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At the blog Everything Finance, Jonathan Parker breaks down the implications of the State of California issuing IOUs to rollover its debts, essentially creating a new currency whose value is pegged to the US Dollar. He makes a number of interesting points including the observation that since California cannot print Dollars, and cannot issue (conventional) debt, the IOUs place the State in a predicament reminiscent of financially-distressed countries having to defend a pegged exchange rate.
And unfortunately, the history of fixed exchange rates in practice includes lots and lots of these effective defaults. Governments that can issue these i.o.u.’s and have trouble balancing budgets tend to issue a greater value of their currencies than they have the will or ability to maintain. And default follows.
Prior to “maturity” will these IOUs trade at some market price reflecting the probability of default? One question is whether banks will be interested in buying IOUs, offering liquidity in return for the asset and a premium? The strategic issue is whether politically the State will find it more or less attractive to default if the IOUs are still largely held by private citizens, or instead mostly by banks?
My guess is that, in a crisis, a small number of banks would more effectively pressure the State to meet their obligations than if IOU holdings were less concentrated. If so, then I would expect banks to be buying IOUs at a steep discount. But does this create a Grossman-Hart style free-rider problem analogous to tendering shares in takeover bids?
As Jeff pointed out in an earlier post, David Levine thinks rational choice theory is remarkably successful and that behavioral economics may be doomed. This message has made it into experiments and the New York Times:
[S]uppose, instead of scanning people’s brains as they’re sipping wine in a laboratory, you tested them in a more realistic situation: a restaurant where they’re spending their own money. That challenge was undertaken at an upscale restaurant in Tel Aviv by two behavioral economists, Ori Heffetz of Cornell and Moses Shayo of the Hebrew University of Jerusalem, who expected to be able to manipulate diners’ choices by changing the prices on the menu.
Unbeknownst to the diners or to their waiters, the economists monitored the choices of people who ordered from the prix fixe menu. The three-course meal cost included a choice of five entrees: shrimp gnocchi, pork shank, red mullet fillet, sausage or stuffed artichoke.
Next to each of these entrees on the menu, in parentheses, was the cost of what it would cost to order that entree from the à la carte menu. These prices didn’t affect the cost of the prix fixe meal, which was the equivalent of $30 no matter what the entree, but the researchers expected just the sight of the prices to make a difference. If the mullet were listed at $20 and the other entrees were $17, more people would presumably be enticed into ordering the seemingly more valuable fish.
But after three months of testing various combinations of prices, the researchers found they couldn’t sway the customers. Putting a higher price on the shrimp or any other entree didn’t make people more likely to order it.
This same stubbornly independent streak was manifest in another food experiment by the same researchers. This time they let people sample two kinds of candies — peanut butter bars and caramels — and varied the sticker prices for each one.
Superficially, the manipulation seemed to work, because people said they would be willing to pay more for a candy if it had a higher sticker price, but that was just in answer to a hypothetical question. When people were given a chance to pick a bag of candy to take home, they pretty much ignored the sticker prices and chose what they liked.
Why weren’t people duped into favoring the high-priced candies and entrees? Why did they follow their own tastes?
“Maybe, sometimes, old-fashioned economics is just about right,” Dr. Shayo says. “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.”
Interestingly, the results also back up another hobbyhorse of economists: experiments with real payoffs give very different results to those relying on answers to hypothetical questions. As economic decisions involve real payoffs, its the results with real consequences that are a better predictor of what decision-makers will do when faced with real decisions. Economists insist that research papers with experiments use monetary rewards. I always wondered if this really mattered – perhaps it does.
Apparently we have arrived at the long run and we are not dead.
Do you remember the Microsoft anti-trust case? The anti-trust division of the US Department of Justice sought the breakup of Microsoft for anti-competitive practices mostly centering around integrating Internet Explorer into the Windows operating system. In fact, an initial ruling found Microsoft in violation of an agreement not to tie new software products into Windows and mandated a breakup, separating the operating systems business from the software applications business. This ruling was overturned on appeal and evnetually the case was settled with an agreement that imposed no further restrictions on Microsoft’s ability to bundle software but did require Microsoft to share APIs with third-party developers for a 5 year period.
Today, all of the players in that case are mostly irrelevant. AOL, Netscape, Redhat. Java. Indeed, Microsoft itself is close to irrelevance in the sense that any attempt today at exploiting its operating system market power to extend its monopoly would cause at most a short-run adjustment period before it would be ignored.
Microsoft was arguing at the time that it was constantly innovating to maintain its market position and it was impossible to predict from where the next threat to its dominance would appear. Whether or not the first part of their claim was true, the second part certainly turned out to be so. It is hard to see a credible case that the Microsoft anti-trust investigation, trial, and settlement played anything more than a negligible role in bringing us to this point. Indeed the considerations there, focusing on the internals of the operating system and contracts with hardware manufacturers, are orthogonal to developments in the market since then. The operating system is a client and today clients are perfect substitutes. The rents go to servers and servers live on the internet unconstrained by any “platform” or “network effects”, indeed creating their own.
The lesson of this experience is that in a rapidly changing landscape, intervention can wait. Even intervention that looks urgent at the time. Almost certainly the unexpected will happen that will change everything.
I read news mostly through an rss reader. The Wall Street Journal syndicates only short excerpts of their articles and if I click through I get a truncated version of the article follwed by a friendly invitation to subscribe to the journal in order to view the rest of the article. It looks like this.
But its not hard to get the full text of the article. I just use google and type in the title of the article. The first link I get is a link to the full text, no subscription required. I always explained this to myself using a simple market-segmentation idea. WSJ will not give their content away to someone who is browsing their site directly because that person has revealed a high value for WSJ content. Someone who is googling has revealed that they are looking for relevant content, without regard to source. There is more competition for such a user so the price is lower.
