Worth Reading

Daniel Kahnemann, the psychologist who won the Nobel Memorial Prize in Economics in 2002 for his contributions to behavioral economics (challenging mainstream conceptions of rationality), has an interesting column in today's New York Times (here) on the "hazards of confidence." Here is an excerpt:

The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true.

I coined the term “illusion of validity” because the confidence we had in judgments about individual soldiers was not affected by a statistical fact we knew to be true — that our predictions were unrelated to the truth. This is not an isolated observation. When a compelling impression of a particular event clashes with general knowledge, the impression commonly prevails. And this goes for you, too. The confidence you will experience in your future judgments will not be diminished by what you just read, even if you believe every word.

Meanwhile, future Nobel laureate (for contributions to environmental and energy economics), William Nordhaus has an interesting essay (masquerading as a book review) on energy in the New York Review of Books (here). Here's an excerpt:

If we look at actual taxes in the energy sector, they are far below the calculated external costs. In 2007, for which we have complete data, after discounting the net of energy subsidies, the money paid in total federal energy taxes was $21 billion, or less than one tenth of the level necessary to price energy at its social costs. Virtually all of these taxes were gasoline taxes—devoted to building roads so that cars could drive faster and farther! So Graetz is correct in his assertion quoted above that the US has failed to charge the full cost of its energy consumption; it is not even close.

A second point is that environmental taxes can play a central role in reducing the fiscal gap in the years to come. These are efficient taxes because they tax “bads” rather than “goods.” Environmental taxes have the unique feature of raising revenues, increasing economic efficiency, and improving the public health.