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Why you don't have to take economists too seriously

I bet you have seen be­fore some ar­ti­cle about how some econ­o­mist cal­cu­lates the val­ue of things.

For ex­am­ple, if you pre­fer not to have health in­sur­ance worth $100 a year, and that means you are X% more like­ly to die in 20 years, then some num­ber-­mas­sag­ing will tell you you val­ue your life at $Y (the num­bers are not re­al­ly im­por­tan­t).

Here is an ex­am­ple in Slate mag­a­zine which in­cludes a rather clear ex­pla­na­tion of how this process work­s.

It shows that a Chica­go drug deal­er val­ues its life at be­tween $50000 and $100000.

Now, this is all based on the fact that that per­son choos­es to go on his life in a cer­tain way for a cer­tain amount of mon­ey. How­ev­er, I am pret­ty sure if of­fered $100000 or life, he would choose life.

Since that choice is just as his as the one used to reach that num­ber, it's clear that hu­man be­ings are in­co­her­en­t, or maybe that the dif­fer­ence in val­ue be­tween a 10% chance of death and a 100% chance of death is way larg­er than econ­o­mists es­ti­mate.

Per­son­al­ly, I can't even think of an amount of mon­ey that would make me take a 50% chance of death. But I am aware that, for ex­am­ple, my di­et caus­es me a cer­tain risk, maybe 1% or 10% (no idea).

How about you? Do you be­lieve in economist­s?

Hook / 2007-05-05 21:27:

For quite a while I've thought of economists as quacks of which the sole purpose is to excuse the situation that suits the capital best.

p.s. yes, in law school we are thought economy by economists themselves ...didn't change my feelings towards them one bit.

Esben Mose Hansen / 2007-05-05 22:14:

Economists are very silly people sometimes. They have a tendency to mix things up.

1. Not taking health insurance is a gamble. Gambles never pay off, but humans do it anyway.

2. I once saw an economist calculate it from life insurance. He concluded how much a person was worth to society from this. Very silly. A prudent person would buy enough life insurance so that those dependent on you can get independent. Thus, if you have no dependent, buying life insurance are irrational. That doesn't mean that your value to society is 0.

3. The value of a persons life to himself this instant is of course very high.. For the last few years of your life in the distant future, not so high (thus smoking, overweight and such).

4. The value of a citizen to the society is a very different thing, and I too often see economists mix these 2 up. In this case, it is the average total net earning of a citizen (include any known traits such as age, if you wish)

Rami Chowdhury / 2007-05-05 23:22:

@Esben Mose Hansen: Actually, gambles do sometimes pay off, and there are studies that examine when people do and don't take them. And given the way the insurance market works, a prudent person would take out life insurance when young (with no dependents, and a low premium) in order to maximize their benefit for when they *do* have dependents. Economists assume people do rational things like this.

Now, people may not always behave rationally, but no attempt to explain or predict in a scientific manner will work.

I believe in economists because, while economics as a science is not perfect -- there are always corner cases, because people don't behave consistently -- but if you aggregate them into large enough numbers it comes out with some pretty useful results. You might as well doubt quantum physics because one atom in one experiment didn't behave exactly as predicted...

(For clarity's sake I should point out I have a degree in economics, and may be biased ;))

Roberto Alsina / 2007-05-05 23:26:

Rami: I don't expect **one** chicagoan drug dealer to refuse to die for $100000. I expect all of them to do so ;-)

superstoned / 2007-05-06 02:03:

Economists have a tendency to try to count things, preferably in terms of money, which does lead to weird things. Roberto sees this calculation, and discovers that people don't follow the logical rules. Indeed, they don't, they behave irrational. But that doesn't change the value of the calculation, it's just that it is only ONE way to look at it, not THE way. This is pretty much like in psychology, where in most cases several pretty different theories are considdered valid. Each can contribute to understanding, but none of them is perfect. Economy IS a kind of psychology, both try to understand and predict human behaviour. Neither is exact science - and they will (hopefully) never be.

Roberto Alsina / 2007-05-06 04:04:

Superstoned: ok, if they give up pretense of being a science, then this is a non-issue. I doubt economists would be happy with that path, though ;-)

If you try to measure something, and claim to have estimated a thing, and there is an obvious way in which that estimate is wrong, then, well, it's just not a very good estimate, not one of several estimates that are right.

superstoned / 2007-05-06 10:04:

Roberto: I don't think many economists would call their science an exact one, just like you wouldn't find many psychologist who would say so. And that's not necesarily a bad thing, really. We're dealing with humans and their behaviour. You can't predict it.

Let's give an example: there are several ways to calculate the value of a company. You can count it's assets, try to predict how much it is going to earn, etcetera. Still, the theoretically best value to measure is worth is the stockvalue. But the stock value isn't rational - expectations, hypes, they play a role. Still, it is considdered the best guess. The market takes into account things which you can't count, and economists know that. That's why the market works well - it is NOT rational. No single person or calculation can really tell you how much something is worth, but the collection of all knowledge of all ppl on the market (who collectively determine the value of a share) is the best approximation of the theoretical 'real value'.

this is how you must see this calculation: you can't know the 'real value' of a life, but use the market-mechanism to come as close as possible. look at behaviour, try to figure out how the person seems to value his life himself. And I'm pretty sure the economist who did this calculation knows the limitations. If you would present your argument, he would agree, and say it's one way to look at it, it's not possible to be sure.

(I studied psychology, and took some basic economy classes as well. They said in the introductionary course "we're some kind of psychologists", and I think they where right)

Rami Chowdhury / 2007-05-06 10:05:

I agree with superstoned here -- it's not an *exact* science, but it *is* a science :) Think of it this way -- give a drug dealer in Chicago the choice of life or $100000, and you're right he'll probably choose life. Give him the choice of $100000 for participating in an almost-certain-death raid against a rival gang, or $0 and staying safe, and it's possible he'll choose the $100000, and indirectly have made the same choice but with a different outcome...

Lion Kimbro / 2007-05-07 22:43:

A quote I heard..: "Economists are like computers-- you have to punch facts into them."

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