But today I noticed that bing, Microsoft’s new search engine, does not get the same special treatment. If I bing “At Chicken Plant, A Recession Battle,” the link provided leads to the same truncated article as my rss reader. Since users have free entry across search platforms I can’t see any reason why bing-searchers (bingers?) would be systematically different than googlers in terms of the economics above. Therefore I am giving up on my theory. What are the alternatives?
- Google has a contract with WSJ?
- WSJ would like to shut out googlers too but finds it hard to shut off a service that users have come to expect. Knowing this, they are keeping bingers out from the outset.
- The game between content providers has multiple equilibria. On the google platform they are playing the users’ preferred equilibrium. On the bing platform they have coordinated on their preferred equilibrium.
- Google has figured out a secret back-door that bing hasn’t found and WSJ just hasn’t gotten around to closing.
Ok the ideas are gettng more and more lame. I am stumped.
Incidentally, there was an article in the New York Times about DOJ investigations of Google, and a Google PR offensive:
“Competition is a click away,” Mr. Wagner says. It’s part of a stump speech he has given in Silicon Valley, New York and Washington for the last few months to reporters, legal scholars, Congressional staff members, industry groups and anybody else who might influence public opinion about Google.
“We are in an industry that is subject to disruption and we can’t take anything for granted,” he adds.
I collect kludges. Its an especially welcome addition to the collection when it involves a tasty snack:
DunceCap Doff: There I Fixed It.
I’ve been on Capri for a week for work. Here are some impressions largely of Anacapri.
Hotel
We stayed at the Casamariantonia. There were four of us so we got a suite. It’s pretty pricey but actually cheaper than the hotels. The hotel is family-owned and they are pretty helpful – the father walked with us part of the way to show directions to a rustic path from Anacapri to the Blue Grotto. The grandmother makes fresh tarts for the breakfast buffet. Our room was nice and had a small kitchen. There’s a grocery store opposite so you can cook if you want to. There’s balcony where you can hang out and good air-conditioning. Two downsides: no swimming pool (they are waiting for a permit) and no WiFi in rooms (you have to go downstairs to the lobby). This is the main reason for my lack of posts!
Restaurants
Our favorite by far was Da Gelsomina (photo was taken there). They have a swimming pool too. There is hefty charge (incl for sunbeds, towels, umbrella as well as entrance) but you get a discount if you eat there and/or stay at Casamariantonia. There is the usual Capri fare, ravioli caprese, insalata caprese, pennette aumm aumm etc, and it’s all done very well. There are also dishes you do not find elsewhere (e.g. gnocchi with gorgonzola and arugula), great fried stuff as an appetizer. They make their own organic wines which are delicious. Down the road from the restaurant there are two spots with amazing views of the lighthouse and the Faroglioni, three dramatic rocks in the ocean. They also have rooms. It’s a bit out of the loop at the top of a hill but they have a free bus service to drop you off and pick you up in downtown Anacapri. Might try it next time.
At 1.4 Euros to the dollar, costs mount up. Pizza is a good standby to tighten the belt. Ristorante Arcate does good pizza. Trattoria Il Solitario does pizza and also some original pastas (e.g. paccheri with lardo and fava beans).
What to do
1. Capri Walk up to Villa Jovis, Emperor Tiberius’s old home. Now in a state of decay. Great views. Walk back into town and eat at Bar Jovis or at Da Gemma, Graham Greene’s favorite restaurant with great views over the mountain and sea. There’s a bunch of chi-chi shops if you are into that kind of thing.
2. Boat trip Splash out for the personal boat ride (around E 50 more than the sardine can version). How else would you ride through the hole in the central Faroglioni?
3. Walk to Grotta Azzurra Take nice old pedestrian walk from Anacapri, not the main road. If you get lost you can find the main road.
4. Hike: There is a great walk along the sea from one pirate watchtower to another (not suitable for young kids).
Things to watch out for: Chair lift up to top of Monte Solaro has individual seats – not good for kids. Grotta Azzurra closes when sea is choppy and there can be a long wait. Go either before tourist hordes arrive from Naples or after they leave. Incidentally, Naples is a bit overwhelming. It feels like Bombay. So be prepared!
Top chess players, until recently, held their own against even the most powerful chess playing computers. These machines could calculate far deeper than their human opponents and yet the humans claimed an advantage: intuition. A computer searches a huge number of positions and then finds the best. For an experienced human chess player, the good moves “suggest themselves.” How that is possible is presumably a very important mystery, but I wonder how one could demonstrate that qualitatively the thought process is different.
Having been somewhat obsessed recently with Scrabble, I thought of the following experiment. Suppose we write a computer program that tries to create words from scrabble tiles using a simple brute-force method. The computer has a database of words. It randomly combines letters and checks whether the result is in its database and outputs the most valuable word it can identify in a fixed length of time. Now consider a contest between to computers programmed in the same way which differ only in the size of their database, the first knowing a subset of the words known by the second. The task is to come up with the best word from a fixed number of tiles. Clearly the second would do better, but I am interested in how the advantage varies with the number of tiles. Presumably, the more tiles the greater the advantage.
I want to compare this with an analogous contest between a human and a computer to measure how much faster a superior human’s advantage increases in the number of tiles. Take a human scrabble player with a large vocabulary and have him play the same game against a fast computer with a small vocuabulary. My guess is that the human’s advantage (which could be negative for a small number of tiles) will increase in the number of tiles, and faster than the stronger computer’s advantage increased in the computer-vs-computer scenario.
