Friday, October 30, 2015

Biases and capture after the book by Carpenter and Moss

We can speak of a number of deviations from bounded rationality that affect the behavior of regulators and agents who interact in the political arena:
-The difficulties of optimizing behavior, either because regulators stop at a satisfacing performance without reaching the optimum, or because they simply behave adaptively, for example acting only when there is an event of great visibility. As the referees in sport, in normal times the regulators would not be carried away because of the "omission bias."
-The existence of intrinsic preferences, either because regulators are moved by an ethos of public service, or a concern for their reputation, or to remain faithful to a rooted belief that comes from the educational process.
-Expert biases, such as confirmation bias, or overconfidence in their own expertise. For example, in Chile the expert engineers who designed the system called Transantiago for the buses in the capital, did not ask the opinion of politicians or ordinary citizens, and this probably led them to overlook the enormous transaction costs that the sudden introduction of a whole new system implied, resulting in a huge social and political scandal.
-The importance of the processes, so that those involved in a particular reform may be more inclined to accept its results, regardless of the exact outcome, if it has been preceded by a fair and participatory process.
-The possibility of cultural capture, because of identity reasons, or again regulators' beliefs forged in certain training institutions, or the status in relation to a particular group or market or professional relationships in the context of a particular social network.
Some biases bring regulators closer to the possibility of regulatory capture, and others away from it. Something similar could be said regarding the possibility of achieving credible commitments. Non measurable cultural aspects related to institutional quality and prevention of capture are closely related to those sources of bias, and take on greater importance than in more traditional analyses.
It is interesting that the possible mechanisms for preventing capture and minimizing its effects are very similar to de-biasing mechanisms (see the excellent book on capture by Carpenter and Moss): have mechanisms that make it necessary to find evidence that "dis-confirms" the held hypotheses, have internal mechanisms of devil's advocate, systematic assessment of ex post decisions, transparency and the obligation to explain decisions, etc. Institutional diversity itself can be a good recipe to experiment and innovate before generalizing possible solutions to the problems of regulation and antitrust in a context of uncertainty and technological complexity.

Tuesday, October 27, 2015

An excellent The Economist

The issue of The Economist published on October 17th has been one of the best I have read in the recent years. It includes very useful material about the "Brexit" hypothesis and the political situation in Britain. It has a remarkable article subtitled "The soft autocracy of nationalist Scotland" about the departures from a perfect democracy in Scotland under the rule of the nationalists (I would encourage the magazine to do a similar report for Catalonia; the Scottish limits to democracy are nothing in comparison). But the best part of the issue is the very informative special report about the hypothesis of the UK leaving the European Union and the risky gamble of David Cameron calling an in-out referendum. The best piece of this special report in my view is the article about the alternative possibilities for partnership with the single European market. It explains how even countries (such as Norway or Switzerland) that are not members of the Union but that have other forms of association to enjoy the benefits of the common market, have to contribute to the EU budget in substantial amounts of money, although they cannot participate in the rule-making process. Or how countries that are supposed to keep a high degree of sovereignty by staying away form the Union but keeping some association with it, like Switzerland, have difficulties in deciding things on their own. It seems for example that the results of the Swiss referendum that restricted immigration from the EU have been difficult to apply because they require the agreement of the Union. I am pro-European and anglophile. My life would have been much less interesting without a EU fellowship that allowed me to live in London for two and a half wonderful years. That is mainly why I don't want the UK to leave us. But after reading this special survey, I not only have a feeling, I also have some powerful arguments.

