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S'more thoughts on the marshmallow game

Continuing the thread of Joseph's recent post on the Marshmallow game...

Everybody reading this has probably run across the persistent (and well-subsidized) narrative that goes something like this: virtually all of the variability we see in wealth can be explained by intelligence, talent and character with luck and inequality of opportunity playing little role in a person's success. In this narrative the labor market is now strongly efficient and the decrease in social mobility is simply the consequence of that current level of efficiency and a very large genetic component associated with those traits needed for success.

There are entirely reasonable parts to this narrative (I don't know of anyone arguing that being smart and hard-working won't won't help you get ahead), but if you try to take that case to the extreme and argue that money, social position and connections don't factor in, you have to start explaining away a large number of counterexamples and potential problems with the narrative.

The new findings in the marshmallow game are one example, showing that deprivation can cause people to be less likely to delay gratification rather than the causality necessarily running the other way.

"Being able to delay gratification—in this case to wait 15 difficult minutes to earn a second marshmallow—not only reflects a child's capacity for self-control, it also reflects their belief about the practicality of waiting," says [researcher Celeste] Kidd. "Delaying gratification is only the rational choice if the child believes a second marshmallow is likely to be delivered after a reasonably short delay."

How about the poor irresponsible spenders who are hopelessly bad with money? According to Sendhil Mullainathan of Harvard that's not the case.

Mullainathan claims that although planning is a central part of poverty, poor people are better at making financial decisions than the rich and middle class. 

“If you go and stop people at a supermarket and ask them for their receipt and say, ‘Hey how much did you just spend,' middle class shoppers have no idea. The poor know what they just spent," he said.

What about on the other side? Are the well off and educated consistently better with their finances? Perhaps not: (via Thoma)

But college-educated people were more likely than those with high school or less education to be above this 40 percent threshold - considered to be a risky amount of debt for most households.

Another, more amusing example, comes from some of the same think tanks and pundits who promote the inequality-reflects-ability narrative. It's the idea that a small increase in the top marginal rate would create a large hardship on those close to the cutoff.

As discussed before, if the cutoff is 250K of taxable income, a family would have to be making in the neighborhood of 300K gross to pay any of the higher tax. To see an increase of three or four thousand in its tax bill, the family would have to be bringing in something like 350K. If someone, even with a family, is making more than a third of a million a year and is so financially shaky that additional expenses of four thousand will cause financial hardship, that person has to be at least one of the following to an extreme degree:

1. Unlucky

2. Undisciplined with limited capacity for delayed gratification

3. Bad with money

So one of the main conservative attacks on increasing the tax rate presupposes that either luck plays a large role in economic outcomes or a significant number of the well-to-do lack the very traits that Charles Murray and company use to explain the success of the upper classes.

As mentioned at the beginning, conservative think tanks and pundits have expended a great deal of money, time and energy promoting the idea that wealth and poverty simply reflect relative contributions to society, that the rich deserve to be rich and the poor deserve to be poor. Perhaps those proponents are right, but you have to wonder what would happen if they trusted the marketplace of ideas enough to let this idea stand or fall on its own merits.

The Marshmallow Game

Even have one of those paradigm changing moments?  When things that you beleived are completely altered by new evidence.  Mark Thoma links to a new version of the Marshmallow game. Consider, especially, this piece:

But as she observed the children week after week, she began to question the task as a marker of innate ability alone. "If you are used to getting things taken away from you, not waiting is the rational choice. Then it occurred to me that the marshmallow task might be correlated with something else that the child already knows—like having a stable environment."
 

This is a massive finding for two reasons.  One, it gets at the issue of trust and how important it is t be able to trust your fellows in order for society to function.  In a low trust environment, there is a serious risk of perverse incentives (and it is easy to forget this).  This may be especially true of issues like employment contracts -- if you can't trust employers to keep their part of the implicit social contract then it is hard to defer gratification. 

Two, all of this talk of impulse control leading to poverty is deeply misguided.  Framing it as impulse control makes it seem like a feature of the person and not the environment.  But it appears that it is also deeply related to how much you trust the systems in place.  So perhaps the issue is growing up in unstable environments or in how much we can depend on people to be reliable. 

