Thursday, May 24, 2007

The government we deserve

Bryan Caplan recently published a book "The myth of the rational voter", arguing that bad policies are less often the result of vested interests than of politicians responding to the irrational biases and ignorance of voters politicians pandering to the biases of stupid and ignorant voters- biases which the politicians often share.

Greg Mankiw called it the best book he has read lately.

I came across the story of Sergei Mavrody while browsing Blanchard's Marcoeconomics- it could have been used as a case study in that book.

From Blanchard (emphasis added):

In 1994 a Russian "financier," Sergei Mavrody, created a company called MMM and proceeded to sell shares, promising shareholders a rate of return of at least 3000% per year.

The company was a huge success, its share price increasing from 1600 rubles in February t0 105,000 rubles in July.

The trouble was that the company was not involved in any kind of production and held no assets, except for its 140 offices in Russia. The shares were intrinsically worthless. The company's initial success was based on a standard pyramid scheme..Despite repeated warnings by Government officials, including Boris Yeltsin, that MMM was a scam and that the increase in the price of shares was a bubble, the promised reurns were just too attractive to any Russian people, especially in the midst of a deep economic recession.

The pyramid collapsed by the end of July 1994 and the company closed but

Mavrody tried to blackmail the government into paying the shareholders, clamining that not doing so would trigger revolution or civil war. The government refused, leading many shareholders to be angry at the government rather than Mavrody. Later that year, Mavrody actually ran for Parliament, as a self-appointed defender of shareholders who had lost their savings. He won!

Warms the cockles.

Postscript: I was reminded of this post in Free Exchange, which quotes Anthony de Jasay

There is a subconscious belief in France that the state does not pay Paul by taking the money from Peter. It just gives it to Paul, and Peter is not made worse off. This is so because the money sits in an imaginary reservoir and the state can "unblock" it (debloquer is the French word used to describe this happy event). . .

Is this true? I don't know. Does it seem plausible? Sure does.

The Economist as Science Fiction writer

Tom Schelling repeatedly surprises you.

From his essay Self-command in Practice, in Policy, and in a Theory of Rational Choice

A second experiment: some anesthetics block transmission of the nervous impulses that constitute pain; others have the characteristic that the patient responds to the pain as if feeling it fully but has utterly no recollection afterwards. One of these is sodium pentothal. In my imaginary experiment, we wish to distinguish the effects of the drug from the effects of the unremembered pain, and we want a healthy control subject in parallel with some painful operations that will be performed with the help of this drug. For a handsome fee you will be knocked out for an hour or two, allowed to sleep it off, then tested before you go home. You do this regularly, and one afternoon you walk into the lab early and find the experimenters viewing some videotape. On the screen is an experimental subject writhing, and though the audio is turned down the shrieks are unmistakably those of a person in pain. When the pain stops the victim pleads, "Don't ever do that again. Please."
The person is you.
Do you care?
Do you walk into your booth, lie on the couch, and hold out your arm for today's injection?
Should I let you?

Worthy of Philip K. Dick.

Where are those huddled masses?

George Borjas asks why anyone still lives in Puerto Rico

Ever since I was first exposed to the music from West Side Story as a teenager, some of Stephen Sondheim's lyrics stuck with me. They appear in the song America. In the movie version, Bernardo and Rita are arguing over the costs and benefits of migrating from Puerto Rico to New York.

BERNARDO: I think I'll go back to San Juan
ANITA: I know a boat you can get on
BERNARDO: Everyone there will give big cheer
ANITA: Everyone there will have moved here


There are no legal restrictions whatsoever that hamper the mobility of Puerto Ricans to the mainland--they are American citizens by birth--and transportation costs are low. Yet here we are, 60 years on (to use an Elton John song title) from the onset of Puerto Rican migration after World War II, and there are still quite a few people left in Puerto Rico. Why hasn't Puerto Rico emptied out?

Between 30 to 40 percent of the Puerto Rican population chose to move out. But that means that about two-thirds did not. Why?

If people are not leaving Puerto Rico even though wages are so much lower there, is capital flowing in the other direction, anxious to exploit these poor, dumb people? Appears not.

There are also no restrictions that hamper the flow of capital between the two places. Yet despite all these unrestricted labor and capital flows, there is still a sizable income differential between the United States and Puerto Rico. By 2003, price-adjusted per-capita GDP in Puerto Rico was still only two-thirds that of the United States (according to the Penn World Table). Whatever happened to the factor price equalization theorem? If 60 years is not the "long run," maybe Keynes was right after all.

Its not just Puerto Rico and the United States.

In London, I was struck by the number of East Europeans around- rather like Hispanics in New York City. New Economist writes that that was an illusion.

Meanwhile, the Daily Star announced: "An army of 600,000 Romanian and Bulgarian immigrants will start entering Britain on Monday - and they won't even have to show a passport."

None of this actually happened. Officially, only 8,000 Romanian and Bulgarian migrants came to work in Britain in the first three months of this year and it is clear now that there will be no "tidal wave".

Of course, they are writing about the migrants who were expected to arrive after Romania and Bulgaria acceeded to the EU this year- not the ones who 800,000 young Bulgarians who left in the 18 years since the Berlin wall fell. I guess those are the ones I met.

I totally understand this fellow

Besides all that, the UK is not the most preferred destination for Bulgarian workers with low qualifications - Greece, Spain and Italy are. The United States also provides opportunities for immigration. I remember a friend who told me that he would always prefer the United States. One of the main reasons was that when you say "I am from Bulgaria" in the United States, the next question usually is: "Where is that?" When you say "Europe", most Americans think "Ah, Europe - Paris", great. And no further questions asked.

Quite right.

Its good to have tenure

Arnold Kling blogs (emphasis mine)

Economic conferences rarely produce great papers. Entrepreneurship, Innovation, and the Growth Mechanism of the Free-Enterprise Economies, a conference dedicated to the work of William Baumol, is typically pedestrian, with particularly forgettable contributions from Kenneth Arrow and Robert Solow.

Anyway, he quotes Barry Weingast on what constitutions do (to paraphrase: they restrict the power of the government and put in mechanisms to enforce those restrictions. This lowers "the stakes of politics"), on how they do this (to paraphrase, they make all elites sufficiently better off so that they have an incentive to protect the new arrangement), and on how the U.S. constitution almost collapsed

many Federalists sought to expand the powers of the federal government beyond those enumerated...Alexander Hamilton expand national power...the Federalists sought to deal with growing opposition through the Alien and Sedition Acts (1798), allowing them among other things to jail opposition newspaper editors. The situation was sufficiently desperate that both Madison and Jefferson thought the Constitution had failed...

