Are Randomized Control Trials Misleading?

April 2, 2012 • Blog, Research • by
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A great post by The Economist discusses the idea that randomized control trials in economics might not be the gold standard some believe them to be. They specifically address the outcome of a trial by an agricultural economist who did two studies on an improved form of seed. Test 1 was a double blind randomized control trial in which the participants did not know whether they were in the test or control group (i.e. they did not know whether they received the new seed or not). There was no difference in yields between the two groups. In test 2 the participants were aware that they were receiving the new high yield seed and it significantly beat the control group in terms of yield.

This is quite an interesting result. On the one hand it makes sense that as an input in your production function changes (the seed) you should adjust other inputs like water, land quality, etc. But the starkness in the result is startling. The article argues that many of the benefits seen in the tests like those of #2 do not really get at the true outcome.

For more read the article here.

Unfair Trade: Does it exist?

February 8, 2012 • Blog, Economics • by
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Child labor. Environmental degradation. Abusive labor practices. These are all things that we as Westerners we try and avoid in our supply chain. But does this end up hurting the very people we seek to help?

Throughout history, as countries have developed, they have often gone through a period where each of these practices were present. During the period that moved America from poor agricultural society to massive economy, the industrial revolution, our factories employed children, polluted communities, and abused their workforce.

Simultaneously America and its people began to prosper. Incomes rose as people began to specialize and leave agricultural livelihoods. It was certainly a difficult time but the real question is, was it a necessary time? Is it a necessary growth pain to go through a time similar to what Western countries experienced during the industrial revolution?

I ask because I wonder if the efforts of Western consumers to help those in developing country through fair-trade and such is actually hurting them. There has been an outrage of Foxconn and I do not deny that its practices could border on the abusive, yet they have a line out the door of people willing to work there, fully aware of the abuse that takes place.

Is it right for us as Western consumers to force producers to bend to our moral framework? Should we allow them to develop in ways that make us uncomfortable and yet are ultimately beneficial? Is it better to have a larger portion of a country out of work if those that do have a job are paid what we consider a decent wage?

These are questions that I think deserve to be wrestled with* and I’m not sure what the answer should be. I support and purchase fair-trade products but then I ask myself, is there any such thing as unfair trade?



*It should be noted that in large part this is a thought exercise and not necessarily the beliefs or values I hold.

Getting into the 10%

February 3, 2012 • Blog, Economics, Politics • by
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Inc. posted an interesting article last week entitled, “How to Join the Top Ten Percent” in which they broadly examined the characteristics of the wealthiest Americans. They chose 10% instead of 1% cause this group in general has a net-worth of over a million dollars which and are still set apart from the average American.

The Inc. article pointed out that the wealthiest Americans tend to be entrepreneurs who own businesses that are doing well. The tax code encourages business and benefits business owners who are willing to take some risks. I think this is actually a really interesting point that I had not considered before. When most people think of the wealthy I think we imagine finance types and celebrities and CEOs. While this is certainly true, a large part of the top 10% Americans are business owners.

The article then goes on to look at some of the characteristics of this group. They find that the top 10% work longer hours, more than 60 per week as opposed to 40. They have taken risks that many tend to avoid. One point that I found very interesting was that at some point in their career they promised something before they were sure they could deliver it. I think every entrepreneur will recognize that.

Its not that these things will propel you into the 10% though. There is significant selection bias here. The author was only looking at the top 10% and found common characteristics, not characteristics that necessarily separate them from other people. There are plenty of people that I’m sure have taken risks, worked hard, and nothing has come of it.

To read the article, click here.

Why I Don’t Understand Self-Deportation

January 25, 2012 • Blog, Politics, Public Policy • by
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In the Republican debate on Monday evening, Mitt Romney answered a question regarding illegal immigration by stating he would like to increase self-deportation. The basic idea is that if an illegal immigrant can’t find a job in the U.S. they will freely choose to “deport” themselves back to their home country.

This doesn’t make sense if you think about it from the perspective of a decision tree.

To get at this we must first ask why someone would illegally come to the United States. For the most part we can say it is opportunity. But since it is still a very risky and often costly endeavor that means that things in their home country are not going well. So they leave a low-paying job to come to the U.S. for better opportunity.

Often time immigrants spend their last resources just getting here. Hiring people to smuggle you across the border is not cheap. It is also common for people to essentially indenture themselves, unable to pay for the border crossing they agree to work for free for some period of time or pay off enormous loans to get across the border.

So if this individual has made it across the border and up to Colorado, New York, or even Florida or Northern California, how are they ever supposed to have the resources to get back. Immigration is often times an “all-in” bet and so if they lose they have nothing left.

Besides, better to be broke in the U.S. than in many other countries with less of a social safety net.

So self-deportation actually hurts the U.S. even more. Because the people that can afford to self-deportate, those with decent jobs and are contributing to American society will leave, leaving those that have been unable to find work and are utilizing social services.

