ΒιΆΉΤΌΕΔ

Here here!

An interesting insight.

and I hope that cake was nice Evan!

Thanks for a clear explanation Evan, I wasn't that interested when i started reading, but i finished up wanting to know more.

A book which may interest you here is "How to cut cake" by Ian Stewart who is a maths professor at Warwick University. It discusses how to extend the one cuts/one chooses fairness beyond two participants and deals with envy in a later chapter.

As an economist and an insurance professional I agree with your initial point that sometimes it is very difficult for people to get excited about either economics or insurance.

It is much easier re medicine where if someone has cracked the DNA code or invented a new means of treating a disease the value of the award is more clearly visible to the general public.

I also agree with your cake analogy but there is one very relevant analogy that is specific to both the works the Nobel award winners undertook and the UK economy and everyone in it. It is also highly topical.

Put simply it is insurance against flooding in the UK. In many European countries insurance policies exclude flood and the cover is picked up by the government by a variety of means.

There are a number of issues with a government backed system which the Northern Rock experience has highlighted a few. How we allocate the risk and who pays for flood cover is critical in the UK for the following reasons.

1) There are a huge number of properties built either on flood plains or in areas prone to flooding. sadly they are not all called Mill Cottage or River View. Without adequate insurance many of these properties are simply valueless as mortgage companies will not lend money without adequate protection and anyone looking to seel one will have their market severely restricted. This opens up a huge issue for property values, mortgages and Uk economic growth.

2) The government has required a huge number of new properties to be built and many of these are in marginal areas (the Thames Gateway for example). If there is no insurance cover available who will buy them?

3) If flood is taken out of the hands of the experts who have centuries of statistics to back up their valuations of cover who will price flood cover? Alistair Darling? How will these premiums be collected? Will people trust the government to administer this properly? The CSA, Passport Authority, Immigration and the NHS IT systems all give credence to those who think they might mess it up.

4) What happens to those who decide not to insure? Could the system be open to abuse via a politically motivated bail out? If I live away from any rivers and nowhere near a flood zone why should I pay when I am not at risk?

Their research may have been obscure but it affects all of our lives in major ways.

Economists can do good but usually don't.

What really needs to happen is that nobody be allowed to become an economist until they are at least 55. This way they will have spent sufficient time working and living in the real world for people to take them seriously.

Evan,

What a great topic! But maybe the question isn’t why did they win it, but why do you have to explain it! It seems that once again the (Memorial) Nobel Prize Ceremony has slipped by unnoticed, other than the recent exposure given to Al Gore, and only due to that poxy Mr Stewart Dimmock and his case against climate change statistics.

It is, for example, climate change, and the methods being explored in an attempt to curtail the effects thereof, that relates nicely to the work done by the 2007 Sverges Riksbank prize winners – mechanism design theory, an application of Game Theory. Another example, as many of your readers would probably remember, is the UK 3G license auction, which was one of the most successful of it’s kind, netting the government billions, all facilitated by experts in game theory – demonstrating a direct link between mathematic theory and public benefit, with economists at the helm!

Unfortunately, more often than not, those involved never achieve notoriety for their efforts. That still seems the preserve of the β€œcelebrity”, that pillar of society! I put this down to the lack of exposure afforded to the Nobel Prize Ceremony. With the popularity and plethora of award shows, it’s strange that the β€œNobel Awards” don’t receive much media interest. But then it’s probably better that way! I suppose it’s due to lack of general appeal and the fact that actors, film makers and musicians receive instantaneous criticism, whereas there is often a significant interval between the accomplishment of the achievement being recognized and the awarding of the Nobel Prize, largely due to the significance of the achievements emerging many years later, and in some cases only when applied to a difference discipline.

Popular Culture, however, is not devoid of references to Nobel Prizes and economics – the film β€œA Beautiful Mind” for example. But the link is tenuous: it was Russell Crow’s portrayal of a schizophrenic mathematician, not a Nobel Laureate, which earned him a BAFTA and Golden Globe. It was, however, John Nash’s brilliance, dogged determination, pursuit of excellence and his theory’s interdisciplinary application which earned him the Nobel Prize!

At a time when instantaneous gratification and media celebrity is of major importance in popular culture, the public seem to have lost the ability to recognise the effects and importance of continuous contribution, which is in essence what economics is all about: the long view.

Keep blogging

My first class in economics dealt with 'IF'.There seems to be nothing concrete with the theory yet so much emphasis is placed on ECONOMICS throughout the world.There are many notable economists at many schools of learnings and institutions throughout the world,yet this world is washed in a state of economic depravation that,seemingly,cannot be fixed.Ask 20 economists the same question,and you will receive 35 answers and the responses will not match the question.Does anyone understand the theory by which they received the award?

Fine, wonderful, but this year's prize winners do operations research, not science. They've produced recipes, or perhaps recipes for making recipes. "If you want to accomplish a and the state of the world is b, do c."

This is nothing to do with human behavior and has no observable implications.

In that case it could be used to save the planet, with a bit more work:
Dividing resources appropriately is free-market enthusiast’s big boast, which socialists dispute. This could lead to exact mathematical proofs about which social system is best! Does Marxism add up? How about the Washington consensus? Let’s just hope we don't come up with gloomy rules like Arrows Impossibility theorem!
Obviously a β€œperfect mechanism” theory can't cover everything, but so much is done in the cause of material fairness and it would be nice to know if people are right before you start implementing their theories.

Evan

The cake cutting analogy is superficially attractive but needs quite a bit of development to reflect real life more accurately.