Yet the Constitution did not fail, in part because a sufficient number of Federalist voters agreed with Jefferson that the Federalists' use of powers was illegitimate, switching allegiance and booting out President John Adams in the election of 1800...With Jefferson taking power in 1801, the Jeffersonians (including many former Anti-Federalists who opposed the Constitution) joined the remaining Federalists in supporting the Constitution.

How does one map this to the situation in India in 1947? Which were the relevant elites? What kept them in line?

In particular, why did the Army (so far as we know) never intervene in politics?

Wednesday, May 23, 2007


From Citizens by Simon Schama

Controller-General Silhouette, for example, in 1759, had proposed a tax on luxury items like gold and silver plate, jewelry, carriages- as well as on celibacy- and was drummed out of office for his temerity, amidst a chorus of execration.

And on tax avoidance

At the level of the urban bourgeois it meant accumulating enough money to buy one of the many thousands of petty municipal offices that would confer tax exemption. So that in every major town and especially in Paris, there were wardens of the oyster sellers' guild and gaugers of cheese and curds and inspectors of tripe who gloried in their small dignities and enjoyed their exemptions

Wednesday, April 04, 2007

Whats New?

In the new economy, many of the old classical rules of economics no longer apply; over the years the U.S. has made and learned new rules all its own
From Time magazine's issue of December 31, 1958.

As quoted in Capital Ideas, byt Peter Bernstein

Keynes, Investment Advisor

Keynes was a great economist and a very successful investment manager, but I think this statement of his is glib and ill-considered.

I am in favour of having as large a unit as market conditions will allow...To suppose that safety-first consists in having a small gamble in a large number of different [companies] where I have no information to reach a good judgement, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy

As quoted by Peter Bernstein in "Capital Ideas".

You would not be pleased with the performance of a share which generated a return of 2% when the market returned 4%. Hence, to say that you have adequate information about a company which you intend to invest in means that you know not only how well its will perform, but how well the other shares in the market (and even assets such as real estate, bonds, and gold) will perform. This means that we need adequate information not merely about the company which we are considering investing in, but also in every other company we might choose to park our funds in.

Even if we merely concerned about the absolute performance of one particular firm's shares, that depends on how its products (not its shares) will do in the marketplace vis-as-vis the products of its competitors. Again, we need information about more than that particular business.

All arguments for diversification, and passive investment

Thursday, March 15, 2007


At the New York Times, John Tierney follows up on his article about the sources of laughter. This quote from Schopenhauer is some of the most turgid prose I have ever had waylay me.

“The origin of the ludicrous is always the paradoxical, and thus unexpected, subsumption of an object under a concept that is in other respects heterogeneous to it. Accordingly, the phenomenon of laughter always signifies the sudden apprehension of an incongruity between such a concept and the real object thought through it, and hence between what is abstract and what is perceptive.”

Translation: laughter requires surprise. Simply stated, and quite false. Why do we laugh at jokes we have heard before, and at Monty Python episodes which we have already seen?

Ignore the rest of the article- the best part is this joke

A blind man enters a department store, picks up his dog by its tail and begins swinging it over his head. A clerk hurries over and says, “Can I help you, sir?”
“No, thanks,” the man replies, “I’m just looking around.”

John Tierney is a strange man. He did not find the Muffin joke funny, and he does not find this one funny either.

Nothing to see here- Move on

On the day that I leave New York to return to Mumbai, this article by Tim Harford strikes a chord. One reason I so prefer Mumbai to Bangalore is that the latter is so one-dimensional. The local economy stands on one leg- Information Technology. This is not merely boring, but a dangerous strategy for a community.

Even big cities can struggle if they overspecialise. Liverpool and Manchester are examples. Birmingham, on the other hand, has always been a city bustling away making everything and nothing in particular. As the late author Jane Jacobs once pointed out, Birmingham was thought highly inefficient compared with the specialised mills of Manchester, but when the downturn came Manchester was devastated and Birmingham kept on chugging along.

Both Mumbai and New York benefit from having diverse economies- finance, tourism, movies, fashion, television.

When communities are in visible decline, why do people stay on? There are the obvious reasons- emotional attachments to familiar places and beloved people. This would be a perfectly reasonable choice- paying for those emotional benefits in the form of lower wages. Tim argues, however, that the desire to own one's home- rather than rent it- is another major cause of economic stagnation.

The British are a nation of home owners, apparently happy to pay far more for the privilege of owning their own house than they would ever pay to rent one. Other nations, happier to rent, see unemployment reduced as a result.

The economist Andrew Oswald has shown that across European countries, and across US states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of trade unionisation don’t explain unemployment nearly as well as the tendency to own houses.

I am having some trouble reconciling the above with the very next passage in the article.

Recent research in the Economic Journal by Jakob Munch and colleagues suggests that people who own their own homes do find jobs as quickly as those who are free to move, but do so partly by being less picky about which job to take, and by commuting further..

I would expect this to result in lower incomes- not necessarily higher unemployment. Can it be that a third factor- conservatism- explains both the economic decline and the high rates of home ownership in these regions? As the local economy declines, the more venturesome residents leave the area for greener pastures. Those who stay on tend to be more conservative and, as they consider themselves more rooted in the area, they are also more likely to purchase homes. This becomes easier to do because house prices decline along with the local economy. The last paragraph seems to suggest some such process may be in play

Even if we did all this, the US economists Ed Glaeser and Joe Gyourko argue that one serious barrier remains: houses do not walk. No matter how bad things get in Detroit or Treorchy, the houses will still be there, and if they are cheap enough people will want to live in them. The likely result is a gloomy sort of segregation: those who feel that they can find a good job in the big cities will move there and pay the higher rents. Those who are less confident of that would rather have no job in a cheap house than no job in an expensive house. Detroit will have residents for a long time to come.

Keep moving.


Move him into the sun-
Gently its touch awoke him once,
At home, whispering of fields unsown.
Always it awoke him, even in France,
Until this morning and this snow.
If anything might rouse him now
The kind old sun will know.

Think how it wakes the seeds--
Woke, once, the clays of a cold star.
Are limbs so dear-achieved, are sides
Full-nerved,--still warm,--too hard to stir?
Was it for this the clay grew tall?
--O what made fatuous sunbeams toil
To break earth's sleep at all?
Wilfred Owen

Wednesday, March 14, 2007

Just Jokin'

I, for one, found this very funny.

