Thursday, December 01, 2005

A case of Behavioral Economics

My Final paper for Behavioral Economics is due tomorrow, so here's what I started writing:

Several months ago, France and Denmark held votes on whether to approve the EU constitution. Both countries decided not to accept it. One of the main reasons for this, at least in France, was an antipathy to Globalization and world trade. France, as a country, has not welcomed free trade for a number of years now, but lately the antipathy has grown. After the election, even politicians of all stripes started denouncing the Evils of trade and liberal economics. This paper will endeavor to show that France’s population is acting in an irrational manner, as well as the fact that French politicians know this, and therefore are very experienced in many tenets of behavioral economics. Were the French to embrace globalization, the country as a whole would be much better off, while were the French people to close themselves off completely (as they say they want to do), they would be much worse off.

Many of the roots of this antipathy towards globalization can be found in the inception of the Common Agricultural Policy, or CAP. This policy established subsidies for farmers, mainly French, who were trying to survive after the destruction of World War II. In these days, the idea that Europe should try to be self-sufficient in case of another world war (and because it was not able to feed itself after the war) was the main reason for establishing the CAP. Today, almost 50% of the EU budget is spent on CAP, with French farmers still the main beneficiaries. Because of this, farmers in other countries, including other countries in the European Union, are not able to access the French market, which creates ill-will towards the French government. French citizens are also paying more money to maintain these farmers. This is because the farming subsidies need to be paid for with taxes. These taxes are then paid to farmers, who produce too much, and sell the remainder of their goods very cheaply abroad. Therefore French citizens are paying for cheap foodstuffs to other nations.

If the French had no CAP in place today, and were given a choice between installing it or not, they would probably choose not to. But, given the fact that it is already in place, they choose not to do away with it. This is because they are told it maintains their way of life. In a sense, they are scared of the changes that may occur. This is an example of Loss aversion. It is curious, however, because an entire population exhibits it collectively. One could try to argue that the French are just being Risk Averse, which may still fall under economic rationality. However, any careful analysis of the situation shows that their welfare would be much higher as a whole without these agricultural subsidies. The only ones acting rationally in this case are French farmers (about 4% of the population), who receive the benefits, as well as French politicians, who benefit off the French population’s irrationality.

Dealing with globalization in general, however, the French tend to have a general antipathy. They see foreign companies as encroaching upon their territory, and taking over. President Chirac said that “France will never let Europe become a mere Free-trade area” . Using that wording is a manner of attracting sympathy. The French population, generally speaking, does not like free-trade. The negative incidents and effects of free trade tend to be highlighted, while the benefits are rarely discussed. This is an example of Confirmation Bias of the population as a whole. The suffering and bad effects of globalization are talked about much more frequently, and the politicians know it, while the more positive effects are not, so the politicians also decide not to discuss them.

Only farmers benefit. People lose out (higher prices, other countries mad)
Loss aversion: Risk averse.
(Representativeness: Evil companies, corporations)Confirmationan Bias.
Other companies M&A: more FDI, more jobs.
Allow more French M&A: Expect retaliation
New news: Confirmation Bias (African countries not doing well).

And at this point I realized I was just trying to find more reasons to say bad things about the French and that, although it's plenty fun, I probably shouldn't turn it in as my Final paper.

Not to mention the fact that the case for average citizens being Economically Irrational and politicians being more Rational, as weird as that may sound, can probably be made in every country. Most forms of subsidies, especially in developed countries, can constitute some form of Inefficiency, and I'd probably say that any time there are lobbyists involved, the final outcome will be Inefficient and therefore Irrational in terms of the average citizen. So in conclusion this would mean all countries are Irrational and therefore all economics is irrelevant.


PhD Wannabe said...

Gosh it's due tomorrow? I thought you said you gonna vegetate..such a liar..this is the time of year where you shouldn't be playing msn and play around with photoshop or whatever program you use

k, i'm so drunk right now wonder if i should go to class tomorrow

PhD Wannabe said...

The last paragraph doesn't make any sense or you should try to give more reasons to it. First of all it's not that people are not irrational.. it's the policy that's screwing up the entire market efficiency. YOu have to allow the invisible hand to work freely. Don't impose any regulations by means of subsidy or whatever to it. And by setting up policy, it does't mean you are not irrational. It's just like instead of having a doward sloping demand you just draw a horizontal line for controlling prices.

And since we are talking about this rational/irrational stuff let me define the technical definition of rational

By rational means your preferences (>~, the symbol used in any econ 101 classes) is complete and transitive.
Completeness means: A>~B or B>~A or both
Transtivity: if A>~B and B>~C then A>~C

So if your preference is transitive and complete then it's rational..and most of our preferences are rational in that sense and I would say agricultural products follow the rational preference choice.

