Barack Obama and Behavioural Economics

This blog is not in the business of endorsing US presidential candidates. Nor we harbor illusion that our position can move votes there.

Nevertheless, as economist wanna-be I could not help but excited over an article (click here) that point how Richard Thaler, one of the early economist that point out behaviour anomalies could not be explain by standard model, is in close contact with the candidates. Behavioral Economics is currently getting stronger hearing in the mainstream after recognition from Nobel Prize committe in 2002 & 2005.

One of Obama policy attributed to his influence cited in the article is:

“For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called status quo bias.”

Good to know that Obama that despite his soaring rhetoric (watch here and here), base his policy on solid and strong economic ideas. They say that economics has turned cynical and can do nothing but become empty shell of materialism. They say that economics can not bring insight about real human behavior into useful policy recommendation. To those charges, let us answer in three words. Yes, we can!

Addendum (01/03/08) from an article in The Economist:

"His chief economic adviser, a respected young academic called Austan Goolsbee of the University of Chicago, is sensible and pragmatic. His plan to save millions of people from struggling to fill out their tax returns is a gem. Anyone who earns only a salary and bank interest, both of which are automatically reported to the taxman, will be sent a tax return that has already been filled in, which they can accept or reject. At a stroke, countless headaches would be averted."

New pop-econ: Parentonomics

The popularity of Freakonomics and other pop-econ books (i.e. Undercover Economist, More Sex is Safer Sex, The Economic Naturalist, Common Sense Economics, Naked Economics, and so on) has lead to even more broader application of economic tools in our daily life. I've just recently read that there will be a new book published under this pop-econ genre. The book is Parentonomics. 

Parentonomics is a book that use game-theory tools to understand and solve problems of taking care of children or being a 'good' parents.   That's what I've surf so far in the blog of the author Joshua Gans - Game Theorist. The book is going to be publish soon. Are you ready to order it?

Some one whispering me, "I believe you need to do census first, to identify how many kaFE's member being married and having kids so the book will be applicable for them". Oh, I guess we can still read this book just to apply it with our nephew though. Doesn't need to have kids first to understand about parenting - especially using economic. Right?

Modelling Art

An Attempt to Crack The Real-World Mechanism [1]

by: Dhaniel Ilyas

Enough about my humble attempts on econometric philosophy and ethics issues that I had written in my previous two writings, I will now try in lettering some words on some semi-technical econometrics topics with simple explanations. My previous writings were in Indonesian language. Since I know we have a noteworthy amount of interested blog-reader, I will now give a shot in making articles in English.

Most econometric models contain unknown parameters. An estimate of these parameters (in a model) is crucial in knowing the behavior of the variables relating to it. To compute the parameter estimates we need two things: A model describing interaction among variables with certain set of parameters and a sample made up of real observed data. Thus, if the model is correctly specified, it will describe the real-world mechanism which generated the data in our sample.

This process does not come without problems. First, nobody knows, even the smartest econometricians alive, the ‘true’ real world mechanism which generated the sample data.[2] Second, often the reliability of the data mining process from surveys is questionable. I have never tried to find any research concerning Indonesia’s Central Bureau of Statistics (BPS) data quality (may be someone can point me out to certain studies). Actually, there have been some techniques in econometrics for minimizing the bias that comes from ‘real’ data error measurement. But if the bias is severe, there is nothing much we can do.

Population is the base from which a sample is drawn. A model is made for explaining what is going on in the population, using the sample data, in order to make inferences and forecasting. Once upon a time, when statistics was biostatistics, their object of studies was the human population from a specific town, villages or country from which random samples were drawn. The average weight of all members in the population would then be estimated by the sample mean of individual’s weight. The sample mean was an estimate of the population mean. The idea was to represent the population by using the sample that could also save time and money. In contrast, the use of the term population in econometrics is simply a metaphor.

