So much of what we think and do about risk does not make sense. (…) In Europe, where there are more cell phones than people and sales keep climbing, a survey found that more than 50 percent of Europeans believe the dubious claims that cell phones are a serious threat to health. And then there’s the striking contrast between Europeans’ smoking habits and their aversion to foods containing genetically modified organisms. Surely one of the great riddles to be answered by science is how the same person who doesn’t think twice about lighting a Gauloise will march in the streets demanding a ban on products that have never been proven to have caused so much as a single case of indigestion.
That’s Dan Gardner, in the introduction to his 2009 book Risk: The Science and Politics of Fear. Gardner also has another book out titled Future Babble, on the lack of accountability — not to mention the lack of accuracy — of experts making predictions.
I have the students in my Law, Economics, and Organization seminar read the beginning chapters of Gardner’s book as part of our in-class discussion of risk sharing and incentives, and they usually find Gardner’s book to be thought-provoking.
Where there are posted restrictions, most European countries take speeding very seriously and levy hefty fines. The latest case in point is a 37 year-old Swedish man who was clocked at 180 miles per hour on a motorway between Bern and Lausanne in Switzerland.
Unfortunately for this driver of a new Mercedes-Benz SLS AMG, Switzerland doesn’t have fixed fines for speeding. Instead they use a formula similar to that in Finland where the fine is calculated based on the vehicle’s speed and the driver’s income. Back in 2002, Nokia executive Anssi Vanjoki had to pay a fine of $103,600 for going 47 mph in a 31 mph zone.
A student in my Law, Economics, and Organization seminar mentioned the article quoted above last week when I was explaining the difference between the twin concepts of absolute and relative risk aversion.
In economics, risk is not so much about what most people call risk as it is about gambles over income. In other words, risk preferences are defined over income or wealth. See here for an excellent discussion starting on page 64 in chapter 6 of David Friedman’s Law’s Order. So why would Switzerland and Finland have speeding fines that vary with income?
Chris Blattman had a good post last week about how much economics one should take in college, and which every student should read.
In that post, Chris also compared economics to karate:
[I]ntro to microeconomics is the yellow belt, and intermediate micro is the green at belt. An undergraduate degree in economics is a brown and an MA is arguably the black. And if you want your dojo or jedi master status then get a PhD or go into investment finance.
And of course the ass who runs around looking for a fight is the ideologically left or right jerk who manages to turn a conversation about the weather into a diatribe about free trade.
(In college I was actually just such an ideological ass–I won’t tell you what side of the spectrum but leave you to guess. Glad to say it was just a phase.)
There is indeed such a thing as studying too little economics, or just enough economics to be dangerous. In introductory courses, it is often the case that students are exposed to textbook neoclassical economics — risk and uncertainty, market power, externalities, asymmetric information, transaction costs, etc. are assumed away and relegated to higher-level courses. Or when market failures are not assumed away, little to no time is spent explaining how government intervention can actually bring society closer to efficiency.
The result is that students end up believing the government can rarely do good, and viewing the world through the near fiction of the First Fundamental Theorem of Welfare Economics — a competitive equilibrium is Pareto efficient.
I should know: I, too, was an ideological ass when I was in college. Unlike Chris, however, I cannot hide it — at least not from French speakers. Here is a bunch of links to the editorials I wrote when I was editor of Quartier Libre, the student newspaper of the Université de Montréal.
Thank goodness I ended up taking more economics and learning about the limitations of economic theory.
But what’s someone who does not want to do a PhD to do? What shortcut can one take in order to go from introductory or intermediate micro to understanding the limitations of economics?
For me, the key lies in taking a course that will teach you how economic theory is tested as well as how to assess the credibility of the empirical evidence.
That is why I spend the second week of my development policy and my law, economics, and organization seminars teaching students the basics of linear regression and causality. This is also why I dedicate both seminars to bridging the gap between theory and empirics. This goes a long way toward showing students that although economic theory often gets things right, it also often gets things wrong.
In many universities, such knowledge can be found in upper-level undergraduate courses in development or labor economics. This is particularly true of courses in which students have to read empirical papers rather than relying on a single textbook.
UPDATE: In the comments, Emilia also suggests taking an environmental or resource economics class, since market failures feature quite prominently in those fields.
Our Risk Perceptions Do Not Make Much Sense
So much of what we think and do about risk does not make sense. (…) In Europe, where there are more cell phones than people and sales keep climbing, a survey found that more than 50 percent of Europeans believe the dubious claims that cell phones are a serious threat to health. And then there’s the striking contrast between Europeans’ smoking habits and their aversion to foods containing genetically modified organisms. Surely one of the great riddles to be answered by science is how the same person who doesn’t think twice about lighting a Gauloise will march in the streets demanding a ban on products that have never been proven to have caused so much as a single case of indigestion.
That’s Dan Gardner, in the introduction to his 2009 book Risk: The Science and Politics of Fear. Gardner also has another book out titled Future Babble, on the lack of accountability — not to mention the lack of accuracy — of experts making predictions.
I have the students in my Law, Economics, and Organization seminar read the beginning chapters of Gardner’s book as part of our in-class discussion of risk sharing and incentives, and they usually find Gardner’s book to be thought-provoking.