Sunday, October 25, 2015

"Superforecasting," by Philip Tetlock

Some years ago, Philip Tetlock published "Expert Political Judgement,"a book that reported the results of a research project showing that, on average, expert political scientists and economists were no better at forecasting important events than monkeys randomly throwing darts. All averages report incomplete information, and some years later Tetlock started a new research project trying to show that some people are better at forecasting than others. The new book, subtitled "The Art and Science of Prediction," shows the results of this new project. Tetlock and his colleagues found a new category of super-forecasters, individuals who were much better than others at predicting important events. These individuals are more modest than typical media pundits. They are not famous and they are not even on demand by broadcasters or newspapers, because they are bad at providing headlines. Tetlock is very good at showing with grace the errors of New York Times columnists. One wonders what would he think of our more local pundits. Instead, super-forecasters are good at assigning precise probability ranges, which they are able to update in the face of new information. They are also good at team-working and at being open to adversarial views. Another thing they do well is to be attentive to the outside view. For example, in front of a question such as would a given family buy a new pet, instead of giving priority to information about that particular family (the inside view) super-forecasters would look at what percentage of similar families had adopted pets in the recent past (the outside view). Tetlock also addresses the criticisms of behavioural sciences giants such as Daniel Kahneman or Massim Taleb. He shows respect for them, and their criticisms made him qualify his views. Kahneman argued that super-forecasting is cognitively exhausting, and that makes him pessimistic about whether their example is going to expand. But Tetlock says that precisely this point should make us reflect on ways to make institutionally lest costly to introduce good forecasting practices where they are needed. Taleb argued that most important phenomena are impossible to predict (such as "black swans"), but the irreducible uncertainty that exists calls as Taleb argues for "anti-fragile" institutions, and where to build such anti-fragility requires some degree of forecasting. In addition, Tetlock argues that although it is true that individual events (where will the next terrorist attack take place) are impossible to predict, what is possible is to predict slightly broader phenomena, such as the degree of risk of a terror attack. A wonderful book.

Thursday, October 22, 2015

The last book by Akerloff and Shiller

The recently published book by George Akerloff and Robert Shiller, "Phishing for Phools" as its subtitle says, is an analysis of "the economics of manipulation and deception." It can be read as the second part of "Animal Spirits," published in 2009, which is the bible of behavioral macroeconomics. The new book is more about behavioral microeconomics, but as the authors argue, they add two new perspectives to what has been previously written by other authors in the field. First, they explain how widespread deception and manipulation of consumers by corporate interests is a natural result of an equilibrium process, where rational firms in competitive markets must exploit any opportunity to manipulate and deceive. Second, and following a line of thought that was already present in "Animal Spirits," they convincingly argue that the multi-dimensional exploitation of the psychological biases of ordinary people has a common thread, which is the wise manipulation of the "stories" that people build to make sense of their experiences. Humans need coherent stories to explain the complexity of the world, although these stories fall short of explaining reality. Then powerful interests are very good at  changhing the focus of these stories in ways that suits their interests, in a similar way as magicians change the focus of their public when they perform a trick. Akerloff and Shiller argue that this common thread based on stories and focus is based on the work of anthropologists and sociologists more than psychologists, as it had been usual in other contributions of behavioral economics. It has to be said that they are not totally pessimistic, as they give examples of public servants, regulators and other leaders, who have raised their voice against these powerful interests in socially beneficial ways. They also have a chapter on how manipulation and deception works in politics. But one feels that they did not go enough in depth in this particular field. It seems to me that there is much more to be said about the role of stories and manipulating focus in the political arena.

Monday, October 19, 2015

"The Morning After," and the myth of the independence referendum

"The Morning after," a book written by Canadian journalist Chantal Hébert, is a thought experiment about what would have happened if the Yes had won the sovereignty referendum of Quebec of 1995. Instead, it was the No vote that won (against all predictions in the last days of the campaign), although by an extremely narrow difference. Hebert analyzes the "what if" scenario by reporting the results of her interviews, twenty years after the event, with the main protagonists of that referendum campaign, from the two sides, and from the perspective of Quebec, the Canadian government and other Canadian provinces. The main message of the book is that neither the yes side nor the No side had a clear idea of what would have happened in case of a yes victory. The referendum question was confusing, and it could as well be interpreted as giving a mandate for the negotiation of a new status of Quebec in the federation. But neither the sovereignists nor the federalists in each camp were united about this: some sovereignists were in favour of a new agreement, and others were in favour of plain secession. Analogously, some federalists were in favour of a new agreement in case of a yes victory, and others were in favour of letting Quebec go. It seems that it was not easy to simplify preferences in a Yes-No dichotomy. The book gives a very complete perspective to the atmosphere in those decisive days. It seems that financial concerns were a big issue, because of the potential costs of uncertainty in case of a yes victory. The international scene was also a key dimension: it seems that France and the "Francophonie" were in a position to recognise an independent Quebec, although the USA government was in permanent contact with the Canadian federal authorities and supporting them. The attitude of the other Canadian provinces was also a key component of the overall equation, and their pressure was decisive in the subsequent approval of the Clarity Act, by which the conditions for a new referendum are now more strict: the question must be clear and to trigger negotiations, the Yes majority should also be clear (although what a clear majority means is open to interpretation). After the Clarity Act, the support for independence and for an independence referendum has substantially declined. For example, it is no longer an issue in the election that precisely today takes place in Canada. The behaviour of the other provinces was also important in the last hours of the campaign in 1995, because the federal government organized a pro-Canadian event in Quebec with the attendance of thousands of people from other provinces to show their love for the province. The influence of that event in the final result is still today a matter of controversy.