Suppose the one doing the choosing is blindfolded and has to take the advice of the one doing the cutting as to which piece of cake is bigger, you get a much more layered (pardon the pun) situation. Is the advice the chooser is getting accurate? What are the motives of the cake cutter? Is Mother standing by to ensure fair play? Is getting the bigger slice of the cake really in the interests of the choosing party?

I could go on but you get the drift....

Or to re-phrase the old joke, "first assume a cake..."

My mum also tried the same tactic as your's Evan. Unfortunately for her my brother and I both worked out that the cutter could do no better than average, and was thus at a disadvatage compared to the chooser. Cue the arguments!

A better way to use the cake to teach a lesson is to allow the same child to cut and choose this time, the other child the next time.

They learn that fairness inculcates fairness and some will even learn to cut unequally and choose the smaller when they know the other child prefers that kind of case.

The problem with economists is they assume greed is good and that everyone is greedy,

"Here here!"?

"Hear hear" shurely?!

Homonyms aside, an interesting piece certainly, and an introduction to the lives of those with siblings - as an only child I never faced such a cake-related dilemma and always got to lick the bowl myself!

The Mechanism Design Theory is interesting but it is more a mathematical than an economic theory. In fact, nowadays, economic science tends to become more an appendage of mathematics and statistics than anything else. Yet there are many domains in economics that demand to be studied and theories to be developed.
For example, the economies of the African countries south of the Sahara have been stagnating or declining over the last forty years while those of the other parts of the world have been growing. Is there a theory that can explain this and provide a solution to these African countries?
The Japanese economy were growing very rapidly at the rate of more than 10% per annum on average from 1950 to 1980; then from 1990 to the present, its growth rate had averaged less than 3% per annum. Is there a theory that can explain this change?
The Chinese economy had been stagnating or even declining from 1950 to 1978. Then, from 1980 onwards it grew rapidly and is now the fastest growing economy. Is there a theory that can explain this change of fortune?
In fact, I should say that in the field of economic growth, economic development and macroeconomics, there is no theory that can explain a situation, make reliable predictions and propose measures that can set an economic in a desired path.

Very interesting,

Then again it is not a two person economy where the divide and choose rule can be applied. At the end the full family should have an equal distribution of the cake which brings us back to the same sitution from where we started.

What people who don't regularly dip a toe into the waters of economic theory (lucky things!) may not know is the extent to which, since the 1970s, economics has focused increasingly on modelling and trying to understand HOW individuals and organisations react to information, incentives and the behavious of others. Economics is a rich subject that uses elements of mathematics and even experimental psychology to try to understand what makes us tick as economic beings, and the consequences of that behaviour.

Incentive design and compatability theory should, then, help us to design better rules to frame the institutions and behaviour we've got. That, and help us to understand in a more dispassionate, analytical way why what we THINK should happen, doesn't.

wait a minute John Hoffman. your assertion that 'the problem with economists is that they assume greed is good and that everyone is greedy' is fallacious. economists do no such thing.

economists, for the purpose of modelling consumer choice, make (usually) 3 basic simplifying assumptions and one of those is of 'non satiation'. whereby, in a simple model, it is intuitive to assume that a consumer will prefer more to less of a 'good', specifically because, by definition, it is a 'good' and if they did not, the 'good' would be a 'bad'. this simple assumption allows useful analysis of human choices when faced with a budget constraint. when these rational assumptions are removed from a model, the outcomes become counter-intuitive and thus, poor allegories of reality.

I consider economics to be the study of reality and what really occurs in the situations humans find themselves in. the modelling techniques used by economists of recreating real life situations and analysing outcomes, brought about by incentives are far reaching and have led to far more efficient mechanisms for allocation of whatever is in question.

economists labour relentlessly, to try and find improved mechanisms for a more efficient but also, fairer, allocation of goods, using such assumptions. here, the trade off between efficiency and fairness tends to raise it's troublesome head and this is why economists spend countless time creating other efficient mechanisms intended to bring about more fairness in economies.

to state that economists merely, 'think greed is good' is a patronising simplification of a discipline which through it's innovative techniques has endeavoured to improve everyone's slice of the cake, (often by magically growing the national cake!) it also likens the profession to Michael Douglas' Gordon Gecko. a cufflink wearing, lunch hating, capitalist pig stereotype, an increasingly popular figure of hate of the ignorant.

JM Wong Sin Wai,

I disagree with your last paragraph, sort of. there are numerous theories that explain huge proportions of changes in variables studied by economists. ecomonic growth, for example, is a fucntion of x, y, w, etc blah blah blah and a stochastic disturbance. it is impossible for economists to produce a perfect explanation for 100% of the variation in a given dependent variable in a human inhabited, ever changing world. this is because of the dynamic nature of the conditions we live in. physics, on the other hand, can produce such results because the variables it studies are constant in the natural world. eg, we cannot change the force of gravity, so once you've worked out the force of gravity and include it in an equation with other variables, it will be remain a constant. which will give accurate values for the other variables, in realtion to gravity.

there is no such variable within the field of economics because of the regularity of that horrible theory buster - the exogenous shock. this is why economics is called the dismal science! alos, many of the variables studied in economics are dependent upon an almost, (but not entirely), unquantifiable variable. namely, confidence. you will notice this variable is inherently human and thus unpredictable.

so, we are trying to capture reality by predicting the unpredictable! obviously, we can predict behaviour to an extent by modelling rational expectations and estimate what choices individuals will make given their options. however, conditions are always changing so I concede we cannot accurately predict what will happen and make perfect future policy recommendations all of the time but we certain have a very good idea. until of course, the next huge exogenous shock occurs.