John Cochrane recently released a blog post about the discrepancy between academic work and policy advice in macroeconomics. He criticizes that consulting for the policy world is most often based on economic methodology such as static IS-LM/AS-AD models. These date back 40 years and have largely disappeared from the academic landscape.
This current state is puzzling. At least one of the reasons why we do economic research is to better guide policy makers to more sensible interventions to the economy. So either “academic research ran off the rails for 40 years producing nothing of value” or we hold back the diamonds for our little elite circle in the ivory tower. I have seen quite some policy related work myself. Thus, I want report from my own field – innovation economics. Continue reading What’s wrong with policy advice?
Game theory has all sorts of interesting applications. In their classic textbook from 1991, Drew Fudenberg and Jean Tirole (this year’s Nobel prize winner in economics, by the way) present an example for a War of Attrition from biology. Two animals are fighting for a prize, let’s say food or a mating partner. Fighting, as you might expect, is costly in terms of energy and because of the possible injuries you might suffer. Both animals do not know the strength of the other. Which means, they do not know how long exactly the opponent is able to withstand* (they might have had some sparring sessions though). As the fight goes on, both animals become more and more pessimistic about the strength of the other. And because the costs of fighting are accumulating, eventually one of them will drop out, leaving the prize up to the other.
Although we occasionally observe fights to the death, these are very rare and most of the times they end with exhaustion and only minor injuries. The goal is winning a fight with the least possible amount of effort. Anything beyond that, risking serious injuries, would be a huge waste of resources, even for the winner. When your enemy appears to be too strong, you rather opt out and try it next year than going all-in.