Only the formality of full Senate confirmation stands between Troy Paredes and the SEC following unanimous approval from the Senate Banking Committee.  Congratulations, Troy.

UPDATE:  [Someone claiming to be] Chairman Cox points out in the comments that Troy was in fact confirmed by the full Senate last week.  Indeed, it is true.  Not much fanfare, but a great development, nonetheless.

My tour of duty as the FTC Scholar in Residence came to an end this past week.  It was a fantastic opportunity for a junior scholar that I am grateful to have had.  Plus, I couldn’t have picked a more interesting year to be at the Commission.  Anyway, I’ll have more to say about all of that later.  For now, I’ll be leaving Arlington tomorrow afternoon for a few weeks of vacation before heading off to Austin where I am very excited to be visiting next year at the University of Texas School of Law.  Blogging is likely to be slow on my end for the next 2 weeks or so, but in the meantime I’m definitely in the market for some good advice on places to eat and family friendly things to do in Austin.   I’m told there is no shortage of either.  Feel free to leave ideas in the comments or send them to me by email.

Related to Thom’s post on behavioral economics and the problem of conflicting or offsetting biases, the American Antitrust Institute (AAI) held a conference on June 18^th 2008 (audio available at the link above). The conference was, as I understand it, designed as a precursor to the AAI’s release of a “Transition Report” to the next administration, offering its own view of antitrust enforcement agenda. The conference kicked off with a keynote from Donald Langevoort (Georgetown), filling in for Cass Sunstein, on behavioral economics and its potential role in antitrust followed by a panel discussion. After listening and reading Thom’s post, and informed by some of the work that I’ve done comparing the empirical predictions of “traditional” microeconomic theory with behavioral economics in consumer contracting markets and finding that the former outperforms the latter, I had a few reactions to what I heard from the keynote and panelists.

The first was that I was surprised at how willing the panelists were to take the various behavioral and experimental insights as “given” for the purposes of antitrust analysis in light of influential papers calling into question their robustness, e.g. Zeiler and Plott I or Zeiler and Plott II with respect to the “endowment effect.” In fact, the keynote began with a long discussion of the endowment effect which asserted that the findings were robust and well established. The tone of panel as a whole was that the results were generally assumed to be verified, robust, and “ready for primetime” in terms of translation into policies. Papers challenging the existence or robustness of these results or outlining their limitations (e.g. learning, specialization, competition) were not mentioned (if they were I missed it).

The second was that I didn’t hear anything about what Thom calls the “conflicting quirks” problem. Of course, as Dan Ariely notes in his comment to Thom’s post, behavioral economics is a young science and many of these issues remain to be worked out. My point is not that they will not be or cannot be. That remains to be seen. Rather, I’m saying that the appropriate point to raise these issues seems to be before we regulate or alter the research agenda based on the existing literature.

Third, there was little discussion about how an antitrust agenda informed by behavioral economics would deal with the problem of behaviorally biased regulators making systematic errors. I did appreciate hearing some discussion of the problem of extrapolating laboratory results to firms, though this strikes me as a much larger problem than the discussion suggested. All in all, it was an interesting panel discussion and keynote and definitely worth a listen.  But I’d like to see a more rigorous theory of incorporating behavioral economics into antitrust, and particularly a theory that addresses some of the objections discussed above, before one takes seriously the notion of altering competition policy to make room for these experimental results.

It should be no surprise that the inventor of the poison pill is pro-director, but Marty Lipton’s remarks at a June 25 conference at the University of Minnesota Law School left no doubt that he truly believes in his heart of hearts that we’re better off with strong, unencumbered boards. According to the WSJ’s deals blog (quoted in today’s print edition), Lipton wondered aloud whether the move to shareholder-centric governance will “simply overwhelm American business corporations.” He also remarked:

The board-centric model of governance is premised on the notion that boards merit the vote of confidence of shareholders and the public markets, and notwithstanding the strong current of distrust that runs through many corporate governance reforms, history has proven this vote of confidence to be well-deserved. I believe it is the only way to assure that public corporations will be able to compete with the state corporatism that is transforming the economies of China, Russia, and other rapidly industrializing countries, cope with the demands for short-term (and shortsighted) stock gains by activist hedge funds and make the long-term investments in the future of their businesses that are essential for the future prosperity of our nation.

