Getting down to work as a behavioral economist

Slides Courtesy of David Laibson

Outline

• Paper/thesis ideas

• Properties of a good paper/thesis

Some advice for generating and evaluating new ideas:

Expose yourself: • read newspapers• watch Simpsons and South Park• ask your 4-year-old niece intertemporal choice questions• go to the mall in Chicago• go to the mall in Sardagna• go to a check-cashing store• visit a public housing project• ask your brother-in-law – a plumber – about his investment philosophy• Ask your uncle – a hedge fund manager – about his investment philosophy• walk into a Chanel boutique in Beverly Hills

In every mall, airport, restaurant ask yourself:

• What is going on in this marketplace? • How are firm pricing decisions made? • How are firm marketing decisions made? • How are firm bundling decisions made? • How are firm location decisions made? • How are firm entry and exit decisions made? • How are firm advertising decisions made? • How are consumer search decisions made?• What is the structure of consumer preferences? • What do consumers know and what don't they know?

For example…• Why does a replacement printer cartridge cost almost as much as a printer? • Why do most of the diamond merchants in NYC locate on the same street? • Why do the diamond merchants in Boston disperse? • Why has New York grown faster than Philadelphia for 150 years? • Why is the savings rate so much higher in Asia than it is in Europe? • Why is the savings rate higher in Newton than in Dorchester? • Why do cell-phone providers write contracts with penalties for early termination (instead of just having a

start-up fee)? • Why do people hate to buy annuities? • Why are there very few reverse mortgages? And no real mortgages?• Why do mutual fund fees range by a factor of 10?• Why is everyone suspicious of free trade, including those who benefit from it?• Why don't US movie theatres sell tickets with seat assignments?• Why do many British movie theatres have the opposite policy?• Why don't airlines charge more for aisle and window seats relative to middle seats?• Why have "miles" programs been so successful in some industries, while barely making a dent in other

industries (e.g., supermarkets or restaurants).• Why aren't executives compensated with options that pay out as a function of relative company

performance, instead of being compensated exclusively with options that pay out as a function of absolute performance?

• Exploit your intuition: does your idea make sense?• Rely on solid psychological micro-foundations.

– Has the effect been replicated?– Has it been replicated by different research groups?– Is the effect magnitude large?– Are the experimental designs convincing?– Would the effect survive if an economist implemented

the experiment?• What do your friends think of your idea?

• Are you studying something important?• Does it generalize?• Can you motivate your research project as the answer to

a single question? Or a small set of questions?• Is your research about something that someone can

measure?• Does your research interest you? Your passion is the

most important ingredient.

• Don’t make the mistake of glibly overlooking rational explanations.

• But, don’t automatically accept rational actor “just so stories” (in practice rational actor model can be just as ad hoc as behavioral models)

• When faced with competing explanations remember that the parsimonious explanation is more often the right explanation.

• Behavioral explanations are not the only explanation or even the most important explanation.

Properties of a good paper/thesis

A property on this list is neither necessary nor sufficient for a paper to be good. Some of the properties are mutually exclusive; there are different ways to write a good paper. Your good paper should exhibit many, but can’t exhibit all, of these properties.

• Paper has a clear, interesting, well-defined, simple motivating question.

• An empirical paper has a great (simple and interesting) fact at its heart.– Fact can be clearly illustrated by plotting data.

• Empirical results are well identified (in a sentence or two you can clearly explain how your parameters are identified).

• Idea is fresh, not a minor permutation of somebody else’s work.

• Theoretical modeling is analytic and conceptually insightful (not black box). – If you need to do numerical simulations, make sure you explain where the

results are coming from with intuition or a simple analytic example. • Theoretical results identify necessary and sufficient conditions.• Theoretical results have high degree of generality (robust; do not

depend qualitatively on functional form assumptions).• Paper makes technical innovations that have demonstrably wide

applicability.

• Propositions/Theorems are far away from assumptions. • Paper gives the reader a modeling tool that can be inserted in a

wide set of applications.– Portability and practical applicability are valuable.

• Model is tractable.• Models are parsimonious (very few free parameters; keep it simple).• Model has convincing microfoundation (resist reduced-form

modeling). • Model is deductive not descriptive.

• Model is testable and falsifiable (at least in principle).• High ratio of predictions to assumptions.• Predictions are empirically valid. • Model makes at least a few novel predictions (untested). • Model is about something important (not arcane). • Predictions are true for the right reasons.• Model is about things that can be measured (somehow, not necessarily by

you). • Model embeds rational actor model as a special case.• Model makes reasonable/standard assumptions but generates absurd

predictions, which turn out to be true.• Model makes reasonable/standard assumptions but generates absurd

predictions, which turn out to be false.– This kind of paper demonstrates that the assumptions are wrong.

• Your brother thinks your paper is interesting