Now there may be many reasons for this, but what I am trying to get at is this. With many tiles, brute-force search quickly plateaus in terms of effectiveness because the additional tiles act as noise making it harder for the computer to find a word in its database. But when humans construct words, the words “suggest themselves” and increasing the number of tiles facilitates this (or at least hinders it more slowly than it hinders brute-force.)
We will take a first glimpse at applying game theory to confront the incentive problem and understand the design of efficient mechanisms. The simplest starting point is the efficient allocation of a single object. In this lecture we look at efficient auctions. I start with a straw-man: the first-price sealed bid auction. This is intended to provoke discussion and get the class to think about the strategic issues bidders face in an auction. The discussion reaches the conclusion that there is no dominant strategy in a first-price auction and it is hard to predict bidders’ behavior. For this reason it is easy to imagine a bidder with a high value being outbid by a bidder with a low value and this is inefficient.
The key problem with the first-price auction is that bidders have an incentive to bid less than their value to minimize their payment, but this creates a tricky trade-off as lower bids also mean an increased chance of losing altogether. With this observation we turn to the second-price auction which clearly removes this trade-off altogether. On the other hand it seems crazy on its face: if bidders don’t have to put their money whether mouths are won’t they now want to go in the other direction and raise their bid above their value?
We prove that it is a dominant strategy to bid your value in a second-price auction and that the auction is therefore an efficient mechanism in this setting.
Next we explore some of the limitations of this result. We look at externalities: it matters not just whether I get the good, but also who else gets it in the event that I don’t. We see that a second-price auction is not efficient anymore. And we look at a setting with common values: information about the object’s value is dispersed among the bidders.
For the comon-value setting I do a classroom experiment where I auction an unknown amount of cash. The amount up for sale is equal to the average of the numbers on 10 cards that I have handed out to 10 volunteers. Each volunteer sees only his own card and then bids. If the experiment works (it doesnt always work) then we should see the winner’s curse in action: the winner will typically be the person holding the highest number, and bidding something close to that number will lose money as the average is certainly lower.
Here are the slides.
(I got the idea from the winner’s curse experiment from Ben Polak, who auctions a jar of coins in his game theory class at Yale. Here is a video. Here is the full set of Ben Polak’s game theory lectures on video. They are really outstanding. Northwestern should have a program like this. All Universities should.)
Wine and movies have a lot in common. They are both worldwide markets for highly differentiated products with critics who are visible and economically important. But while there are as many film critics as there are films and opinions about films, there are just a handful of highly influential wine critics, Robert Parker’s Wine Advocate, The Wine Spectator, and a few others. This is somewhat counterintuitive because there are many, many more wines than films. Here are a few thoughts.
- People know their taste in movies better than they know their taste in wine. This makes it easier to find idiosyncratic movie critics that have similar tastes. Similar critics face an entry barrier in the wine world.
- All wines taste the same and the role of a critic is just to tell you which wines you are supposed to like and which wines you can brag about drinking. This creates a natural oligopoly among the wine critics who the market coordinates on.
- Wines are given as gifts and movies are not. This means that wine critics are rewarded for reflecting general rather than specialized tastes.
- A very small fraction of wines are good and wine criticism just means tasting thousands of wines until you find the good ones. This creates increasing returns to scale in wine criticism, another source of natural monopoly power.
- The movie businesss is less competitive so a blockbuster film earns more rents and as a result there is more rent seeking, especially in marketing. Thus the emergence of David Manning. There is no analogous force behind “The feel good wine of the year!”
- Wine critics provide a service for wine-makers, film critics are serving film-goers. What makes a good wine critic is the ability to articulate what wine buyers will buy. Whoever is best at this will dominate.
Cynics believe some version of 6 and 2 (Parkerization.) I don’t understand why 5 wouldn’t be the same for wine and film maybe this is just a matter of time. 4 may be true in the mid-range but whether this matters depends on whether you think wine critics are really influential here or rather at the high end where there are relatively few consistent performers. I lean toward 1, Gary Vaynerchuck notwithstanding, which is a less cynical version of 6.
I believe that the study referred to in this CNN piece is pure noise. (Don’t bother watching it. Bottom line: 1 in 5 teens admits to “sexting.”) But that doesn’t mean that it carries no information. The mere fact that this claim would be repeated, at the expense of the marginal piece of news, turns pure noise into information.
Evolutionary Psychology and, increasingly, behavioral economics spin a lot of intriguing stories explaining foibles and otherwise mysterious behaviors as the byproduct of various tricks nature utilizes to get us to do her bidding. I am on record in this blog as being a fan of this methodology. But I also maintain a healthy skepticism and not just at the tendency to concoct “just-so” stories that often ask us to reformulate our theories of huge chunks of evolutionary history just to explain some nano-economic peculiarity.
Instead, when evaluating some theory of how emotions have evolved to induce us to behave in certain ways, skepticism should be aimed squarely at the basic premise. The theory must come with a convincing explanation why nature would rely on a blunt instrument like emotions as opposed to all of the other tools at her disposal. These questions seemed especially pressing when I read the following article about depression as a tool to blunt ambitions:
Dr Nesse’s hypothesis is that, as pain stops you doing damaging physical things, so low mood stops you doing damaging mental ones—in particular, pursuing unreachable goals. Pursuing such goals is a waste of energy and resources. Therefore, he argues, there is likely to be an evolved mechanism that identifies certain goals as unattainable and inhibits their pursuit—and he believes that low mood is at least part of that mechanism.
Why not a simpler mechanism: just have us figure out that the goal is unattainable and (happily) go do something else? Don’t answer by saying that this emotional incentive mechanism evolved before our brains were advanced enough to do the calculation because the existence of an emotional response indicating the right course of action presupposes that this calculation is being made somewhere in the system.
