So are social aversion something to fret over? Could be. And there are other interesting bits in there. Is smoking partly signaling? Marijuana use? What other margins do bans (or Pigovian taxes or nudges) push people towards?

Closed Standards & Moral Outrage

I often find myself sympathetic with the idea that the counterfactual world the open source folks imagine would be objectively better: oceans of highly customized products for the galaxy of customer desires that dot the consumer landscape. You want a life-size version of the Decepticon Soundwave that will breakdance on your helicopter pad out back? We got an app for that. Closed protocols make that world marginally harder to attain, particularly if network switching costs are insurmountable.

Coerced by capitalized network value?

On Twitter, Brock Cusick described the gap between the counterfactual, open source world and the one we actually live in as "deadweight loss", which seems to me to be a bit of a misapplication of the term, but the overall observation is, I think, spot on.

Imagine a tabula rasa with no Facebook, no Skype, no iPhone, no whatever. You're sitting at the top of a game tree deciding whether or not to take the high road or the low road. You think you know what's coming, but you're really just making your best guess, both about the sort of services you'll be getting and about the value of the network that will glom on the product. If the closed-protocol branch looks better ex ante, it should surprise no one that that's the one that gets the customers.

Nobody uses G+ anymore, it's too crowded.

Anyway, is this de facto sort of coercion by consumer surplus, by network benefits if you will something we should fold to when we form our moral intuitions? The consequential arguments are pretty obvious: we'd be better off with innovation, both more and faster (here we come, white and trashy and incredibly dumb). But it's hard to see how, say, property rights are being violated. And BATNA disparities would be well-mocked in a "first world problems" series of image macros (that's the right name for those, by the by. "Meme" is a more general term for cultural transmission elements). Maybe there's a case for regret aversion, but it doesn't seem to be systematic regret, and even if it were, it would still be tough to tell a priori that there's any negligence or fraud going on.

What think ye? Are closed, proprietary protocols euvoluntary? Why or why not?

Two by Four: Round 2

Last time, I questioned folks who invoke pedestrian notions of cost when discussing the encorpulentation of Americans. Today, I want to ponder the ecological rationality of gluttony and its partial role in body weight outcomes.

Our good pals Von Neumann and Morgenstern lend us four axioms against which to adjudge blackboard rationality:

1. Completeness: preferences can be weakly rank-ordered. I either prefer apples to oranges, oranges to apples, or I'm indifferent between the two. I cannot both prefer apples to oranges and oranges to apples. I think of the completeness condition as the anti-schizophrenic axiom. 
2. Transitivity: preference rank order preservation. If I prefer apples to oranges and oranges to bananas, I prefer apples to bananas. No rock-paper-scissors when it comes to preferences. This one is where it gets tricky when we include extra dimensions.
3. Continuity: there's some exchange rate at which I'll swap apples for bananas. Yes, I like one apple more than one banana, but all else equal, I'll give up a slice of apple for a bunch of bananas. And then it'll get awkward because I'm always tempted to call a bunch of bananas a "group" of bananas, much in the same way I'll call a bunch of grapes a "cluster" of grapes just for pure contrary cussedness. 
4. Independence: irrelevant choices shouldn't affect my rank ordering. If I prefer one apple to one banana, I should prefer one apple and one orange to one banana and one orange. This one is the most obviously difficult to sustain in an ecological setting. Suppose I prefer milk to apples. Add oranges to each. With apples and oranges, I can make fruit salad (yum!). With milk and oranges, all I can make is sadness and disappointment. Independence is violated (sort of).

These are nice axioms to use when we create those cute utility models with which to derive demand curves. The problem is, as with the GDP stuff I keep grousing about, is when our model shifts from being a tool to describe the world to being Procrustes' bed upon which to rack and hew mankind. Nutritional do-goodniks wage bright campaigns against sellers of chow balanced upon the thin reed of probable regret. No raw milk, no imported cheese, no big-ass sodas, no bundling of toys with fast food, no trans-fats, no bacon-wrapped frankfurters, no this, no that. You can't control your appetite, so it's up to us to control it for you. Don't worry, you'll thank us later.

