Thursday, January 30, 2014

Do Good Looking People Get Better Loan Terms?

See Love & Loans: The Effect of Beauty and Personal Characteristics in Credit Markets by Enrichetta Ravina of Columbia University (this is a technical paper). Here is the abstract or summary:
"I examine whether easily observable variables such as beauty, race, and the way a loan applicant presents himself affect lenders’ decisions, once hard financial information about credit scores, employment history, homeownership, and other financial information are taken into account. I use data from, a 150 million dollars online lending market in which borrowers post loan requests that include verifiable financial information, photos, an offered interest rate, and related context. Borrowers whose beauty is rated above average are 1.41 percentage points more likely to get a loan and, given a loan, pay 81 basis points less than an average-looking borrower with the same credentials. Black borrowers pay between 139 and 146 basis points more than otherwise similar White borrowers, although they are not more likely to become delinquent. Similarity between borrowers and lenders has also a powerful impact on lenders’ decisions. In my sample personal characteristics are not, all else equal, significantly related to subsequent delinquency rates - with the exception of beauty, which is associated with substantially higher delinquency probability. The findings are consistent with personal characteristics affecting loan supply through lenders’ preferences (taste-based discrimination a la Becker) and perception, rather than statistical discrimination based on inferences from their previous experience."
81 basis points means that if the average looking person gets a loan for 5.81%, the good looking person would get it for 5%. If your loan is for $100,000, it means if you paid it back in a year, the good looking person would get to pay $810 less.

For a non-technical article about how peer-to-peer lending works, see It's Like eBay Meets Does peer-to-peer lending work? by Ray Fisman of Slate. Very entertaining.

Here are some earlier posts on the money value of looking good:

Do looks matter? 

Do Looks Help In The Job Market? 
From The Life Is Not Fair Category: Better Looking, Tall, Thin People Make More Money

Thursday, January 23, 2014

Another Semester Has Started

Welcome to any new students. I usually post something three times a week. The next post should be next Wed. The entries usually have something to do with a basic economic principle that is related to a recent news story. If you want to learn more about me go to Why is college so hard?

That link may not be working. So here is the article, which was from my college news paper in 2011.
Students might wonder why college, and SAC in particular, is hard. This might sound trite, but I think the faculty at SAC want students to achieve success in life and that means that classes have to be hard if you are going to learn and understand the concepts which provide a foundation for that success.

I think my own experience as a community college student over 30 years ago helps me understand this. My teachers took their subjects seriously and maintained high academic standards. They got me excited because of the expertise they brought to their teaching. Now that I have been a teacher for over 20 years, I can see how important that was.

After finishing my A.S. degree at Moraine Valley Community College (MVCC) in Palos Hills, Ill., I transferred to and graduated from the University of Chicago with a degree in economics. But it was my community college teachers prepared me to handle the rigors of the U. of C.

Later, I got a Ph. D. in economics from Washington State University. But I've accomplished some other things I never could have dreamed of when I began taking classes at MVCC and I think my teachers there paved the way for me.

In 2005, I had a letter to the editor published in The Wall Street Journal (I have now had five published there, three in The New York Times and three op-eds in the Express-News). This one was several paragraphs long, nearly as long as some of their op-ed pieces. It was the first letter in the letters section that day, and I got the top headline. It dealt with NAFTA and trade agreements.

As nice as that was, I got a big shock a few days later when I got a letter in the mail, on official stationery, from Richard Fisher, the president of the Federal Reserve Bank of Dallas. He complimented me on my letter and said it was superb. I had never even met him or ever tried to contact him before.

Wow. I graduated from high school with a 2.7 GPA, and when I started at MVCC, I had no idea what I would do with my life. If you had told me then that someday I would have a letter in the WSJ and get that kind of compliment, I doubt I would have believed you.

Then an adjunct professor at the business school at the University of Chicago contacted me a few years ago and wanted to know if it was OK for her to assign a paper I wrote on entrepreneurs for a class she was teaching on innovation. (Of course, I said yes).

That professor was Nancy Tennant Snyder. She has a Ph. D. from George Washington University and is a vice president at Whirlpool. Business Week magazine has called her one of the leading innovators in the world. She also cited two of my papers in one of her books.

Then I got an email from John Joseph, a professor at the University of Edinburgh. He is an expert on language and politics. He wanted to know if he could include an essay I wrote in a four-volume work he was planning. I again said yes and it was published last year (and it is called Language and Politics).

It is a collection of essays. Mine is titled "The Intersection of Economic Signals and Mythic Symbols." Other contributors include Jeremy Bentham and George Orwell. When I was a community college student, I never imagined being included along with the likes of those great thinkers.

The co-authors of the book The Economics of Public Issues have thanked me in each of the last three editions for my helpful suggestions. Almost all of the people they thank are from big universities. One of the co-authors of this book, Douglass North, is a Nobel Prize winner. Never imagined someone like that would value my input when I started out as a community college student.

Getting such recognition in cases like this gives me a sense of achievement. I know I have made a scholarly contribution to the world. And I want all SAC students to have a chance for this same kind of success (as an academic or any in line of work). I think all SAC faculty do. That is why school is hard, and that is why I'm thankful that my community college teachers were experts who maintained high academic standards.

Friday, January 17, 2014

How Firms’ Reaction To An Excise Tax Determines The Market Outcome

We usually assume that firms must collect an excise tax. Then we shift the supply curve up by the amount of the tax to illustrate the effect on the market. A student once asked what the individual firms did to end up with this result. This was my attempt at an explanation. Click here to read the pdf file

Thursday, January 16, 2014

Mindfulness Practices And Learning Economics

That is the title of an article by David R. Borker who teaches at Manhattanville College. It was published in the American Journal of Business Education in 2013. Click here to find out more about it and a link to a pdf file of the entire article. Here is the abstract:
"There is a growing interest among educators in teaching and learning practices based on mindfulness, a concept derived from eastern meditative traditions.  This paper describes how mindfulness practices and concepts can be used to enhance the student’s learning experience in beginning economics courses. Specific areas with a high potential for learning enhancement are identified: grasping abstract economic concepts, seeing beyond obvious economic consequences, and finding one’s own ethical framework in economic analysis.  Current research linking mindfulness practices to student development in these areas is examined and practical methods are offered to integrate mindfulness into the economics classroom."
Full disclosure: A post from this blog in 2006 gets mentioned in the paper. It was Good Economics is Good Story Telling.

Update 1-19-14: The NY Times has an article on mindfulness, meditation and their effect on cognitive ability and creativity. It may help cognition but hinder creativity. Click here to read it