Apparently, the Local Government Association has told British bureaucrats in local and town governments to stop using 100 “non-words.” (CNN) From the story:

The list includes the popular but vague term “empowerment;” “coterminosity,” a situation in which two organizations oversee the same geographical area; and “synergies,” combinations in which the whole is greater than the sum of its parts. Officials were told to ditch the term “revenue stream” for income, as well as the imprecise “sustainable communities.” The association also said councils should stop referring to local residents as “customers” or “stakeholders.” The association’s chairman, Simon Milton, said officials should not “hide behind impenetrable jargon and phrases.” “Why do we have to have ‘coterminous, stakeholder engagement’ when we could just ‘talk to people’ instead?” he said.

Legal academics are certainly not immune to anything ranging from the use of non-words to scholarly cliches and “ostentatious erudition.” There is even academic buzzword bingo. Any good examples of words that should make the list of top 100 words never to be seen again in law reviews?  Because I just read an article that used the word “modalities” 51 times in about as many pages, I’ll start there.

The new issue is available here, and features the following articles in Class Certification and Antitrust Actions:

Why Economics Now Matters for Antitrust Class Actions at the Class Certification Stage
by Wendy Bloom (Kirkland & Ellis)

The Potential Impact of Twombly on Antitrust Class Actions
by Wendy Bloom (Kirkland & Ellis) and James Langenfeld (LECG)

Opening the Curtain: Why Economics is Taking Center Stage in Class Certification Battles in Antitrust Cases
by John Majoras (Jones Day)

Assessing Antitrust Injury in the Class Certification Context
by William Rooney (Willkie Farr & Gallagher) & Kristin McNamara (Willkie Farr & Gallagher)

Economic Analysis of Class Certification
by Richard Schmalansee  (MIT Sloan School of Management)

And the following articles on MERGER REVIEW IN THE UK:

A New Style of Merger Review in the UK: Perspectives and Proposed Reforms
by Andrea Gomes da Silva (Freshfields)  & Manish Das (Freshfields)

Comment on the OFT and Competition Commission Merger Guidelines Review
by Thomas Sharpe QC (One Essex Court)

The OFT Draft Mergers Jurisdictional and Procedural Guidance and key Issues Arising in UK Merger Control
by Sheila Tormey (Barlow Lyde & Gilbert)

Yesterday the W$J ran an article with the above-referenced title (see here). The gist of the article is that whenever a household is blessed with an unexpected windfall, it will be cursed by an equal, unexpected cost. When I read the column, I thought to myself that it’s funny because it’s true. Now I’m thinking it’s true but not so funny. Earlier this week I learned that I’m getting a bigger than expected raise for the coming year. Well, a few hours ago my wife called me from the orthodontist to tell me that my oldest son needs braces. After answering the question of “how much is that going to cost us” she remarked “there goes the raise” and she hadn’t even read the article. Damn the law of household economics.

I’ve been spending quite a bit of time with the behavioralists lately. I recently read Dan Ariely’s interesting book, Predictably Irrational: The Hidden Forces that Shape Our Decisions. Then I heard Tom Ulen give a nice overview presentation at the recent Silicon Flatirons conference on the New Institutional Economics. I’m currently reading Cass Sunstein and Richard Thaler’s, Nudge: Improving Decisions About Health, Wealth, and Happiness, which argues that public policies should be structured (by “choice architects”) to account for the various cognitive quirks behavioralists have discovered.

I must admit, I’ve had plenty of misgivings about behavioralism in the past. Mainly, I’ve suspected that the empirical evidence purporting to demonstrate major, systematic cognitive quirks was not all that strong. For example, I believe (though I’m not sure) that I was a subject in one of those coffee mug experiments that purports to establish the endowment effect. We did one of those exercises in one of my law school classes. If that’s the sort of experimental data underlying this supposed quirk, it’s hardly robust. Indeed, as Josh has explained, Charles Plott and Kathryn Zeiler recently showed that the endowment effect studies reach quite different conclusions when the questions are posed differently.