This is the world of ex post regret. Would you like to super-size that?

Funny thing though, there's a lot to the argument. Ignore the shallow reasoning based on fiscal externalities and assume that we've got a world undistorted by farm bills and "health" policy (the scare quotes are there because we subsidize medicine and insurance and then pretend that we're subsidizing health). Even in a world where all costs are borne by the consumer, discounting is such that many folks will overeat. Gluttons will regret all the face-stuffing. Gorging yourself isn't euvoluntary.

There's a now-ridiculed old-timey virtue called temperance which unfortunately got all muddled up in the anti-alcohol campaigns of the late 19th and early 20th centuries. Temperance and a fair dose of table manners may have helped keep appetites in check. As with most other virtues, the path that leadeth there cannot be trod by political elites on the behalf of constituents. Forced virtue is no virtue at all. Duh. So if I prefer more food to less food today and I prefer being svelte to being obese tomorrow, I've got a challenge that confounds my Max-U rationalist. Maybe it's a fine time to recall that this problem is far from intractable. It's just that the particular traction happens to be out of the hands of politics but rather impaled on the forks of diners.

So yes, people are getting fatter. The solution isn't more and thicker bans. People are too hungry and too clever for that. At a minimum, it's directionally euvoluntary to stop doing harm. 

Euvoluntary Labor and Workplace Safety in Bangladesh: Wilson on Bill on Yglesias

At Groping To Bethlehem, "Bill" questions Matt Y.'s comprehension of institutional economic analysis in response to the tragic Bangladeshi version of the Triangle Shirtwaist Factory Fire that happened in New York in 1911 . Note the points he makes towards the bottom of the post. In a nutshell, the problems of Bangladesh are: industrial monopsony (BATNA), information asymmetry (regret condition), and institutional corruption (coercion by human agency). These three bullet points could have been lifted straight from the EE playbook.

Labor in Bangladesh is not euvoluntary.

Good, it's critical to identify this feature of the Bangladeshi economy, because it helps inform what a reasonable, ethical response might look like. A reasonable, ethical response includes unilaterally lowering any trade barriers that might remain with the impoverished country, and granting unlimited work visas in lieu of open borders (policies that the median voter should support anyway based on the likely outcomes).

Okay, maybe my libertopian flights of fancy, even if there's something close to unanimity in the economics profession supporting free trade (in goods if not necessarily always in migration), might be a bridge and half too far. At the very least, it's important for the sake of Bangladeshi workers that well-intentioned outsiders don't push for disruptions to what is famously one of the most fragile economies in the world.

Look, language is a funny ol' boy. We have at least three terms for the pretty much the same thing: "industrial policy" (meaning protectionist policies), "boycott", and "embargo". The practical result among this trio is the same: inhabitants of the target country (as well as the aggressor country) are made poorer by reduced opportunities to truck, barter, and exchange. The only difference is in the rhetoric and the mood affiliation.

So cries for boycotts aren't really any different than cries for the same kinds of policies the US has been inflicting on the immiserated citizens of Cuba for over half a century and on the oppressed population of Iraq between the close of Gulf War I and the start of Gulf War II, Electric Boogaloo. Treating Bangladeshis like war criminals hardly seems like an appropriate response to an industrial accident. It's probably wiser to recognize that workplace safety is a normal, perhaps superior good: as income rises, so goeth demand. It's probably wiser to do what we can to build wealth and productive capacity (read: trade with the Bangladeshi people) with them rather than throttle the extent of their market.

On a more positive note, I'm encouraged to see that the Bangladeshi people themselves are demonstrating against poor workplace safety standards: it's (weak) evidence that overall conditions could be improving. Truly desperate people don't have the luxury of marching in picket lines. Accidents notwithstanding, things might be looking up a bit.