This bride needs a crash course in signalling

Back in 2014, I wrote a post about why weddings are expensive, and the main explanation comes down to signalling:

Why are couples willing to pay such high prices for wedding dresses? It may be because they are signalling as well. They are trying to reveal two items of private information to their wedding guests (friends, family, etc.): (1) the quality of their relationship; and (2) their social status.

Starting with (1), guests don't know the quality of the relationship that is about to be formalised, but the couple does (hopefully!). Does this create market failure? That is, can the couple take advantage of this information asymmetry to their advantage and to the detriment of their guests? Maybe, if we consider wedding gifts. Guests would probably give less valuable gifts if they believed the marriage wouldn't last (i.e. if the marriage is low quality), than if they thought it would last a long time (i.e. high quality). So, if guests can't be sure about the quality of the marriage, then they may assume the marriage is lower quality and buy less expensive wedding gifts (or no gift at all) as a result. So, high-quality couples need to find some way of signalling their quality, and this may be through the cost of the wedding. This may be an effective signal, because it is costly (obviously), and more costly to low-quality couples since they may expect to marry more than once over their lifetime. So, lower quality couples may be less willing to spend a lot on their wedding than high quality couples.

What about (2)? This isn't an adverse selection problem at all, since there is no market that will fail. However, there is still signalling here - the couple may want to signal their social status to the community. Higher social status is linked with wealth, which means that couples with high social status are likely to be able to afford a more lavish wedding celebration than couples with lower social status.

Which brings me to this story from a couple of weeks ago:

 "Susan" is causing quite the debate online after posting a bizarre Facebook rant about her now-canceled wedding. Yup, the couple called off the wedding just days before their I dos, after their guests refused to pay the $1,500 attendance fee Susan was demanding in order to pay for her CAD $60,000 ($46,020 USD) dream wedding.

In her long-winded, expletive-filled explanation, the (former) bride accused her friends and family of ruining her marriage and her life. “How could we have our wedding that we dreamed of without proper funding? We'd sacrificed so much and only asked each guest for around $1,500. We talked to a few people who even promised us more to make our dream come true," she reportedly wrote on Facebook.

Note the quote from my earlier post above. If wedding guests don't know about the quality of the relationship (it is private information), then having an expensive wedding is an effective signal of quality. It meets the two criteria for being an effective signal: (1) it is costly; and (2) it is costly in such a way that lower-quality couples would not attempt it (it is more costly for lower-quality couples, who may get married more than once in their lifetime).

However, having an expensive wedding but not paying for it yourself is not an effective signal, since it is no more costly for a lower-quality couple to do than for a higher-quality couple. In fact, it is more likely that a lower-quality couple would ask the guests to pay for the expensive wedding than a higher-quality couple. The invitees were probably right not to want to pay for "Susan" to have her dream wedding.

[HT: Marginal Revolution]

Book Review: More Sex is Safer Sex

I just finished reading Steven Landsberg's 2009 book More Sex is Safer Sex. The subtitle is "The Unconventional Wisdom of Economics", which pretty accurately sums up the content. It is unconventional, and uses the tools of economics. At the heart of the book is the premise that problems arise when we don't face all of the costs, or are unable to capture all of the benefits, of our decisions. Landsberg uses that premise to illustrate a number of surprising arguments, such as this from early in the book:

When you're splitting the dinner check, ordering dessert can be a lot like littering - you get the benefits and the costs spill over onto your friends. If the $10 double chocolate mousse is worth only $4 to you, you really shouldn't order it - and you won't, if you're paying your own way. But when you split the check ten ways, that mousse starts to look (to you) like a bargain.

I found a lot of the stories and examples in the book to be deliberately provocative. For instance, Landsberg argues that firefighters should be allowed to keep any property that they save from a burning building (they face all the costs of their actions, so they should be able to claim all of the benefits). Sometimes, provocativeness can be a good thing, but I feel like in much of the book Landsberg is over-playing his hand. And there are clearly cases where, in his zeal for revealing some surprising results, he over-stretches, such as this:

Any act of charity entails a clear moral judgment. When you give $100 to CARE, you assert that CARE is worthier than the Cancer Society. If that's your honest judgment when you give your first $100, it ought to be your honest judgment when you give your second $100. Giving to the Cancer Society tomorrow means admitting you were wrong to give to CARE today.

Of course, it is likely that there is diminishing marginal utility to giving to each charity. That means that each donation you give to a charity provides you with less satisfaction (or happiness) than previous donations you gave to the same charity. So it is by no means a given that if you receive more utility (or satisfaction) from your first $100 being given to CARE, that your second $100 would provide you with more utility if also given to CARE than if you gave it to the Cancer Society. Landsberg does acknowledge this, although not in as many words, and it is buried in the appendix to the book.

Overall, there are some interesting points made in the book, and if you want to see the application of economic costs and benefits to a wide range of (often surprising) situations, this book will provide you with that. I made a number of notes of things that will be helpful in my teaching. However, if you are sceptical about the use of economics, this book probably won't convince you. And to top it off, Landsberg's in-your-face style won't be to everyone's taste.