So there are these two muffins baking in an oven. One of them yells, “Wow, it’s hot in here!”
And the other muffin replies: “Holy cow! A talking muffin!”

Yesterday's New York Times had a nice article on humor. It was well worth reading, even with little gems like this

“Primal laughter evolved as a signaling device to highlight readiness for friendly interaction,” Professor Panksepp says. “Sophisticated social animals such as mammals need an emotionally positive mechanism to help create social brains and to weave organisms effectively into the social fabric.”

I happened to wonder about the purpose of laughter a couple of weeks back. I was just about to open the door to the stairwell at work here when someone opened it from the other side, and we almost collided. We instinctively laughed, and I wondered at that.

There was nothing funny about what happened- someone could have got hurt- so why did we laugh? My best guess was that it had something to do with signalling that we both meant no harm- I had not been lurking in wait to pounce on that poor guy. From the article

“Laughter is an honest social signal because it’s hard to fake,” Professor Provine says. “We’re dealing with something powerful, ancient and crude. It’s a kind of behavioral fossil showing the roots that all human beings, maybe all mammals, have in common.”

If I had been lurking in wait to beat that poor man up, I would have found it very hard to laugh convincingly.

And of course, your boss' jokes are always funny.

Which brings us back to the muffin joke. It was inflicted by social psychologists at Florida State University on undergraduate women last year, during interviews for what was ostensibly a study of their spending habits. Some of the women were told the interviewer would be awarding a substantial cash prize to a few of the participants, like a boss deciding which underling deserved a bonus.

The women put in the underling position were a lot more likely to laugh at the muffin joke (and others almost as lame) than were women in the control group. But it wasn’t just because these underlings were trying to manipulate the boss, as was demonstrated in a follow-up experiment.

This time each of the women watched the muffin joke being told on videotape by a person who was ostensibly going to be working with her on a task. There was supposed to be a cash reward afterward to be allocated by a designated boss. In some cases the woman watching was designated the boss; in other cases she was the underling or a co-worker of the person on the videotape.

When the woman watching was the boss, she didn’t laugh much at the muffin joke. But when she was the underling or a co-worker, she laughed much more, even though the joke-teller wasn’t in the room to see her. When you’re low in the status hierarchy, you need all the allies you can find, so apparently you’re primed to chuckle at anything even if it doesn’t do you any immediate good.

Again, it could be that to "get" a joke, you need to be able to empathize with the other person, and we know that being in a position of power diminishes empathy.

HT: Brad DeLong

Tuesday, March 13, 2007

The neighbours are watching

From the essay "Against backsliding", in the book "Strategies of commitment and other essays" by Thomas Schelling:

S.L.A. Marsall in Men against Fire (Magnolia, Mass.: Peter Smith, rpt. 1985) discussed the phenomenon that in all armies in World War II most individual soldiers never fired their rifles- no matter how long a battle lasted, how brave they were, or what targets presented themselves- while weapons that required joint action by two or three soldiers, like feeding a belt of ammunition intop a machine gun or loading and aiming an artillery piece, were regularly fired as intended.

P.S. I later came across this- "What economists should learn from sociology"- and this seemed apt

Sociologists have a deep appreciation of imitation and conformity as a basic feature of human behavior. Economists rarely model this explicitly. If it is so important, as sociologists have shown, then economists are really missing the boat.

Thursday, March 08, 2007

Meet the Family

Jeffrey Hoover of the Illinois Natural History Survey and Scott Robinson of the University of Florida conducted an amazing experiment, which is described in the latest issue of the Economist.

COWBIRDS, like cuckoos, are brood parasites—that is, they lay their eggs in the nests of other birds and leave those others to do the hard work of raising their changeling young. But there is a difference. A cuckoo chick usually pushes the original nestlings out, so that it can monopolise the food brought by its unwitting adoptive parents. Cowbird chicks, by contrast, seem to tolerate their nestmates.

Turns out this is a hostage situation.

The victims of the racket are prothonotary warblers. These birds do not reject cowbird eggs even though they look quite different from their own.

The experiment itself is quite marvellous.

Dr Hoover and Dr Robinson demonstrated what was going on by erecting 182 warbler nestboxes at the top of narrow, greasy poles. (The grease stopped any ground-dwelling predators getting close to the nests.)

The first phase of their study was observational. Over the course of six years, they watched 472 nests in which warblers had laid their eggs. Almost half of these were parasitised by cowbirds. But, parasitised or not, almost all—protected as they were from ground-based predators—successfully produced fledgling warblers.

Then the experiment began. In the following seasons Dr Hoover and Dr Robinson removed cowbird eggs from some of the parasitised nests. At the same time, they reduced the diameter of the entrances to some of the nest boxes, in order to deny admission to cowbirds (which are larger than warblers).

Warblers whose nests were thus protected did well, raising an average of four chicks to maturity in the absence of a cowbird parasite. Nests from which cowbird eggs had been removed, but which lacked protection, did badly. In fact, more than half of them were attacked. The eggs were pecked open and the nests themselves torn to pieces. Nests thus attacked yielded, on average, but a single fledgling, whereas those with a cowbird egg in them yielded three warbler fledglings. Paying protection money in the form of food for the cowbird nestling thus looks a good deal from the warbler's point of view, and explains why cowbirds do not need to disguise their eggs to look like those of prothonotaries.

The cowbirds' dastardly tricks do not stop at this protection racket, either, for a fifth of those warbler nests that had never had cowbird eggs in them also got destroyed. Dr Hoover and Dr Robinson ascribe this behaviour to a strategy they call “farming”. If warblers lose a clutch, they will often produce a second. If a cowbird female fails to lay in a warbler nest in time for her egg to hatch with those of the host, she can reset the clock in her favour by killing the first clutch. Even the Mafia never thought of that one.

Why do people look to the Godfather for the language to use when trying to describe these situations?

The Fog of War

This looks to be a great documentary.
Robin Hanson at Overcoming Bias quotes Robert McNamara

What makes us omniscient? Have we a record of omniscience? We are the strongest nation in the world today. I do not believe that we should ever apply that economic, political, and military power unilaterally. If we had followed that rule in Vietnam, we wouldn't have been there. None of our allies supported us. Not Japan, not Germany, not Britain or France. If we can't persuade nations with comparable values of the merit of our cause, we'd better reexamine our reasoning.

