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Upending Economic Thinking

Richard Thaler won this year’s Nobel Memorial Prize in Economic Sciences for his foundational contributions to behavioral economics. The key insight of the growing field is that contrary to traditional economic models, humans don't always act rationally.

That seemingly self-evident insight has transformed economic thought, though not easily. Robert Shiller, also a Nobel winner and a pioneer in behavioral economics, wrote after Thaler's win that “there has been antagonism—and even what appeared to be real animus—toward our research agenda.”

In conversation with the New York Times, Thaler explained how seemingly silly things can lead to serious insights on sunk costs, supply and demand, and choice architecture that improved economic theory and had real-world policy implications.

Back in 2009, Yale Insights talked with Thaler about how governments and businesses can use “nudges” to encourage better outcomes.

After the Equifax Breach

Is there any way past the cycles of breach and contrition? Equifax let hackers steal the private financial and personal details of 143 million Americans by leaving a hole in its system unpatched for months.

Bryce Covert’s New York Times op-ed notes, “We are not the customers of credit reporting companies, but the product.” In her view, there shouldn’t be a private credit rating industry. “Given how poorly they operate and how little incentive their business model gives them to improve, their duties should be handed over to public institutions.”

Even such a significant shift would not be a fix alone, according to experts consulted by Knowledge@Wharton. They call for laws clarifying the obligations of companies, harsher penalties for firms that don’t fulfill their duties, and a defined role for the military in securing our digital borders.

What about those who were exposed in the breach? Ron Lieber of the New York Times has been fielding reader questions and explaining what to do next ("freeze" your credit file at all three major agencies, when you can get through.) He has been struck by a sense of "helplessness" among consumers—"the recognition that we are at the mercy of an industry that makes money off our data, treats us with disdain and answers to no one."

The Lifecycle of a Crisis

With Houston’s sprawl submerged under its third “500-year flood” since 2015, Texas governor Greg Abbott predicted years of recovery and “a new and different normal for the entire region.”

“Crisis has a lifecycle,” noted a white paper from Deloitte, “and so does crisis management.” The most heroic actions often happen on a sunny day in a conference room, long before any crisis, as responsibilities and redundancies are established in scenario planning sessions. And the hard work of dealing with impacts from natural disasters persists long after the public’s attention has moved elsewhere.

But the best-laid plans don’t always lead to the intended result. Michael Grunwald, writing in Politco, points out that the National Flood Insurance Program was created in 1968 to discourage building in flood-prone areas. Powerful lobbying morphed it into an expensive subsidy that underwrites actuarily-unviable development despite decades of warnings from researchers.

Before the Flood

Climate change is creating new problems and difficult choices everywhere, but coastal zones are particularly susceptible because of the double whammy of sea-level rise and increasingly intense storms.

In the U.S., the National Flood Insurance Program is supposed to keep flood insurance affordable while staying fiscally solvent. Climate change is making that mandate all but impossible. The Washington Post examines the politically fraught challenges of getting incentives right for a program that is $25 billion in debt and still underwriting properties that have filed as many as 40 claims.

Meanwhile, a century-old cranberry bog in Massachusetts is being re-wilded as an experiment in creating “natural infrastructure” that can buffer coastal regions, according to the New York Times.

For the Philippines, an archipelagic nation in the typhoon belt of the Pacific, the challenges are critical. Kenneth Hartigan-Go of the Asian Institute of Management has an overview in Global Network Perspectives.

Winner Take All?

Nine retail brands have declared bankruptcy this year and 3,000 stores have closed. Meanwhile, Amazon is moving into bricks and mortar—opening bookstores, experimenting with convenience stores that don’t need cashiers, and most recently buying Whole Foods.

The New York Times points to an economy-wide fight for scale as markets increasingly favor a few big winners. Research finds these “superstar firms” pay more, explaining much of the increasing pay inequality.

That’s great for those on the winning teams, but Stanford’s Nicholas Bloom writes in the Harvard Business Review, “Workers outside this charmed circle experience something quite different.”

Yale SOM’s Lisa Kahn found another explanation of divergence between companies: as many tasks are computerized, the more successful companies are the ones that learn to complement technology with uniquely human capabilities.

How Do We Combat Cybercrime?

The biggest cyberattack to date unfolded like a Hollywood thriller. Exploiting a vulnerability in Microsoft Windows stolen from the NSA, hackers—possibly linked to North Korea—crippled more than 200,000 computers at government agencies and businesses with the "WannaCry" ransomware.

Microsoft’s president called for a Digital Geneva Convention, saying that 74% of companies expect to be hacked each year and the economic cost of cybercrime is expected to hit $3 trillion by 2020.

Wired seconded the call, pointing to models of successful international technical accords on everything from telegraph to satellites.

Are We Living in a Near-Zero World?

Janet Yellen recently signaled that the Fed has shifted its goal from stimulating the economy to maintaining gains. Is this low-interest rate environment is the new normal?

There’s wide agreement that the natural rate of interest has been declining, though less agreement on why. Recent work from Brookings attributes it to investors’ willingness to pay a premium for safe and liquid assets like U.S. Treasuries, which keeps interest rates low.

What will the future look like? Modeling by the Fed showed its rates could hit zero as much as 40% of the time.

Ben Bernanke weighed in on the policy and political consequences. And the New York Times suggested that if monetary policy is losing some of its punch, perhaps fiscal policy—government spending and taxation—will need to be pulled out of the toolbox more often.

Fixing Healthcare?

The much-discussed Affordable Care Act and American Health Care Act are mostly about health insurance, not healthcare. It takes a lot more than insurance to create a successful healthcare system.

The NYU Langone Medical Center aims to train doctors while delivering world-class care. But in 2007 it lost $120 million and seemed to be in decline. strategy+business details how a new CEO led a turnaround that put the organization in the black and raised its rankings and quality scores. 

Harvard Business Review looked at a range of strategies to pare away the estimated $1 trillion in wasteful healthcare spending. 

And we talked with Yale professor Zack Cooper about his groundbreaking work on healthcare pricing.

"The future is here—it’s just unevenly distributed"

Quartz warns that we are heading into a Great Displacement. Automation is likely to eliminate millions of jobs in coming decades, a phenomenon already hitting those least able to adapt. Can entrepreneurs counter the trend and create widespread opportunities?

Already, jobs are moving away from the places where many of us live. Since the Great Recession, less than 40% of metro areas are adding new companies every year, according to an Economic Innovation Group report. And five metros accounted for as many new businesses as the rest of the country combined.

Yale Insights talked with Yale SOM economist Lisa Kahn to get an overview of the roiled labor markets.

Predictions for 2017

A tumultuous 2016 culminated in a political earthquake: the election of Donald Trump. Will the upheaval continue in the year to come? 
 
Writing for Bloomberg, Satyajit Das says that Trump’s proposals sound big, but aren’t actually going to change much for the economy as a whole.

Former treasury secretary Larry Summers and the Eurasia Group see a stock bubble and additional political shifts from elections in Europe as possible sources of chaos. 

And the FT sees economies performing above expectations—unless Trump throws a wrench into global trade.

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