Even granting that nature finds it convenient to do the calculation sub-(or un-)consciously and then communicate only the results to us, why using emotions? Plants respond to incentives in the environment and they don’t need emotions to do it, presumably they are just programmed to change their “behavior” when conditions dictate. Why would nature bother with such a messy, noisy, and indirect system of incentives rather than just give us neutral impulses?
Finally, you could try answering with the argument that evolution does not find optimal solutions, just solutions that work. But that argument by itself can be made into a defense of everything and we are back to just-so stories.
How often does your mind wander?
Some of the most striking evidence comes from Jonathan Schooler, a psychologist at the University of California at Santa Barbara who is one of the leading researchers on mind wandering. In 2005 he and his colleagues told a group of undergraduates to read the opening chapters of War and Peace on a computer monitor and then to tap a key whenever they realized they were not thinking about what they were reading. On average, the students reported that their minds wandered 5.4 times in a 45-minute session. Other researchers have gotten similar results with simpler tasks, such as pronouncing words or pressing a button in response to seeing particular letters and numbers. Depending on the experiment, people spend up to half their time not thinking about the task at hand—even when they’ve been told explicitly to pay attention.
When I was a kid I thought there was something wrong with me because I would “read” pages at a time without paying attention to what I was reading. My eyes would crawl over the words and move from line to line and in a certain real sense I was reading but my conscious mind was completely uninvolved. After a few pages I would notice that I had absorbed nothing.
I still have a wandering mind but over time I have come to view it as a net asset. The key is learning to teach your wandering mind to leave breadcrumbs. Because it knows how to get to places that your conscious mind doesn’t.
Because a fair amount of mind wandering happens without our ever noticing, the solutions it lets us reach may come as a surprise. There are many stories in the history of science of great discoveries occurring to people out of the blue. The French mathematician Henri Poincaré once wrote about how he struggled for two weeks with a difficult mathematical proof. He set it aside to take a bus to a geology conference, and the moment he stepped on the bus, the solution came to him. It is possible that mind wandering led him to the solution. John Kounios of Drexel University and his colleagues have done brain scans that capture the moment when people have a sudden insight that lets them solve a word puzzle. Many of the regions that become active during those creative flashes belong to the default network and the executive control system as well.
The article is worth a read. (akubura ack: Mindhacks)
I came across this philosophy paper (miter missive: The Browser) which ponders whether the hypothesis of an omnipotent and omniscient God is any more likely to imply that God is good rather than God is evil.
Suppose, for example, that the universe shows clear evidence of having been designed. To conclude, solely on that basis, that the designer is supremely benevolent would be about as unjustified as it would be to conclude that it is, say, supremely malevolent, which clearly would not be justified at all.
The problem always appears at a much more basic level for me. Suppose you are an omnipotent God. What do you do? Obviously to answer that question you should start by identifying all of the feasible alternatives (ok that one is easy, everything is feasible because you are omnipotent), rank them according to your preferences, and do the one that ranks at the top. Wait a minute. What are your preferences?
You are omnipotent remember. Its not just that you get to choose your preferences. Your preferences do not exist until you create them. Ok. So first you choose your preferences then solve the problem of what to do given those preferences. How do you choose your preferences? It is no help trying to choose the preferences that are easiest to satisfy blissfully because you are omnipotent. All preferences are trivial to satisfy blissfully. But why do you want to want that anyway? How do you even know what you want to want? You don’t have any preferences yet right?
So I think that an omnipotent God would be too neruotic to even get out of bed and decide whether to be good or evil.
Should texting, emailing and browsing be banned in meetings? This article discusses the current climate.
Despite resistance, the etiquette debate seems to be tilting in the favor of smartphone use, many executives said. Managing directors do it. Summer associates do it. It spans gender and generation, private and public sectors.
A few years ago, only “the investment banker types” would use BlackBerrys in meetings, said Frank Kneller, the chief executive of a company in Elk Grove Village, Ill., that makes water-treatment systems. “Now it’s everybody.” He said that if he spotted 6 of 10 colleagues tapping away, he knew he had to speed up his presentation.
While I would always prefer to have my iPhone handy, I would volunteer to keep the meeting smartphone free. And that is not because I want the undivided attention of my colleagues. If we all deprive ourselves we create high-powered incentives to keep the meeting as short as possible. That sentiment is echoed here:
Mr. Brotherton, the consultant, wrote in an e-mail message that it was customary now for professionals to lay BlackBerrys or iPhones on a conference table before a meeting — like gunfighters placing their Colt revolvers on the card tables in a saloon. “It’s a not-so-subtle way of signaling ‘I’m connected. I’m busy. I’m important. And if this meeting doesn’t hold my interest, I’ve got 10 other things I can do instead.’ ”
Wimbledon, which has just gotten underway today, is a seeded tournament, like all major tennis events and other elimination tournaments. Competitors are ranked according to strength and placed into the elimination bracket in a way that matches the strongest against the weakest. For example, seeding is designed so that when the quarter-finals are reached, the top seed (the strongest player) will face the 8th seed, the 2nd seed will face the 7th seed, etc. From the blog Straight Sets:
When Rafael Nadal withdrew from Wimbledon on Friday, there was a reshuffling of the seeds that may have raised a few eyebrows. Here is how it was explained on Wimbledon.org:
The hole at the top of the men’s draw left by Nadal will be filled by the fifth seed, Juan Martin del Potro. Del Potro’s place will be taken by the 17th seed James Blake of the USA. The next to be seeded, Nicolas Kiefer moves to line 56 to take Blake’s position as the 33rd seed. Thiago Alves takes Kiefer’s position on line 61 and is a lucky loser.