The (Ugly) Math of 50-50 Fundraisers

January 16, 2012 • Development, Economics • by
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One of the readers of the Freakonomics blog asked a question about 50/50 fundraisers. If you are unfamiliar, these are fundraisers where you buy raffle tickets and the organization keeps 50% of the money raised and gives away the other 50% to the winner of the raffle. Freakonomics reader Melissa Belvadi writes:

This strikes me as an incredibly bad deal, but a bit complicated to explain why, as it contains 2 components:

  1. As a gamble: poor expected value. I am not sure how to calculate this, but from my experience in Las Vegas where slot machines boast being set to 97% return ratios, a gamle where 50% goes to the “house” seems unlikely to be a good EV.
  2. As a charitable donation: poor “program ratio” - at most, 50% of my donation will go to the “program” (charitable cause) - this is considered a very poor ratio in the philanthropic world where typically 60% is the bare minimum acceptable - the BBB requires 65%

I completely agree with the above analysis. I think that 50-50 raffles are not great gambling or philanthropic decisions but they are obviously popular for a reason. To understand why I wonder if it helps to think about it from the perspective of the purchaser.

A person who purchases a lotto or traditional raffle ticket certainly hopes to win, but I don’t think there is any expectation that they will win. People might not be great with statistics but they understand that the odds are stacked against them. So win they think about their future they face two scenarios: the rare chance they win and become wealthy; the likely scenario though is that they will lose and be out their money.

In a 50-50 raffle the two outcomes are changed. There is still the rare chance that they will win but now if they lose they’ve still done something good with that money so it softens the blow some.

Does your organization do a 50-50 raffle? Do you participate in them? Tell me why or why not.

A Tale of Two Tacos

January 2, 2012 • Blog, Economics, Research • by
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Down the street from my apartment is not one but two 24 hour taco places. They literally share a building and yet are not affiliated in any other way. How could it possibly be good for business to have two 24 hour taco places right next door to one another?

It doesn’t make intuitive sense. One would imagine that it would be best for similar businesses to put some space between themselves and yet, like with the two 24 hour taco joints, we see this kind of behavior all the time. Two (three or even four) gas stations share an intersection. Home Depot and Lowes build right next door to one another. Target is often across the street from Walmart.

A guy named Harold Hotelling noticed this kind of behavior among firms back in the 1920s and created a model to describe what was happening. Picture a town with one main street down the middle where two guys want to open identical 24 hour taco places. The people of the town don’t have a preference among the restaurants and will go to whichever one is closest.

Where should the two entrepreneurs open up their business?

Assume they both set up shop on opposite ends of the town, at the far ends of Main street. Since they are equally far apart half of the town goes to Taco Place A and half to Taco Place B. This seems fair but Taco Place A could do better by moving slightly more towards the middle, picking up more customers who are now closer to Taco Place A than Taco Place B.

Imagine this happens again and again. With the stores constantly moving closer and closer towards the middle of town. Eventually they will end up like the two taco places in my neighborhood, right next door to one another in the middle of town.

This result doesn’t just occur in business, it has very important applications for politics. In fact Hotelling’s model has been one of the most important for modern political science.

This theory tells us that in a two-party political system we should see candidates converging towards the middle. Of course our primary system messes with that some but in this recent election we saw more and more independent and third-party candidates running and influencing the debate. We saw this most prominently with tea-party candidates who were making sure that their Republican nominees wouldn’t move too much towards the center of town.

While the center of town might be the most lucrative place, its not where movements happen. The tea partyers on the outskirts of town have fundamentally shaped conservative politics. Those occupying wall street, while still struggling to exert their power don’t spend much time shopping in the middle of town.

If your only goal is to win, then move to the middle of town. There really is no better place (and there’s math to back that up). But if you want to shape the debate, exert your influence, and change the world the outskirts might fit you better.

Distorting Nonprofits

December 20, 2011 • Blog, nonprofit, Thoughts • by
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The nonprofit world has a fundamental distortion; the people who pay for services hardly ever receive them. The person who pays for the homeless shelter, never uses it. The person who pays for a child to receive a meal in Africa will most likely never meet that child. There is one portion of the nonprofit world for which this fundamental distortion is not generally true, the arts world.

Those who pay to keep art museums open, symphonies playing, and theaters performing are generally those who visit them regularly. This gives these organization a fundamental advantage when it comes to funding (and why some think these organizations should not really be considered nonprofits).

The Stanford Social Innovation Review, a go-to resource for all in the sector, had an interesting article last week entitled Arts Funding Promotes Neighborhood Vibrancy. What I found most interesting though, was the idea of selling the general community benefits of arts organizations. The SSIR had originally reported that arts funding spurs economic development but the organization ArtsWave responded by saying, while that’s true we like to say that it increases neighborhood vibrancy.

Here’s the ArtsWave insight: people are ready enough to agree with the notion that the arts are good for the economy. But if you probe deeper, and ask what top three things we should do to improve the economy, no one answers “subsidize the arts.” So apparently the argument that the arts are an economic engine (true or false) is unpersuasive, which is what really matters.

