Duncan Green is offering a small bet that the charter city in Honduras won't work. Here's the thing, sometimes its worth making the bet even if the odds are stacked against you, because you also have to take into account the payoff to success. An economist would call this expected value. Even if there is only one card in the deck that can complete my hand, and I am very likely to lose the round, I should still call a £5 raise if there is £500 in the pot that I could win.
Even if the odds of a Charter City taking off in Honduras are 1 in a thousand, its still worth a punt if the payoff could run into the billions.
So what odds do you say Duncan? I'll give you £10 if it fails and you give me a £1000 if it works?
Edit: Andrew reminds me about opportunity costs. If I only have £6 left then it would be silly to call a £5 raise on such long odds. The opportunity cost is playing the next round, where I might have better odds of winning a smaller amount. But if I have £500, then I can afford to take a smart £5 gamble with low odds of winning. So its a question of the overall budget constraints too. I'm not convinced that there are huge opportunity costs associated with the needed investment in a Honduran Charter City, relative to overall government expenditure (the idea is to encourage private investment for most of the construction).
Edit: Andrew reminds me about opportunity costs. If I only have £6 left then it would be silly to call a £5 raise on such long odds. The opportunity cost is playing the next round, where I might have better odds of winning a smaller amount. But if I have £500, then I can afford to take a smart £5 gamble with low odds of winning. So its a question of the overall budget constraints too. I'm not convinced that there are huge opportunity costs associated with the needed investment in a Honduran Charter City, relative to overall government expenditure (the idea is to encourage private investment for most of the construction).
5 comments:
A few thoughts:
1. Remember that our welfare function should.be accounting for the people who are going to live there when we start talking about expected utility. We can waive around the unrealistic assumptions for Tibout choice all we want, but these assumptions are extremely context sensitive, and its perfectly possible that in the case.of failure, a lot of people get stuck in a failed city. You could title this thought "Should you be playing poker with poor people's time and money?"
2. Duncan is inherently skeptical about this idea, but some of his criticisms of how they are approaching the problem aren't still worthwhile. Why rely on a bunch of incredibly busy people (sans Rome) for the transparency board?
I'm extremely skeptical about charter cites, but I am still keen to see if this might work. That said, we should be ok with a little risk aversion here, not a trait I see often in poker players.
A few thoughts:
1. Remember that our welfare function should be accounting for the people who are going to live there when we start talking about expected utility. We can waive around the unrealistic assumptions for Tibout choice all we want, but these assumptions are extremely context sensitive, and its perfectly possible that in the case.of failure, a lot of people get stuck in a failed city. You could title this thought "Should you be playing poker with poor people's time and money?"
2. Duncan is inherently skeptical about this idea, but some of his criticisms of how they are approaching the problem aren't still worthwhile. Why rely on a bunch of incredibly busy people (sans Romer) for the transparency board?
I'm extremely skeptical about charter cites, but I am still keen to see if this might work. That said, we should be ok with a little risk aversion here, not a trait I see often in poker players.
Or to be more precise; "Should poor people be playing poker with their own time and money," to which the answer I think is a pretty clear "it's up to them not you." Nobody is forcing people to move to a charter city. If it doesn't work, noone will move there.
Of course, because everyone is good at predicting lifetime income flows. Are you willing to even entertain the idea that things could start of well, especially with a lot of optimism, energy, focus, and likely a little subsidisation, then subsequently fail?
Yeah alright. Still, I expect people can grasp in some way that this is a MASSSIVELY RISKY PROJECT. Bit like early migrants to the US, they must have been nuts, or desperate, or desperately brave, but on balance it's probably quite good that they did.
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