The New York Times review.
In his book "Choice and Consequence", Thomas Schelling quotes a passage from Richard Neustadt's book Presidential Power. The same passage can be read here

IN THE EARLY summer of 1952, before the heat of the campaign, President [Harry] Truman used to contemplate the problems of the general-become-President should [Dwight David] Eisenhower win the forthcoming election. "He'll sit here," Truman would remark (tapping his desk for emphasis), "and he'll say, 'Do this! Do that!' And nothing will happen. Poor Ike-it won't be a bit like the Army. He'll find it very frustrating."

Eisenhower evidently found it so. "In the face of the continuing dissidence and disunity, the President sometimes simply exploded with exasperation," wrote Robert Donovan in comment on the early months of Eisenhower's first term. "What was the use, he demanded to know, of his trying to lead the Republican Party. ..... And this reaction was not limited to early months alone, or to his party only. "The President still feels," an Eisenhower aide remarked to me in 1958, "that when he's decided something, that ought to be the end of it ... and when it bounces back undone or done wrong, he tends to react with shocked surprise."

Given that each individual in a large organization has limited information as to what is going on, and limited cognitive powers, and that even Presidents of the United States have limited powers over their subordinates, who often wish to mislead them as to the actual situation, what is the role of leadership?

Monday, March 05, 2007

Minority Report v0.1

The BPS Research Digest reports

Researchers have shown they can read a person's intentions from the patterns of activity in the front of their brain.

The experiment is quite remarkable

Eight participants decided privately whether to add or subtract two numbers that appeared between 2.7 and 10.8 seconds after they had made their decision. Shortly after that, a response screen appeared, featuring the two possible answers, plus two other numbers, in randomly-arranged positions.

The participants had to press a button corresponding to the number on the response screen that matched the act of subtraction or addition they had previously decided to make (thus revealing what their prior intention had been).

This is a nice touch because

Crucially, because the answers and distractors were arranged randomly on the response screen, the participants could not start preparing the specific button press response they would need to make until the response screen appeared. This helped ensure relevant brain activity reflected the participants' chosen intention rather than motor preparation.

The researchers found patterns of activity in several regions of the prefrontal cortex predicted whether the participants' had chosen to add or subtract. In particular, decoding the spatial distribution of activity in the medial prefrontal cortex was able to predict the participants' intention with 70 per cent accuracy. There was no difference in overall levels of activity between the addition and subtraction decisions.

An important question for future research is whether “the medial prefrontal cortex is generally involved in encoding specific tasks during intentional choices or whether encoding in this region is specific for tasks such as the preparation of addition and subtraction”, the researchers said.

Just deserts

In this post, Chris Dillow links to an older blog entry - a favorite of mine.
The great virtues of a market economy are that it respects individual freedom and fosters dynamism. Too many people who root for the free market, however, believe that markets also consistently reward virtuous behavior, so that people who succeed in a marketplace do so because they are better at spotting what people want, are better at working with other people, and work harder. Free markets probably encourage such behavior, in that being a successful businessman in a sufficiently competititive marketplace requires you to practice the bourgeois virtues. However, Chris quotes Hayek as arguing that this is no argument for Capitalism:

[The function of the price system] is not so much to reward people for what they have done as to tell them what in their own as well as in general interest they ought to do. …To hold out a sufficient incentive for those movements which are required to maintain a market order, it will often be necessary that the return to people’s efforts do not correspond to recognizable merit…In a spontaneous order the question of whether or not someone has done the ‘right’ thing cannot always be a matter of merit.

And many people who worship Hayek as the prophet of free markets would suffer apoplexy if they read this by him

There is no reason why in a free society government should not assure to all protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody need to descend. To enter into such an insurance against extreme misfortune may well be in the interest of all.

Just consider the recent boom in the market for programmers in India. This was triggered by a whole host of developments, mostly in the United States: mainly the introduction of the (publicly provided) internet in the late 1990s and the dotcom boom. None of these could have been foreseen by those high-school kids in India who chose to study programming in the 1990s, and yet they were the major beneficiaries of these developments. These were not necessarily the best engineers- the brightest and most hard working- of their cohort. It so happens that this particular field is easy to join, and so those engineers who studied other subjects did not face too much of a barrier if they wished to become computer programmers.
The price mechanism did its job of reallocating resources- now the best brains in India are more likely to become software engineers. In case of a software "bust", caused by some as yet unanticipated development- they would find it hard to get out.
A well-designed system of social insurance- like Chris' old favorite, the Citizens' Basic Income -would actually increase the dynamism of the free market by subsidizing experimentation- mitigating the risk of launching a new business, or of trying an unusual career.


Tim Harford has a superb article in Forbes on what factors may be holding back African-Americans in the United States.
Some of the work he describes is familar- for example, Sendhil Mullainathan's work demonstrating the existence of discrimination in the job market.

Economists Marianne Bertrand and Sendhil Mullainathan recently conducted a large study along these lines in the U.S., mailing out nearly 5,000 résumés after randomly assigning them black-sounding names like Jamal or Ebony or white-sounding names like Kristen or Brendan.

Not only did the "black" résumés get fewer callbacks, but employers didn't even seem to notice whether the résumés were any good or not. They just stopped reading at "Jamal."

Similar studies

have uncovered British discrimination against immigrants from Asia, the West Indies and Africa--but far less evidence of discrimination against white immigrants from France and Australia.

He also discusses the distinction between taste-based discrimination and statistical discrimination.

Economists distinguish between "taste-based" discrimination, where racist employers refuse to give minorities a job because they don't like minorities, and "statistical" discrimination. When an employer considers an applicant's race as a marker for his or her ability, that's statistical discrimination

In an environment where a particular minority is discriminated against in the job market, even though they are just as capable as others in the marketplace, their wages would be below the wages of others in the same line of work but their output would be just as good. Businesses can gain an advantage by hiring these minorities. Hence taste-based discrimination should be purged from the marketplace as bigoted businesses are outcompeted by relatively open minded businesses. I once discussed this.
On the other hand, if certain minorities are truly less capable on average than the rest of the population, businesses can gain an advantage by taking this fact into consideration- just as insurance companies charge young men more for a drivers' license- even though some young men are probably very safe drivers. (Personally, I would expect this to apply only for people just entering the job market. As people gain experience, employees will be able to judge their true abilities.)

Harford's point, though, is more subtle- he describes research which shows that statistical discrimination could easily become a self-fulfilling prophesy.

