On the determinants of bitcoin returns: a LASSO approach


 By Orestis Vravosinos (Economics ’18)

 

Orestis shares his recent work on bitcoin, joint with professors Theodore Panagiotidis (Univeristy of Macedonia) and Thanasis Stengos (University of Guelph).

The paper is in press and currently available online at Finance Research Letters. It first appeared as a working paper of the Rimini Centre for Economic Analysis (RCEA).

Extended abstract: Bitcoin has recently received increased attention by both investors and researchers. The consumer base, transaction frequency in the digital currencies market and the number of businesses and organizations accepting payments in bitcoin have been rapidly expanding.

In this paper, within a Least Absolute Shrinkage and Selection Operator (LASSO) framework, we examine the significance of factors such as stock market indices, exchange rates, gold and oil, central bank rates, internet trends and policy uncertainty as drivers of bitcoin returns for alternate time (sub)periods within 2010-2017. The advantage of LASSO is that it performs coefficient shrinkage (even setting some coefficients to zero) and in this way automates model selection. Search intensity and gold returns emerge as the most important factors for bitcoin returns.

 

References

Panagiotidis, T., Stengos, T. and Vravosinos, O. (2018). On the determinants of bitcoin returns: a LASSO approach. Finance Research Letters, doi: 10.1016/j.frl.2018.03.016

In Praise of Imperfection

Rita Levi Montalcini on her 100th birthday.

By Roberta Sgariglia (International Trade, Finance, and Development ’18)


Ideally, in the best of possible worlds, we would not need a day when we are reminded of exceptional women in science and statistics on gender quotas in American research departments. However, such is the current state of things, and in this relatively brief article I will report the results of a hectic, imperfect and rather personalized attempt I made to address some of the myths, common ideas and stereotypes regarding the role of women in science. The main insights have been drawn from Halpern, Benbow et al (2007), a reading I highly recommend.  I will also briefly share some highlights from the story of Rita Levi Montalcini, who is a source of great inspiration for me, and whose book In Praise of Imperfection this article is named after. As I hope will become clear, I chose this title because of the complex and troubled relationship women generally have with imperfection as well as, obviously, the great consideration I have of Levi Montalcini’s work.

 

The question of whether women can contribute meaningfully to science, how they compare to men in terms of “ability”, whether or not they are underrepresented in STEM academic environments was of little interest to me until fairly recently. As a matter of fact, I have been raised in a country where the greatest strength of the public educational system lies in humanities, classics and history. This particular feature of the Italian “liceo classico” is incredibly enriching in many respects, and it provides students with a unique, though slightly outdated, understanding of the world. Later in life there is always time to gain hard skills that are more in demand, but what does acquire shape in these crucial years for personality formation is a general tendency to see the world through non-scientific “lenses”. Piero Angela, perhaps Italy’s most famous science journalist (who was awarded 10 degrees ad honorem  in a broad range of disciplines), indeed notes that Italian culture is still heavily humanities-centered, and this significantly hampers Italian productivity and growth prospects. Very few children in general see themselves as scientists, let alone girls. Therefore, part of the reason why we need a “Women in Science” day is the fact that some countries and societies do not invest enough in scientific research, and do not understand its value in modern economies.

 

To start with, we need to address a question that I find rather fascinating: can observed differences in female and male behavior and skills be traced back to structural differences in the brain? If that were the case, perhaps our scope for action would be limited. Contrasting evidence has been found on this matter. Male brain size seems to be higher,  which however tells us little about brain functions, the amygdala seems to be larger for men on average as well, and recent studies find that women tend to have thicker prefrontal cortices, which translates into higher general intelligence and cognitive ability, a result that is obviously sensitive to how such a characteristic is defined, measured and sample size used.

 

However, most researchers point out that there are effectively more similarities than differences, and an interesting study of 1400 individuals by the University of Tel Aviv finds that brains are “patchworks of forms” that do not fit into male or female categories, as defined by an index of “maleness” and “femaleness”. Researchers involved in this project argue that the majority of brains observed could be described as a “mosaic” of female and male structures, and therefore it does not make sense to speak about female or male “nature” ex ante. A significant portion of heterogeneity can be accounted for by environmental factors affecting the biological development of the brain. However, no consensus has been reached on these matters. What is worth mentioning though is an idea that is thoroughly explained in Halpern et al (2000): it is extremely difficult to separate biological and environmental factors in brain development and consequently other outcomes deriving from it. As a matter of fact, prenatal hormones as well as other hormones released later in life can develop differently depending on the experiences of the individual in question, as hormonal secretion is altered by the environment. This statement is reassuring: it tells us that there is no reason why women should, a priori, be less competent scientists.