In addition to questioning the quality of the underlying empirical data, I’ve suspected that behavioralists are too quick to draw conclusions — both positive and normative — from their experimental findings. I once wrote a short response piece titled Two Mistakes Behavioralists Make, where I criticized two symposium participants for jettisoning rational accounts too quickly in attempting to explain survey findings and for being too quick to advocate governmental solutions to various cognitive quirks (with little regard for government’s own institutional maladies).

But I don’t want to be a knee-jerk ideologue. When facts conflict with theory, facts must prevail. To the extent people do depart systematically from the rational choice model of human behavior, we need to tweak the model accordingly. And when we’re crafting public policies, we ought to take account of the behavior of real people (“humans” as opposed to “econs,” to use Sunstein and Thaler’s lingo).

The challenge for the behavioralists is to set forth a predictable (and thus useable) model of human behavior that improves upon the rational choice model by accounting for the well-established, systematic departures from rationality. That’s presumably what books like Dan Ariely’s Predictably Irrational are trying to do. But there’s still lots of work to be done in this area.

A particularly vexing problem, I believe, is the difficulty of conflicting quirks. What do we do when one heuristic would lead humans to reach a particular non-rational conclusion and another simultaneously operative heuristic would push in the opposite direction? Which heuristic trumps? We need to know that so that we can predict what conclusions people will reach.

Consider, for example, chapter one of Sunstein and Thaler’s book. The chapter, titled “Biases and Blunders” aims to sketch out the mental shortcuts we humans use in judging the magnitude of risks. The authors discuss the well-known “availability heuristic,” pursuant to which people “assess the likelihood of risks by asking how readily examples come to mind.” They explain that “[i]f people can easily think of relevant examples, they are far more likely to be frightened and concerned than if they cannot.” (So, for example, we tend to think that homicide is more common than suicide because we hear about homicides more; in reality, suicide is far more common.) Sunstein and Thaler also discuss people’s overconfidence bias, which leads us to be overly optimistic about our own abilities to avoid bad outcomes (e.g., 90 percent of drivers believe they are above average behind the wheel).

So what would we predict about human risk judgments when both of these heuristics are operative? Take, for example, gay men’s estimates of their risk of contracting HIV. On the one hand, gay men are much more likely to know people infected with HIV and to have observed the highly salient, agonizing death of friend or acquaintance suffering from AIDS. (The more salient a bad outcome, the greater its perceived risk.) On the other hand, because the behavior leading to HIV infection is generally voluntary, the overconfidence bias is likely to kick in. Which bias would we expect to trump?

Sunstein and Thaler point to gay men’s perceptions of their own HIV risk as exemplifying the overconfidence bias: “Gay men systematically underestimate the chance that they will contract AIDS, even though they know about AIDS risks in general.” But what happened to the availability heuristic and the salience bias?

Perhaps I’m demanding too much here. Even the rational choice model can’t predict human judgments when individual preferences push in different directions (e.g., will a lawyer who values money, leisure, and the life of the mind give up a lucrative law firm job to become a law professor?). But I do think that if we’re going to complicate the rational choice model with a bunch of quirky “exceptions,” we need some account of how the quirks interact when they conflict. Otherwise, we won’t be able to say that humans are predictably irrational.

The Supreme Court has granted cert in Pacific Bell Telephone Co., dba AT&T California v. linkLine Communications in order to address the question of whether a Section 2 “price squeeze” claim is viable under the Sherman Act if the defendant has no duty to deal.  (HT: Scotusblog, which also has all of the relevant links).   The “price squeeze” claim alleges that the defendant— typically a vertically integrated retail competitor with a monopoly at the wholesale level— leaves too small a margin between wholesale and retail prices to allow the plaintiff to compete.

Of course, one of the most interesting aspects of the case is that the Solicitor General’s amicus brief favored granting cert whereas the Federal Trade Commission Statement recommends denial.   If the recent trends of the Robert Court’s antitrust jurisprudence hold, the combination of consensus view that “price squeeze” claims don’t make economic sense or improve consumer welfare and the Solicitor General’s recommendation means that the smart money is that the Court will abolish the price squeeze theory of liability.   I predict at least 7 votes in the majority.