Fryer and two colleagues, Jacob Goeree and Charles Holt, showed how statistical discrimination could easily lead to a vicious circle. They used computer-based classroom games that assigned students the role of employers, "purple" workers and "green" workers. Students in the role of employers quickly jumped to the mistaken conclusion that purple workers were uneducated, and that view became self-fulfilling, as purple workers abandoned hope of getting hired and stopped paying for education. Once the downward spiral set in, a color-blind employer would actually lose money.

"I was amazed," recalls Fryer. "The kids were really angry. The purple workers would say, 'I'm not investing [in an education] because you won't hire me', and the employers would respond 'I didn't hire you because you weren't investing.' The initial asymmetries came about because of chance, but people would hang onto them and wouldn't let them go."

So, members of minorities which are discriminated against tend to stop investing in skills which could help them in the marketplace. Fryer also conducted research which indicates that that they also tend to become increasingly insular.

Harvard's Roland Fryer, is attracting attention for his study of "acting white," where black kids who work hard at school are said to be ostracized by their peers. Despite a lot of talk about the problem--Barack Obama raised it in his famous speech to the Democratic National Convention--some academic researchers weren't convinced that it existed. Their surveys showed that kids who were doing well at school, whether black or white, had lots of friends.

Fryer argued that asking a teenager how many friends he had wasn't any more likely to produce the truth than asking him whether he was a virgin. Instead, he sifted through a database of the social connections of 90,000 teens, judging a teen's popularity based not on their own claims but on whether other teens named them as a friend. His conclusion was that hardworking black and Hispanic children, unlike non-Hispanic white kids, lost friends if they studied hard.

Fryer has an economic explanation of why white nerds get an easier ride from their peers. Members of minority groups often face a choice between learning something that the minority group values (say, street slang) or learning something that is more widely valued (say, accountancy). Someone who chooses the minority activity is making a commitment to the group--hence it's natural for him to enjoy more trust. And Fryer points to similar behavior by Italian immigrants in 1950s Boston; by the Burakumin in Japan, who are descendants of what was traditionally a low caste; and even in some traditional Amish communities.

Previous posts on discrimination here, here, here, here, and here.

HT: Marginal Revolution

Friday, March 02, 2007

Nice one

Millions long for eternal life who do not know what to do with themselves on a rainy Sunday afternoon

I wonder if this is actually true. We fear death, and hope for a long life, but surely eternal life would be intolerably boring?

HT: Jane Galt

Wednesday, February 28, 2007

Tilting at windmills

Tyler recently blogged about the new book "The Black Swan" by Nissim Taleb.
Coincidentally, the Economist recently carried a story that governments are now seriously working on preventing what could have been the greates Black Swan of all- an asteroid colliding with the Earth.

The preferred way to deal with rogue asteroids is still a Hollywood-style heroic space mission to knock the object off course, or possibly blow it up—although almost surely as an unmanned effort. However, Edward Lu, of NASA's Johnson Space Centre, has recently proposed an intriguing alternative, which he outlined to the meeting in San Francisco. The idea is to send a satellite to hover alongside a threatening asteroid and, using the gravitational attraction between the two objects, to pull the asteroid gradually off course. Even though the force acting on the asteroid would be extremely small, the cumulative effect over a week or so should be enough to do the trick.

NASA no plans to test any asteroid-deflection scheme, but the ESA does, and they have a sense of humor:

the European Space Agency does have such a project in the pipeline. With an irony the organisers have not, perhaps, properly appreciated, it is known as Don Quijote. The mission will have two craft, Hidalgo and Sancho. As in Cervantes's novel, the servant will observe while his master makes a fool of himself by crashing blithely into the target asteroid. If all such asteroids turn out to be harmless windmills, it will have been a wasted effort. But if one does, indeed, turn out to be a threatening giant, future generations may be very glad of the Don's headlong charge

Edge .org has an interesting article by Nissim Taleb- first published in the New York Times. As he puts it

A black swan is an outlier, an event that lies beyond the realm of normal expectations. Most people expect all swans to be white because that's what their experience tells them; a black swan is by definition a surprise. Nevertheless, people tend to concoct explanations for them after the fact, which makes them appear more predictable, and less random, than they are. Our minds are designed to retain, for efficient storage, past information that fits into a compressed narrative. This distortion, called the hindsight bias, prevents us from adequately learning from the past.

Black swans can have extreme effects: just a few explain almost everything, from the success of some ideas and religions to events in our personal lives. Moreover, their influence seems to have grown in the 20th century, while ordinary events — the ones we study and discuss and learn about in history or from the news — are becoming increasingly inconsequential.

Consider: How would an understanding of the world on June 27, 1914, have helped anyone guess what was to happen next? The rise of Hitler, the demise of the Soviet bloc, the spread of Islamic fundamentalism, the Internet bubble: not only were these events unpredictable, but anyone who correctly forecast any of them would have been deemed a lunatic (indeed, some were). This accusation of lunacy would have also applied to a correct prediction of the events of 9/11 — a black swan of the vicious variety.

He points out that

There is a silly book called A Millionaire Next Door, and one of the authors wrote an even sillier book called The Millionaire's Mind. They interviewed a bunch of millionaires to figure out how these people got rich. Visibly they came up with bunch of traits. You need a little bit of intelligence, a lot of hard work, and a lot of risk-taking. And they derived that, hey, taking risk is good for you if you want to become a millionaire. What these people forgot to do is to go take a look at the less visible cemetery — in other words, bankrupt people, failures, people who went out of business — and look at their traits. They would have discovered that some of the same traits are shared by these people, like hard work and risk taking. This tells me that the unique trait that the millionaires had in common was mostly luck.

Note that he is himself a multi-millionaire trader.
More than a year ago, Tyler Cowen blogged about Philip Tetlock's book "Expert Political Judgement", quoting the book matter how unequivocal the evidence that experts cannot outpredict chimps or extrapolation algorithms, we should expect business to unfold as usual: pundits will continue to warn us on talk shows and op-ed pages of what will happen unless we dutifully follow their policy prescriptions. We -- the consumers of expert pronouncements -- are in thrall to experts for the same reasons that our ancestors submitted to shamans and oracles: our uncontrollable need to believe in a controllable world and our flawed understanding of the laws of chance. We lack the willpower and good sense to resist the snake oil products on offer. Who wants to believe that, on the big questions, we could do as well tossing a coin as by consulting accredited experts?