 

Having spent some time on a somewhat biological excursus, let me address the common perception that women may lack or have less “cognitive abilities”, especially those necessary to thrive in science and mathematics. This statement was also made in 2005 by no less than Lawrence Summers. As explained in Halpern et al (2007), evidence has been found that there are differences in some psychological variables between men and women (see Hyde, 2005). However, these discrepancies are generally measured based on the following broad categories of core cognitive skills: verbal, visuospatial, quantitative skills, general reasoning as well as measures of working memory, perceptual speed and mechanical reasoning. First and foremost, these categories are not unitary constructs, they comprise a wide range of skills and activities, for which men and women may have different predispositions. For instance, the two sexes may naturally excel in different components of language use, or different aspects of image processing in the range of visuospatial abilities. In general, women seem to fare better in verbal, memory and general reasoning, while men in quantitative and visuospatial skills. However, as discussed above, we have reason to be skeptical of these generalizations.

 

This brings me to the most important point I want to make. There is consensus that girls generally receive higher grades in school, and that, even when lacking the initial foundations in a specific subject, they tend to perform better in the long run (see Dwyer, Johnson, 1997). They also fare worse in admission and standardized tests than their counterparts, but it has been proven that the latter underpredict academic performance. Bearing this in mind, we should also note that there are no “science abilities” per se: success in STEM research requires a wide range of skills, capabilities, approaches that complement one another and are used simultaneously. Given the evidence on girls’ and women’s ability to learn, and learn effectively, a strong case can be made for higher female involvement in science, a field where thinking differently and rigorously is an asset rather than a restraint.

 

To conclude, I have provided substantive evidence to back the idea that women can not only contribute to science, but can in fact thrive in all sciences. A complex set of factors is holding them back, and this would be a great subject for another article, but in this one I will mention three in particular, and explain how they are connected: perfectionism, low self-esteem and interiorized societal expectations. As a matter of fact, it is understood that women generally have lower self-esteem than their male counterparts, and take action when they are sure they will succeed, basing perception of their own capabilities (and often also self worth) on exterior feedback and reinforcement mechanisms.  This often results in girls and women setting higher standards for themselves than necessary, and striving for an unattainable perfection which they believe is out of their reach. This was one of the main issues Rita Levi Montalcini strived to address in her book In Praise of Imperfection and in her personal life. A Jewish woman, political refugee and Nobel laureate in neurobiology, Rita argued that just like the human brain, an incredibly sophisticated creation, is inherently flawed, we should not strive too hard for perfection, as it is not the essence of nature nor life . Moreover, she encouraged young people, men and women, to “think of the future”, “think of what you can do and do not fear anything”, to build one’s own path and follow one’s own aspirations. Rita is one of the many exceptional women that set the example and took revolutionary stances on controversial matters.  I look forward to a time when great female minds become the norm rather than the exception.

 

References

Dwyer, C.A., & Johnson, L.M. (1997). Grades, accomplishment, and correlates. In W.W. Willingham & N.S. Cole (Eds.), Gender and fair assessment (pp. 127–156). Mahwah, NJ: Erlbaum

Halpern, Benbow et al (2007). The Science of Sex Differences in Science and Mathematics, Association for Psychological Science, Volume 8

Halpern, D.F. (2000). Sex differences in cognitive abilities (3rd ed.). Mahwah, NJ: Erlbaum.

Halpern, D.F. (2004). A cognitive taxonomy for sex differences in cognitive abilities. Current Directions in Psychological Science, 13, 135–139

Hyde, J.S. (2005). The gender similarities hypothesis. American Psychologist, 60, 581–592.

A master student’s experience delivering a TEDx talk on the value of European integration

A year ago, master’s student in the Barcelona GSE Finance Program, Patrick Altmeyer gave a talk at TEDx University of Edinburgh on how positive impact European integration has had and should continue to have on our lives contrary. It provides us with greater freedom to choose, learn, exchange ideas, experience, develop. Here he describes his experience as a TEDx speaker and expands on the subject of the talk based on his experience as a student in Barcelona:

“TEDx at the University of Edinburgh was a very challenging and rewarding experience. I loved the thrill of speaking in front of hundreds of people and would definitely enjoy doing something similar again. It also provided my fellow speakers and me with a unique platform to speak out and actually reach people. I was at the time and still am bothered by growing pessimism about the idea of European integration. With my speech I intended to remind people of what’s at stake if in face of undeniable difficulties we simply give up on Europe and return to nationalist agendas.

Experiencing at first hand the recent political developments here in Barcelona has been a true reality check for me. The call for secession is by its very nature anti-unionist. But somehow the many peaceful independence supporters I have seen in the streets – among them many of my Catalan friends – have nothing in common with what we would generally think of as nationalists. Their opponents love to portray the Catalan separatists as anti-European (and themselves as saviours of the union), but personally I don’t buy that. I have realised during my time here that a strive for regional identity can go hand in hand with an open mind for Europe. One of today’s biggest challenges for supporters of integration is therefore to promote a sense of European unity while at the same time recognising that we are a very diverse group of people.”