Let me just pause here quickly and say that I think they are slightly incorrect. Everyone would probably agree with the statement that having a healthy diet will improve an athletes performance but it probably wouldn’t show up in the top three ways to improve an athletes performance. Other things like exercise, good coaching, and practice might be the best ways to improve performance but they are not the only ways.

But the ArtsWave research also uncovered the fact that if you ask people what would improve their neighborhood the most, the arts come up time and time again. Why? Because artists’ residences are known to herald an improvement in real-estate values; because arts audiences mean feet on the street and therefore greater public safety; and because arts venues are known to spawn coffee shops, restaurants, and other places of urban liveliness.

Therefore, the argument for public funding needs to be focused not on the art but on the public benefits of art-making.

I think this is an important insight. When approaching donors, the focus needs to be on persuasiveness, not just what is true. Organizations need to think about how to sell their impact to donors. This is true for all organizations, not just arts organizations. Think about the effect you have on your community and how that benefits various stakeholders, then approach them and ask them to pay for that benefit. It is a subtle correction to the fundamental distortion found in the social sector.

Experiments in Charitable Giving

December 19, 2011 • Blog, Development, Research • by
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The Freakonomics blog had a post last week entitled, To Ask or Not to Ask: Experiments in Charitable Giving. It was a brief follow-up to their What Makes a Donor Donate? podcast episode.

In the post they talk about the research of James Andreoni, Justin M. Rao, and Hannah Trachtman. In their experiment they positioned bell ringers outside of a grocery story in suburban Boston. They told a portion of the bell ringers to not say anything, to just stand there ringing the bell. They told the rest of the bell ringers to solicit customers as they were going in and out, asking directly for a donation.

Their findings are both interesting and illuminate unintended consequences.

While hardly anyone avoided the silent bell-ringers a full 30% purposefully avoided the ones making solicitations. Among those that did give, the donation increased by 75% for those that gave to the bell ringer who solicited the gift. The conclusion: that asking for the gift drives some people away but the gift size might increase.

Check out the whole post here and read their study here.

How To Spot A Bargain in Philanthropy

December 8, 2011 • Blog, Philanthropy & Giving • by
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What makes something a bargain in the philanthropic world? Last week, Dean Karlan wrote a post on the Freakonomics blog entitled, Bargain Hunting for Charities. He wrote,

Gosh that sounds so stingy. When we are charitable, we don’t want to be cheap. This is our moment of giving, of generosity, not bah-humbugness. Alas, that is exactly what we should be. If we go to a restaurant for chicken wings, what would you think of the following prices:

  • 4 chicken wings: $8
  • 6 chicken wings: $8
  • 8 chicken wings: $8

Which would you opt for (assuming more is always better)? Naturally, it shouldn’t require much thought. So why not apply this to charity?

Karlan then goes on to highlight GiveWell, a great organization that does some very innovative work in studying nonprofit institutions and makes recommendations about excellent charities. There are a couple of similar organizations, but GiveWell seems to be the most robust. Unfortunately, many of these resources are vastly under-utilized when it comes to an individual’s giving, with only 1 in 10 donors utilizing such resources at all.

I love Karlan’s premise but I’d like to take it one step further, because the issue isn’t really that we go to the same restaurant and are shown the same price for different quantity wings. It’s more like different restaurants offering a burger at different prices. In that case we don’t always go for the cheapest. I’m not going to eat a burger at McDonald’s when I can go to Kuma’s Corner.

As donors we shouldn’t be focused solely on quantity but quality as well. We trade off those things in our consumer purchases all the time, and the same thing can occur in our philanthropic choices as well. A focus solely on quantity leads to ever decreasing overhead which does not always lead to the best quality (think low overhead, large transaction chains like McDonald’s). Quality and quantity are not positively correlated, but they don’t have a negative correlation either. Just because something is more expensive does not make it better.

As we approach our philanthropic decisions let’s think about quantity and quality. Also, check out resources like GivingWell. They help you make good giving decisions.

How An Economist Runs A Casino: Apply Economics Ideas to Any Business

December 5, 2011 • Blog, Business, Ideas, Research • by
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I am really interested in how businesses and other organizations can implement economic ideas. That’s why I was really excited when I saw podcast #323 from Planet Money entitled, From Harvard Economist to Casino CEO. It’s about former Harvard economist Gary Loveman who is now CEO of Ceasar’s Entertainment Corporation, one of the largest casino companies in the world.

One of the things I found interesting was how Loveman tests everything. He completes trials of every new initiative before rolling it out company wide. Whether it’s how much of an incentive is the right amount for waiters to get their customers to order drinks (that have higher margins than food) without getting naggy and annoying, or how to decrease the amount of randomness in the level of pleasure in the Ceasar’s experience (Loveman says that it’s better to have lots of experiences distributed closely to the mean return than a wider distribution), Loveman completes as close to a randomized trial as possible.

I love Planet Money in general and if you’ve never checked them out, listen to From Harvard Economist to Casino CEO and if you’re looking for ways to implement these kinds of ideas into your organization, Contact Me about my consulting practice.

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