That makes the whole issue seem both a lot clearer and a lot more complex.

The Antonym Game

I thought of this* a while back as a possible classroom game but as I was working on another post it came to mind again, this time for its metaphorical possibilities.

The object of the game is to get from a word to to its antonym through a chain of roughly synonymous pairs in the fewest number of steps. For example, small and large.

Small can mean fine

Fine can mean excellent

Excellent can mean great

Great can mean large

Admittedly, some of these pairs stretch the relationship a bit but you get the general idea. (I'm tempted to segue into a discussion of Janus words here, but that's off the main topic and really ought to wait for another post). I'm not sure how well it would actually work as a word game but at least it makes a useful metaphor when discussing contrarian journalism.

The objective of contrarian journalism is analogous, describing something with an antonym of the word you'd normally associate with the thing. Like the game, this linking of antonyms is normally done through a series of steps that seem that seem more or less reasonable when viewed individually even though, taken together, they lead to an absurd conclusion.

More importantly, this kind of journalism is, at heart, also a game, a demonstration of cleverness, no more intended to produce meaningful insights than a game of Scrabble is intended to produce elegant verse. This isn't to say that counter-intuitive conclusions are bad. If a line of reasoning leads to somewhere surprising, somewhere conventional wisdom would never point to, that can be a very good thing (assuming you didn't reach that conclusion via a stupid mistake in your reasoning -- counter-intuitive often means wrong).

But if you start out with a counter-intuitive position and set out to find a just-good-enough argument to prop it up, then the whole exercise is no more productive than misusing the transitive property to claim that small means large.

*I'm pretty sure someone else thought of it first.

Higher Education

Matt Yglesias:

Summers mentioned that for all the valid complaints that one hears about the state of American college education, there's a clear demand for it on the international stage so we must be doing something right. Many more foreign students come here to study than we send abroad, notwithstanding the generally higher cost structure of the American higher education sector.
 

 I actually think that this can be one of the weaknesses of market signals.  Reputation persists even after fundementals have changed.  The classic example of this, in my view, is the American Car Industry.  If one were to go to Detroit in 1968 and talk about how bad decisions might eventually catch up with them, they would look silly.  But when these decisions actually did catch up with them the damage was very hard to reverse. 

Another example was deforestation on Easter island.  Over the short term, each tree that was harvested was an economically sound decision.  It had an immediate and positive payoff.  But when all of the trees were gone, things definitely were not improved.

So just because an industry looks strong (now) doesn't mean that there are not rising challenges in the future. 

Nate Silver interview on Fresh Air

Promoting his new book The Signal and the Noise. The part I caught was excellent and I've got the rest downloaded for tomorrow.

 You can catch it here.

Jon Stewart does not believe that 8 million > 4 billion

and he's also kinda picky about decimal places.

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Better yet, it was a satirical math twofer.

The Daily Show with Jon Stewart
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Health Insurance markets are tricky

The problem with trying to harness market forces to provide less expensive health care for older adults is the lack of an open price system.  Matthew Yglesias critiques David Brook's alternative to the current proposal of using a panel of experts to try and set costs:

Brooks says Obama's plan to do this with price controls is doomed for political economy reasons. A politically powerful coalition of elderly people and health care providers will block it. That's certainly plausible. But what's the alternative?

Brooks says the alternative is to insert an additional layer of rent-seekers into the dynamic by contracting Medicare services out to private health insurance companies.
 

This approach always assumes two things: 1) that there is a functional market that can set prices independent of the insurance system.  How many elderly patients pay out of pocket for major medical services in the United States and then brag about the transparent pricing?  2) that there are real efficiencies to be gained by a private firm that could not be availed by the government.  Notice that the insurers are not the providers, we already have private hospitals.  So the efficiency would have to come from somewhere else.  For example, that the firm could simply billing procedures to reduce administrative overhead.  But medical billing tends to be complicated and needing to interface with a lot of different systems/reporting structures reduces efficiency.  Or they could set prices more saccurately, but then they are just another panel of experts that is not accountable to the electorate. 

