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I don't see anything in the article about the extent to which this effect has been observed in the real world. Is it another example of economists assuming that

I don't see anything in the article about the extent to which this effect has been observed in the real world. Is it another example of economists assuming that people are idealised rational actors (who would prefer a 1.6x coffee bean premium to a 2x, to take the example in the article), or is there some hard evidence that it explains the real behaviour of real people?

dyeje 8y ago
They give 3 examples at the end: "The effect has been studied as it applies to illegal drugs and it has been shown that the potency of marijuana increased in response to higher enforcement budgets,[2] and there was a similar effect for alcohol in the U.S. during Prohibition.[3] This effect is called Iron law of prohibition or Cardinal rule of prohibition. Another example is that Australians drink higher-quality Californian wine than Californians, and vice versa, because it is only worth the transportation costs for the most expensive wine.[4]"
- andyjohnson0 8y ago
  Thanks. I did read the article and noticed the examples that you referred to. To clarify: I just don't see where the evidence for any of these claims is accessible. Four of the six references don't appear to be available on-line. Of the two that are, one is a brief summary that leads to a paywalled FT article that I can't read, and the other is a ~200 pdf economics textbook. I'm happy to accept that a price differential changes when a constant is added to both prices. But I do question whether people in the real world will switch to a different type of coffee bean because the differential goes from x2 to x1.6. And I wanted to know more about the real-world circumstances in which it had been observed. I might be pursuaded that the market for illegal drugs/alcohol could exhibit this effect, but it would be interesting to know how how, given that illegal products are probably going to be subject to other effects not shared by legal products, biases and selectivities were compensated for. Edit: Made first paragraph clearer.
  - zwaps 8y ago
    Here is a study in trade on this phenomenon https://krannert.purdue.edu/faculty/hummelsd/research/apples.pdf https://krannert.purdue.edu/faculty/hummelsd/research/apples...
  - pc86 8y ago
    The fact that the sources are not easily accessible to you for free does not negate the fact that there are cited sources explicitly disproving your assumption (that this is just economists making things up). > Thanks, I also read the article. I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk.
    - andyjohnson0 8y ago
      > > Thanks, I also read the article. > I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk. Did you consider the possibility that I was simply thanking dyeje for their reply, and confirming that I had noticed the examples that they referred to? Assumption of good faith, etc? Nevertheless I've edited my reply to hopefully make my intended meaning clear.
- srtjstjsj 8y ago
  Those don't seem to be the same effect as buying fancier coffee because it seems like a comparatively better deal per pound. Prohibition makes a product hard to get in desired volumes, beyond just price, so you want as much as you can get when a window opens; you can dilute it yourself at home later. It may be the case that demand an't be satisfied by buying weak lots in low quantities.
  - greggyb 8y ago
    In economics, "price" is pretty inclusive. Price is usually considered in terms of opportunity cost, and dollars (or other currency) are a nice proxy to use. But, the thing you think is a confounder here "prohibition makes a product hard to get in desired volume" is pretty much equivalent to an economist as saying "the price went up". There is no really meaningful difference. I have to expend more - either currency (to some bootlegger or intermediary, to cover their risk), time/effort (to find and get to a seller), or risk (I might get caught and go to jail - we can put a price on imprisonment).
Matticus_Rex 8y ago
Most of the reaction against modern economists for assuming rationality is just meme repetition. Yes, this is an accurate criticism of a tiny portion of modern economists, and of many economists of prior eras. One of my favorite books, Kahneman's Thinking, Fast and Slow, is a prime example of how pervasive this meme is -- he seems completely unaware that the critique has largely been integrated into the field well before the time of publication. The assumption of rationality has been replaced by assumptions around bounded rationality and cognitive bias. Modern economic theory is not some abstraction that doesn't resemble the real world, even in cases where the empirical evidence is as-yet weak (which it's not in this case, as is apparent to anyone who reads the whole entry).
- greggyb 8y ago
  Maybe I had pretty biased professors, but in my study of economics, there was no standing assumption that individuals are rational. Rationality is an observation of aggregate behavior, rather than individual. This is pretty robustly observed. It is interesting because this is in spite of the glaringly obvious observation that most people are not rational at all times (though many people are sometimes rational). Thus it is a useful abstraction to reason about rational individuals, though I have never been exposed to a serious claim in academic economics that individual human beings are rational. The interesting results of behavioral economics are many, but they primarily give us proof of the already-known fact that individual humans are often irrational. The interesting part is not that humans are individually irrational, but how. Behavioral economics makes the observation of aggregate rationality even more interesting, because many irrational actors can cause aggregate rationality. If you would like my musing about how it is that what I have said above is so often misunderstood, then I have some thoughts below. In my academic experience, all of my intro level professors took pains to ensure we understood that we were learning useful models, and that rationality is an observed phenomenon in aggregate. My intermediate level professors often didn't take as many pains to make this clear, but did make similar explanations. For anything 300-level or above, we never really discussed this topic, as the professors assumed we had already learned such. Based on my observations, I would guess that most people who do not take a full course load of intro and intermediate economics do not have drilled into them that rationality is not something we expect of individuals, despite it having a lot of explanatory power in aggregate observations. Additionally, as with all fields, those who practice often forget what is taken for granted in the field. Among economists, unless one has significant experience teaching economics to beginners, I expect it is not a common thing to preface every statement with the type of 101-level introductory remarks that would help to remove such confusion. Additionally, economics seems to me to be plagued with jargon that are homonyms with common words in the vernacular. E.g. "cost" to a layperson often means "value denominated in currency, which I might pay to someone to acquire a specific good or service" or "the amount my supplier paid for the thing I am purchasing, such that their cost is less than the price that supplier charges me", whereas to an economist, "cost" is pretty much always going to mean "opportunity cost"[0], which is the value (to the entity making the choice) of the next best alternative. This sort of homonymity is rampant in economics jargon. Finally, there is a pervasive assumption in economic thinking of "ceteris paribus", or "all other factors being held constant" (technically "all else equal", but give me some leeway in the translation to capture intent a bit better). Most theories, models, and statements in economics are going to be statements about a single factor/observation with a magical "nothing else can or will change" condition applied to the entire universe. This is, obviously, a huge over-simplification, but one that is useful for discussion. In summary, all models are wrong, but some are useful. Economists often discuss in terms of models and the way they discuss uses words you think you understand but you don't, unless you study economics (not a dig, just a truthful observation of laypeople using jargon - see a recent SMBC for non-economics examples[1]). [0]: https://en.wikipedia.org/wiki/Opportunity_cost https://en.wikipedia.org/wiki/Opportunity_cost - Key excerpt: > Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered an opportunity cost. [1] http://www.smbc-comics.com/comic/physical-analysis http://www.smbc-comics.com/comic/physical-analysis

