Dear Friends,

Remember the name “Susan Athey.” As the first woman to be awarded the John Bates Clark medal, one of the most prestigious awards in economics, she could very well be the first woman to win a Nobel Prize in this field.

But that’s probably at least a decade or two down the road. The John Bates Clark medal is given every two years and recognizes up-and-coming economists under the age of 40. So far, 11 of the 18 recipients have won a Nobel Prize.

That’s not something Athey is focused on. As a professor at Harvard and a new mom in her thirties with her feet solidly planted on the ground, she says she has never set out to capture any awards.

“Winning contests never appealed to me. I’m more interested in making a difference,” Athey said.

Thanks to her parents, who supported integration in the deep South during the 1960s, and a childhood growing up in the politicized atmosphere of Washington, D.C., Athey says “I’ve always had a social conscience.”

While she was good at math as a child, she claims academics took a back seat during her teenage years and even, at times, in undergraduate school (modestly omitting the fact that she entered Duke University at the age of 16!). She received her doctorate from Stanford when she was 24.

It was in college that Athey realized that economics is a powerful tool for understanding and solving social issues. “Doing math for its own sake never appealed to me,” she told me. “With economics, the mathematics really had a point. I felt a connection to human problems.”

Within the economics community Athey is widely respected for the work she has done to improve the basic tools and methods economists use to measure — or “model” — how changes in rules and regulations affect the way people make decisions and behave. But she is equally admired for being able to connect the theoretical to real life.

Research she began as an undergraduate student has altered the way the American, Canadian and Australian governments auction off timberland. For instance, it was known that
sealed bid auctions generate more money, i.e. higher bids, than those that allow open bidding. However, no one understood the reason for this.

Athey helped solve the mystery. First, she mathematically predicted what buyers should be willing to pay in an open auction. When they consistently came in lower than expected, the only plausible explanation was that “bidders were colluding.”

In other words, logging firms were agreeing, “You let me win this round, I’ll let you win the next one.”

You might be thinking, “Duh! Of course they were!” But it’s one thing to suspect this is going on and quite another to objectively demonstrate it.

On the other hand, auctions that require bidders to submit sealed bids raise more revenue than expected. Although competing firms might have an informal agreement on who should win a particular auction, the fact that bids are secret means the parties involved can’t confirm that the other side is sticking to the bargain. This causes each firm to bid higher than it would in an open auction.

In addition, Athey found there’s another factor at work: increased competition. Small logging operations are more likely to participate in sealed bid timber auctions because they have an equal chance of winning as the big guys — who, with their deeper pockets, could simply out-bid them in a live, out-cry auction.

Another way Athey discovered bidders were gaming the system centers on how much they bid for certain types of trees. Again, it comes down to figuring out how to exploit the rules. When it pertains to timber auctions, two are central: (1) your overall bid is evaluated based on how much you offer to pay for each species of tree you cut down; however, (2) the amount you ultimately pay is based on the number of trees of each species that you actually harvest.

“Say the government estimates that there’s a 50-50 percent mix of spruce and hemlock,” she says. “But you think it’s mostly hemlock.” In this case, you’d put in a very high bid per spruce tree because you believe you won’t find a lot of those and, thus, won’t actually end up paying the price you’re offering. Your offer for the hemlocks might be slightly on the low side. But your generous bid for the spruce wood makes your overall bid much more attractive than your competitor’s so you win the auction.

Think this doesn’t happen? According to Athey, “In some extreme cases you have a firm bid five times the amount some trees could be worth.”

This type of strategic thinking doesn’t just apply to trees! It affects everything from the approach companies use when they bid on government contracts to negotiating with a neighborhood kid to rake the leaves in your yard (you think there’s more of them than she/he does or vice versa).

Athey, who is married to economist Guido Imbens, also a professor at Harvard, says she isn’t yet applying the economic theories she’s helped develop on her own family. After all, her daughter is only 9-months-old and “we’re just getting into adding with my son — he’s three.”

But she says studying the economics of information makes you think hard about “how rules and regulations can cause people to manipulate the rules and have unintended consequences.” And this has important lessons for all parents, especially those with teenagers.

“If you want honest communication, you need to think about whether your punishments make it hard for your teenager to have honest communication. You need to provide incentives for good behavior without making a teen afraid to call if they’re in a dangerous situation,” she said.

In other words, if your son/daughter breaks the rule about drinking will the consequences they face cause them to risk driving under the influence rather than phone you for a ride home?

One of the reasons Athey stands out in her field is the fact that she is a woman. Traditionally, young women have avoided math and science majors. She remembers feeling completely out-numbered in undergraduate school where “there were classes of 120 students and three of us were women.”

That’s something she’d like to change. In fact, in general too few teenagers pursue math-related careers. “One reason I’m excited about winning this prize is the chance to explain what it means to be an economist. The stereotype is that what you do with an advanced degree is sit in an office and not talk to anyone. There’s nothing glamorous about that.”

“For adolescents, you need an element of excitement. They get inspired to pursue science by seeing an astronaut,” she said.

Her hope is to show “people how math and math-based fields can lead to careers that are glamorous and exciting. Being educated in analytical thinking opens doors.”

So when she has the opportunity to talk about what she does, she stresses the ability to travel, to give speeches, to testify before Congress, to influence public policy. In short, to make a difference.

The message: economics is a way to understand and affect real life. It’s not just the geek squad.

You go, Susan!
Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.