Was this simply Wimbledon tweaking the draw at their whim or was there some method to the madness?
Presumably tournaments are seeded in order to make them as exciting as possible for the spectators. One plausible goal is to maximize the chances that the top two players meet in the final, since viewership peaks considerably for the final. But the standard seeding is not obviously the optimal one for this objective: it makes it easy for the top seed to make the final but hard for the second seed. Switching the positions of the top ranked and second ranked players might increase the chances of having a 1-2 final.
You would also expect that early round matches would be more competitive. Competitiveness in contests, like tennis matches, is determined by the relative strength of the opponents. Switching the position of 1 and 2 would even out the matches played by the top player at the expense of unbalancing the matches played by the second player, the average balance across matches would be unchanged. If effort is concave in the relative strength of the opponents then the total effect would be to increase competitiveness.
When you start thinking about the game theory of tournaments, your first thought is what has Benny Moldovanu said on the subject. And sure enough, google turns up this paper by Groh, Moldovanu, Sela, and Sunde which seems to have all the answers. Incidentally, Benny will be visiting Northwestern next fall and I expect that he will be bringing his tennis racket…
One of the highly touted features of the iPhone is the abundance of applications available for near-instantaneous download and seamless installation. In traditional Apple fashion, in order to keep full control of the software environmnet and maintain this seamless experience, Apple exercises strict control over which apps are made available through the app store. Short of jailbreaking your phone, there is no other way to install third-party software.
The process by which apps are submitted and reviewed strikes many as highly inefficient. (It also strikes many as anti-competitive, but that is not the subject of this post. There are legitimate economic arguments supporting Apple’s control of the platform and for my purposes here I will take those as given, although for now I remain agnostic on the question.) Developers sink significant investment producing launch-ready versions of their software and only then learn definitively whether the app can be sold. There is no recourse if the submission is denied.
(Just recently, we witnessed an extreme example of the kind of deadweight loss that can result. A fully licensed, full-featured Commodore64 Operating System emulator, 1 year in the making, was just rejected from the app store. )
Unfortunately, this is an inevitable inefficiency due to the ubiquitous problem of incomplete contracting. In a first-best world, Apple would publicize an all-encompassing set of rules outlining exactly what software would be accepted and what would be rejected. In this imaginary world of complete contracts, any developer would know in advance whether his software would be accepted and no effort would be wasted.
In reality it is impossible to conceive of all of the possibilities, let alone describe them in a contract. Therefore, in this second-best world, at best Apple can publish a broad set of guidelines and then decide on a case-by-case basis when the final product is submitted. This introduces inefficiencies at two levels. First, the direct effect is that developers face uncertainty whether their software will pass muster and this is a disincentive to undertake the costly investment at the beginning.
But the more subtle inefficiency arises due to the incentive for gamesmanship that the imperfect contract creates. First, Apple’s incentive in constructing guidelines ex ante is to err on the side of appearing more permissive than they intend to be. Apple knows even less than the developers what the final product will look like and Apple values the option to bend the (unwritten) rules a bit when a good product materializes. While it is true that Apple’s desire to keep a reputation for transparent guidelines mitigates this problem to some extent, the fact remains that Apple does not internalize all the costs of software development.
Second, because Apple cannot predict what software will appear it cannot make binding commitments to reject software that is good but erodes slightly their standards. This gives developers an incentive to engage in a form of brinkmanship: sink the cost to create a product highly valued by end users but which is questionable from Apple’s perspective. By submitting this software the developer puts Apple in the difficult position of publicly rejecting software that end users want and the fear of bad publicity may lead Apple to accept software that they would have like to commit in advance to reject.
The iPhone app store is only a year old and many observers think of it as a short-run system that is quickly becoming overwhelmed by the surprising explosion of iPhone software. When the app store is reinvented, it will be interesting to see how they approach this unique two-sided incentive problem.
Update: Mark Thoma further develops here. He didn’t ask in advance for permission to do that, but if he did I would have given encouraging signals but then rejected it ex post.
That’s the title of a new essay by the omnipresent David Levine. An excerpt:
The key difference between psychologists and economists is that psychologists are interested in individual behavior while economists are interested in explaining the results of groups of people interacting. Psychologists also are focused on human dysfunction – much of the goal of psychology (the bulk of psychologists are in clinical practices) is to help people become more functional. In fact, most people are quite functional most of the time. Hence the focus of economists on people who are “rational.” Certain kinds of events – panics, for example – that are of interest to economist no doubt will benefit from understanding human dysfunctionality. But the balancing of portfolios by mutual fund managers, for example, is not such an obvious candidate. Indeed one of the themes of this essay is that in the experimental lab the simplest model of human behavior – selfish rationality with imperfect learning – does an outstanding job of explaining the bulk of behavior.
Jonah Lehrer suggests leveraging “mental accounting” to create a free lunch by imposing a tax on homeowners to pay for energy retro-fitting that they won’t notice because of its small size relative to the price of the house:
But I can already hear the naysayers: Won’t homeowners object? Won’t that just add thousands of dollars to the cost of buying a home?Enter mental accounting, an irrational bias that can be tweaked to produce positive outcomes. Because a home is already such a gigantic purchase, and because the home buying process is already so saturated in peculiar fees (inspection charges, loan points, escrow fees, mortgage broker expenses, etc.) I’d argue that consumers will be much less sensitive to the cost of a home renovation. They’ll barely even notice the $5000 “energy efficiency charge” when it appears on their massive bill from the real estate agent. (Besides, they’ll get a big chunk of the money back as a tax credit.) In other words, they’ll act just like me the last time I stayed at a fancy hotel, when I ordered the internet and ate the peanuts.