Does studying economics overcome misperceptions?

Many students are surface learners - they learn just enough to get through assessments, and then rapidly forget what they have 'learned' (because they never really learned it at all!). Other students are deep learners - they really try to understand, and they usually have an intrinsic motivation for learning. A third groups of students are strategic learners - they will employ whichever strategy (surface or deep learning) will allow them to achieve their grade goals in a given situation. This last group is the group that is most motivated by grades. You can read a very brief summary of these types of learners here (and click through to the linked video as well).

Surface and strategic learners present a real problem. We want students to take on board the key principles of economics, but students using surface learning strategies only want to do the minimum necessary to get by. That leads to some interesting outcomes, such as those in this 2017 article by Isabel Busom, Cristina Lopez-Mayan and Judith Panades (all from Universitat Autonoma de Barcelona, published in the Journal of Economic Education (sorry I don't see an ungated version online, but it may be open access).

Using data on 596 first-year college students in Spain, Busom et al. look at whether the students hold misperceptions about key economic concepts at the start of an economics principles class, and again at the end. Importantly, the questions were asked in an opinion survey format, which did not contribute to grades, so the students could feel freer to answer without necessarily trying to get the 'correct' answer. The results at the beginning of the course are mostly not surprising:

...most students (68 percent) believe that rent controls would allow more people to have access to housing, a belief that is not consistent with the model of demand and supply in competitive markets.

Students have not been exposed to economics principles yet probably wouldn't realise that rent controls actually decrease access to housing (especially for low-income tenants). However, it is a pretty straightforward result from applying the supply and demand model. Students who understand some economics should do better, but:

Having taken some course on economics in high school does not make much difference.

That's a little bit of a worry, but it gets worse when Busom et al. look at the data at the end of their course:

We observe a change in the right direction in the case of minimum wages but a change in the wrong direction in the case of rent controls.

In other words, students were more likely to agree that rent controls increase access to housing at the end of the course than at the beginning. And yet it gets even worse:

It is disturbing that course performance is uncorrelated with the statements on rent controls, minimum wages, or buying home-country products.

Students who did better in the economics course were no more (or less) likely to hold the correct opinion on rent controls than those who did worse in the course. Busom et al. conclude that:

These results suggest that students fail to integrate the newly learned economic tools into their thinking process after a semester of study, even if they do well in the course. This raises some concerns. If what we observe in our study generalizes to students taking economic principles in other universities and countries, we then should question our way of teaching and communicating economic knowledge. Even if some teaching methods have a positive effect on exam performance, this does not necessarily imply that students will revise important misconceptions. Successfully challenging laypeople’s misconceptions may be even harder.

They also suggest that:

Several hypotheses might explain the persistence of misconceptions: (1) one semester may be too short a period to let new knowledge sink in and enable a student to use it to analyze economic issues outside the classroom; (2) students’ dedication to study may be too low; (3) students may remain skeptical toward economic models (even if they understand them) for a variety of reasons, and (4) a combination of all the above.

I think they miss the fact that many students are simply employing surface learning strategies, as I noted at the start of this post. Those students won't change their misconceptions, because they aren't really taking in what they are studying beyond what is necessarily to get through their assessment. So, before we give up completely on trying to teach economics principles because we might be making students' misconceptions worse, we need to adapt teaching methods to better engage the surface learning students, or to dissuade them from surface learning strategies.

This is probably the most difficult task of all for a teacher, and there is no silver bullet. I've found that using lots of real-world examples and applications in class (and writing about them here), seems to help. So do assessment questions that are more applied and less theoretical, and where the assessment marks are weighted more heavily towards explaining why rather than answering the question of what is happening. It is a lot harder to explain why if you are simply a surface learner. In my ECONS102 class I take this a step further by asking some really open-ended questions, which can really only be effectively answered well by students who have done some deeper thinking about the economics concepts and models from class. Of course, these strategies don't work for all students.

I'd love to think that we could break down students' misperceptions about things like rent controls or minimum wages, in a single first-year economics paper. But Busom et al.'s research paper now has me a little worried. I wonder how my students would do in a similar opinion poll?

James Mirrlees, 1936-2018

It seems we can't go a full year lately without losing a great (often Nobel laureate) economist. The latest was James Mirrlees, aged 82, winner of the Nobel prize in 1996. I know of his work on information asymmetries, especially moral hazard, which I teach in my ECONS102 class (ironically, it is the topic we are covering this coming week).

He is also well known for his work on optimal taxation, defining the balance between equity and efficiency. That work has been used to justify reducing marginal income tax rates in most developed countries over recent decades.

There are good obituaries noting his life and key contributions at The Sunday Times (gated), the Washington Post, and the New York Times, but for a more personal tribute, read this piece by John Kay.

[HT: Marginal Revolution, here and here]