What Tyler wrote then applies here as well

Assume that the experts are usually wrong in their novel predictions. The consensus views of a science still might be worth listening to. Economists cannot forecast business cycles very well, but you should listen when they tell you that a deflationary shock is bad news. Each new forecast or new theory is an example of individual hubris and in expected value terms it is stupid. But the body of experts as a whole, over time, absorbs what is correct. A large number of predictions creates a Hayekian discovery process with increasing returns to scale. Social knowledge still comes out ahead, and in part because of the self-deceiving vanities put forward every day. You can find that point in Jonathan Swift's Gulliver's Travels.

Monday, February 26, 2007

Culture matters

From an article in the Economist about how different countries treat gifted children:

And in Japan there is a widespread belief that all children are born with the same innate abilities—and should therefore be treated alike. All are taught together, covering the same syllabus at the same rate until they finish compulsory schooling. Those who learn quickest are expected then to teach their classmates.

In China, extra teaching is provided, but to a self-selected bunch. “Children's palaces” in big cities offer a huge range of after-school classes. Anyone can sign up; all that is asked is excellent attendance.

This from a New York Times article on how Japanese companies deal with slowdowns

If cost-cutting is necessary in Japan, there is a pecking order, says Yoshi Tsurumi, an economist at Baruch College in Manhattan and a consultant to Japanese companies. Dividends are cut first, then salaries — starting at the top. Finally, there are layoffs — if attrition is not enough to shrink staff.

“The matter of flexibility is important,” Mr. Tsurumi said, “but the Japanese notion is to retrain and transfer people within an organization.”

Tuesday, February 20, 2007

Mirror, mirror on the wall..

Over at Chatty Apes, Jason Wheeden describes a very interesting finding.

Measurable symmetry accounts for less than 1% of the variance in the attractiveness of women's faces and less than 3% of the variance of the attractiveness of men's faces. Before we went and checked, we had both believed the widely circulated story that symmetry was a big deal in attractiveness.

Of course, I have come across this story myself, and believed it. One of the reasons why people believed this theory is that there is a plausible "explanation" for why people find symmetry attractive. This is exactly why scientists are supposed to replicate the findings of others. Feynman said that Science is what we have learned about how to keep from fooling ourselves. However, at least in this case, the problem was not that others did not try and replicate the results.

So how did it happen that so many of us believed that symmetry was a big deal in attractiveness judgments? There were studies that said so, obviously. But when we looked at the details, it turned out that the initial studies showing big effects typically involved samples of less than 20 faces each, which is irresponsibly small for correlational studies with open-ended variables. Once the bigger samples starting showing up, the effect basically disappeared for women and was shown to be pretty low for men. But no one believed the later, bigger studies, even most of their own authors -- pretty much everyone in my business still thinks that symmetry is a big deal in attractiveness.

So, the first lesson I learned: Small samples are dangerous. They're so dangerous that we need to force larger samples. How? My solution has been to ditch the old p<.05 significance standard. Right now, most social scientists allow themselves to call something a real finding if there is less than a 1 in 20 chance that it's from random noise. It's a standard that arose before computers, in a day when scientists ran their numbers by hand and so just didn't run very many numbers. These days, all you have to do to basically ensure at least one significant finding is to measure 7 variables -- the resulting correlation table has 21 correlations, and, just at random, you'd expect at least one to be p<.05. Look at my dissertation or any of my published work (two new ones are coming out soon), and you'll find that I'm using p<.005 -- a 1 in 200 standard. I don't think anyone has noticed -- I haven't had any reviewers comment on it at all. But what the .005 standard does is force larger samples, leading to more stable estimates, leading to more replicable results. So that was my first lesson from the health-attractiveness paper -- false positives are easy to get and powerfully resilient to correction, so we need better studies in the first place, which means bigger samples, in which case the only way to police it is using better significance criteria.

It appears that the site has been down for quite some time- I am relying on the Google Cache of the post, and I am quoting extensively in case the cache becomes unavailable. This is one reason I blog, to keep a copy of all the stuff I find interesting- just in case the source disappears. Redundancy.

HT: Robin Hanson at Overcoming Bias

Wednesday, February 14, 2007

The Perverse Power of Praise

Arnold Kling links to a fascinating article in New York Magazine on the effects of praise. The gist is that children respond to incentives. If they receive praise for being smart, they try to look smart, even at the cost of becoming underperformers, or cheats. If they receive praise for the effort they put in, they work harder and get smarter.

For the past ten years, psychologist Carol Dweck and her team at Columbia (she’s now at Stanford) studied the effect of praise on students in a dozen New York schools. Her seminal work—a series of experiments on 400 fifth-graders—paints the picture most clearly.

Dweck sent four female research assistants into New York fifth-grade classrooms. The researchers would take a single child out of the classroom for a nonverbal IQ test consisting of a series of puzzles—puzzles easy enough that all the children would do fairly well. Once the child finished the test, the researchers told each student his score, then gave him a single line of praise. Randomly divided into groups, some were praised for their intelligence. They were told, “You must be smart at this.” Other students were praised for their effort: “You must have worked really hard.”


the students were given a choice of test for the second round. One choice was a test that would be more difficult than the first, but the researchers told the kids that they’d learn a lot from attempting the puzzles. The other choice, Dweck’s team explained, was an easy test, just like the first. Of those praised for their effort, 90 percent chose the harder set of puzzles. Of those praised for their intelligence, a majority chose the easy test. The “smart” kids took the cop-out.

Why did this happen? “When we praise children for their intelligence,” Dweck wrote in her study summary, “we tell them that this is the name of the game: Look smart, don’t risk making mistakes.” And that’s what the fifth-graders had done: They’d chosen to look smart and avoid the risk of being embarrassed.

In a subsequent round, none of the fifth-graders had a choice. The test was difficult, designed for kids two years ahead of their grade level. Predictably, everyone failed. But again, the two groups of children, divided at random at the study’s start, responded differently. Those praised for their effort on the first test assumed they simply hadn’t focused hard enough on this test. “They got very involved, willing to try every solution to the puzzles,” Dweck recalled. “Many of them remarked, unprovoked, ‘This is my favorite test.’ ” Not so for those praised for their smarts. They assumed their failure was evidence that they weren’t really smart at all. “Just watching them, you could see the strain. They were sweating and miserable.”

Having artificially induced a round of failure, Dweck’s researchers then gave all the fifth-graders a final round of tests that were engineered to be as easy as the first round. Those who had been praised for their effort significantly improved on their first score—by about 30 percent. Those who’d been told they were smart did worse than they had at the very beginning—by about 20 percent.