dyeje 8y ago

They give 3 examples at the end: "The effect has been studied as it applies to illegal drugs and it has been shown that the potency of marijuana increased in response to higher enforcement budgets,[2] and there was a similar effect for alcohol in the U.S. during Prohibition.[3] This effect is called Iron law of prohibition or Cardinal rule of prohibition. Another example is that Australians drink higher-quality Californian wine than Californians, and vice versa, because it is only worth the transportation costs for the most expensive wine.[4]"

andyjohnson0 8y ago
Thanks. I did read the article and noticed the examples that you referred to. To clarify: I just don't see where the evidence for any of these claims is accessible. Four of the six references don't appear to be available on-line. Of the two that are, one is a brief summary that leads to a paywalled FT article that I can't read, and the other is a ~200 pdf economics textbook. I'm happy to accept that a price differential changes when a constant is added to both prices. But I do question whether people in the real world will switch to a different type of coffee bean because the differential goes from x2 to x1.6. And I wanted to know more about the real-world circumstances in which it had been observed. I might be pursuaded that the market for illegal drugs/alcohol could exhibit this effect, but it would be interesting to know how how, given that illegal products are probably going to be subject to other effects not shared by legal products, biases and selectivities were compensated for. Edit: Made first paragraph clearer.
- zwaps 8y ago
  Here is a study in trade on this phenomenon https://krannert.purdue.edu/faculty/hummelsd/research/apples.pdf https://krannert.purdue.edu/faculty/hummelsd/research/apples...
- pc86 8y ago
  The fact that the sources are not easily accessible to you for free does not negate the fact that there are cited sources explicitly disproving your assumption (that this is just economists making things up). > Thanks, I also read the article. I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk.
  - andyjohnson0 8y ago
    > > Thanks, I also read the article. > I'm not sure the extent to which you considered this, but in this context it's hard to read that sentence without making you sound like a jerk. Did you consider the possibility that I was simply thanking dyeje for their reply, and confirming that I had noticed the examples that they referred to? Assumption of good faith, etc? Nevertheless I've edited my reply to hopefully make my intended meaning clear.
srtjstjsj 8y ago
Those don't seem to be the same effect as buying fancier coffee because it seems like a comparatively better deal per pound. Prohibition makes a product hard to get in desired volumes, beyond just price, so you want as much as you can get when a window opens; you can dilute it yourself at home later. It may be the case that demand an't be satisfied by buying weak lots in low quantities.
- greggyb 8y ago
  In economics, "price" is pretty inclusive. Price is usually considered in terms of opportunity cost, and dollars (or other currency) are a nice proxy to use. But, the thing you think is a confounder here "prohibition makes a product hard to get in desired volume" is pretty much equivalent to an economist as saying "the price went up". There is no really meaningful difference. I have to expend more - either currency (to some bootlegger or intermediary, to cover their risk), time/effort (to find and get to a seller), or risk (I might get caught and go to jail - we can put a price on imprisonment).