We have the same issues with defense contractors.  It is very hard to set market prices for items that can only be sold to the United States government (think nuclear weapons or aircraft carriers). So we rely on expert judgement (on the part of the government) as to what costs should be for these items.  Would we really expect to see costs drop if we inserted another layer of "bargainers" who acted on behalf of the government to set prices and then got to have a percentage of expenditures?  How could such incentives ever work out? 

 

Innovation

Noah Smith has a dynamite post on a recent economics paper.  It puts forth the idea that "cuddly" countries (i.e. Sweden) are parasitizing off of "cut-throat" countries (i.e. the United States).  The problem is the modeling assumptions.  In one especially problematic passage of the Daron Acemoglu and James Robinson paper is:

We assume that workers can simultaneously work as entrepreneurs (so that there is no occupational choice). This implies that each individual receives wage income in addition to income from entrepreneurship[.]
 

This basically, all by itself, destroys the link between their model and real world experience.  How many people do you know are able to do these two things at the same time?  How can the time spent in your garage inventing Apple computers not reduce your ability to work at a demanding corporate job?  How many people can draw a full wage and benefits while working for themselves on a small start-up?  Can we really believe that there is no financial sacrifice at all? 

Then I think about things like Health Insurance.  When reading about a small retail businesses (see this comment thread), one thing that was clear was how useful it is to have a spouse with a good job (i.e. one that gives out health insurance).  How can the need to construct these elaborate safety net plans possible improve the success rate of small business? 

Another assumption that seems implausible:

Also, the authors assume that entrepreneurs do not put up any of their own wealth as startup capital for their ventures, and they assume no heterogeneity between worker/entrepreneurs. This means that it is just as easy - and no more risky - for a poor person to start a successful company as for a rich person to do so.

I am reminded of the founder of Jimmy Johns who started a business with a $25,000 loan from his father (in 1982 dollars).  It's an inspirational story, but what about people who did not have parents with that level of capital to just give to their children?  Would he have been as successful if he stopped by a bank and asked for a loan?


Instead I want to think about whether you see the reverse in terms of entrepreneurship.  Look at Sweden versus the United States -- why do they have more entrepreneurs? 

Which brings us to the final problem -- innovation being measured by patents.  Are we really excited to see Apple and Google spending more on patents than research?  After all, patents prevent emulation of good ideas and slow innovation.  In theory the patent process is intended to reward innovators, but are we positive its real effect isn't to enrich lawyers? 

More indispensable journalism from Marketplace

Marketplace Money devoted an excellent episode to poverty this week. You should check the whole thing out if you can, but if you're pressed for time make sure to listen to this interview with Harvard economist Sendhil Mullainathan.

Cutthroat capitalism and the 52/20 club

Lane Kenworthy has a long but pithy post questioning the claim that "cutthroat" capitalism spurs innovation. The whole thing is worth reading but this passage in particular got me thinking:

The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. I’m skeptical, for three reasons.

The first flows from America’s past experience. According to Acemoglu et al’s logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%’s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and others.

I think we can take this even further. The entire quarter century following the WWII was marked exceptional innovation and growth and yet there were a number of factors (taxes, unions, large government payrolls, etc.) that reduced pay-outs for economic winners and risks for losers. Many of these factors involved programs for veterans (a huge group at the time). Of these, the most relevant might be one known, disapprovingly, as the 52/20 Club.

 Another provision was known as the 52–20 clause. This enabled all former servicemen to receive $20 once a week for 52 weeks a year while they were looking for work. Less than 20 percent of the money set aside for the 52–20 Club was distributed. Rather, most returning servicemen quickly found jobs or pursued higher education.

You don't hear much about the 52/20 clause these days. I first came across it in a film called the Admiral Was a Lady about a group of airmen living on their pooled unemployment checks (if you're interested in the period you might check it out but be warned: despite the cast, it's not a very good movie).

There was some grumbling at the time at the time (the term "gravy train" was thrown around), but on the whole, Americans in the years after the war (with the Depression still fresh in the collective memory) seemed to be inclined to believe that those who needed a hand should get one. This attitude did not seem to have hurt us in terms of growth or innovation.

There's one more notable implication of the history of the 52/20 Club. We've heard claims recently that unemployment insurance causes people to stay unemployed, but the history of this program suggests that this effect disappears when people can actually find work.