 

You can watch his TEDx talk from January 2017 here, as well as discover what triggered the idea for this TEDx talk here.

The Implications of Declining Firm-Level Uncertainty for Consumption Variety and Cities (Unicredit & Universities Job Market Best Paper Award)

alumni

Editor’s note: In this post, Federica Daniele (Economics ’13 and PhD candidate at UPF-GPEFM) shares a summary of her paper, “The Implications of Declining Firm-Level Uncertainty for Consumption Variety and Cities,” which has won the 2017 UniCredit & Universities Economics Job Market Best Paper Award. She also offers some advice to aspiring PhD students in the Barcelona GSE Master’s programs.


Paper summary

There is something alarming about the direction in which firm dynamics have been changing over the course of the last decades. Today it’s much rarer to encounter firms that undergo large up/downsizings than it used to be in the past: in other words, firms have become more tied to their rank in the firm size distribution. This has been of concern for many economists, who see this happening jointly with a slowdown in aggregate productivity growth and competitiveness. Being aware that the question on the drivers behind this trend and its consequences was still open to debate, coupled with an interest for entrepreneurship, is what pushed me to dive into this topic to better our understanding of the issue in my paper, “The Implications of Declining Firm-Level Uncertainty for Consumption Variety and Cities.”

An explanation for the decline in business dynamism consistent with the data is that technological change has caused the degree of idiosyncratic uncertainty that firms routinely face about their chances to grow to go down. This implies that today most of the return from starting a firm is determined by its initial (in)success as opposed to luck in the development of the business over its life-cycle. Based on evidence drawn from data on the universe of German establishments, in the paper I argue that a reduction in firm-level uncertainty is consistent with lower incentives for potential entrepreneurs to start a new business. My paper offers a new insight into the literature on the role of uncertainty for economic activity: some degree of uncertainty is beneficial, because – by unlocking the opportunity for a given firm to grow large out of fortuitous events (such as a favourable demand turn) – it encourages entrepreneurship. In this sense, my paper provides a defence of the classical argument by Frank Knight according to which risk-taking is a characterising feature of entrepreneurship.

A deficit in the growth rate of the stock of establishments triggered by a decline in firm-level uncertainty is cause of concern for multiple reasons. In my paper, I investigate the importance of two dimensions: first of all, the fact that consumers get to consume a less wide variety of goods than otherwise; and secondly, the fact that, being the loss in entrepreneurship larger in big cities, fewer consumers find appealing to move to large cities than otherwise, thus diminishing the extent of positive spillovers due to higher urban density. Another outcome of interest would have been, for example, the process of innovation within an industry.

All in all, the contribution of this paper consists of assessing both empirically and theoretically novel long-run consequences on economic activity of declining firm-level uncertainty.

Advice for future PhD students

I think Barcelona GSE masters students who are considering going the PhD / academic career route should be strategic. There is no harm in taking one year to do some exploratory work, working as RA, for example, for some good professor, if that buys the time to figure out what kind of research best matches your interests, in which institution you would feel better fulfilled, or whether academia suits you at all.

In the end, if you choose to pursue the academic route, you will have most certainly achieved a better match with the institution/supervisor, and spared a lot of time later on during the course of the PhD, which you can instead dedicate to producing research of good quality.

But even if you decide that academia is not for you, the value of the investment will still be positive, as experimenting early during one’s working career is much less costly than doing it later.

Some thoughts by Prof. Hogarth on Prof. Thaler’s award of the Nobel Prize in economics

llustration: Niklas Elmehed. Copyright: Nobel Media AB 2017

By Orestis Vravosinos (Economics ’18)


Universitat Pompeu Fabra and BGSE Emeritus Research Professor Robin M. Hogarth shares some thoughts in the light of Prof. Thaler’s award of the Nobel Prize in economics.

 

  1. What would you deem to be the most significant contributions of Prof. Thaler?

Prof. Hogarth: “I’m very glad that Thaler got the Nobel Prize, because it’s a recognition that the field of behavioral economics has to be taken seriously. He has made the field more popular and two of his books are quite interesting. Even though from an academic point of view ‘Nudge’ may not be so strong, in both ‘Nudge’ and ‘Misbehaving’ Thaler has done a very good job in explaining things and making behavioral economics accessible to the wider public. ‘Nudge’ has spurred the creation of nudge initiatives in the UK and the US.”

Prof. Thaler has greatly contributed in popularizing behavioral economics and manifesting the insight it can offer in practice and policy, especially though the use of nudges bringing nudge theory to prominence. However, as is most times the case with influential research, Prof. Thaler’s work has also been a matter of controversy, as criticism of what is called ‘libertarian paternalism’ has developed. Concerns have been raised both in regards to freedom of choice (e.g. Mitchell, 2005; Veetil, 2011) and the efficiency or optimality of paternalistic policies (e.g. Rachlinski, 2003; Mitchell, 2005; Glaeser, 2006).

