Five intriguing papers I discovered this week

In what might become a recurring feature, I am going to summarise the findings of a few research papers, potentially of interest to ASI blog readers, that were either first released this week, first published this week, or first come upon by me this week.

1. Fernandes, D., Lynch, J. G., and Netemeyer, R. G., “Financial Literacy, Financial Education and Downstream Financial Behaviors” (Jan 2014)

This paper is a large meta-analysis of 168 other papers, which in turn refer to 201 different studies and experiments. They find that at least 99.9% of financial behaviour in life cannot be explained by differences in financial education, or conversely at most 0.1% of the difference in people’s financial decision-making and choices is down to education interventions designed to improve their financial literacy. In the words of their abstract: “even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention”.

While other correlational studies appear to show some relationship between financial behaviour and educational schemes (i.e. one explaining more than 0.1% of the variance between individuals) they explain that this is only because those typically getting financial education already have various psychological traits associated with careful management of finances. They therefore suggest that big schemes designed to improve lifetime financial decisionmaking are futile and a waste of money; the best we can hope for is “just in time” interventions, perhaps at the point of financial transactions, that are more likely to be taken in and not forgotten.

2. Wang, M-T., Eccles, J. S., and Kenny, S., “Not Lack of Ability but More Choice: Individual and Gender Differences in Choice of Careers in Science, Technology, Engineering, and Mathematics” (May 2013)

In this paper the authors find that a substantial fraction of the male-female “gap” in STEM (Science, Technology, Engineering and Medicine) fields can be explained by the fact that women who are talented at maths tend to also have high verbal skills, skills that mathematically talented men are much more likely to lack. This means they have a wider range of choices available to them, and also possibly identify less closely with maths as part of their personality, and it is this choice not to pursue STEM further that drives the gap, rather than, for example, discrimination in the area or a perceived unfriendly atmosphere.

3. Liu, S., Huang, J. L., and Wang, M., “Effectiveness of Job Search Interventions: A Meta-Analytic Review” (Mar 2014)

Liu, Huang and Wang found, reviewing 47 different experiments testing if schemes “teaching job search skills, improving self-presentation, boosting self-efficacy, encouraging proactivity, promoting goal setting, and enlisting social support” could boost the unemployed’s chances of getting a job. In fact, on average those in the treatment groups—i.e. those actually subject to the intervention, and not in the control group—were 2.67 times more likely to get a job. Since the studies all used randomness of quasi-randomness to assign treatment, this suggests, they say, that schemes that develop skills and self-motivation can be effective. However, the schemes were more likely to help the young than the old, the short-term unemployed than the long-term unemployed, and job-seekers with special needs, as compared to the population at large.

4. Karwowski, M., and Lebuda, I., “Digit ratio predicts eminence of Polish actor” (Jul 2014)

In a slightly surprising study, the two authors looked at 98 Polish actors, both male and female, and compared the ratio between their second and fourth digits on their hand (a measure of prenatal testosterone exposure) and their productivity and fame. For both men and women, even controlling for age, a higher ratio predicted more pre-eminence.

5. Aisen, A., and Veiga, F. J., “How Does Political Instability Affect Economic Growth?” (Jan 2011)

In a classic example where economists do extensive research to tell us what we already know, this IMF paper from 2011 shows us how bad political instability is for economic growth. Actually, the paper is a great one because it allows us to estimate the size of the impact of different political elements on instability and then the size of instability’s own impact on economic aggregates.

Their findings are highly interesting: whereas primary school enrolment has a pitifully small impact on economic growth, and the impact of investment, economic freedom and the security of property rights comes out quite small, violence, political instability and cabinet changes have substantial negative effects, as does, surprisingly, population growth. And while the most productive regions in Europe are the most ethnically diverse, in this study ethnic homogeneity is very strongly associated with growth. Of course, the conclusions of the paper—that countries should address the root causes of political instability—are much easier said than done!

Does the existence of intangible goods mean we shouldn’t maximise wealth?

The proposal I made last week—that we abolish parliamentary democracy and turn over decision-making to a a set of betting/prediction markets—faces a number of serious objections. In this post I will deal with the objection that national wealth in principle misses out several important contributions to welfare like liberty, love or other intangibles. I have four further serious objections, which I will attempt to tackle in a third and final piece.

What makes us happy, and helps or allows us to satisfy our desires and preferences, may not be wealth alone. A millionaire who desires only a dishwasher is no better off for all her wealth if she is unable to buy one. A world in which dishwashers are harder to get hold of—perhaps due to a ban—is worse than one in which they are widely available, for a given amount of wealth.

But introducing “for a given amount of wealth” might be begging the question. Our measure of wealth, to be a good one,  will include some correction for changes in prices (like the official measure). Even under our current system of drug prohibition there are measures of illegal substance prices. Similarly, if we banned dishwashers, perhaps in some bizarre return of the lump of labour fallacy, they might still exist, albeit underground and more costly. In this way the measure would show an expected dip in real wealth in the prediction market for the national wealth effects of dishwasher banning.

