4 things you learn as a first year Economics PhD

A PhD is a weird process. People come from different backgrounds and the first year teaches everyone a common language. The incentive to ‘speak’ this language is an exam. It’s a capstone to catching up (somewhat) with 250+ years economic research. I wrote a draft of this story, a few week after taking this exam.

Generally, economics gets divided into ‘big’ picture decisions (macroeconomics) and ‘small’ picture decisions (microeconomics). Last year, I took two courses in each subject. I wanted to give a little reflection about what I learned from each and share it on the internet.

1. Greed makes you predictable

My first course in microeconomics went over the normal things you learn economics 101 — just with more careful attention to detail.

At the beginning of the semester, you start by assuming that people are greedy (rational and self interested). It turns out this view on human nature makes it really easy to explain our decisions — we always want more. One of the questions on the exam actually involved exploring what happens when people don’t necessarily ‘want more’. The answer was that their choices became more ambiguous.

2. Information has a cost

The second semester we studied situations where people are less predictable using game theory. Game theory is about the ‘chicken and egg’ situation when we make decisions together. My decision depends on yours and yours depends on mine. Our decisions are less predictable because we are missing information about each others’ decisions.

My biggest take away was how clearly we value information. In many cases, you can actually put a dollar amount on this value. For example, your health insurance will be less expensive if you demonstrate you are healthy. Or, a used car with a warranty will be more expensive. In both cases, you can see the value of information.

3. People plan ahead

Macroeconomics involves big picture decisions made by society. There is generally one standard way to think about the macroeconomy. At its core, it involves the idea that people plan for the future.

The difference between stocks and bonds demonstrates how these plans influence the present. People save using both. However, stocks are riskier than bonds. As a result, stocks pay more in the future, (relative to their prices in the present) because of their uncertainty.

4. Expectations matter

In 1976 Robert Lucas, changed economic policy and prediction with this idea. In fact, some call it the ‘Lucas Critique’ for that reason.

A football metaphor demonstrates how this works. In 2015, the NFL increased the distance from the goal to make kicking an extra point riskier. As a result, you could not use data from the 2014 to predict, the likelihood of kicking in 2015. Why? The rules changed. As a result, people’s expectations about scoring on the extra point changed. People kicked less often.

Similarly, when the rules change for society, people’s expectations change. When expectations change, the past will not predict future decisions.