Ok I talk too much but rational does have mathematical assumption behind it..use it wisely.. In other words sth that you would think irrational such as love can be rational if it's complete and transitive. I don't think I have to give you example on this one

Lugano said...

Yes. Thank you so much for enlightening me with your formula that I had Never seen before. And btw you're wrong. Transitivity is ONE of the examples of rationality. And incidentally, most people violate it quite often.

The definition of rationality is maximizing one's own utility. That's it. And my whole case was not about the governments and what subsidies they have, but how the general population is blatantly violating this law of rationality.

And I posted this the day before, and the paper was due yesterday. Nvm. Why do I bother arguing with drunk comments? Next time please wait until you're sober to post.

PhD Wannabe said...

where/when did i say i was drunk ?

BUT transititivy is a necessary condition for rational preference. Check Mas-Collel Microeconomic Theory book.

every word has math definition behind it. Rationality cannot be just based on some subjective analysis only, check your math assumption before you conclude which is rational.

PhD Wannabe said...

Oh stupid me, i did say i was drunk last night hae hae .. -_-! i'm dumb

PhD Wannabe said...

but you gonna get an A anyways, so don't bother with my comment.

Lugano said...

Sure. Transitivity is necessary for rational economics. So is Marginal Utility and so is Supply and Demand and all that good stuff. I'm just saying, that's a small part of it. There are many examples of Behavioral economics where transitivity is not violated. Look up Lake Wobegone effects, Confirmation bias, Hot-hand bias, Winner's curse, etc. etc.

Apart from the fact that transitivity is violated many times (the most common example is with the difference between WTP and WTA), also with regular voters everyday. I also mentioned an example, with CAP, in that if it had not existed before and were proposed as new now, I'm sure nobody would vote for it. But since it's been in use for over 50 years everyone accepts it. So transitivity proves my point as well.

And btw, thanks for explaining what ">" means, since I am, as you know, exceedingly stupid.

Lugano said...

And, as I mentioned, I didn't use this as my paper in the end. That's why it's incomplete. I wrote a different one.

PhD Wannabe said...

i am not saying you're stupid dork

geezzzz.. i know you know those completness and transtivitiy crap i'm just trying to point out the meaning of rationality in math

gosh did i hit your sensitive spot or sth?

Lugano said...

Just for the record, Nat and I met yesterday evening and discussed all of this, and she agreed I was right.

And she also needs to control her emotional outbursts.

PhD Wannabe said...
This comment has been removed by a blog administrator.
PhD Wannabe said...

Just for the RIGHT Record, we discussed about this last night and we agreeed we are right in our own ways and Lugano math explanation is so illogical I just let it go

and my emotion is quite under contorl but someone needs stop acting like a girl

BBS said...

what's with you two? freaks...

spook said...

now children.. play nice.... let uncle here teach you what rationality is.

rationality is the nationality of people from the ration nation. got it?

Alternatively, rationality is really trying not do the dumbest thing your animal instincts are telling you to.

Or, rationality is doing what little shit you can given what shit equipment that nature has provided you knowing full well that it'll only lead you to shit.


Lugano said...

Yes, thank you uncle spook. I think we're talking about the last definition and, if you ask me, it seems rational enough (2nd definition) not to follow it under certain circumstances. And Buraskorn is from Thailand, so she has no Rational nationality.

Security Joe said...

damn. you guys know all this stuff. just a thought and I am probably wrong, but, umm, doesn't transivity have a role in maximizing utility and consequently being rationale? so, although some French see

some French see A>B>C
some French see B>C>A
some French see C>B>A

A= free trade
B=Keep CAP
C=Bomb Germany

If they vote, they will end up with B since B is always preferrable to a majority of the populace over other ones. Hence, there transivity or prefernce ranking. So, that's why French people can act rationally given their available options but seem completely retarded to the rest of us.

Security Joe said...

damn typos

Lugano said...

ok, if
Frenchy group 1) see A>B>C
Frenchy group 2) see B>C>A
Frenchy group 3) see C>B>A
and I'm rooting for group 3,

Then group 3 could vote for A when that comes around, and since Group 1 will agree with them, B will be voted out. Then they will have to choose between A and C. So they choose C, and group 2 will vote with them and C will win out and the Krauts get bombed.

But this would take coordination and planning ahead, So I guess you're right. The CAP could be the rational outcome even though it seems irrational. See that Nat? Behavioral econ doesn't apply to frenchies. You should move there.

PhD Wannabe said...

no coz french ppl pro ag subsidy

dude, ok find new topic i'm done arguing with you about behav econ .. let's end that discussion for 2005.. find me new topic