  1. How do you think concerns regarding the use of nudges can be alleviated? Do you think there needs to be any form of regulation on it?

Prof. Hogarth: “Thaler and his co-authors have supported nudge coining the term ‘libertarian paternalism’. Although I don’t think the term makes much sense, I don’t see what is wrong with governments saying that some things are better for people than others; advertisers do it all the time.

In some EU countries there is a total rejection of organ donation after death, while in others almost total acceptance and the reason is the difference in the default option on the driving license among countries. I don’t see why this is wrong; since a default has to be chosen, why not choose the one that is on average better for everybody? Provided that people can still go against the default, if they want to. Governments should be able to use as much social science knowledge as they want. As long as there is “good knowledge”, why should we ignore it? Whether it comes from sociology, psychology, anthropology, economics or whatever, we should use it, as long as it is good for the society.

I don’t think there is any need for regulation of nudge. One should not regulate how advertisers advertise the products, as long as they say the truth. Similarly, governments or agencies should be allowed to design choice; they just need to be honest and clear about it.”

 

  1. Are there any other thoughts you would like to share in the light of this year’s awarding of the Nobel Prize in Economics?

Prof. Hogarth: “Another interesting aspect of Thaler’s work is that it has managed to make an impact without being heavily mathematical. The other point I would like to make is that Thaler owes a tremendous debt to Tversky and Kahneman. Prospect theory provided a framework for explaining things Thaler thought of.”

 

We kindly thank Prof. Hogarth for sharing these thoughts with us.

References

Glaeser, E. L. (2006). Paternalism and Psychology. The University of Chicago Law Review, 73(1):133-156

Mitchell, G. (2005). Libertarian Paternalism Is an Oxymoron. Northwestern University Law Review, 99(3):1245-1277.

Rachlinski, Jeffrey J. (2003). The Uncertain Psychological Case for Paternalism. Northwestern University Law Review, 93(3):1165-1225.

Veetil, V.P. (2011). Libertarian paternalism is an oxymoron: an essay in defence of liberty. European Journal of Law and Economics, 31: 321-334.

Financial Knowledge and Behavioral Economics as Means to a Wealthier Life

Photo credit: Nattanan Kanchanaprat


By Orestis Vravosinos (Economics ’18) – This article first appeared on the blog of Nudge Unit Greece.


In recent decades, financial literacy has been gaining more and more research interest with experts emphasizing that it can be conducive to more efficient financial decision-making. Given the tough economic situation in many countries around the world after the global financial crisis, the need for financial literacy has become even more imperative. Through financial literacy people can both achieve higher levels of wealth and better allocate it in order to make the most out of it or, as an economist would say, maximize their utility.

Before we start to examine the ways, in which financial literacy can inform our decisions, we first need to define financial literacy. An integrative definition stressing both financial knowledge and the ability to put it in practice has been proposed by Remund (2010, p. 284), who defines it as

a measure of the degree to which one understands key financial concepts and possesses the ability and confidence to manage personal finances through appropriate, short-term decision-making and sound, long-range financial planning, while mindful of life events and changing economic conditions.

Financial literacy and behavioral economics enhancing financial decision-making

Financial knowledge can enhance decision-making by raising awareness about some common behavioral errors people are susceptible to, when making financial decisions. Estelami (2009) argues that financial literacy programs could fight typical financial decision-making errors, such as hyperbolic discounting, short-term memory overload, anchoring effects, inaccurate risk perceptions and mental accounting. Similarly, Loerwald and Stemmann (2016) suggest that, when people become aware of some common human decision-making errors, they can better resist to making them, while the importance of financial education and financial literacy is also stressed by Altman (2012) and Shen (2014), who addresses overconfidenceanchoring and framing effects.

Another major mistake people do is that they often hold under-diversified portfolios. The importance of portfolio diversification in mitigating risk and achieving optimal return and risk combinations has long been acknowledged both in academia and by investment professionals. This crucial role of portfolio diversification has become even better acknowledged, since Harry Markowitz’s –recipient of The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1990– seminal paper Portfolio Selection(1952)*. However, studies have shown that many households and individual investors hold under-diversified portfolios.

Fortunately, based on empirical evidence it appears that individuals with higher financial knowledge possess better diversified portfolios (Goetzmann and Kumar, 2008; Calvet, Campbell and Sodini, 2007; Guiso and Jiappelli, 2009; Abreu and Mendes, 2010; Kimball and Shumway, 2010).

Struggling against bad financial decisions

Nevertheless, as Estelami (2009) underlines, knowledge of financial matters cannot guarantee success in our financial decisions, as behavioral errors and biases in these decisions are often found to affect even the most financially knowledgeable. The father of Modern Portfolio Theory, whom we met just above, Harry Markowitz, admitted that he had used the 1/N heuristics or naive diversification; that is, he simply assigned equal weights to all assets in his portfolio without for example looking at the correlations among the included assets. He attributed this decision to regret aversion“My intention was to minimize my future regret, so I split my retirement plan contributions 50/50 between bonds and equities.” (Mitra, 2003; Pompian, 2012).

