New evidence on the tech bubble

A new empirical paper on the dot-com bubble of the late nineties presents some serious challenges to the efficient market hypothesis. The authors report that 'institutions trade in the direction of clear mispricing in a small sample of equity carve-outs', the mispricing being a parent firm's share in a dot-com venture that exceeds the value of the parent firm (yes, that means that part of company A is worth more than company A altogether!). This should seriously worry anyone who believes that experts' use of arbitrage is a rationalising force in financial markets.

Furthermore, the paper takes some of the bubble blame away from individual investors by identifying big institutions (such as hedge funds) as the main drivers behind the bubble. This finding again (remember this guy?) contradicts the idea that the dot-com bubble was fuelled by personal investors, which seems like a textbook case of mistaking correlation for causality.

Digital magic and stupidity

I'm currently at the 2011 ICABEEP/SABE Conference in Exeter to see what's happening in the fields of experimental psychology and behavioural economics. Presentations as well as the weather (in the UK, nonetheless!) have been good so far. One of the keynote speakers, Russell Belk, gave a very inspiring talk on the digital consumer this afternoon. He described the lifecycle of a digital innovation as a transition from something new and magical to a common good. When it's at the magical stage, a well-marketed innovation becomes the subject of a furious discussion between various ideological perspectives. These ideologies, which in one of the talk's reference papers are categorised as technotopian, work machine, green luddite and techspressive, give rise to stories of both utopian ("social media made the 'Arab spring' possible") and dystopian ("excessive use of the web leads to social isolation") ilk.

As with any good talk on innovation, the speaker notes many similarities between people's response to new digital technology and previous generations' response to innovations of their time. He highlights Plato's description of a dialogue between Phaedrus and Socrates, in which Socrates criticises the practice of writing things down as a memory aid, arguing that when wisdom is contained in books, people will be dumber for it. This, of course, sounds a lot like the idea that Google is making us stupid. Well, perhaps Socrates would be delighted to hear that schools in Indiana have finally taken his advice on board and have stopped teaching cursive handwriting.

Youth unemployment nudged down in 2013

With compulsory school leaving age in the UK to be raised to 18 in 2013, a lot has been said about how students and teachers would be affected by this policy. From a liberal standpoint, it is hard to see the benefit of forcing ill-motivated teenagers to stay in school longer. Even libertarian paternalists (or is it paternalist libertarians?) would probably be uncomfortable with the mandatory nature of the plan. Some argue this policy is just a trick to bring down the youth unemployment rate and that teachers' jobs will become a lot harder. A newly published paper in Economic Inquiry, using the compulsory raising of school leaving age in Spain as a 'policy experiment', offers a possible answer to the question of teacher effort: sickness absence increased by 15%. It is not clear-cut whether this effect would be as prominent in the UK because, as one of the interviewees of the Guardian remarks: "many of the extra students will undoubtedly be in colleges not schools". But the general message that the policy should include compensation to teachers for taking on board students that would otherwise have left education seems hard to argue with.

Census & health

Just did my civic duty by filling out my 2011 census questionnaire. One of the questions on the form (about the state of my health) reminded me of Paul Dolan's talk at LSE about happiness, in which he argues that questions of the form:

How much does X matter to you when you think about how much it matters?

are not the right way of assessing the importance of X. He goes on to discuss priming and affective influence in a most engaging way. Worth a look/listen.

Cooperation: pairs beat groups

There's this experimental paper I've wanted to read for a while (only just got around to skimming it). The interesting part is that tacit coordination only occurs in two-player settings, whereas larger groups "can hope to coordinate their actions only by explicit communication and planning", in the authors' words. The paper's press release sums up the main findings.

Unstable preferences and the invisible hand

Last week, Robert Sugden gave the 2010 Keynes lecture on unstable preferences and the invisible hand (click link for a MP3 download). An interesting listen for anyone who'd like to know more about markets and how the stylised facts of behavioural economics change how we understand their functioning.

[Link from the British Academy website.]