Sometimes, the best way to understand an idea is to meet the people who devote their time and energy to studying it.
The Institute’s mission to conduct and promote research that will promote economic opportunity and inclusive growth for all Americans means engaging with a diverse group of scholars who approach opportunity and inclusion from many angles. This series of short Q&As spotlights those individuals, what led them to economics, and how their research connects to opportunity and inclusion. Plus: the most useful ideas in economics, abandoned projects, podcasts, and economists to lunch with.
For this installment, Institute Writer Lisa Camner McKay sat down with Jane Olmstead-Rumsey, assistant professor of economics at the London School of Economics (starting fall 2022), to discuss the sunk cost fallacy, the quality of patents, and the joys of ice cream.
What led you to study economics?
I went to college planning to study international relations. I did debate in high school because I was interested in policy, which I thought was political science and international relations. But as part of that, I had to take some econ classes and I loved those classes, and I noticed that I was way happier in those classes than my friends who were international relations majors. We were learning about comparative advantage, and it seemed like, okay, this might be my comparative advantage. Econ seemed like the perfect way to combine my interests in math and policy.
What do you think is one of the most useful ideas in economics?
In my personal life, the sunk cost fallacy—trying to figure out when to abandon something—is really useful. I used to never walk out of movies, but now, if I don't like the movie, I'll just leave!
More broadly, the other idea I think is interesting to mention is the Lucas critique, which is the idea that we can't just look at historical data to teach us about economic relationships. The relationships you would find in historical data are dependent on the policies that were in place at the time. So if you're thinking about changing policy, those relationships might change because of the new policy. So that one is super cool. It's a strong argument for the type of research that I do, structural modeling, to help us understand if a policy changes, how will people's behavior change and what will that mean for the macroeconomy?
What economist, living or deceased, would you want to have lunch with?
Daron Acemoglu. I do some growth economics, and he's a growth economist and also has work on political institutions, which I find interesting. And he's also extremely productive. I would love to ask him how he does it!
What are you studying now?
I have two main agendas at the moment that are pretty different from each other. One is about female labor supply and trying to understand whether the reasons female labor supply changes might be different from the reasons that male labor supply changes. Women tend to have more family considerations than men, for instance. There may be differences in the kinds of skills that men and women have. And so which sectors of the economy are growing can influence whether men or women have better labor market opportunities.
The other agenda I have is trying to understand the role of really large firms in the economy, particularly their innovative activity, measured by the quality and quantity of their patenting output as well as their research and development expenditures. Recently, there’s been a lot of concern about these big firms: Are they a good thing or are they a bad thing in terms of promoting innovation and growth? What policies should govern their behavior? Those are the two main areas that I work in.
What do you want to study next?
I have a work in progress related to the agenda on large firms that is trying to understand merger activity of large firms and whether that's changed over time. Can traditional merger policy based on market shares of sales be applied to mergers in the tech industry, where many companies offer free services to consumers? It’s very preliminary at this point, but that's something I'm super excited to work on in the upcoming year.
How does your research relate to economic opportunity and inclusive growth?
I'm not sure how the large-firm agenda relates, but certainly my work on female labor supply is related to inclusion. As I said, there might be very distinct drivers of male and female labor supply. Understanding those can also help us understand how to create more opportunities for women in the workforce.
Do you have a project that you've decided to abandon—putting the sunk cost fallacy to work—and if so, why?
Yeah. I had a project early in grad school that tried to understand the non-participation puzzle in asset markets. Why do some people just not hold pretty much any stocks or bonds? My idea was that these people might have a lot of ambiguity about what they think the returns on those assets will be. And so maybe they respond to that ambiguity by just saying, okay, I'm not going to even get involved.
But it was very hard to measure that ambiguity. As economists, we want to document everything, measure everything. And ambiguity is such an abstract concept—it’s a way that people think. And so it was very hard to measure.
What's your favorite podcast?
I listen to a lot of noneconomic podcasts. I like Ask Ronna, which is an advice-comedy podcast. It’s really funny. And econ-related, I really like the podcast Macro Musings with David Beckworth, because he brings a lot of enthusiasm to discussing technical work and dives very deeply into the inner workings of monetary policy.
If you could live anywhere, where would it be?
I lived in Barcelona as a grad student for a couple months and I loved it—just everything about it. The weather, the food, there are tons of universities there, its cultural life, it’s just amazing.
The hardest thing for me was the late meal times!
If you could choose any career for a day, what would it be?
This one was hard. The only thing I thought of was having a job where I come up with different ice cream flavors. I think that would be really fun. I've been eating a lot of ice cream lately and thinking about new flavor combinations—maybe a s’mores and raspberry flavor …
What is the best piece of advice you've received or read?
One thing I didn't know about the dissertation defense is that your committee will give you advice afterward. My committee gave me really good advice, and what stuck out to me was they said, work on whatever gets you excited. You should work on that. But then also you should find other people who do that, too, to work with. Find people who are at your same seniority level and who have the same enthusiasm, and work with those people. I thought that was really good advice.
Lisa Camner McKay is a writer/analyst with the Opportunity & Inclusive Growth Institute at the Minneapolis Fed. In this role, she creates content for diverse audiences in support of the Institute’s policy and research work.