Dweck had suspected that praise could backfire, but even she was surprised by the magnitude of the effect. “Emphasizing effort gives a child a variable that they can control,” she explains. “They come to see themselves as in control of their success. Emphasizing natural intelligence takes it out of the child’s control, and it provides no good recipe for responding to a failure.”

In follow-up interviews, Dweck discovered that those who think that innate intelligence is the key to success begin to discount the importance of effort. I am smart, the kids’ reasoning goes; I don’t need to put out effort. Expending effort becomes stigmatized—it’s public proof that you can’t cut it on your natural gifts.

Repeating her experiments, Dweck found this effect of praise on performance held true for students of every socioeconomic class. It hit both boys and girls—the very brightest girls especially (they collapsed the most following failure). Even preschoolers weren’t immune to the inverse power of praise.

Dweck's theories were tried out at the Life Sciences Secondary School in East Harlem

Life Sciences is a health-science magnet school with high aspirations but 700 students whose main attributes are being predominantly minority and low achieving. Blackwell split her kids into two groups for an eight-session workshop. The control group was taught study skills, and the others got study skills and a special module on how intelligence is not innate. These students took turns reading aloud an essay on how the brain grows new neurons when challenged. They saw slides of the brain and acted out skits. “Even as I was teaching these ideas,” Blackwell noted, “I would hear the students joking, calling one another ‘dummy’ or ‘stupid.’” After the module was concluded, Blackwell tracked her students’ grades to see if it had any effect.

It didn’t take long. The teachers—who hadn’t known which students had been assigned to which workshop—could pick out the students who had been taught that intelligence can be developed. They improved their study habits and grades. In a single semester, Blackwell reversed the students’ longtime trend of decreasing math grades.

The only difference between the control group and the test group were two lessons, a total of 50 minutes spent teaching not math but a single idea: that the brain is a muscle. Giving it a harder workout makes you smarter. That alone improved their math scores.

This research suggests that the "Self-esteem" movement is correct: how children feel about themselves is a major determinant of how they do in life. Correct, but in an unexpected way.

Dweck and Blackwell’s work is part of a larger academic challenge to one of the self-esteem movement’s key tenets: that praise, self-esteem, and performance rise and fall together. From 1970 to 2000, there were over 15,000 scholarly articles written on self-esteem and its relationship to everything—from sex to career advancement. But results were often contradictory or inconclusive. So in 2003 the Association for Psychological Science asked Dr. Roy Baumeister, then a leading proponent of self-esteem, to review this literature. His team concluded that self-esteem was polluted with flawed science. Only 200 of those 15,000 studies met their rigorous standards.

After reviewing those 200 studies, Baumeister concluded that having high self-esteem didn’t improve grades or career achievement. It didn’t even reduce alcohol usage. And it especially did not lower violence of any sort. (Highly aggressive, violent people happen to think very highly of themselves, debunking the theory that people are aggressive to make up for low self-esteem.) At the time, Baumeister was quoted as saying that his findings were “the biggest disappointment of my career.”

Children respond to praise, but they take into account not only what they are being for (for being smart versus for trying hard) but also why. As with any currency, too much supply leads to devaluation.

Psychologist Wulf-Uwe Meyer, a pioneer in the field, conducted a series of studies where children watched other students receive praise. According to Meyer’s findings, by the age of 12, children believe that earning praise from a teacher is not a sign you did well—it’s actually a sign you lack ability and the teacher thinks you need extra encouragement. And teens, Meyer found, discounted praise to such an extent that they believed it’s a teacher’s criticism—not praise at all—that really conveys a positive belief in a student’s aptitude.

In the opinion of cognitive scientist Daniel T. Willingham, a teacher who praises a child may be unwittingly sending the message that the student reached the limit of his innate ability, while a teacher who criticizes a pupil conveys the message that he can improve his performance even further.

Cheap praise can even corrode character
Scholars from Reed College and Stanford reviewed over 150 praise studies. Their meta-analysis determined that praised students become risk-averse and lack perceived autonomy. The scholars found consistent correlations between a liberal use of praise and students’ “shorter task persistence, more eye-checking with the teacher, and inflected speech such that answers have the intonation of questions.”

Dweck’s research on overpraised kids strongly suggests that image maintenance becomes their primary concern—they are more competitive and more interested in tearing others down. A raft of very alarming studies illustrate this.

In one, students are given two puzzle tests. Between the first and the second, they are offered a choice between learning a new puzzle strategy for the second test or finding out how they did compared with other students on the first test: They have only enough time to do one or the other. Students praised for intelligence choose to find out their class rank, rather than use the time to prepare.

In another, students get a do-it-yourself report card and are told these forms will be mailed to students at another school—they’ll never meet these students and don’t know their names. Of the kids praised for their intelligence, 40 percent lie, inflating their scores. Of the kids praised for effort, few lie.

When students transition into junior high, some who’d done well in elementary school inevitably struggle in the larger and more demanding environment. Those who equated their earlier success with their innate ability surmise they’ve been dumb all along. Their grades never recover because the likely key to their recovery—increasing effort—they view as just further proof of their failure. In interviews many confess they would “seriously consider cheating.”

And, of course, there is a biological basis to the ability to persist.

Dr. Robert Cloninger at Washington University in St. Louis located the circuit in a part of the brain called the orbital and medial prefrontal cortex. It monitors the reward center of the brain, and like a switch, it intervenes when there’s a lack of immediate reward. When it switches on, it’s telling the rest of the brain, “Don’t stop trying. There’s dopa [the brain’s chemical reward for success] on the horizon.” While putting people through MRI scans, Cloninger could see this switch lighting up regularly in some. In others, barely at all.

What makes some people wired to have an active circuit?

Cloninger has trained rats and mice in mazes to have persistence by carefully not rewarding them when they get to the finish. “The key is intermittent reinforcement,” says Cloninger. The brain has to learn that frustrating spells can be worked through. “A person who grows up getting too frequent rewards will not have persistence, because they’ll quit when the rewards disappear."

The article does not claim there are no innate differences between children. People have traditionally worried about how labelling can harm ordinary children when they compare themselves to the gifted, but even gifted children suffer from excessive emphasis on ability rather than effort.

Friday, February 09, 2007

Prizes for all

The New York Times recently published an article on how prizes could be used to encourage innovation. Prizes were common in the 18th century.