And many other restrictions on liberty that we’d have independent reasons against would also depress our wealth, e.g. racist employment regulations, restrictions on travel. Even something like the ability to marry could be factored in—if people want to have marriages, they will have a higher demand for housing in areas where marriages are allowed. However this faces a lot of difficulties in a world where so many goods are unpriced and thus we cannot measure all of these effects. And it’s unclear whether all of the cost to an individual of, for example, restrictions on marriage would be fully capitalised into house prices. So there might be some reason to expect a wealth maximising state to be less liberal than the ideal happiness-maximising state would be.

Further, typically unmeasured goods like love—which many people see as one of the most important—may not be measured by any element of the wealth markets. While current parliamentary systems don’t necessarily directly consider what effect policies will have on aggregate love in the country, were it to be significantly effected by a (proposed) policy they would be able to factor it in. But a pure national wealth-driven system would not.

This is certainly a difficult objection for the model of government, but it isn’t necessarily fatal. After all we know there are devastating problems with the current system, including distorted incentive structures, but even more than that public ignorance. We’d want evidence that not only would maximising expected wealth tend to cut the amount of aggregate love in society—it would do so to an extent that outweighed the improvements in policymaking down to an unbiased, properly incentivised and dispassionately rational decision-making system.

We’d need particularly robust evidence to overturn the strong established empirical connections between wealth and happiness (which presumably takes into account the effect of love on happiness). This means the love objection is not telling on our account without much further exploration. As suggested above, there remains the objection that some liberty contributes to happiness without contributing to wealth, or being fully accounted for in wealth measures, and this stands, and should be weighed against the other benefits gained from the wealth-maximising state. And the wealth-maximising state may well be more liberal than current parliamentary arrangements, given what we know about free markets and long-term growth.

A new governing paradigm—maximising national wealth

How should governments decide on policy? One answer is that policy should follow a particular ideology, such as libertarianism or socialism. Another answer—direct democracy—is that policies should be arrayed in front of the populace at large so they can pick. Another is that the people at large should choose people who vote on policies from options selected by a third group of people—roughly the Westminster system. Absolute monarchy would give a family and their descendants control of policy. But an under-considered method of choosing policy is via markets.

Here I don’t mean getting rid of social democracy and having most or all goods provided by the market; instead I mean choosing policies—whether free market or interventionist, right- or left-wing—with respect to the result of a hypothetical prediction market, specifically, one looking at some measure of national wealth.

Why wealth? Well what we really want to do is make people have better lives—increase their well-being. But measuring well-being directly is controversial and difficult. The two leading theories of well-being are that well-being consists in happiness/pleasure and that well-being consists in satisfying one’s desires or preferences. We know wealth makes people happier, particularly when they are poor, but even when they are already well-off, and we know more wealth means more ability to satisfy most different preferences.

Thankfully, both measures (like the official ONS statistic) and proxies (like the total market capitalisation of, FTSE All-Share firms, which make up 98% of total business wealth) of wealth are fairly widely available. Of course, these happen after the fact—so while we could easily judge past governments by their effects on these metrics, we couldn’t judge current policy proposals. But that needn’t hold us back! We already have markets in future RPI inflation in the UK (and CPI inflation in the US), called TIPS spreads. These take the price differential between RPI-linked and regular gilts or T-bills to work out what the market expects inflation will turn out to be. We know this because if it didn’t represent the market opinion, then traders could buy and sell bonds to achieve a higher expected return (i.e. take arbitrage opportunities).

Even a simple, TIPS-like market in national wealth would help us rationally guide policy. It’s not exactly clear whether central banks check TIPS markets, but if they did, the markets would give them advance guidance on whether their policy would help them hit their target level of inflation, based on reactions to policy changes, suggestive speeches, and explicit forward guidance like the Carney or Evans rules. In the same way, important policies would shift the wealth markets, and governments could use that as evidence for doubling down on wealth creating policies and for getting out of wealth-destroying moves.

However there are important distinctions between the Bank of England’s role in stabilising the nominal side of the economy, and the government’s role in making policy that makes it likely that lots of real wealth is generated. The best nominal policies, like NGDPLT, focus on stabilising, or ensuring the stable growth of, some nominal variable. The optimal result is extremely reliable stable growth. But that’s not what we want in real wealth. When it comes to real wealth, the more the better. That a policy boosted the markets’ expectations of national wealth by 10% in five years would not prove it was an optimal, or even good policy, if there was an alternative that could boost wealth by 50%.

So when it comes to national wealth we need conditional prediction markets. We need markets that tell us what would happen if we implemented a given policy. The specifics of implementing these sorts of markets become quite complex and difficult, as we do not want to restrict the policy choice too much, but it may also not be practicable to open up a gilt market for every permutation of every major political idea. But if we could start conditional prediction markets up, we’d have a range of policy options with very interesting and suggestive evidence of what is best for the country’s social welfare.

I think there are some persuasive objections to the results of these markets, and—further—to running policy in any rigidly-linked way to these markets. But I also think they can all be plausibly dealt with, and I will attempt to do so in a blog post tomorrow.