Thaler-Massey winners and losers from the NFL draft 2009

Economist Kevin Hassett has taken to assessing NFL teams’ draft choices based on the Thaler-Massey strategy, which emphasizes a player’s value (based on performance and salary).

Hassett identifies four winners: New England Patriots, Denver Broncos, Detroit Lions Lions, and New York Giants.

New England’s coach, Bill Belichick,…ditched his first-round pick altogether and loaded up on four second-rounders. In addition, he traded some of his later picks for other teams’ second-round picks next year. The big news is that the Giants maneuvered to get two second-round and two third-round picks, elevating their final scores.

The big losers were the Washington Redskins, the New York Jets, and the San Francisco 49ers.

The Redskins once again revealed their extreme economic ignorance, trading away their second-round and fourth-round picks…The Jets made a classic error, falling in love with University of Southern California quarterback Mark Sanchez and virtually guaranteeing they will have a large number of undrafted scrubs on their roster. Given the high salaries at the top of the draft, Sanchez will probably not generate much value above that demanded by his salary, even if he becomes a superstar.

Thaler loves the Patriots draft and also gives a positive review to the Cleveland Browns. After entering the draft with the 5th pick overall, the Browns traded down three times to take center Alex Mack with the 21st pick, plus defensive end Kenyon Coleman, quarterback Brett Ratliff, safety Abram Elam, a second round pick from the Jets, and sixth round picks from the Buccaneers and the Eagles. That’s a lot of chances to pick up some solid starting players. Football pundits didn’t think so highly of the Browns draft, but none of them are economists.

More information about seniors’ prescription drug choices is coming in. It’s not looking good.

Two MIT economists recently published the most comprehensive study to date on seniors’ choices under Medicare Part D, the government’s massive prescription drug program passed in by Congress in 2003. Looking at nearly half a million seniors participating in Part D, Jason Abaluck and Jonathan Gruber tracked both the choice of plan and prescriptions filled, and then compared the two to see if those individuals could have selected a different available drug benefit plan and saved money. They found that 70 percent of seniors are not choosing the most efficient plans, meaning there were unselected alternatives that offered better risk protection for less money. If these seniors opted for the best plan, Abaluck and Gruber estimate they could have saved about 27 percent of their total costs.

Instead, it seems that seniors are making three major errors in their plan selection:

1) Seniors weight plan premiums far more than expected out-of-pocket costs.

2) Seniors choose to pay for extras like donut hole coverage and low deductibles that they don’t need. They also prefer plans that cover more drugs, but they lack the foresight to decide which plans cover drugs they might need in the future.

3) Seniors do not appreciate the risk-reducing aspects of plans themselves. For instance, they aren’t willing to pay more for plans with lower variance in expected spending, which could save them money if there is a spike in prescription drug costs on year.

The bottom line is that seniors could have saved quite a bit of money without sacrificing many benefits if they had chosen one of the lowest cost options in their state. Don’t be turned off just because a plan is inexpensive. It may fit you just fine.

A gated version of the paper is here.

The hometown bias puzzle in investing

In its chapters on investing, Nudge puzzles over the “home bias puzzle,” in which investors in a given country tend to overweight their portfolios with stocks from that country. So for instance, although U.S. equities make up less than half of the global stock market, most U.S. investors’ portfolios are dominated by them. This kind of geographical proximity in investing is often explained by differences in regulation, culture, and taxation between nations, as well as differences in understanding about home versus foreign companies. These frictions can occur within nations as well, according to Tobias Moscowitz (of Chicago’s Booth School of Business) and Joshua D. Coval, leading to what might be called the “hometown bias puzzle.”

Using a unique database of mutual fund managers and company locations, identified by latitude and longitude, we find that the average U.S. fund manager invests in companies that are between 160 to 184 kilometers, or 9 to 11 percent, closer to her than the average firm she could have held. Alternatively, one out of every ten companies in a fund manager’s portfolio is chosen because it is located in the same city as the manager. With a variety of measures used, the null hypothesis of no local equity preference (or local bias) is consistently rejected, demonstrating that the distance between investors and potential investments is a key determinant of U.S. investment manager portfolio choice.

Why the hometown bias? Familiarity and understanding.

We find that local equity preference is strongly related to three firm characteristics: firm size, leverage, and output tradability. Specifically, locally held firms tend to be small, highly-levered, and produce goods not traded internationally. These results suggest an information-based explanation for local equity preference, since small, highly levered firms, whose products are primarily consumed locally, are exactly those firms where one would expect local investors to have easier access to information and are firms in which such information would be most valuable.

A pdf of the working paper is here.

What does Kathie Lee Gifford have against Nudge?

Cosmopolitan magazine’s book editor stopped by the Today show last week to pick the top 10 books for spring. Nudge made the list as the only non-fiction book. Kathie Lee Gifford didn’t seem too interested. Ouch! (The video has been taken down from its original site, but here is another link. Nudge part starts at about 3:35.)

Barack Obama’s nudge-ocracy

The New Republic calls it his “new theory of the state.”

Obama has set out to synthesize the New Democratic faith in the utility of markets with the Old Democratic emphasis on reducing inequality. In Obama’s state, government never supplants the market or stifles its inner workings–the old forms of statism that didn’t wash economically, and certainly not politically. But government does aggressively prod markets–by planting incentives, by stirring new competition–to achieve the results he prefers. With health care, for instance, he would make it easier for employees to tote their insurance from job to job, eliminating the disincentive for insurers to invest in preventive care. Or take his bank plan, which helps banks dispose of their toxic assets, reducing uncertainty and making the banks more attractive to private investors–a far less drastic step than nationalization. Rather than force markets to conform to his wishes, he shapes their calculus so they conclude (on their own) that their interests coincide with his wishes.

The “-ocracy” label is about as unpopular as libertarianism and paternalism, so the term joins a proud, long tradition. The full piece is here.

A pre-earth day nudge: “Paper, plastic, or personal?”

Using canvas shopping bags at the grocery story instead of the usual paper or plastic ones is one small way to help save the planet. Many companies have adopted strategies for encouraging people to bring their own bags from home by giving small rebates, charging small fees for plastic bags, or placing displays for reusable bags near the checkout counter.

Reader Will Katz sends along another approach stores may want to consider using. Instead of asking customers if they want to use “Paper or plastic?” Katz suggests that clerks tweak the question by asking “Paper, plastic, or personal?” He says there are lots of advantages.

-It costs nothing to implement.
-It plants the seed of an idea in shoppers’ minds and reinforces it every time they shop.
-It keeps the alliteration, making it more memorable.
-As more people got in the habit, bag usage would extend to other stores or shopping situations.
-If the supermarket provided canvas bags for sale at the checkout area, implementation would be immediate.

And if supermarkets didn’t provide canvas bags in the checkout aisle (say, because the markup on candy is a lot better), reminding the customer about reusable bags would still be a worthy service.

Assorted links

1) Richard Thaler on his trip to the U.K. in the Financial Times.

2) Do you remember the last time you gorged on food? Chances are you gorge a lot less than people who don’t.

3) Richard Thaler’s Newsweek diary on saving.

4) Wayne Smith points out how the recently concluded Designing Better Health “nudge” contest follows Parkinson’s Law. Ahem, people procrastinated.

Another alarm clock for the collection

This one requires you to complete a puzzle involving shaped blocks.

Hat tip: Chad Valasek

Our first bleg: Request for child rearing nudges

The first bleg to our readers had to come at some point.

Have you discovered or created any tricks for raising kids based on the ideas in Nudge?

Something like a computer login that asks your child if she’s finished her homework yet?