I have always preferred Guinness at the warmer temperatures I have had it served to me in Britain. And I always assumed that 45-50F was the recommended serving temperature. That is why I was surprised to see this:
I assume that this is US-specific marketing. In the US, beer is always served ice cold and the marketing around this fact can be hysterical. I once remember an advertisement for Miller Genuine Draft which claimed that it was the “coldest.”
Anyway, does anybody know what temperature Guinness is served, say in Ireland? And on these new bottles with the “widget” and the nitrogen, does it also read “Serve Extra Cold” where you live?
(In the background is guacamole made in a molcajete. Grind 1/2 white onion, chopped, one jalapeno diced, and a small handful of cilantro in the bottom of the molcajete, with some kosher salt. 2 ripe avocados and the juice of one lime. Mash the avocado with the onion/cilantro/chile using a plastic fork. top with some more diced white onion and chopped cilantro. no tomatoes! Pair with… well duh.)
It is well-known that when you ask a person to construct a random sequence, say of zeroes and ones, the sequence they create differs in systematic ways from a “truly random” sequence. For example, they exhibit regression to the mean: the person constructing the sequence is too careful to make sure that the short-run averages are 50-50 resulting in too-frequent alternations between zero and one.
Knowing this, here is a simple bet you can use as a money pump at parties. Tell someone to write down a random sequence of heads and tails, and bet them that you can guess the numbers in their seqeunce. A simple strategy that correctly predicts more than 50% of the time is to randomly guess the first number and then guess that each subsequent number is the opposite of the previous. But if you study this article (and its links), you can refine your strategy and do even better.
And soon, as icing on the cake, you can offer your victim favorable odds, say you pay $1.10 every time you are wrong and she pays you $1.00 every time you are right. You will still make money.
Then after you have relieved your fellow revelers of their pocket cash, and they want to turn the tables on you, remember to use one of the coins you have just won to construct your sequence in a truly random fashion.
I’ve had a couple of excellent bottles of Coltassala in the past. Definitely had to try it again. Came away it a bit disappointed. It was very heavy. Quite bitter. May have drunk it about 10 years too early in my attempt to recreate old memories. Its almost 100% Sangiovese. I’ve never liked Chianti which is also Sangiovese. I think it needs to be blended with another grape.
Whic brings me to ….Balifico which was very delicious. It’s a Cabernet/Sangiovese blend. Very smooth. Lots of fruit, deep red color.
The Chianti from Castello di Volpaia is quite easy to get hold in the States. I have found Coltassala in the past. Hope I can get hold of Balifico somehow.
As you can guess from my earlier post, I totally love Volpaia. Castello di Volpaia has a tasting room and what looks like a restaurant under construction. There are at least two other places to eat, including the wonderful Bottega. Not sure what would keep the Euros rolling in but I would love to move here. It’s a cliche.
Q: How do you prove the existence of Spring in Chicago?
A: By continuity.
In February it was zero Farenheit. Today it is muggy and approaching 90. By continuity, Spring happened somewhere in between. But note that this existence proof is not constructive. It is of no help in telling us exactly when it was that Spring fluttered by. I must have been sleeping at the time.
A Slate article reports that in surveys the proportion of people who say they voted for Obama over McCain does not match the results of the election. Of course this panders to my inner economist. I’m interested in how much of the difference can be attributed to outright lying versus self-deception. An outright liar knows he is lying while credible self-deception involves some chance you actually believe the story you tell yourself.
It would be cool to have an experiment that distinguished between the two. Maybe it’s already out there?
List the different varieties of animal meat that are sold at a typical grocery. Then ask for item on that list what is the fraction of the US population that finds it acceptable to eat it. The distribution you will map out is not at all smooth. Most people will either find it acceptable to eat everything on the list or unacceptable to eat anything on the list.
I believe that both mass points are a result of the same phenomenon: the slippery slope. Moral rules are vulnerable to creeping margins and unraveling. If I want to argue that people should not eat meat it is easier to make that argument if I take an absolute stand. Absolute rules are easier to defend then nuanced rules that define some interior boundary (it is ok to eat animals if and only if they have no feelings) because nuanced rules admit cases that are very similar but fall on opposite sides of the boundary (you mean its ok to eat squid but not octopus?)
Likewise, people who insist that it is ok to eat all meat are usually painted into that corner for similar reasons. To accept that it is not ok to eat veal makes your filet mignon vulnerable.
So the slippery slope of moral negotiation pushes us to extremes where we are on firmer footing. All sides lose as a result. Especially those of us who would prefer that fewer animals are eaten. I was reminded of this point by an article from the Atlantic about “semitarianism:” proudly taking the middle ground. Here is an effective passage:
…, recall that even the most fervently ethics-based vegetarianism isn’t really about an ideological purity of all-or-nothing, us-versus-them purism activist groups foster. It’s about reducing animal suffering. Whether one person gives up meat or three people cut out a third, it’s all the same to the cow, and it should be the same to us.
(a little shout-out to Sandeep who is in Tuscany exercising his finnochiana option.)
In an old post, I half-jokingly suggested that the rules of scrabble should be changed to allow the values of tiles to be determined endogenously by competitive bidding. PhD students, thankfully, are not known for their sense of humor and two of Northwestern’s best, Mallesh Pai and Ben Handel, took me seriously and drafted a set of rules. Today we played the game for the first time. (Mallesh couldn’t play because he is traveling and Kane Sweeney joined Ben and me.)