What’s the takeaway?

Financial literacy and knowledge of our psychological and cognitive biases and errors are key factors that can help us lead a wealthier life. However, the battle against bad financial decisions is not a piece of cake for any of us. The best we can do is to start this learning journey in financial literacy and behavioral economics -which hopefully you have already done by clicking on these eye-catching hyperlinks in the text. That way, the next time we are buying a new 20.000€ car and are presented with these gorgeous 2.000€ accessories to buy with (because “come on, it’s peanuts, I’m already spending 20.000€ on the car”), we will know that we may be falling for mental accounting and “bundling”. Therefore, we need to think twice if we value these accessories that much; maybe these 2.000€ spent on something else would finally prove to be much more useful and make us a lot happier!

 

Note: The idea for the last example comes from the lecture Mental Accounting and Expenditures of the free online course Behavioral Finance, which you may well want to enjoy by clicking here.

*The concept of diversification had been known for many years before, but Markowitz’s work provided a solid theoretical framework and helped lay the foundations of Modern Portfolio Theory. For an assessment of the early history of portfolio theory, see Markowitz (1999).

References

Altman, M. (2012). Implications of behavioural economics for financial literacy and public policy. The Journal of Socio-Economics, 41(5), pp.677-690.

Estelami, H. (2009). Cognitive drivers of suboptimal financial decisions: Implications for financial literacy campaigns. Journal of Financial Services Marketing, 13(4), pp.273-283.

Loerwald, D. and Stemmann, A. (2016). Behavioral Finance and Financial Literacy: Educational Implications of Biases in Financial Decision Making. In: C. Aprea, E. Wuttke, K. Breuer, N. Koh, P. Davies, B. Greimel-Fuhrmann and J. Lopus, ed., International Handbook of Financial Literacy, 1st ed. Springer Singapore, pp.25-38.

Markowitz, H. (1999). The Early History of Portfolio Theory: 1600-1960. Financial Analysts Journal, 55(4), 5-16.

Rasiel, E. & Forlines, J. (2016). Mental Accounting and Expenditures. Lecture, Behavioral Finance by Duke University on coursera.org.

Shen, N. (2014). Consumer rationality/irrationality and financial literacy in the credit card market: Implications from an integrative review. Journal of Financial Services Marketing, 19(1), pp.29-42.

Five lessons from a one-week meeting with 18 Nobel Laureates

By Fernando Fernández (Economics ’13, GPEFM)

Photo credit: Lindau Nobel Laureate Meeting

By Fernando Fernández (Economics ’13, GPEFM) [1]


“Just when we thought we had all the answers, all the questions changed.” Mario Benedetti

That was my reaction when the 6th Lindau Meeting in Economic Sciences concluded. This meeting occurs every two years and gathers several Nobel Laureates and young economists (graduate students and assistant professors) from around the world. This meeting is certainly the most inspiring academic event I have ever attended.

The meeting took place in the beautiful town of Lindau, next to Lake Constance, in southern Germany between August 22nd and August 27th. During these days, we attended lectures from 18 Nobel laureates in Economics on a wide range of topics: bounded rationality, investment management, pension design, monetary policy, labor markets, morality and markets, political systems, innovation, and econometrics. I will not attempt to summarize these great lectures but all of them were recorded and are available on this link.

 

I would rather focus these lines on the interactions that occurred outside the “classroom”. Every day the program included lectures, lunch, seminar presentation panel discussions, and dinner.

The first lecture was given by Daniel McFadden [2], and besides the content, something really caught my attention. In the first row of the room (it was actually a theater) you could see the other Nobel Laureates. All were carefully listening to the speaker! They seemed like young students paying attention to an important professor. So the first lesson from this meeting was that we, as researchers, should actively embrace our academic curiosity.

Over lunch, I had the first opportunity to talk to a Nobel Laureate. I was sitting with some friends I just met and were talking about each others’ research. At some point, Bengt Holmstrom asked: “Would you mind if I join you?” We welcomed him, and seconds later he started asking us about our research interests. He soon realized that all of us were doing empirical work and said: “I am the only theorist in this table!”

He listened to all of us, asked some questions (some of them were hard to answer) and even gave us some advice. I was able to confirm that these brilliant economists have a special talent to listen to others, even if they are PhD students struggling with their papers. He was very generous with his time and recommended us to work hard but only on topics that we really cared about. He also advised us not to focus on publishing papers but instead on gaining respect from our peers through our work.