Bill Henderson has some thoughtful commentary on Northwestern University’s announcement of its 2 Year JD.  He likes it.  Here’s an excerpt:

So let’s get this straight:  NWU Law is going to attract applications from all the experienced, motivated students who want their elite JD degrees in two years versus three.  Then it is going to give them, through mandatory coursework, business training that will bridge the traditional gap between lawyers and their MBA clientèle.   Sorting plus training.  Why would an employer prefer a 25 year-old fresh out of another elite law school?  Because the education was stretched over 32 months rather than 24 months–that trumps work experience and mandatory business training?

Read the whole thing.  Bill looks to the market for evidence that the NWU program is a good idea (and finds it).   As an economist, I am inclined to agree with Bill that this approach is superior to ” taking a poll in the faculty lounge.”  Along those lines, there is a rule of thumb in antitrust analysis that a fairly reliable indicator for assessing the competitive effects of some proposed conduct: if customers complain, the conduct is likely to be anticompetitive, but if it is competitors that are complaining, the proposed conduct probably makes the firm a more effective competitor and is good for consumers.  Through this lens, the critical comments from representatives of Northwestern’s in state rivals University of Chicago and University of Illinois (Chicago Professor Geoff Stone went so far as to describe the program as “irresponsible”) look like good news for consumers of legal education.

Chairman Kovacic has posted a paper announcing a major self-assessment initiative at the FTC: The FTC at 100: Into our Second Century.  Here is the opening paragraph:

Albert Cummins was one of the chief sponsors of the Federal Trade Commission Act of 1914. In the weeks before the passage of the legislation that would create the Federal Trade Commission (FTC), Cummins predicted that the new agency “will be found to be the most efficient protection to the people of the United States that Congress has ever given the people by way of a regulation of commerce.”  Just over six years from now, the FTC will reach the one hundredth anniversary of the statute that gave it life. How well is the agency fulfilling the destiny that Congress foresaw for it in 1914? What type of institution should we aspire to be when the Commission’s second century begins in 2014?

The motivation of the presentation was the announcement of the FTC’s self-assessment project which will take the form of external consultations and workshops involving academics, industry and agency officials starting in late July and extending throughout the calendar year.  in the United States and abroad.  The self-assessment will focus on six questions and themes identified by the Chairman:

1. First, when we ask how well the Commission is carrying out its responsibilities, by what criteria should we assess its work?
2. Second, by what techniques should we measure the agency’s success in meeting the normative criteria by which we determine whether the agency is performing well? Once standards for assessing performance are chosen, it is necessary to decide how to apply them. How, in other words, are grades to be calculated?
3. Third, what resources – personnel, facilities, equipment – will the FTC need to perform its duties in the future?
4. Fourth, what methods should the FTC use to select its strategy for exercising its powers?
5. Fifth, how can the FTC strengthen its processes for implementing its programs?
6. Sixth, how can the FTC better fulfill its duties by improving links with other government bodies and nongovernment organizations?

From the Mississippi College School of Law:

The Mississippi College Law Review is issuing a call for papers
pertaining to antitrust law. The Law Review has published several themed
issues in the past two years, and wishes to publish an article
concerning antitrust, as the Law Review has not published any articles
on this topic in several years.  We hope to increase the quality of our
submissions significantly and to attract a diverse mix of academics and
practitioners who each wish to contribute thoughtful dialogue on the law
in his or her subject of expertise.

Articles are recommended to be at least 25 pages of double-spaced text.
Depending on article length, the Law Review anticipates that one or two
articles on antitrust could be selected and published in a single
volume.  The deadline for article submission is August 1, 2008.
Synopses of works-in-progress submitted by July 1, 2008 will also be
considered, given an understanding that a final draft would be due
September 1, 2008.  The Mississippi College Law Review does not accept
work of current students of other law schools.  Submissions may be sent
to lawreview@mc.edu.

Thanks!

Sincerely,
Kaytie Pickett
Articles Editor
Mississippi College School of Law

So says Jagdish Bhagwati about the recent objections by 100 or so University of Chicago faculty members to the establishment of the Milton Friedman Institute.  (HT: Chicago Tribune).  Here’s the whole quote as reported from the Chicago Tribune:

“It is nonsensical to object. . . . Chicago should be proud it has someone like Milton on its rolls … . Anybody who can claim that Milton was not one of the major thinkers of his time is crazy.

