Saturday, December 12, 2009

Tiger Woods & The Trouble with Economics

Two items. 3 days ago, famous Harvard economics professor, greg mankiw, on his blog, using words of a UCLA professor as proxy, predicted Tiger Woods would play more games in 2010 based on the logic of "income effect", something straight from any good 101 textbook.

Today Tiger Woods announced an "indefinite break from professional golf".

What conclusion, if any, we may draw from fact vs theory?

The fact is economic theory as taught for years at academia is based on pure logic, a logic that assumes human beings are a specie of "homo economicus" -- a being acting purely on maximizing one's interest. To simplify matters, textbooks assume self interest is money. Money is measurable, quantifiable and is easy to use as evidence.

In Tiger Woods case, total income and wealth is expected to decline sharply as sponsors leave in droves. To maintain his accustomed life-style and to maximize his assets size, the axiom of "income effect" predicts MORE games Woods will play in 2010 not fewer.

Well, that's the problem with academic economics. We maximize and minimize all kinds of things in life. Sometimes it is $$ alone, other times, other stuff.

More often than not, except of course those guys and gals at Goldman Sachs et al, we maximize a lot of the "other stuff".

In Woods case, if we accept his public announcement that he wanted to work on being a "better person, a better husband and a father", the "other stuff" is not about money. It is anything but money.

The conceit of modern economics -- as we should all know by now -- was one of the factors in the creation and then the destruction of the financial bubble the fallout of which we are still living through.

Remember the big debate of "Freshwater" vs "Saltwater" Schools of economics? I wrote about that awhile back on my blog.

Here are the two references:

1) Greg Mankiw's blog:

Tiger Woods as a Natural Experiment
Chapter 21 of my favorite textbook discusses the role of income and substitution effects in determining labor supply, including a case study about lottery winners. UCLA economist Matthew Kahn applies this kind of thinking to the Tiger Woods saga.

Before reading Matthew's analysis, ask yourself this question: Does economic theory predict that Woods will play more or fewer tournaments next year?

Source: Greg Mankiw's blog

2) Tiger Woods' Statement here.

1 comment:

Anonymous said...

hmm.. informative style..