Hours later, I had the chance to sit on the table with Eric Maskin for dinner. He told us about the day he received the call from Stockholm and found out he won the Nobel prize. Then, we talked about US politics, big data, increasing co-authorship in economic journals, and other current issues in academia. As you can imagine, when you are sitting next to a Nobel Laureate you get the feeling that you can ask him any question. Well, these questions (some of them unrelated to economics) arrived and Maskin, very modestly, said : “I know very little about this particular topic, so I cannot have an informed opinion. In fact, you should know that one wins the Nobel prize, not because you know everything, but because you specialize in certain specific topics”. His reaction really impressed me but he was right. He could not be an expert in every topic and he acknowledged it. How many times do we feel the need to have an opinion on everything? The second lesson from this meeting is that we must always acknowledge our limitations and be humble enough to don’t give uninformed opinions.

One of the big questions most PhD students have is the following: where do great ideas come from? Tirole, Hart and Holmstrom provided some light on this issue and their advice was the third lesson. Tirole said two great sources of ideas were talking to people around you (his office was next to Hart’s) and to people outside the academia (practitioners, policy makers and business men). He encouraged us to talk to practitioners because they are facing the real problems we must address, that they have many important questions that remained unanswered and deserve our attention. Holmstrom said that the idea of his well-known model of career concerns (one of the reasons he was awarded with the Nobel prize) came when he has working in a plant in Finland, and had some problems with his manager. He then went to do his PhD and wrote a model to explain the behavior of this manager. In addition, he recommended us to become experts in the literature of our field of interest, not to follow it but to depart from it. After this, Hart said that working with Holmstrom and Tirole was a great way to find ideas. He also suggested us that when doing theoretical work, we should keep models as simple as possible.

James Heckman’s lecture was about the identification problem in econometrics. He was the most enthusiastic person I have ever seen giving an econometrics lecture. And this enthusiasm was quite contagious. Even though he was talking about highly technical and complex conditions for a new interpretation of Instrumental Variable (IV) estimates, I was surprisingly able to follow his lecture and understand the contribution he was making. Or, at least that’s the impression I had. That same day, we had a Bavarian dinner at night, with traditional music, food, and of course, beer. This was the last night of the event and the time to say good-bye to other fellow economists.

The coolest table at the Bavarian dinner

After some drinks, I decided to walk back to my hotel, located around 50-minutes away from the place we had dinner. On my way, I ran into Heckman, who seemed a bit confused. He had been walking with other young economists and then he was not sure where to go. I approached him and we realized we had to walk in the same direction. This was quite a unique and unexpected opportunity to talk about his lecture. So I started with my questions and he replied to all of them with great patience and enthusiasm. I could confirmed I had actually understood his lecture. Then, we started talking about the rapid increase in data availability and how big data should influence econometrics. He also told me good stories about his last trip to Barcelona and Peru. Eventually, we arrived at the hotel and said good-bye. This great conversation was the fourth lesson: we should remain enthusiastic even after years of dealing (doing research or teaching) with the same subject.

The fifth lesson is that these people seem very happy doing their jobs. Yes, I know, they are Nobel Laureates, they have already accomplished important professional goals. But it is still surprising how much they enjoy doing research. During lunch time or dinner, when we were able to talk to them more informally, people would usually ask: Which are the questions we should tackle? What fields are relevant now? Most Nobel Laureates seemed to share the view that the relevant questions are the ones you really care about. And if they actually work according to this view, it is not that hard to understand why they look like if they were having fun all the time.

When I was heading to this meeting, I had a lot of questions in my mind and thought the meeting would be an ideal place to get answers. During the meeting, some of my questions were being answered but later I realized that getting answers was not so important. Once the meeting was over, I realized all the lessons I took from it were unexpected. I had misunderstood the purpose of this meeting. I should have not come to the meeting looking for answers. I should have come looking for questions. These highly talented economists are Nobel Laureates precisely because they are extremely good at raising questions. Questions that open new streams of work. Questions that people had overlooked but that deserve careful thinking and attention. Now, two months after the meeting, I realize that all the questions raised by these Nobel Laureates are the reason why this event was so inspiring. Because in research that’s what keeps us working: Questions!


[1] I am thankful to the Marie Sklodowska-Curie Fellowship (through the PODER network) for sponsoring my participation in the meeting.

[2] Before McFadden’s lecture, there was a keynote address by Mario Draghi, president of the European Central Bank.

Why more educated individuals are not always healthier

Caleb Hia (Economics ’18) wrote the following article on health economics from his research for his undergraduate dissertation at the University of Edinburgh.

BGSE Voice

Caleb Hia ’18 wrote the following article on health economics from his research for his undergraduate dissertation at the University of Edinburgh.


From 2006 to 2007, almost half of the UK’s National Health Service’s (NHS) costs were attributed to behavioural risk factors: diet-related sickness, sedentary lifestyles, smoking, alcohol and obesity cost more than £15 billion (Scarborough et al., 2011). This mammoth sum, deemed an economic burden on public resources, attracted the government’s attention. In the recent Budget, the Chancellor introduced a tax on the sugar content of soft drinks from 2018 to tackle childhood obesity aimed at compelling individuals to consider external costs associated with its consumption which they do not bear such as the publicly-funded health costs of treating diet-related diseases. The effectiveness of this or any further government intervention in an attempt to correct this “externality” will influence the way the NHS allocates its limited resources in healthcare provision.