A copy of the letter sent to the U of C President and Provost is available here.  The faculty proposal for the MFI is here.  I cant find the identities of the signatories anywhere.  I’m particularly interested to know whether any members of the University of Chicago Law School signed this or alternatively, have publicly supported the Milton Friedman Institute given that its mission as described in the Tribune article includes “attract[ing] visiting scholars who will conduct research on topics related to economics, business and law.”  The proposal indicates that Eric Posner is the sole law school member of the MFI faculty committee, along with Lars Peter Hansen, Gary Becker, John Cochrane, James Heckman, Robert Lucas, and Kevin Murphy.

Crooked Timber has a very interesting post up on the minimum wage debate (HT: Brian Leiter).  I want to comment on the sub-theme of the post (and the theme picked up in the title of Leiter’s post), which was that economics ideologically driven by pro-market bias which results in the publication of pro-market findings over those that would favor regulation or demonstrate some sort of market failure.  Here’s an excerpt:

Another thing that must be pointed out: given the anti-regulation ideological bias of the economics profession as a whole, it’s not hard to imagine that studies that do find that the minimum wage has a disemployment effect are considerably more likely to be published.

And later:

The ideological character of much of the economics profession in the United States suggests that there are rewards for producing scholarship that confirms the idea that the minimum wage causes unemployment, and punishment for scholarship that finds otherwise.

I am not a labor economist and don’t have much to say about the substantive economic disputes here.  Card, Krueger, Kevin Murphy and others can certainly fend for themselves.  But I want to make two points here that are relevant to this larger debate about what Leiter describes as the “ideological character of economics.”

The first is that the evidence that the economics profession exhibits a pro-market bias is suspect (see, e.g., Klein & Stern (2007)).  I do not dispute that there might exist pockets or sub-specialties of the economics world where a pro-market bias influences what scholarship is published in top journals, though I have no evidence in support of that proposition.   It becomes popular once a year or so to lament the free-market nature of the economics profession.  Last year, it was in conjunction with this NY Times piece, which prompted several economists to respond.  My favorite came from Mankiw who wrote:

Many economists in the past have questioned “free-market orthodoxy”–for example, Samuelson, Tobin, Modigliani, Solow, Sen, Stiglitz, Akerlof, Phelps,…. Does the economics profession consider these guys “deluded or crazy?” No, we give them Nobel Prizes! Maybe it’s because I have spent my education and career at Princeton, MIT, and Harvard, rather than Chicago, but I have never viewed the economics profession as being dominated by free-market orthodoxy.

The point is that these caricatured descriptions of the political leanings of economists, and the trouble facing those who dare to dissent from the “free market orthodoxy” are overplayed.

The second point, and one which I‘ve mentioned before, is that my own experiences in industrial organization economics and law and economics more generally, I strongly disagree that there is any sort of “free market orthodoxy”.  I wrote previously:

I find these observations [ed: that free market dissenters do quite well within the profession] consistent with my experience in the antitrust branch of industrial organization economics where top journal publications are in large part reserved for theoretical models demonstrating the possibility that some conduct might be inefficient or result in market failure under some set of (usually fairly stylized) conditions. As a colleague of mine once warned: “nobody gets tenure for demonstrating that markets really work.” At the end of the day, I highly doubt that any “interventionist leaning” antitrust economists are looking over their shoulder in fear of the AEA taking back their membership.

While I am not prepared to back the statement with evidence, casual empiricism suggests to me that free market economic principles do not dominate the “law and economics” world either. A look at the ALEA program for the last 5 or so years would probably confirm this suspicion. For example, I don’t believe any law school L&E types would be willing to support the position that those relying on behavioral L&E insights to argue in favor of various intervention proposals have suffered on the job market, in law reviews or peer-reviewed journals, or amongst their peers in recent years. Perhaps I’m wrong about this. If you think I’ve underestimated the plight of the dissenters in the L&E world in particular, I’d love to hear about it in the comments.

My anecdotal evidence in IO, antitrust, and law and economics certainly does not prove that no such free-market bias exists in other pockets.  Perhaps labor economics is different.  Or perhaps I’m wrong about my own fields.  But my sense is that the ideological character of modern economics is driven by much less pro-market bias than the post at Crooked Timber suggests and it is no longer accurate to talk about the “anti-regulation ideological bias of the economics profession as a whole.”