A better way to explain the last statement is by introducing the concept of data-generating process (DGP). By this term, any real-world mechanism that is at work in actual economic activity process, it is precisely the mechanism that our econometric model is supposed to describe. Thus, a DGP is the analog of the population in biostatistics as sample could be drawn from a DGP just as they may be drawn from a population. This seems too technical to be digested. Let just say that if I were the know-all-superman, and I have a magic-super-complex mathematical equation that can explain perfectly about all things that happened in the world describe in the form of parameters, variables and some well-defined stochastic element, I can explain the past, present, and future with remarkable accuracy. It is exactly what we after in building a model: cracking the real ‘true’ world mechanism (with our naïve and limited[3] mathematical and computation ability) as close as we can be.

A model is build to understand the existing phenomena. A class of models may have a general (mathematical) form within which the members of the class are distinguished by values of the parameters. In a model that are not mathematically tractable, computationally intensive methods involving simulations, resamplings, etc may be used to make the desired inferences. The process of model building required continous refinements. The evolution of the models proceeds from vague, tentative models to more complex ones, along with our understanding of the process being modeled. It is not possible to measure bias or variance of a model selection (from any arbritary set of models), except in the relatively simple case of selection from some well-defined and simple set of possible models.

Now, let me explain a bit into the practice of modelling. With our limitation to process all the data in the world, we need to create a reasonable strategy in our modelling process. First, we need to form a solid theory about the phenomena we want to observe. This is critically needed because basically we can throw any variables into our (simplified) model. Do you think a falling leaves in autumn will have an effect to certain stock price? Although some ambitious modeller could believe that this seemingly uncorrelated varibles can actually relate, I doubt that an economist will pursue such modelling strategy. And even if I have a good model that explain elegantly the change in one or some variables in terms of other variables, it does not imply true causation. Let me quote what Gujarati said in his book,”…a statistical relationship per se cannot logically imply causation…”[4]. From this apriori or theoritical considerations we go forward into the ‘jungle of empirical study’. Many of us experience surprising result that mounted into a variety of problems, but as life itself, we have to put up with it and struggle all the way. Thus we have come into what people say of a knowledge that is described more as an ‘art’.

Everyday, we look into the debate of outstanding economists, econometricians, physicists[5] statisticians, and mathematicians with their own economic model that they believe were superior, but at the end of the day the winner is hardly found in the mist of our limitation in comprehending the world perfectly. But we have to acknowledge also the positive result and insight from each of their models that shapes our economic advancement until today. Never forget that the ‘real’ judge is not a bunch of towering scientist that has a privilege to say a model is good or bad. It is the effect of the positive spirit in the model, acknowledge by the real advancement of human beings in all the related aspects, which will make a model superior. Thus as a modeller myself, I will say,”one effective and efficient model for one problem at hand.”

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[1] For interested (highly) advanced reader, I recommend Russel Davidson and James G. MacKinnon book,”Econometric Theory and Methods”. I quote heavily from the book in the fourth and fifth paragraph.

[2] My Econometric Professor during a class session made this kind of statement. It was one of my most enjoying lecture.

[3] If our mathematical and computation ability were fully perfect, there will be no forecasting error. This statement create a philosophical trait: Is it all things in this world were just merely mathematics?

[4] See Damodar N. Gujarati book,”Basic Econometrics”.

[5] An of research come to be known as physical economics has been going on for some time until today.

Why Plastic (Bag) Should Be Expensive?

After I take the photo above, I realize why in many western country plastic bag should be expensive.

If plastic bags is free (like in all supermarket at Jakarta), then there is no need for people to think further about environment. Of course, it should be not as simple as that. But, if people cares with sewage flow, they should be care with garbage and waste that they thrown away into the river or brooklet or sewer. But, people obviously ignorant. If you take a closer look at the river or brooklet or sewer, you will easily find that all them are fully covered with waste and garbage especially plastic. When you are willing to spent a bit of time to count how many plastic bag and plastic wrap (e.g. for package food products) - among any other kind of waste, then you will realize that plastic waste are more than half of total waste. The implications for this neglected situation are water flow jammed, some sort of vegetation will grown in the banks, some sort of animal (snakes, lizards, rats, etc.) also build their nest there, in the long run you will see the water level rise, water born disease exposed the population and ‘Aha!’ flood is everywhere.