Beyond this political issue runs an underlying discussion of the social determinants of health which have long been studied (Wilkinson and Marmot, 2003; Adams et al., 2003). In particular, the effects of education on health has been of interest since the inception of Grossman’s (1972) health model. Grossman’s model suggests health can be maintained by health investments, depending on goods and activity consumption, which affect health although health depreciates as individuals age. As better health gives an individual more time to work and enjoy consumption, more educated individuals are expected to demand more health and invest more in their health. This implies more educated individuals are also more efficient health producers.

A possible causal link between education and health exists possibly because higher productivity from more education directly translates to a higher level of health production through allocative efficiency (Kenkel, 1991; Rosenzweig, 1995) and productive efficiency (Grossman, 1972). For example, low literacy is associated with a poor understanding of hospitals’ discharge instructions (Spandorfer et al., 1995) while higher educated individuals are more likely to follow medical treatments (Goldman and Smith, 2002). Relatedly, higher educated people spend more time on health-related activities because they are better at allocating inputs (Grossman, 1972). Additionally, higher educated individuals use their higher earnings to purchase healthier lifestyles (Glied and Lleras-Muney, 2003) which entail more expensive medical treatments, healthier food consumption and living in healthier areas.

I use a natural experiment in England, the increase in compulsory schooling laws from fifteen to sixteen years old following the Raising of School Leaving Age Order in 1972, and an instrumental variable (IV) regression model to examine the relationship between education and health in greater detail. My sample incorporates additional years of data from Health Survey England between 1991 and 1993 which were not analysed before. I measure various health-related measures and behaviours including Body Mass Index (BMI) which has not been considered before. I run Ordinary Least Squares (OLS) and two-stage least squares (2SLS) regressions in a sample containing all individuals and a discontinuity sample comprising individuals born only in January and February using February-born individuals as my instrument. I show education has no causal effect on various health-related measures and behaviours.

A possible explanation for this lies in time inconsistent preferences supported by behavioural economics. Quasi-hyperbolic discounting (Phelps and Pollak, 1968; Laibson, 1997) induces dynamically inconsistent preferences contrary to geometric discounting. The following payoff matrices models a hypothetical situation where an individual fails to quit smoking due to quasi-hyperbolic discounting:

Under geometric discounting where ∝ ≈ 1 and β ≈ 0.8,

he makes time consistent choices regardless of when benefits to those choices are delayed. Since he gets more utility from quitting in both periods, he quits immediately.

However, under Quasi-hyperbolic discounting where ∝ ≈ 1 and β ≈ 0.8,

he changes his choices based on his distance in the future. Unlike geometric discounting, he gets more utility from quitting only in future and not at present and hence do not quit.

The empirical evidence from Gruber and Köszegi’s (2001) addictive behaviour model which incorporates time-inconsistent preferences to the standard “rational addiction” model (Becker et al., 1994) suggests smokers exhibit forward-looking behaviour with time inconsistent preferences concerning smoking. Thus, individuals start smoking often as adolescents when they are most present biased (Hammond, 2005) and do not anticipate the difficulty of quitting.

Therefore, lifestyle habits may not be correlated with education. In the case of smoking, individuals who quit smoking successfully may have used commitment devices (Ashraf et al., 2006; Kaur et al., 2010; Beshears et al., 2011) like quitting with friends to constrain their own future choices by deciding ahead of time to make future deviations costly. Increasing the education budget may be a sound way to promote public health but understanding behaviours and exploring policies to incentivise individuals to adopt healthy habits may be more effective in the long-run.

Download the full paper:

The causal relationship between education and health-related measures and behaviours: Evidence from England

Advice for new master’s students from Marc de la Barrera ’17

Marc de la Barrera ’17 shares some advice from his recent experience as a student in the Barcelona GSE Economics Program. 

At the welcome event for new students on September 26, alum Marc de la Barrera ’17 shared some advice from his recent experience as a student in the Barcelona GSE Economics Program.

alumni speech
Marc de la Barrera (Economics ’17, GPEFM)

Here is the text of his speech (see if you can spot all the references to a certain television series…)

Dear BGSE students, staff, professors and friends, 

I am very happy to be here giving this speech, remembering myself just one year ago sitting in your place. By that time I was an engineer starting an Economics Master, both amused but nervous for digging in a new field. “You know nothing, Marc Barrera”, I keept saying to myself. One year later, at least I can say I know something.