Scrabble normally bores me to tears but I must say this was really fun. The game works roughly as follows. At the beginning of the game tiles are turned over in sequence and the players bid on them in a fixed order. The high bidder gets the tile and subtracts his bid from his total score. (We started with a score of 100 and ruled out going negative, but this was never binding. An alternative is to start at zero and allow negative scores.) After all players have 7 tiles the game begins. In each round, each player takes a turn but does not draw any tiles at the end of his turn. At the end of the round, tiles are again turned over in sequence and bidding works just as at the beginning until all players have 7 tiles again, and the next round begins. Apart from this, the rules are essentially the standard scrabble rules.
Since each players’ tiles are public information, we decided to take memory out of the game and have the players keep their tiles face up. It also makes for fun kibbitzing. The complete rules are here. Share and enjoy! Here are some notes from our first experiment:
- The relative (nominal) values of tiles are way out of line of their true value. The way to measure this is to compare the “market” price to the nominal value. If the market price is higher that means that players are willing to give up more points to get the tile than that tile will give them back when played (ignoring tile-multipliers on the board.) That means that the nominal score is too high. For example, blanks have a nominal score of zero. But the market price of a blank in our play was about 20 points. This is because blanks are “team players:” very valuable in terms of helping you build words. So, playing by standard scrabble rules with no bidding, if the value of a blank was to be on equal terms with the value of other tiles, blanks should score negative: you should have to pay to use them. Other tiles whose value is out of line: s (too high, should be negative), u(too low), v(too low.) On the other hand, the rare letters, like X, J, Z, seem to be reasonably scored.
- Defense is much more a part of the game. This is partly because there is more scope for defense by buying tiles to keep them from the opponent, but also in terms of the play because you see the tiles of the opponents.
- It is much easier to build 7/8 letter words and use all your tiles. This should be factored into the bidding.
- There are a few elements of bidding strategy that you learn pretty quickly. They all have to do with comparing the nominal value of the tile up for auction with the option value of losing the current auction and bidding on the next, randomly determined, tile. This strategy becomes especially interesting when your opponent will win his 7th tile, forcing you the next tile(s) but at a price of zero.
- Because the game has much less luck than standard scrabble, differences in ability are amplified. This explains why Ben kicked our asses. But with three players, there is an effect which keeps it close: the bidding tends to favor the player who is behind because the leaders are more willing to allow the trailer to win a key tile than the other leader.
Finally, we have some theoretical questions. First, suppose there is no lower bound to your score, so that you are never constrained from bidding as much as you value for a tile, the initial score is zero, and there are two players playing optimal strategies. Is the expected value of the final score equal to zero? In other words, will all scoring be bid away on average? Second, to what extent do the nominal values of the tiles matter for the play of the game. For example, if all values are multiplied by a constant does this leave the optimal strategy unchanged?
I’m visiting my sister in Tuscany on my way to a conference. She runs a cooking school, Organic Tuscany. The students are all housed in an 18th century villa near Certaldo. We’re staying here too because the villa is huge and has a swimming pool. The students seem to be having a great time. They cook from 10.30-1.30. and then eat what they made for lunch. The incentives are place to pay attention in class! In the afternoon, they go somewhere for an organized trip – today Siena, yesterday San Gimignano. My sister has set this up. I’m very impressed as I could never pull off something like this.
We didn’t want to disturb her this morning during class so we did our own disorganized trip to Volpaia. We went there ten (!) years ago before we had kids. We had a nice, semi-challenging hike to the hill-top where Volpaia sits prettily. I remember it well as my pre-made boring pecorino sandwich looked much less interesting that by wife’s finnochiana. That’s where the salami-exception to my “vegetarianism” began. The beginning of a key hypocrisy is always memorable, however many mild hypocrisies you commit daily.
I indulged the big one again at La Bottega di Volpaia where we shared a salami plate. I followed this with spectacular potato tortelli in a fresh porchini sauce. My wife enjoyed her classic ricotta ravioli in a butter and sage sauce and the kids even ate their spaghetti with pesto.
The drive up there is great too as long as your stomach can withstand the hair-raising near-crashes with Italians speeding in the other direction while hogging the middle of small, windy roads. The lunch was so good and the drive so picturesque that we might risk it again.
Behavioral economists Devin Pope and Maurice Schweitzer have a new paper showing that professional golfers perform differently on putts that are identical in all respects except that one is for par and one is for birdie. What does “identical in all respects mean?” From a summary in the New York Times:
The professors, Devin Pope and Maurice Schweitzer, seemingly anticipated every “But what about?” reflex from golf experts. The tendency to miss birdie putts more often existed regardless of the player’s general putting or overall skill; round or hole number; putt length; position with respect to the lead or cut; and more.
They find that par putts are made more often than birdie putts. One natural response might be the following. If the putt is for par, then the golfer is, on average, farther behind than if the putt is for birdie. And when you are farther behind you have an incentive to take greater risk. In putting, you can increase the chance of making a putt at the expense of a more difficult next putt if you miss (by say using a firmer stroke.) You would have more incentive to do this when you are farther behind. (Then you care less about the consequences in the event of missing since in that event you are even further behind.)
But they apparently control for this by matching par putts with birdie putts that are identical in terms of the total score that would result from sinking them. They find the bias is still there. (See Column 8 of Table 3 in their paper.)
However, you might say that this means that the bias is not due to loss aversion. Because in these two matched settings the golfer is at the same point relative to any reference point. And if you appeal to “narrow framing” by saying that the players are using a hole-by-hole reference point of par, then the same narrow framing makes it rational to take risks when the putt is for par and play it safe when the putt is for birdie.
