loss aversion

Here is a nice link between my human factors blog and public policy. The idea of loss aversion says that people prefer (generally with a large subconscious component) to make worse decisions if it means avoiding an overt loss. For example, many people will hold onto a bad stock because they refuse to sell it at a loss. They will wait for it to at least come back to their original purchase price (which most eventually do just because of inflation) and then sell it. Gamblers do the same thing - they keep playing until the are even (or broke). Homeowners have been doing it for the past year, refusing to sell their houses for anything less than they paid for it.

These are poor choices because they take into account "sunk costs" which should be irrelevant if the decision was just economic. But any major decision is not just economic, it is also psychological. Which is where effects like loss aversion comes into play.

So what does this have to do with public policy? I can't say it any better than this. (warning, there is no permalink yet. So if you read this after Oct 5, you will need to find the Sept 30 comic).

statistics and Iraq

I haven't watched the hearings of General Petraeus and Ambassador Crocker very closely, in general because they have so much more information than the rest of us that they can present any conclusions they want and there is no way to really know how "real" a picture they are presenting. Most people know the saying "there are liars, damned liars, and statisticians" and there is a reason for that. The reduction in violence being presented could be the usual seasonal lull in the summer. It could also be temporary because of the surge but ready to come back when the US troop levels return to 130,000. Or it could be that the general and ambassador are cherry picking the stats that look good while ignoring others that don't (an alpha error). Or it could be that fundamental improvements are really occurring (you can stop laughing now).


I fool myself with statistics when my favorite sports teams are failing and I need a reason to keep cheering for them. But to do this with thousands of lives and billions of dollars at stake is really foolish. But as a libertarian, maybe I should be happy that both houses of Congress and all the 24 hour news shows are busy with this and not messing around with the economy. But then again, the Fed meets next week . . .

patents and piracy

The debate over how harmful China's rampant piracy of US technology continues to rage. On one extreme, US tech companies are losing billions of dollars a year when Chinese consumers purchase pirated copies of MS Windows off the streets for $1.50 or when Chinese companies buy fake Cisco routers for half price. If you simply multiply the number of pirated units by the normal retail price of the official versions, the numbers are truly astronomical.

But on the other side of the scale, there are two reasons why the total is not really this high. First, many Chinese consumers couldn't or wouldn't pay for the official versions. So the total lost revenue is much lower. Second, there is some evidence (or at least theories) that when China finally does start enforcing patents and copyrights (more likely because its own companies are developing intellectual property rather than the cajoling of the US trade missions), there will then be a huge base of consumers used to the US style products (and more able to purchase them). The current piracy is sort of like a loss leader where the company loses money now to make more later. Of course, this second reason is not really fair to the US companies, as it should be their choice whether to use a loss leader strategy, not the Chinese government, consumer, or pirates. Stealing can't be justified by saying that it helps in the long run.

But what does matter is how much time, effort, and political capital the US government should use on this issue. Would it be better to work on the currency misalignment? Or China's growing relationship with dictators around the world - helping them economically and enabling them to continue repressive policies? There is no easy answer, but it is worth thinking about.