In the Economics Master, I learnt to play with macroeconomic models, how to gather valuable information from data, and to understand how we take decisions. Also that asking the right question is almost as important as finding the answer. I remember me having troubles understanding the “risk free rate” concept. How is it possible that you get a return on your money for sure? Then someone told me that America always pays its debts. Well, they assume they do, I don’t know if now they are so confident with its new administration. Those in data science will learn that information is power, while these of you taking political economy classes will argue that power is power. For competition ones… well, competition is lack of power. And no matter which master you are enrolled in, you are going to meet, John Maynard Keynes, 1st Baron Keynes, Companion of the Order of the Bath, Fellow of the British Academy and father of modern economics.

I hope you are enjoying your time here, nice weather, meeting new people every day, no pressure… But summer will not last forever. Soon you will realize that winter is coming, and with them, exams. And remember that when exams come and problem sets appear, the lone student dies but the pack survives. Everyone has its studying style, but I deeply encourage you form teams and work altogether. You are here, hence you are all very intelligent, I have no doubt about that, but there is a problem… Your professors more. You will need to merge several minds to solve one problem. You have different backgrounds, someone will be very strong in formal math, others might excel at economic intuition, and others will know coding. These three aspects, and many others, are needed to succed all the masters at BGSE.

But it is not only what I learnt that made last year special, it was the experiences I lived and more importantly, the people I meet. I want to make use of this privilaged attention I have, to encourage BGSE to do more activities outside the academic environment, at the same time that I congratulate them for the ones they are currently performing. Butifarrada, football tournamen, sky trip, fideuà… Go to as many events as you can, if not all. Defying all economic laws, this events provide one thing that economists belief do not exist: “free lunch” (just ignore the tuition fees).

Then the people. You will get in touch with many people from many nationalities, such opportunity must be taken. But is not only the cultural exchange what matters. Feelings, frienship will arise. Some cuples will form with probability one. Networking to get opportunities, information or new jobs is fine, but spending time with people you like and appreciate, is better.

>And finally the faculty. Their level is extraordinary, make the most of them. Not only during the class, they are here to help and guide you. I might have abused of their kindness last year, but every professor and staff member I asked to see, whether for a technical doubt regarding the notes, to more fundamental and vital questions like “should I do a PhD”, received me and helped me as much as they could. Luckily you don’t have to send a raven, although we have more pidgeons here, an e-mail should work. The objective of the faculty is to make the most of you, so let them help.

Whether you stay in Bellaterra at UAB or in the Citadel Campus at UPF, it is time to go beyond the wall. After the master the research frontier will be near, and some of you, like me, will opt to go further, to the unexplored. Those who opt for a professional career, maybe we will make it to the World Economic Forum in Davos.

Congratulations for being admitted to your program. This year will be a great year: you will learn economics, meet people, and discover cultures. I hope that the first weeks have been pleasant, and get ready to work hard, because as bodybuilders say, “no pain, no gain”.

Original post and more from Marc de la Barrera on his personal blog. Connect with Marc on Twitter and LinkedIn


Videos from welcome events for the Class of 2018:

A Study on the Measurement of the Compensating Wage Differentials in European Countries

Yusuf Aguş (Economics student ’18) shares a summary of his bachelor’s thesis on the measurement of the compensating wage differentials in European countries.


According to the economic theory, the differences of working conditions are compensated
by wage differentials at the equilibrium in a perfect competition setting. In other words, if a worker
is working in a job with undesirable characteristics, he or she needs to have a higher wage then his
or her counterparts.

Earlier studies failed to find significant results for the effect of most of the working
conditions on wages, which could be possibly caused by several different biases, and focused on the
effect of the risk of fatal or non-fatal accident. These biases can be summarized as the effect of
unobserved characteristics, survey errors, heterogeneity of individual preferences on job
characteristics and endogeneity of job riskiness. In this direction, the effect of risk perception on
wages has been tried to be estimated by using 2010 and 2015 waves of the data set of European
Working Conditions Survey (EWCS) which includes a wide set of data from 25 countries. As it is a
very wide set of data, it allows us to control for a lot of heterogeneities across the individuals. A
three-staged estimation strategy has been used in order to show the cross-national differences
clearly. Firstly, the estimation is done for all the countries. Secondly, the models are estimated only
for Turkey. In the third and the last stage the estimation is done separately for two different
country groups, which are constructed according to their GDP levels. For the sake of simplicity,
countries with higher GDPs are addressed as the developed countries and the rest as less developed
countries. The lists of country groups can be found in the following table:

 

The estimation gave insignificant results for most of the cases. However, the most salient
result has appeared in the estimation for the less developed countries. A negative and significant
effect of risk perception on wages has been received for the group of less developed countries,
which can be the sign of a segmented labor market across European countries in terms of
compensation of working conditions.

For the case of Turkey, It can be observed that Turkish workers receive a positive wage premium for being informed about risk, but they do not think that their wage is compensated for risk. Pooled results are quite confusing as well. Risk perception did not bring a significant wage premium, but workers who think that their wages are compensated for risk have higher wages than their counterparts. According to these somewhat controversial results, we might say that European workers are not perceiving the risk correctly.

The full article can be read here.