A real smoking gun would be the following. Take the birdie and par putts matched in terms of score conditional on sinking the putt. Now ask what is the expected final score, or tournament rank, or prize money, or other measure of success, conditional on whether the putt was for birdie or bogey. The null hypothesis is that these would be the same. Loss aversion would imply that they are not the same, although it is not obvious which direction it would go. (The authors do a back of the envelope calculation to address a related question in their concluding section. They find that the apparent loss aversion matters for final scores but they don’t seem to include any of the controls from the earlier parts of the paper in this calculation.)
(Gatsby greeting: kottke.org)
Iran’s political system is complex and confusing. But the basic point is that it is a form of dictatorship with Supreme Leader Khamenei in charge. The protests on the street suggest it is weaker than ever before. My research with David Lucca and Tomas Sjöström suggests regimes which are neither democracies nor dictatorships but something in between can be the most aggressive of all.
I used this idea for an opinion piece in the New York Times. Here it is:
A stolen election, and what it reveals about the security of Iran’s ruling elite, means that it is more important than ever to engage with Iran.
So far the signs from the Obama administration are encouraging: “The administration will deal with the situation we have, not what we wish it to be,” one senior official said. Let’s hope the administration understands what that situation is.
President Obama is in a difficult position. He under pressure to speak out more and take a tougher line with Iran, as Senator McCain has. But the main issue is not whether the election was stolen or not, but what it reveals about Ayatollah Khamenei’s hold on power.
If we respond with our own saber-rattling, this is more likely to inflame the situation than ever before.
Under Khamenei’s leadership, the Revolutionary Guard has become more powerful and taken over parts of the economy. The disputed election suggests that Khamanei’s position has become weaker as the public distaste for Ahmadinejad’s policies has grown. If we respond with our own saber-rattling, this is more likely to inflame the situation than ever before. A strong dictator can be passive in the face of aggression and still survive in power. But a weak dictator must respond forcibly to every threat to his rule.
The key question is whether Khamenei will ratchet up aggression to survive in power. One way to consolidate power is to win a war. If the regime’s survival is in question, it may destabilize the region and pursue nuclear weapons in a bid to consolidate internal support. A democratic leader may also try to use aggression to drum up support for re-election.
A careful study of history finds that weak dictatorships like Iran, that lie in between full democracy or strong dictatorships, can be the most warlike of all.
I might add one more point: I would love for the Obama administration to “help the demonstrators” somehow. But making a statement in their support will backfire as it will give an excuse to display demonstrations as American sponsored. Iranian TV can just run footage of Obama making the statement, translate it and interpret it in a biased way and literally beat protesters over the head with it.
Now we have set the stage. We are considering social choice problems with transferrable utility. We want to achieve Pareto efficient outcomes which in this context is equivalent to utilitarianism.
Now we face the next problem. How do we know what the efficient policy is? It of course depends on the preferences of individuals and any institution must implicitly involve providing a medium through which preferences are communicated and mediated. In this lecture I introduce this idea in the context of a simple example.
Two roomates are condering purchasing an espresso machine. The machine costs $50. Each has a maximum willingness to pay, but each knows only his own willingness to pay and not the others. It is efficient to buy the machine if and only if the sum exceeds $50. They have to decide two things: whether or not to buy the machine and how to share the cost. I ask the class what they would do in this situation.
A natural proposal is to share the cost equally. I show that this is inefficient because it may be that one roomate has a high willingness to pay, say $40, and the other has a low willingness to pay, say $20. The sum exceeds $50 but one roomate will reject splitting the cost. This leads to discussion of how to improve the mechanism. Students propose clever mechanisms and we work out how each of them can be manipulated and we discover the conflict between efficiency and incentive-compatibility. There is scope for some very engaging class discussions here that create a good mindset for the coming more careful treatment.
At this stage I tell the students that these mechanisms create something like a game played by the roomates and if we are going to get a good handle on how institutions perform we need to start by developing a theory of how people play games like this. So we will take a quick detour into game theory.
For most of this class, very little game theory is necessary. So I begin by giving the basic notation and defining dominated and dominant strategies. I introduce all of these concepts through a hilarious video: The Golden Balls Split or Steal Game (which I have blogged here before.) I play the beginning video to setup the situation, then pause it and show how the game described in the video can be formally captured in our notation. Next I play the middle of the video where the two players engage in “pre-play communication.” I pause the video and have a discussion about what the players should do and whether they think that communication should matter. I poll the class on what they would do and what they predict the two players will do. Then I show them the dominant strategies.
Finally I play the conclusion of the video. Its a pretty fun moment. I conclude with a game to play in class. This year I had just started using Twitter and I came up with a fun game to play on Twitter. I blogged about this game previously.
(By the way this game is extremely interesting theoretically. I am pretty confident that this game would always succeed in implementing the desired outcome: getting the target number of players to sign up, but it is not easy to analyze because of the continuous time nature. The basic logic is this: if you think that the target will not be met, then you should sign up immediately. But then the target will be met.)
Here are the lecture slides.
Apparently the price you are quoted when you search for fares on Spain’s high-speed railway depends on whether you search in English or Spanish:
When I searched the site earlier that day from my office, I searched in Spanish. A one-way ticket from Barcelona to Madrid could be had for around 44 euros on a “tarifa Web,” their Internet special fare with 30 day advance purchase.
When I was at home, ready to finalize my purchase, I opted to search with the site language set to English. The price was nearly 110 euros.
The economic logic is standard: language is a way to segment the market and this segmentation is profitable if the two markets have a large difference in price-sensitivity. Presumably if you are searching in English then you are a tourist and you have fewer alternative modes of transportation. This makes you less price-sensitive.
I thank the well-travelled and multi-lingual Mallesh Pai for the pointer.