Ok, enough with the fortune teller stuff. (What?! It’s not prediction, it’s already occur now!). That is where the economics incentive/disincentive works. If you agree with me that the root of problem here is plastic waste, then the simple solution is reduce the plastic waste. To reduce the plastic waste then we have to reduce plastic usage. To reduce plastic usage, it must be “expensive” enough so people will reduce their use of plastic. Low usage of plastic will lead to lower plastic waste. Lower plastic waste will make our job a lot more easier to clean up river or brooklet or sewer everywhere, especially in our neighborhood. The long run impact of such achievement will be better environment that create cleaner, healthier, and economically efficient society. I will leave you all with such a “good-to-be-true” dream.

One moment, I am hearing someone ask me a question: "how we should bring our shopping goodies?" Well, I may answer: Why don’t we start bring our own bag, and you can decide the size depending on your own need. Or, why don’t you ask for paper box? See, there are lots of option actually...

See No bag, thanks! campaign for more photos prove on plastic ‘disease’ on earth

Message on Economic Welfare...

From the conclusion of Debnath Guharoy's article in The Jakarta Post titled This is a good time for business to remember Robin Hood,

If cub bike demand is flat, can motorcycle manufacturers look at assembling big bikes for the top end of the local market? Can cosmetics companies examine the demand for an upmarket chain of salons? Can fast-food chains open more outlets in more metro areas? Can the telcos license more resellers to push broadband for them? Can everybody who can afford it please subscribe to cable TV, newspapers and magazines? I could go on and on but the message is simple: Sell more high-end goods to the fortunate minority because they can afford it, and create new jobs for the poor because they need it.

I am wondering the Guharoy's main message as bolded above. How economic policy could support such "normative" idea? It sounds like ask the economy to give charity...

Sustainability in project financing: equatorial principle

Ide-ide mengenai pembangunan yang berkelanjutan sebenarnya tidak terbatas pada bidang fisik terkait dengan lingkungan hidup. Kita juga bisa mendorong hal tersebut melalui sektor-sektor yang tidak berhubungan sama sekali, misalnya sektor pembiayaan. Justru disini pintu masuknya karena pihak pemberi pinjaman bisa memilih apakah akan membiayai /tidak proyek-proyek yang mempunyai dampak terhadap lingkungan dan melanggar HAM.

Equatorial principles adalah prinsip-prinsip yang dianut oleh sektor keuangan dalam menyalurkan pembiayaan dengan mempertimbangkan bagaimana pinjaman tersebut digunakan oleh peminjam apakah telah sesuai dengan pengelolaan lingkungan yang baik dan pelaksanaan tanggung jawab sosial perusahaan. Berdasarkan prinsip-prinsip tersebut, pembiayaan suatu proyek harus menjamin bahwa proyek tersebut tidak merusak lingkungan dan mempunyai dampak sosial yang positif bagi masyarakat disekitarnya. Dengan menerapkan prinsip-prinsip tersebut diharapkan memberikan manfaat kepada sektor pembiayaan, peminjam/ pelaksana proyek dan stakeholder lokal yang berkepentingan. Prinsip-prinsip tersebut juga menegaskan komitmen sektor pembiayaan terhadap keberlanjutan (sustainability) dan mendorong pembangunan yang bertanggung jawab secara sosial dalam praktek bisnis keuangan.

Dalam prakteknya, lembaga pembiayaan (bank) dapat tidak menyetujui pinjaman kreditur jika kreditur tidak dapat memenuhi ketentuan perbankan mengenai kebijakan lingkungan dan pengelolaan sosial. Equatorial Principles pada dasarnya merupakan panduan umum sementara bank yang mengadopsi akan mengembangkan secara tersendiri kebijakan institusi dan pelaksanaannya dengan mengacu kepada prinsip-prinsip tersebut. Terdapat beberapa kategori proyek yang digolongkan berdasarkan potensi dampak sosial dan lingkungannya. Diatas kertas, bank seharusnya menolak proyek-proyek dengan kategori A.

