Sunday, July 27, 2008

I'm moving!!!

Hi all- I just wanted to let you know that my blog is moving! I am taking most of the old posts over, and the new blog can be found at:

I am in the process of bringing the posts and comments over, so bear with me! I think the new, more customizable blog will make for a more enjoyable reading experience.


Saturday, July 19, 2008

Incentives Aren't Always About Compensation...

So, I am sitting at home on a beautiful Saturday afternoon watching a baseball game between the Boston Red Sox and the Los Angeles Angels of Anaheim. (I know, I have issues.) Unlike most games, this one is on FOX, and, while I love Jerry Remy and Don Orsillo, it's a nice change to hear what other anouncers have to say. One of the more interesting points that they brought up was how well-trained the Angels players are in terms of the overall spectrum of baseball skills (sacrifices, bunting, strategic running, etc.). They credited the Angels' minor league organization for this fact, saying that the minor league managers were somewhat unique in that they were more focused on developing players' skills than on specifically winning games. Put that way, the managers' goal makes perfect sense- I don't really think there is a large benefit for a team due to a winning minor league organization. Furthermore, the incentives for the players are such that they are much more willing to practice and experiment in the minor leagues than they would be when a whole bunch of people (fans, other teams, etc.) are watching and critiquing. So why doesn't this happen more often?

I am not overly familiar with the contracting structures for minor league managers, but I highly doubt that their compensation is directly dependent on the number of games that they win. (Players aren't allowed to contract on such things, so it would stand to reason that managers can't- or won't- either, especially since no one seems to care about the minor league records.) Therefore, an economist might argue that there are no perverse incentives at play since there is no direct compensation for wins, which would incentivize wins at the expense of drilling fundamentals. However, the FOX announcers are quick to point out that there are indirect incentives for wins because minor league managers use their records as a selling point when angling for a promotion.

How can this unintended incentive be corrected for? One solution would be for an organization to commit to not using win-loss records in promotion decisions. This would work well for internal promotions, and seems to be roughly what goes on with player promotion to the big leagues. (There isn't a particularly high correlation between minor league stats and getting called up.) But this would be ineffective overall, since an organization cannot prevent other teams from considering the records in external hiring decisions. A practical solution, then, would be to offer a competing incentive. Ideally, you would want to incentivize based on how well the manager drills the basic skills. Unfortunately, this is hard to measure, especially without distorting incentives in other ways, and there is a clear bias towards providing incentives for things that the easily measured. That said, the organization that can overcome that issue will end up with a very well-trained major league team, not to mention (theoretically) higher value for its minor league prospects.

Tuesday, July 15, 2008

The Office Understands Economics...

Angela: Gift baskets are... the essence of class and fanciness. They are the ultimate present that a person can receive.

Dwight: What about cash? With cash you can buy whatever you want, including a gift-basket, so... it's kind of the best gift ever.

Jim: What about a gift basket full of cash?

Andy: Yes! Cash-basket! Nice work, Tuna.

Monday, July 14, 2008

Bueller...Bueller...And the Disposition Effect...

Okay, I have to admit that I can't see Ben Stein's byline without thinking of his character (an economics teacher, of course) in Ferris Bueller's Day Off. As such, I am including a visual reminder for your viewing pleasure:

But I digress...Ben Stein has an article in today's NYT entitled "Lessons in Love, by Way of Economics". This article briefly describes the economic principles that, he argues, *should* guide our romantic choices. One part caught my interest in particular:

"When you have a winner, stick with your winner. Whether in love or in the stock market, winners are to be prized."

Now, consider the empirical finding in the stock market (called the disposition effect) that investors have a bias towards selling off winners (to realize gains) and holding on to losers (to avoid realizing losses). I am scared to think about how the disposition effect carries over to the relationship market. *shudders*

For way more disposition effect references than you would ever want, see here.