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Posts Tagged ‘Thomas Schelling’

Economics and Global Climate Change

In popular economics, reblog on July 15, 2009 at 11:53 am

Conor Clarke, correspondent for The Atlantic, lists the reason why it’s difficult to make sense of global climate change after his interview with Thomas Schelling, who won the 2005 Nobel Prize in Economics. Schelling has been recognized in the field of game theory, which is the study of strategic situations. A strategic situation, by layman’s definition, is simply a situation where the outcome of one’s decision is affected by the decision of another party.

The rationale for the interview is to contextualize the issue of global climate change in complicated bargaining agreements among nations. Part one of the interview can be found here. He summarizes the difficulty of making sense of the issue in the following:

1. Any solution to climate change must have a theory for what the present generation owes future generations. That’s hard. How do we weigh the interests of people that don’t yet exist?

2. Any global solution to climate change must take account the fact that the costs of warming will be borne unevenly around the world. Parts of the northwestern United States will actually benefit from a warmer climate. Bangladesh will not. But why should the U.S. care what happens in South Asia?

3. Any solution should account for the fact that the responsibility for global warming is also borne unevenly. The developing world will bear most of the costs, but the developed world bears most of the responsibility. (My understanding is that this will change at some point in the next 50 years.)

4. Related to #2, the world’s ability to adapt to a changing climate is distributed unevenly. It would surprise no one to learn that wealthy nations will have an easier time adapting than poorer ones. So should we allow poorer nations to pursue the most rapid growth possible, before the consequences become dire? Or should we pursue a solution that achieves the maximum possible reduction in global emissions?

5. There is a great deal of uncertainty about what will happen. To be sure: There is no (repeat, no) scientific uncertainty as to whether or not the climate is warming. It is. But the question is, By how much? And when? Will the temperature increase by two degrees Celsius over the next 100 years? Three degrees? Seven degrees? The differences matter.

6. Climate change has an incredibly long time horizon. Any small cost or small chance of a catastrophic outcome must to weighed across hundreds or thousands of years. There is also one-way ratchet here: It isn’t clear everything we change about the climate can be reversed.

7. Global warming asks us to weigh economic factors — growth, GDP — against non-economic ones, like the diversity of species and the amount of arable land on the planet. I have absolutely no clue how to do that.

Thomas Schelling

Related post:
Game Theory of Washing Dishes

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How to read your own books

In academia, popular economics on June 3, 2009 at 5:02 pm

You love buying books, but once the titles are in your shelf, you just kind of stare at them and read books you do not own.

It makes sense. Books you lend are transient, while books you own are permanent. You just want to maximize limited privileges (library, friends, anyone?). That’s why a criterion I use in buying a book is that I shouldn’t want to read it right away. But ten years have passed and I still have dusty Austen, yellowing Twain and crispy Dickens, untouched like wrinkled virgins. How many of us are guilty of this cognitive bias?

Perhaps you should turn to economics. It’s time to get over what Richard Thaler calls the endowment effect, which makes us value the things we own more than what they were worth when we did not own them.

Thomas Schelling, whose work on conflict and cooperation through game-theory analysis won him the 2005 Nobel Prize, proposes an art of self-management he calls egonomics. He says each individual has a kind of split personality — for instance, one part wants to read the books in the shelves, while the other wants to play a simulation game instead.

You can force a cooperation between two conflicting parties through precommitment, which is a strategy that Schelling recommended in nation-state wars. The idea is for you to cut off your options to retreat or give up, hence making your threat credible. The credibility of the threat will deter the conflict, and the end result is avoidance of war (“you go to war to prevent it”).

Precommitment can cure the endowment effect. Simply threaten yourself to let go of your books, and see if you still won’t read them. The only catch is that the threat must be credible. Leave no option of retreating.

I did this by auctioning my books on eBay, where there’s a constant threat that a book will be sold. When someone bids for a book, I quickly pick it up from my shelf and read it before finally shipping it to the customer. I would feel sorry for myself if I did not read the books before letting them go.