• Kategori A: proyek-proyek yang secara signifikan berpotensi menimbulkan dampak negatif terhadap lingkungan yang luar biasa dan tidak dapat dikembalikan ke kondisi semula.
• Kategori B: proyek-proyek yang berpotensi menimbulkan dampak lingkungan secara terbatas, bersifat lokal (site specific), dan dampak tersebut dapat dikelola dengan melakukan serangkaian kegiatan mitigasi yang sesuai.
• Kategori C: adalah proyek-proyek yang berdampak minimal atau tidak mempunyai dampak secara sosial maupun lingkungan.

10 prinsip dalam equatorial principle bisa dilihat disini

Secara singkat, institusi keuangan harus melakukan studi kelayakan sosial dan lingkungan disamping studi kelayakan finansial biasa. Setelah proyek-proyek dikelompokkan, pihak kreditur harus melakukan penilaian sosial dan lingkungan yang mencakup dampak sosial dan lingkungan yang relevan, potensi resiko akibat proyek tersebut, dan rencana penanggulangan dampak yang sesuai dengan skala proyek termasuk mekanisme monitoringnya. Diluar itu semua, proses penilaian dan pembentukan rencana aksi tidak dapat dipisahkan dengan konsultasi dan partisipasi stakeholder yang berkepentingan terutama yang berpotensi terkena dampak. Transparansi sangat diperlukan dalam tahapan ini.

beberapa lembaga keuangan yang telah mengadopsi equator principle ada disini

Equatorial Principles: belum menjamin!

Adanya prinsip-prinsip untuk melakukan bisnis keuangan yang bertanggung jawab secara lingkungan merupakan inisiatif untuk mendorong langkah-langkah ke arah praktek bisnis yang berkelanjutan. Tujuan yang ingin dicapai dan bayangan indah sustainability sejenak bisa tergambar oleh kita ketika membaca Equatorial Principles tersebut. Namun sebagai prinsip-prinsip yang mengikat secara moral dan tidak ada konsekuensi hukum yang mengikat, prinsip-prinsip ini terlihat lemah. Tidak ada jaminan bahwa institusi keuangan yang mengadopsi Equatorial Principles akan menciptakan keberlanjutan di segala operasinya. Jaminan itu ada tetapi kita masih layak mempertanyakan sejauh mana pelaksanaan dari komitmen institusi tersebut (baca juga ini).

Contoh terbaru dengan bencana Lumpur Lapindo, FoE International mengungkapkan beberapa bank internasional besar merupakan penyandang dana dominan dari konsorsium Lapindo (Energi Mega Persada, Medco E&P Brantas dan Santos Australia) sebagai pelaksana eksplorasi minyak di Sidoarjo. Bank-bank internasional tersebut adalah Credit Suisse, Barclays, Fortis Group, Merrill Lynch & Co. and Natixis. Menariknya, institusi keuangan diatas adalah para peng-adopsi Equatorial Principles.

Dalam kasus ini kesalahan operasional berada di tangan kreditur yaitu konsorsium Lapindo, namun dalam kerangka Equatorial Principles, institusi keuangan yang menjadi sponsor terbukti gagal dalam melakukan proses kajian kelayakan proyek sejak awal hingga persetujuan kredit. Dampaknya sangat jelas, terjadi kerusakan lingkungan yang luar biasa yang tidak mungkin terjadi seandainya konsorsium Lapindo tidak dibiayai. Ditambah lagi menurut laporan FOEI, bulan Mei 2006 ketika bencana lumpur Lapindo baru saja terjadi, Credit Suisse kembali mengucurkan pinjaman US$ 126 juta kepada Energi Mega Persada tanpa mensyaratkan bahwa Lapindo akan membayar kerusakan lingkungan. Dengan berbagai tuntutan masyarakat yang berkembang setelah bencana lumpur tidak dapat diatasi, bank-bank tersebut terbukti gagal memastikan berjalannya sistem manajemen sosial dan lingkungan yang dilakukan oleh peminjam dana seperti tercantum dalam prinsip ke-6.