Health Insurance Question

Austin Frakt on John Goodman's proposals in Priceless: 

Anyway, the main rule John doesn’t like is community rating. He explains the problems with community rating, leading to a seeming take-down of risk adjustment. One problem with risk adjustment is that no methods predict costs all that well. Of course, some of health care, probably most of it, is unpredictable, the very part John thinks we should insure against.

John’s proposed solution to risk adjustment is that, upon switching plans, an individual’s “original health plan would pay the extra premium being charged by the new health plan, reflecting the deterioration in health condition.” There are two things about this I do not understand. First, how would this extra premium be calculated in a way that is different from risk adjustment payments? If we knew a better way, we’d have better risk adjustment now.*

Second, this idea seems no different than risk adjustment by another name. Think about it from the new plan’s point of view. Would the plan manager act any differently if the payment is called a “change of health status offset” and paid by the original insurer or a “risk adjustment payment” and paid via a market administrator of some sort (funded, for example, by assessments on low-risk bearing plans)? A dollar is a dollar. The same limitations of risk adjustment apply, don’t they?*
 

I see two issues here, both brought up in the comments.   The first is that there is a huge issue with information here.  Sorting out what the "lump sum payment" would be from the first plan to the second plan is a daunting task.

The other is the assumption that market players are immortal.  What happens if a company invests in high risk assets with their reserves?  Or if a company goes bankrupt?  How does the consumer get to be reimbursed for the increase in premium now that the original company has no assets? 

This is unlike a regular insurance company, because if a regular insurance company has to stop covering thousands of customers for fire, they do not incur instant liabilities.  Nor does the underlying risk of fire make it harder and harder to insure a house over time (or at least this doesn't change as briskly as health between 20 and 50).

The closest analogy is pension funds, but notice the huge problems we are having with defined benefit pension plans.  Notice how much discussion there is about breaking pension plan contracts due to bankruptcy; airline pilots seem to be the latest example.

Now consider the amount of personal risk such a system would create.  At 18 you buy insurance and then hope that it lasts until you are 65 (if we keep medicare) or perhaps 80 or 90 if we don't.  Even the 18 to 65 perod is 47 years.  How many top companies of 47 years ago are healthy today? 

So what is the solution to this risk and information problem?  Well, with pensions we have government backing.  That helps.  But at what point does regulating the market and creating an interaction system between insurers reduce efficiency to the point where competition isn't going to improve gains?  And recall, the real way to make money in this market is to be able to forecast risk (over 47 years) better than your competitors.  But if you underestimate risk and mis-price your plans, you can't reduce services or customers will leave and bankrupt you instantly.

Isn't this just begging for an endless cycle of bailouts?

Jaime Escalante and the full factorial

Just so there isn't any confusion following my previous post, having followed education from lots of angles for a long time (including stints teaching in Watts and the Delta), I have no doubt that Jaime Escalante was the real thing, a genuinely great teacher with exceptional technique and a profound understanding of both the cognitive and emotional aspects of learning.

I brought up the fact that Escalante wasn't able to duplicate his results, not because he was overrated (I honestly don't believe he was), but because the results of even the best teachers are affected by a number of factors and interactions. Escalante was a great teacher in the right school and community with the right administrator at the right time. That was part of why he accomplished so much at a school that most teachers would have struggled with.

The idea that one teacher might do better in school A than in school B while another teacher might do better in B may not seem like that radical a notion but it has big and potentially troubling implications.

Consider three of the factors that might interact with the teacher effect:

Level (remedial, average, advanced);

Class size (small, medium and large);

Administrator (for the sake of the discussion, we'll limit this to two -- A, who keeps a high profile and is liked and respected by the kids and B, who doesn't and isn't).

Both common sense and anecdotal data should alert us to the potential for first, second, even third order interaction here.

As a personal example, my preferred approach to teaching secondary math classes (particularly when students came in below grade level) was to reserve some time at the end for kids to work individually on worksheets and homework while I went from desk to desk to make sure that each student understood the lesson and was doing the problems correctly. Every student got some personal attention and none got left behind.  (By comparison, my college teaching style was mostly lecture/Q&A-based and worked about as well for two hundred students as it did for twenty.)

