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Accidental Deliberations: Sunday Morning Links

Assorted content for your Sunday reading.

– Tim Harford discusses how insurance and other industries are built on exploiting people who are risk-averse due to the inability to absorb substantial costs as “money pumps” for those who have more than they need:

(L)et’s step back and ask ourselves what insurance is for. Classical economics has an answer: people are risk-averse, which means that they will pay good money to reduce the variability of outcomes they face. If home insurance guards against the loss of a million pounds when my house burns down, I’m happy to buy the insurance even though the insurance company expects to make a profit from it.

But this risk aversion emerges from the fact that money is worth more to poor people than to rich people. Gaining a million pounds would make me rich but losing a million pounds would make me poor. I should not gamble a million pounds on the toss of a coin, because the million pounds I might lose is more precious to me than the million pounds I might gain.

As so often with classical economics, this is an excellent description of how we should behave. It is not such an excellent description of how we actually do behave. Risk aversion can only explain why we insure large risks. It cannot explain why we insure small ones. 

A money pump is a person whose irrationalities can be systematically exploited for financial gain. The simplest money pump is a person who prefers an apple to a doughnut, prefers a doughnut to a chocolate bar, and prefers a chocolate bar to an apple. Just offer them an apple in exchange for their doughnut plus a penny. They will accept. Then offer them a chocolate bar for their apple plus a penny. Then offer them a doughnut for their chocolate bar plus a penny. They end up with their original doughnut and are three pence poorer. Repeat for ever.

Money-pump arguments are sometimes deployed to object that people cannot be irrational, otherwise they would be bankrupted by money pumping. But economists are increasingly coming to realise that, instead, we should be looking for money pumping in action.

Given our anxiety about small risks, what would the money pumping look like? It would be an insurance policy focused on the narrowest possible slice of risk. It would be sold alongside another product or service, often at the last moment. It would be marketed by creating anxiety and then offering the product to make the anxiety go away. In short, it would look like the collision damage waiver, the extended warranty, and PPI. These bespoke slices of insurance are among the largest money-pumping projects in the modern economy. No wonder the banks abandoned their principles to join in.

– Jared Bernstein and Lori Wallach highlight (PDF) the need for an international trade regime which serves the public interest, not only the greed of the people who already have the most. And Yves Smith theorizes that the public backlash against corporate-centered trade deals may lead both to changes in how international trade is managed, and the identity of the countries at the forefront of developing the standards to be pursued.

– Needless to say, the Libs’ devotion to the current trade model figures to exclude Canada from that group for the foreseeable future. And the Alberta Federation of Labour laments the Libs’ determination to exploit foreign labour at the expense of both easily-abused temporary workers, and the Canadians who would otherwise fill the positions.

– Derek Thompson makes the case for a long-overdue round of trust-busting to reduce corporate power over innovation and economic development.

– Finally, Ed Finn writes that our health system should focus far more on maintaining wellness rather than responding only once an illness develops. . . . → Read More: Accidental Deliberations: Sunday Morning Links

Accidental Deliberations: Sunday Morning Links

This and that for your Sunday reading.- Paolo Giuliano and Antonio Spilimbergo study (PDF) how the economic conditions an individual’s youth influence enduring values – and find that the experience of an economic shock tends to lead to a greater apprec… . . . → Read More: Accidental Deliberations: Sunday Morning Links

Accidental Deliberations: Monday Morning Links

Miscellaneous material to start your week.- Branko Milanovic points out how the commodification of our interactions may create an incentive for short-term exploitation:Commodification of what was hitherto a non-commercial resource makes each of us do m… . . . → Read More: Accidental Deliberations: Monday Morning Links

Accidental Deliberations: Saturday Morning Links

Assorted content for your weekend reading.- Yvan Guillemette discusses the need for public-sector investment in economic development to make up for the massive amounts of private capital sitting idle. And Daniel Kahnemann challenges the theory that cor… . . . → Read More: Accidental Deliberations: Saturday Morning Links

Accidental Deliberations: Saturday Morning Links

Assorted content for your weekend reading.

– CBC follows up on the connection between childhood poverty and increased health-care costs later in life. And Sunny Freeman points out how the living wage planned by Rachel Notley’s NDP figures to benefit Alberta’s economy in general.

– Meanwhile, William Gardner laments our lack of accurate information on . . . → Read More: Accidental Deliberations: Saturday Morning Links

Accidental Deliberations: Now we’re just haggling over the price

Others have rightly wondered whether the Wildrose Party’s new promise to make floor-crossing MPs pay a price to the party will be enforceable at all. But it’s also worth examining how it might affect MLAs’ decision-making – with the result potentially being the exact opposite of what Brian Jean intends.

Previously, the bar to Wildrose . . . → Read More: Accidental Deliberations: Now we’re just haggling over the price

Accidental Deliberations: Wednesday Morning Links

Miscellaneous material for your mid-week reading.

– Joe Fiorito discusses the spread of income inequality in Canada. And Doug Henwood reviews Thomas Piketty’s Capital in the 21st Century, while wondering what will follow from the empirical observation that accumulated wealth tends to perpetuate itself to the detriment of most of the population: The core message . . . → Read More: Accidental Deliberations: Wednesday Morning Links

Accidental Deliberations: Saturday Morning Links

Assorted content for your Saturday reading.

– Rick Salutin writes about the need for the labour movement to better promote its contribution to the general public – and my only quibble is that I’d prefer to see a focus on what still can be (and needs to be) done rather than past victories: (W)hy don’t . . . → Read More: Accidental Deliberations: Saturday Morning Links

Accidental Deliberations: On default positions

Dan Ariely comments on how the normalization of cheating can produce a cascading effect: The consequences of this sort of cheating are even more severe when the network of contagion is larger. We see this when we look at Greece, where masses of people have been cheating a little bit everywhere, and it’s all added . . . → Read More: Accidental Deliberations: On default positions