John Ji’s Blog

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Charlie Wilson’s War is my favorite movie this year.

It is based on a true story of Congressman Charles Wilson secretively funding Afghanistan on a war against the Soviets.

In the film, Charlie Wilson is able to take advantage of the Congressional bureaucracy and pass a bill that gives funding of weapons to Afghanistan. This allows US to help the Afghans resist Soviet invasion without being directly involved due to the Cold War. This film reminds us that although the Afghans were able to resist the Soviets, they have become a problem today, harboring terrorists organizations. Charlie Wilson aptly put it, “we fuck up the end game.”

One character in this film explains to Charlie Wilson that nothing is necessarily good or bad, because the future is so unpredictable. This reminds me of the second best theory which I mention in my last post.

The theory of the second best states that,

if one optimality condition in an economic model is not satisfied, it is possible that the next-best solution involved changing other variables away from the ones that are usually assumed to be optimal.

Here is the clip from Charlie Wilson’s War.

Wallstreet is a movie released in 1987, directed by Oliver Stone. It gives me a glimpse of the workings of investment banks, brokers and traders.

The highlight of the film is when Gordon Gekko, an investor, gave this speech at a stockholder meeting of a company he plans to take over:

Greed is good. But it is not entirely correct. As Charles Wheelan wrote in naked economics,

Greed can be very bad-even for people who are entirely selfish. Indeed, some of the most interesting problems in economics involve situations in which rational individuals acting in their own best interest do things that make themselves worse off. Yet their behavior is entirely logical.

A classic example is the Prisoner’s Dilemma. To some extent, Theory of the Second Best is also an example.

Personally, I found it very interesting how a movie made in the 1980s is so right on the dot about the financial crisis today.

My amateur interest in behavior economics first arose back in college, when I stumbled upon a New Yorker article Mind Games. I wondered how hard-wiring of the brain can be used as decision models. But at the end of the day, everything I read about was popular psychology and trivia.

Since then, I gather whatever free time I had on my hand to learn some concrete economics. First, I took a intro to macroeconomics class, then a microeconomics class. Recently, I am taking a Economic Analysis where I learned some game theory and basic economics models. I also attended many related talks on the topic, namely one given by Peter R. Orszag, director of the US Congressional Budget office.

To demonstrate behavioral economics, here is an example.

Risk Aversion - People like certainties more than uncertainties.

When given the choice between 1/3 the chance of winning $600 and a sure chance of winning $200, people often choose the certain option even though the expected value for both is the same. This concept is know as the Ellsburg Paradox, illustrated below.

Which do you choose?

A paradox of choice that usually elicits responses inconsistent with expected utility theory. Two urns are filled with red and green balls. Urn A contains 50 red balls and 50 green balls randomly mixed; Urn B contains 100 red and green balls randomly mixed in an unknown ratio. You choose an urn and a colour, and you then draw a ball at random from your chosen urn. If the ball is your chosen colour, you win a prize. Most people strongly prefer to draw a ball of either colour from Urn A, although this violates the axioms of expected utility theory. According to expected utility theory, if a decision maker prefers to draw a red ball from Urn A than to draw a red ball from Urn B, then the (subjective) probability of drawing a red ball from Urn B must be less than 1/2; but that means that the (subjective) probability of drawing a green ball from Urn B must be greater than 1/2, and the decision maker should therefore prefer it to drawing a red ball from Urn A, which carries a 1/2 probability of winning. According to Ellsberg, human decision makers tend to maximize expected utility (or subjective expected utility) in judgements involving risk, such as exists in Urn A, to use maximin strategies (to maximize minimum utility) in judgements involving uncertainty, as in Urn B, and to use compromise strategies when the degree of confidence in their probability estimates is intermediate between risk (high confidence) and uncertainty (low confidence), confidence being derived from the amount, type, reliability, and unanimity of information. This implies that expected utility theory, subjective expected utility theory, and the concept of revealed preference apply to situations of risk but not to situations involving uncertainty.

Because people are not rational actors like classic economic theories suggest. They are, irrational, and often make decisions on perception. Thus I believe behavioral economics is a more fitting model when making policies because people are not totally rational calculating robots. Perhaps, we were wired this way for a reason.

For the past three month, I have been to quite a few talks by professors around campus. To name a few, I have heard David Gergen speakabout the three circles: ambition, capacity and character. I heard David Cutler debate Gail Wilensky about the Obama versus McCain health care plan. I have been to a panel assembled by Drew Faust on the economic crisis featuring Jay O. Light, Dwight Robinson, Greg Mankiw, Robert Merton, Kenneth Rogoff and Elizabeth Warren. I also went to an under-advertised talk between Greg Mankiw and David Cutler on the economic policies of the two presidential candidates.

Today, I took the bus in the blistering cold to see Joe Stiglitz, along with Robert Dugger and Jack Bloom talk yet again about the economy. The message is basically we need more regulation in the financial markets because it has become an international one and our current regulatory agencies focus on domestic issues.

I think I am very econ-ed out for now.

Hi! Welcome to my blog!

I haven’t written in a blog since Xanga from high school. Certainly I am very rusty. I plan to use this blog to write about current events and my philosophical development. I will also try to be extremely funny, but this may not happen. 

I will also use this blog to keep track of my researches. 

Disclaimer: the content on this blog is the sole opinion of John Ji, not Joshuwa Liu. However, I would like to thank him for setting this up for me, and the people who host this site.