For a teacher with a style that relied ono one-to-one interaction to help struggling students, you might not see a first order interaction with level and teacher effect (as long as you kept the size small), or with size and effect (as long as you kept the level advanced), but the combination of large and remedial would severely limit the effectiveness of this approach. The administrator and school culture also play a role here -- it's easier to spend time with the kids who are falling behind if the rest of the class is quietly doing its work.

These interactions seem reasonable enough, certainly not the sort of thing you can rule out, but in a real sense, proposals for test based teacher evaluation routinely do just that. Most evaluation periods, by necessity, cover a tiny range of data: one school; one administrator; one subject; one level; one class size. The result is a ridiculously narrow picture of a teacher's performance. If there's a serious potential for interaction, their conclusions can't possibly be valid.

Even if we ignore the potential for interaction, three or four years of confounded, nested data is an awfully thin basis for decisions about bonuses, promotions and dismissals. If we allow for the obvious possibility that some teachers work better with certain students and under certain administrators and in certain environments (as Escalante did), we will either need a fractional (perhaps even full) factorial approach which will require huge samples or we will have to have a sophisticated understanding of just how teaching styles, learning styles and management styles interact not only with each other but with subject matter, school and class structures, adolescent psychology, group dynamics, cultural differences and government policy.

Good luck

One more argument for the list

I think that this argument is the weakest valid one for preserving Social Security that I am aware of:

One thing it made me realize is that I was (I think) wrong to support full social security privatization. Of course, that's a cheap concession for me to make, since nothing like that is on the horizon. But this has relevance to other potential issues, so it's worth thinking through.

 

When social security privatization was being debated, I looked at successful schemes like the ones in Chile and, er, Sweden. And of course, sovereign wealth funds like Norway's. But I didn't think about the vast gulf between us and them. The US has the largest, deepest, most liquid capital markets in the world, by a fair margin. Small countries can safely invest in our markets (and others) without moving prices or outcomes much.

 

The unfunded liability of social security, by contrast, is in the tens of trillions (net present value). Where would we put enough investment to cover that kind of liability? Our investments would swamp markets, including our own, in a way that Sweden's just don't. And if they were directed by a single government entity, that swamping effect would hand a disastrous amount of power to the investment committee.
 

But it does point out the huge issues that setting such a project up would involve.  Notice, as well, that the safest investments (like government bonds) are just as subject to political risk as social security.  Governments renegotiate bonds all of the time.  Not usually the United States, I agree, but then they haven't been defaulting on social security payments either.

That said, I am much more interested in the implicit insurance that being able to tax the US population gives the payments.  Even if the return is lower than in the private market (qustionable at today's yields), being protected against fraud or large losses is very, very valuable.  

What is the new interest in complexity?

One thing that I have been wondering a lot about lately is the move towards more and more complex ways of doing things that should be relatively simple.  Consider a few examples:

1. School choice and voucher systems.  This requires an informed parent to research options, see through marketing hype and balance factors like location versus performance.  How is this necessarily better than a system designed to just improve schools?
2. Medicare advantage programs.  This requires older adults to balance complex features of different plans and try to ensure that their provider is going to treat them well at a point of great personal stress.  How is having the government or the courts acting as a post-hoc check better than just have a simple system of insurance to begin with?
3. 401(k) and other defined contribution accounts.  Individual investors have enormous information deficits relative to instituitional investors.  Individual investors bear far higher levels of market risk and making the funds able to be withdrawn (even at a penalty) forces complex balancing decisions.  How is this better than an automatic pension plan like Social Security?

I totally understand that high information individuals may be able to optimize more clearly in a complex environment.  But the increase in transaction costs (needing to advertise, sorting through options) seems to suggest the median user will be worse off. 

Now this might be different if there was an open market in any of these examples.  But medicine is tightly regulated, we have laws saying that children must go to school, and anybody who was worked for an employer with a badly selected 401(k) knows that there is no free market alternative to shop your account to another employer.  It is not like a restaurant or a clothing store where the conditions for free markets will end up making it easy to find what you want.  But you can't switch health care providers or schools based on the sale of the week. 

So why do we want to make these things harder and harder to understand or engage with?