GET1023 – Thinking like an Economist

Practice Questions for the Final

1. Suppose that in a hypothetical jurisdiction murder and attempted murder are both
punished by capital punishment. Discuss the pros and cons of such a penal configuration.

By punishing attempted murder by the death penalty, the criminal justice system attempts to
deter people from even attempting murder. On the other hand, the fact that the penalty is the
same for murder and the attempt of it, does not give any incentive to a criminal who has
commenced her homicidal attack to back away before completing it. Since the penalty is the
same, they might as well complete the murder, so that, at the very least, they do away with one
witness, the victim. A system that escalates penalties for more serious crimes makes use of the
marginal effect of punishment.

Typically societies give a way out to criminals who have already commenced a criminal attack
so that they don’t complete it. But, thinking like an economist, one can think of setups in which
the legal framework of our hypothetical jurisdiction (attempted murder = completed murder)
might be more appropriate. Let’s imagine a society that is plagued by a lot of attempted
murders which for some reason are not completed. Maybe the criminals are clumsy shooters,
or they have bad vision, or their sense of guilt is triggered when they pull the trigger, or the
bullets used are not the right caliber, etc. In that scenario, the law might want to push the
penalty for attempt up one notch in order to disincentivize the attempt itself.

2. A doctor is going to perform a painful procedure on a patient. She has two options, both
of which will generate the same maximum amount of pain but the first one will be shorter
and will end shortly after this maximum, while the second one is longer and will last
longer ending on a good note. Which option would you advise the doctor to follow?

Several studies have shown that people are subject to duration neglect and the peak-end rule.
Duration neglect means that people are relatively insensitive to the duration of unpleasant
experiences. According to the peak-end rule, the magnitude of an unpleasant experience can
be explained by the average between the peak of the unpleasantness and the end of it.
Considering the two procedures have the same peak, a lower end will generate a lower average
and thus a lower overall unpleasant feeling. This is the case for the second procedure.

Therefore, if the objective of the doctor is to reduce the memory of the pain, she should choose
the second procedure. If her objective is to reduce the overall amount of pain, then she should
choose the first one. In the former case, the doctor is tending to the remembering self. In the
latter case, she is tending to the experiencing self.

Examples that can be brought in showcasing the two effects (duration neglect and peak-end
rule) are the colonoscopy example and the cold water experiment (pp. 378-384 of the
Kahneman book, Thinking fast and slow).
3. What are the historical developments that led to the adoption of the engagement ring as
a commitment mechanism?

The engagement ring as a commitment mechanism originated in the United States after the
1930s when the “breach of promise” action was abolished. The action allowed a woman who
was engaged and was promised marriage to sue her fiancé who promised to marry her but
never did. The reason for this action was that such a woman, before the 1930s, would have a
hard time finding another fiancé and eventually getting married. Based on the social mores and
the closed nature of the societies of the time, the news of the broken engagement would
seriously damage her reputation and her chances of eventually becoming somebody else’s
wife. The breach of promise action by making the fiancé liable for any such damage, deterred
such occurrences of abandonment and, in any case, compensated the woman for the harm done.
Therefore, the law operated as a commitment mechanism that held the engagement together
and guaranteed the subsequent marriage.

When this action was abolished, a new commitment mechanism had to be invented. The
engagement ring donated by the fiancé to the fiancée acts as collateral that the man forfeits if
he breaches his promise to marry. Therefore, it is a type of in-kind compensation that the
woman receives in case of breach. Presumably the woman has no interest in the ring itself after
the end of the engagement but she can sell it in the open market in order to cash its value and
thus receive appropriate relief for the damage suffered. In this respect, the engagement ring
has a similar function to the breach of promise action, deterring fiancés to break engagements
and punishing them when they do.

4. Describe how the ultimate factors lead to the proximate factors according to Jared
Diamond.

Diamond argues that there is a series of ultimate factors that lead to and explain the proximate
factors, which, in turn, explain the different paths history took in different areas of the world.
The ultimate factors are the Neolithic revolution that occurred independently in at least 5 areas
of the world and the orientation of the continents that allowed the benefits of the Neolithic
Revolution—the domestication of plants and animals—to spread more easily in Eurasia than
in Africa or America.

One of the proximate factors is horses, which give a society the capacity to transport goods
over long distances as well as military power. Horses are directly derived from the Neolithic
Revolution. Additionally, living in close proximity with animals allows epidemic diseases to
spread to the humans, thus over the long run allowing them to build up their immune system.
Domesticated plants and animals create food surpluses, which, in turn, allow large sedentary
societies to form. The latter generate a need for political organization and record keeping by
way of writing. In addition, large populations also help in the spread of diseases and the buildup
of the human immune system. Finally, in those sedentary societies, technological
improvements can be achieved. Thus we derive the remaining proximate factors: guns, steel,
maritime technology.
5. According to Piketty, what happens when the return on capital (r) exceeds the growth
rate of the economy (g)?

In such a case inherited wealth will grow faster than income generated from a lifetime’s labor.
This result can be enforced by the fact that rich people save a larger proportion of their income
and they are able to achieve higher returns by hiring better wealth managers and being able to
wait and take the right risks.

All this leads to divergence of incomes or high levels of inequality. Forces of convergence,
like the diffusion of knowledge or investment in training and skills, also exist but they don’t
seem to have the upper hand at this stage. Moreover, Piketty’s model does not assume any
market imperfections. Rather the more perfect markets are, the more likely it is that the return
on capital is higher than the economy’s growth rate.

Therefore the meritocratic foundations of a democratic society are undermined. Inherited

wealth, due to its size, will be playing an ever-increasing role in perpetuating economic
inequality. This is not the best way to nourish a passion for creativity and dynamism as the
new generations will feel that the deck is stacked against them from the get-go.

6. What are the risks associated with the development of Artificial Intelligence
applications?

Digital age machines pose risks that are unprecedented in the history of human kind. Because
of the links that connect our technological infrastructure, the latter becomes vulnerable to
accidents as well as to intentional criminal activities. Power outages, stock market glitches,
etc. can have repercussions of far wider magnitude than in the past. Spies and criminals can
use digital technology to further their interests by wreaking havoc.

Moreover, the development of autonomous systems, such as cars, aircraft, and weapons can
also be a source of concern if control over them is lost. This is particularly disconcerting given
that nuclear weapons can destroy the entire planet. The decision to initiate such a catastrophic
cascading event may not even need to be taken by a human (see the film “Doctor Strangelove”).

Taking this line of thought to the next level, we can envision super intelligent machines that
acquire consciousness. Doomsday fears naturally ensue, as machines may overpower their
creators and take over resources and control of the planet (see the film “The Terminator”).

More examples on this can be found on pp. 252-254 of the book, The Second Machine Age
(uploaded on IVLE).