Most famously, the British Parliament offered the £20,000 longitude prize to anyone who figured out how to pinpoint location on the open sea.

Times changed.

Eventually, though, prizes began to be replaced by grants that awarded money upfront. Some of this was for good reason. As science became more advanced, scientists often needed to buy expensive equipment and hire a staff before having any chance of making a discovery.

But grants also became popular for a less worthy reason: they made life easier for the government bureaucrats who oversaw them and for the scientists who received them. Robin Hanson, an economist at George Mason University who has studied the history of prizes, points out that they create a lot of uncertainty — about who will receive money and when a government will have to pay it. Grants, on the other hand, allow a patron (and the scientists advising that patron) to choose who gets the money. “Bureaucracies like a steady flow of money, not uncertainty,” said Mr. Hanson, who worked as a physicist at NASA before becoming an economist. “But prizes are often more effective if what you want is scientific progress.”

Recently, though, prizes have made a comeback in the private sector- the article describes two: a million-dollar prize which Netflix is offering for any system that is at least 10 percent better than their own system (Cinematch) at predicting how many stars someone would give a movie, and the X Prize, which was created in 1996 as a $10 million purse for the first private manned flight into space. The latest prediction model is already 6.75% better than Cinematch, and there are 4.5 years to go before the prize expires. The X-prize was awarded just eight years after it was announced.
The advantages of prizes are two-fold:

They pay for nothing but performance, and they ensure that anyone with a good idea — not just the usual experts — can take a crack at a tough problem. Much to the horror of the leading astronomers of the day, a clockmaker ultimately claimed the longitude prize

Another day, another prize.

Richard Branson and Al Gore announced today a $25 million prize for the best way to remove significant amounts of carbon dioxide from the atmosphere.

The key insight is that the best way to handle a problem is not to impose a solution, but to provide people with incentives to come up with their own solutions.

Thursday, February 08, 2007

The psychology of power

Anders Sandberg blogs on new research that explores just how being in a position of power changes how we deal with others. The bottomline

it was found that high-power subjects also tended to assume other people had the same information that they had (the "telepathic boss" problem - the boss assumes that everybody knows what he knows and want). They were also less accurate than low-power subjects at judging emotional expressions. There were also anticorrelations between reports of general feelings of being in power in one's life and tendency to take other's perspective. Overall high-power people seem to anchor too heavily on their own vantage point and this impairs their ability to consider what others see, think and feel.


In general power bias would make the empowered people tend to think they have more support from others in their views than they have. Altruists in power would be even less concerned with individual variations in goals and values - i.e. they would tend to become more egalitarian and paternalist. Egoists in power would become more concerned about the ambitions of others, i.e. paranoid.

Thus, even altruists are corrupted- probably assuming that they are anyway doing it "for the good of all".


I have been reading "Stumbling on Happiness" by Daniel Gilbert. Its a good as they say it is.Two experiments on how our brains process sensory information jumped out at me.

Researchers tape-recorded the sentence 'The state governors met with their respective legislatures convening in the capital city'. Then they doctored the tape, substituting a cough for the first 's' in 'legislatures'. Volunteers heard the cough alright, but they heard it happening between the words- they heard the missing 's' too. Even when they were specifically instructed to listen for the missing sound, and even when they were given thousands of trials of practice, volunteers were unable to name the missing letter that their brains knew ought to be there and had thus helpfully supplied.

I wonder what would have happened if two coughs had been introduced- one overlaying the first 's' (as before)- and one in between the words (where the brain shifted the cough so we would "hear" the 's' that had been obscured).

Even cooler was this one

Volunteers listened to a recording of the word 'eel' preceded by a cough (which I will denote with *). The volunteers heard the word 'peel' when the it was embedded in the sentence 'The *eel was on orange', but the heard the word 'heel' when it was embedded in the sentence 'The *eel was on the shoe'. This is a striking finding because the two sentences differ only in their final word, which means that volunteers' brains had to wait for the final word of the sentence before they could supply the information that was missing from the second word. But they did it, and they did it so smoothly and quickly that volunteers actually heard the missing information being spoken in its proper position.

Lots more.

The case for limited Democracy

In this post, Chris Dillow argues that there is a place for non-representative institutions such as the House of Lords. He claims that

Representative democracy, then, would drive out virtuous people

and that

Maybe it shows the difference between political and market institutions. Market institutions are a way of ensuring that vices work for the public good, so bad men can do good things. Political institutions, however, have an adverse selection effect, ensuring that virtuous men can do no good.

An interesting argument, coming from someone on the Left.

Last night, I was watching a PBS documentary on one such non-representative institution: the Supreme Court of the United States. This episode was about how the Supreme Court stepped in to massively expand the rights of American individuals in the second half of the 20th century. What struck me was just how undemocratically the Supreme Court acted in most of these cases. In Brown v. Board of Education and Cooper v. Aaron, the Court unanimously ruled that segregation in public schools was unconstitutional. Segregation was hugely popular among the white majority in the Southern United States. The laws which were the basis of segregation were passed by democratically elected legislatures, and enthusiastically enforced by governments which were accountable to the electorate. In Miranda v. Arizona, the Court ruled that

detained criminal suspects, prior to police questioning, must be informed of their constitutional right to an attorney and against self-incrimination.

The Republicans argued that such laws needlessly tied the hands of the police, and this was one of the planks on which Ronald Reagan won the Presidency. These were cases in which one branch of the Government had to step in and restrain another branch, and the only reason the Court could do this was that they were not accountable to the electorate.
Why did the Legislature introduce these laws in the first place? Part of the answer may have been that they could thus pander to the prejudices of their electorate, while incurring none of the cost. Sometime back, Don Boudreax quoted an article by Thomas Sowell that suggests that this may have been true in the case of "Jim Crow" laws regarding public transport.

It was politics that segregated the races because the incentives of the political process are different from the incentives of the economic process. Both blacks and whites spent money to ride the buses but, after the disenfranchisement of black voters in the late 19th and early 20th century, only whites counted in the political process.

Katie blogged on the same article

Private owners of streetcar, bus, and railroad companies in the South lobbied against the Jim Crow laws while these laws were being written, challenged them in the courts after the laws were passed, and then dragged their feet in enforcing those laws after they were upheld by the courts.

Unconstrained democracy has a tendency to descend into demagoguery. To oversimplify, democracy is a tool to check the power of governments by making them accountable to the populace. A constitution is (among other things) a tool for checking the power of the people to use their elected government to tyrannize minorities.