Friday, October 16, 2015

"Danubia," by Simon Winder

I have been reading "Danubia: A personal history of Habsburg Europe," by Simon Winder. It should be added to the collection of great books about the disfunctions of the nation-state in Europe, together with "Danube," by Claudio Magris, and others. Although the problems of overlapping ethnic groups have been specially tragic in Eastern Europe, they are not exclusive of that region. For example, it would be really challenging to exactly define the boundaries of the Catalan nation relative to the Spanish nation (if such nations exist). That is not the only analogy that I find with more familiar territories from reading the book. A permanent criticism here and there in "Danubia" is that historians and social scientists have been ready in many places to dance to the tune of nationalist leaders when tensions have been acute, without much concern about the collateral damage (which has been huge). Does that sound familiar? Tim Judah reviewed this book nicely in The Guardian, including some criticisms. Here are a couple of paragraphs of this review:
After the revolutions of 1848, he argues, "much as the new regimes tried to pretend otherwise, everything became about national identity". Groups were in competition for "authority, autonomy and economic control". It is impossible, he says, not to feel a "sense of dread about the gap between the excitement of 1848 and the degree to which we now know it was firing the gun that would initiate many of Europe's most terrible events".
No one would want to go back to the aristocratic and feudal world of those decades, Winder contends, but still he is clear about the odd process by which the Habsburgs began to be regarded as the liberals who had successfully juggled competing nationalities, while after 1918 came the "small and dirty cages of the new nation states".

Monday, October 12, 2015

Deaton, Zucman, and what can you do

The award of the Nobel Prize in Economics to Angus Deaton is a big endorsement to research on inequality, not only by him, but by many others such as Piketty, Atkinson, Bowles and Milanovic. All these great economists have argued that inequality is important in addition to a concern about poverty, mainly because of the political consequences of inequality and the dangers it poses to democracy. An example of this is in the difficulties of fighting against fiscal havens, as explained by Gabriel Zucman in a recent article and book. In the article in The Guardian, this economist gives a good reason to give a conditional yes to free trade agreements. These agreements should be endorsed as long as they are accompanied by mechanisms to fight fiscal fraud at the international level. There was a time where talking about inequality was not polite, but now thanks to all these scholars and to the Nobel Prize, what is not polite is not to talk about inequality. It would be a shame if the example of these economists was not followed by the voters in democracies. Voters should listen to these voices and be able to understand, through the fog of nationalism and populism, that powerful people do not want them to listen. It is just embarrassing that in countries where inequalitites have increased during the last crisis, like Spain, some popular media still sees a witch hunt when famous footballers (or their agents or their clubs) are investigated by the fiscal authorities, guess why. Because they have allegedly tried to avoid paying millions of euros in taxes using fiscal havens. What can you do? To start with, vote for reasonable left wing parties, and denounce the hypocritical behaviour of our sports stars.

Saturday, October 10, 2015

FIFA: How to reform a global, de-regulated, olygarchic monopoly?

Andy Robinson, in the Spanish newspaper La Vanguardia, mentioned in a recent article that Rogan Taylor, a professor from Liverpool University, had proposed a democratic voting system to reform FIFA, the global governing body of football (soccer). I contacted Mr. Taylor by e-mail to see if he had recently written something about it that I could share with my students of the course on soccer and economics that I teach in Barcelona, but he replies that “I know I've been discussing these kind of issues since I launched the Football Supporters Association in 1985!” but “There are no papers or material I can send you (none I can remember anyway!)”.The president of the International Olympic Committee is more modest in his reform ambitions, and justs asks for a credible external presidential candidate to replace Mr. Blatter. Would that be enough? Or would a world democratic election be feasible and effective? Actually, a lot of soccer is already very democratic (clubs like FC Barcelona or many German clubs), but that does not guarantee good governance. Meanwhile, FIFA is a monopoly for good reasons (only one set of rules is desirable in a global industry), and it operates like a guild or a standard-setting institution (about which there is an interesting economic academic literature). The problem is not that it is a monopoly, but that it is unregulated and that it is olygarchic and non-transparent. However, good standard-seting institutions are not democratic in the sense of being elected by the people, but in the sense of being accountable to democratic institutions, although themselves they are managed by carefully selected and trained experts. That should be the future of FIFA, to become an expert, technical, monopolistic governing body regulated by global democratic institutions. It will take time, I know.

