Putting Microeconomics to Work

I’ve long been puzzled by the almost complete disconnect between real-world businesses and academic economics.  After I graduated from college, I went to work as a management consultant.  Almost nothing I learned as an economics major proved helpful to me in that job.  Then, when I went back to get a Ph.D., I thought what I had learned in consulting would help me in economics.  I was wrong about that as well!

Ever since, I’ve felt that both business and economics would benefit from a greater connection.  Why don’t businesses set prices the way economics textbooks say they should?  Why are randomized experiments so rare in business?  Why do economists write down models of how businesses behave without spending time watching how decisions are actually made at businesses? The list goes on and on.

It’s taken a while, but the business/economics connections are finally starting to happen with greater regularity.  John List and I wrote an academic piece about field experiments in businesses a few years back that focused on how partnering with businesses could help academics with their research.

The benefits are also going the other way.  The Economist has a nice article about how microeconomists are adding value to businesses.  (I’m sure the economists mentioned in the article are delighted to be included; I’m almost as sure they will hate the cartoon likenesses that accompany it!)

For what it’s worth, I’m trying to do my part to improve philanthropy and business through a little firm called The Greatest Good.  But, damn, it turns out to be a lot harder to make things happen in the real world than it is in the ivory tower!

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  1. Joe says:

    Tell me about it!

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  2. H. Bell says:

    Two issues:

    1) Economic models are normative by nature and don’t necessarily reflect how things really are. Plus they’re simplistic (all other things constant) and don’t add the additional layers (behavioral, environmental, cultural) that go into decision-making. For example, one place I worked we always asked “What are the ‘people’ implications of this change” after we did the analysis.

    2) Like informationally efficient financial markets, by the time the microeconomic model recognizes the need for an adjustment (like price), the adjustment has already happened. The models lag and are often built on historical data.

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    • TexCIS says:

      Kind of like “Global Warming” models . . . not so good at forecasting, but really good at hindcasting . . . after adjustments for historical data (reality).

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  3. Michael Cohen says:

    This is actually rather straightforward, isn’t it? Business owners stick with what they “know” works, because the cost of experimentation is perceived to be too high for the value that they think it will return. Even if they are wrong about both the costs and the value.

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  4. billb says:

    Randomized controlled trials are conducted on a pretty massive scale when it comes to e-commerce and web useability. E.g., should the ‘Buy Now’ button be green or red? The answer is often determined by serving different users different pages (randomly) and gathering statistics over the course of days or weeks. The winning button gets implemented. You have probably personally participated in such experiments without ever knowing it.

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    • Enter your name... says:

      Good advertising firms also do RCTs to find out which ads work best. That’s how we learn things like the more text, the more sales, even though very few people read all the text. If we didn’t test, you wouldn’t be getting multi-page letters from charities, in black-and-white “typewriter” font with “handwritten” circles and arrows and notes scrawled in the margins in “blue ink pen” color.

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  5. tmeier says:

    as T. H. Huxley put it:

    “The great tragedy of Science — the slaying of a beautiful hypothesis by an ugly fact.”

    It has taken several hundred thousand years for science to take hold of human imagination precisely because nearly all of us prefer beautiful theories to ugly facts. The preference for beauty over truth is so prevalent I only wonder at the exceptions.

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  6. TexCIS says:

    Academia and reality differ? This is news?

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    • nobody.really says:

      Levitt is elaborating on the relationship between theory and practice — which can be stated thus:

      – In theory, there isn’t any difference between theory and practice.
      – In practice, there is.

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  7. Paul S Vigil says:

    It’s always been about politics hasn’t it?

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