Matticus_Rex 8y ago

Most of the reaction against modern economists for assuming rationality is just meme repetition. Yes, this is an accurate criticism of a tiny portion of modern economists, and of many economists of prior eras. One of my favorite books, Kahneman's Thinking, Fast and Slow, is a prime example of how pervasive this meme is -- he seems completely unaware that the critique has largely been integrated into the field well before the time of publication. The assumption of rationality has been replaced by assumptions around bounded rationality and cognitive bias. Modern economic theory is not some abstraction that doesn't resemble the real world, even in cases where the empirical evidence is as-yet weak (which it's not in this case, as is apparent to anyone who reads the whole entry).

greggyb 8y ago
Maybe I had pretty biased professors, but in my study of economics, there was no standing assumption that individuals are rational. Rationality is an observation of aggregate behavior, rather than individual. This is pretty robustly observed. It is interesting because this is in spite of the glaringly obvious observation that most people are not rational at all times (though many people are sometimes rational). Thus it is a useful abstraction to reason about rational individuals, though I have never been exposed to a serious claim in academic economics that individual human beings are rational. The interesting results of behavioral economics are many, but they primarily give us proof of the already-known fact that individual humans are often irrational. The interesting part is not that humans are individually irrational, but how. Behavioral economics makes the observation of aggregate rationality even more interesting, because many irrational actors can cause aggregate rationality. If you would like my musing about how it is that what I have said above is so often misunderstood, then I have some thoughts below. In my academic experience, all of my intro level professors took pains to ensure we understood that we were learning useful models, and that rationality is an observed phenomenon in aggregate. My intermediate level professors often didn't take as many pains to make this clear, but did make similar explanations. For anything 300-level or above, we never really discussed this topic, as the professors assumed we had already learned such. Based on my observations, I would guess that most people who do not take a full course load of intro and intermediate economics do not have drilled into them that rationality is not something we expect of individuals, despite it having a lot of explanatory power in aggregate observations. Additionally, as with all fields, those who practice often forget what is taken for granted in the field. Among economists, unless one has significant experience teaching economics to beginners, I expect it is not a common thing to preface every statement with the type of 101-level introductory remarks that would help to remove such confusion. Additionally, economics seems to me to be plagued with jargon that are homonyms with common words in the vernacular. E.g. "cost" to a layperson often means "value denominated in currency, which I might pay to someone to acquire a specific good or service" or "the amount my supplier paid for the thing I am purchasing, such that their cost is less than the price that supplier charges me", whereas to an economist, "cost" is pretty much always going to mean "opportunity cost"[0], which is the value (to the entity making the choice) of the next best alternative. This sort of homonymity is rampant in economics jargon. Finally, there is a pervasive assumption in economic thinking of "ceteris paribus", or "all other factors being held constant" (technically "all else equal", but give me some leeway in the translation to capture intent a bit better). Most theories, models, and statements in economics are going to be statements about a single factor/observation with a magical "nothing else can or will change" condition applied to the entire universe. This is, obviously, a huge over-simplification, but one that is useful for discussion. In summary, all models are wrong, but some are useful. Economists often discuss in terms of models and the way they discuss uses words you think you understand but you don't, unless you study economics (not a dig, just a truthful observation of laypeople using jargon - see a recent SMBC for non-economics examples[1]). [0]: https://en.wikipedia.org/wiki/Opportunity_cost https://en.wikipedia.org/wiki/Opportunity_cost - Key excerpt: > Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered an opportunity cost. [1] http://www.smbc-comics.com/comic/physical-analysis http://www.smbc-comics.com/comic/physical-analysis