Tuesday, October 6, 2015

Weingast, countermajoritarian institutions and Spain

In his recent paper on countermajoritarian institutions, Stanford's scholar Barry R. Weingast explains the advantages of limits to majority rule to facilitate democratic stability. I agree with the view that the dynamics of democracy are important and that institutions that limit what majorities can do are necessary. Weingast illustrates most of the benefits of these institutions with the Constitutional history of the United States, which he knows very well as shown in much of his previous work and also in this recent article. He also mentions some other examples from other countries. In pages 17 and 18 of the paper, he mentions Spain, and how some countermajoritarian constitutional provisions made it possible the consolidation of democracy after the Franco dictatorship in the 1970s. He mentions in particular the malapportionment of seats in Congress (even more in the Senate, the other Chamber in Parliament) giving rural voters an advantage, the privileges granted to the Catholic Church, and the establishment of a quasi-federal system of decentralized regional autonomies. I agree that countermajoritarian institutions were important in Spain, but I also believe there is room for improvement in the list of Prof. Weingast. Privileges for rural voters and the Catholic Church certainly contributed to facilitate the support of the Spanish right to democracy. I see however the quasi-federal system more as a concession to new regional majorities that had been discriminated in the Franco period than a concession to the right, although combined with the privileges to rural voters, quasi-federalism might have contributed to the creation of new conservative elites in the regions, which probably helped to consolidate democracy. In general, however, the concession to powerful minorities was more in the "quasi" rather than in "federalism," something that many are now trying to correct on occasion of the debate about secessionism vs federalism in Catalonia. Finally, I believe that Prof. Weingast should incorporate in his Spanish list of countermajoritarian institutions the role of the monarchy. The restablishment of the Spanish monarchy (something that had been carefully planned by Franco himself) and the constitutional provision that the king would be the supreme leader of the army, was a concession that the left and most democrats had to accept to gain the support of many conservatives to democracy. There is a lively debate now on the need to adapt the Spanish Constitution and reform it that surely would benefit from a better knowledge in Spain of the work of scholars of the calibre of Barry Weingast.

Friday, October 2, 2015

The time-inconsistency of a referendum on independence

I have done work (with Paul Levine, Jon Stern, Jordi Gual and M.A. Montoya, in different papers) on time-inconsistency in regulation as compared for example with time-inconsistency in monetary policy. A decision is time-inconsistent when the decision maker would have taken another decision if she had been able to take and maintain that decision ex ante, before other players had made long lasting decisions. The following situations would be described as time inconsistent behaviour by a regulator:  a regulatory decision is made that could not have been predicted, is the opposite of what had previously been decided (and communicated), and sunk investments had taken place based on the previous decision. For example, a national government expropriating a foreign-owned electricity firm without sufficient compensation would be time-inconsistent.  Or a regulator fixing motorway tolls lower than those that had been committed to at the time of contracting with third party construction/operators, would be time-inconsistent. I would argue that the idea of time-inconsistency can be applied much more generally, and that it is a risk inherent in majoritarian decision-making. Unanimity or super-majorities are required in most democracies to avoid reneging on important commitments. For example, as I argue here, a secession referendum of a relatively rich region divided across ethnolingüistic lines is not necessarily a good idea, despite its popularity. It creates the risks of reneging on the investments by potential losers on human capital, and other assets whose value depend on the stability of institutions. Given a flat-out choice between “yes” and “no” to independence, Catalans for example would be forced to choose between extremes. This would unfairly eradicate the significant middle ground that exists between the two black and white options. Under a federalized system, Spain and Catalonia could continue to enjoy the benefits of union, and Catalans could operate with the enhanced autonomy they desire, without breaching any explicit or implicit contract. By forcing voters to choose between two extreme views, an independence referendum favors extremist thinkers and movements, rather than those seeking to compromise. This will empower those who are intolerant of the opposing side, raising tensions within Catalonia, further creating uncertainty, as well as those between Catalonia and the Spanish state. In addition, by being forced to choose sides, anti-secessionist leftists are pushed into an uncomfortable alliance with rightists who partially share their views on the issue. A referendum on independence is a democratic tool. A deliberative process that ends in a broad compromise, followed by a referendum, is as democratic as that, and scores much higher in terms of commitment and stability. You might be tempted to think that I am like those that when they have a hammer, they think everything is a nail, but I learn these arguments from the readings of great economists and social scientists. Weingast argues here that "unfettered democracy fails to provide the conditions for democratic stability." And Silvestre vindicates the virtues of unanimity or at least qualified majorities as a principle of social justice as defended long ago by Wicksell.