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Much as I’d like to rationalize alcohol consumption, it seems the studies showing moderate drinking leads to better health have the usual problem according to the New York Times:
No study….. has ever proved a causal relationship between moderate drinking and lower risk of death — only that the two often go together. It may be that moderate drinking is just something healthy people tend to do, not something that makes people healthy.
Health economics might provide a treasure trove for economists well-versed in the techniques of “instrumental variables” typically used to determine causation.
There is a summary of the research in the New York Times:
In those families, if the first child was a girl, it was more likely that a second child would be a boy, according to recent studies of census data. If the first two children were girls, it was even more likely that a third child would be male.
Demographers say the statistical deviation among Asian-American families is significant, and they believe it reflects not only a preference for male children, but a growing tendency for these families to embrace sex-selection techniques, like in vitro fertilization and sperm sorting, or abortion.
Here is the source article. There is one small problem with the conclusion:
To reduce the probability that there was an eldest child not in the household, we also restricted our sample to families where the oldest child was 12 years or younger.
Here is the problem. Let’s suppose that Asian-American parents have a preference for boys but do not engage in any manipulation, except that they keep trying until they get one boy. Consider two families. Both families have kids spaced 3 years apart. The first family has a girl and then a boy and stops. The second family has 4 girls before the first boy is born. The first family is included in the sample, the second is not. More generally, families whose first two children are girls are less likely to be included in the sample than the boy-girl families. This statistical selection makes it look as if the parents are actively engaged in selection.
The 12 year cap may exclude very few families and so this selection effect may be too small to generate the statistics they are reporting, but it’s hard to know for sure. The sample sizes are not large. Here is a graph showing large and overlapping confidence intervals.
It is worth acknowledging that even my alternative story relies on Asian-American parents having a stronger preference for boys than the American population as a whole. However, it doesn’t require the assumption that they engage in pre-natal sex selection.
Update: The ever-vigilant Marit Hinnosaar (are you noticing a pattern here?) has pointed out to me that I mis-interpreted their sample selection criterion. As she puts it:
The situation you discribed would create a problem if their sampling method was: include in the sample each household iff the age difference of the children is no more than 12 years. But that is not what they did. With the sampling method they used, they included households, where the oldest child in the household was born not earlier than in 1988 (they used 2000 census data and excluded households that had a child older than 12). This does not lead to the biased sample that you described, since for the researchers these two households that you described are equivalent in terms of whether to include in the sample.
This is not one of those arrangements where donors can sponsor a needy child or a sorghum farmer in the developing world. The person asking for help is a 21-year-old neurobiology major at Harvard, and she is requesting a loan from Harvard alumni.
The service, Unithrive, resembles micro-lending in a number of ways (except perhaps the sticker.)
Unithrive, which made its debut last month, matches alumni lenders and cash-strapped students, who post photographs and biographical information and can request up to $2,000. The loans are interest-free and payable within five years of graduation.
See the article in the New York Times.
When groups wanting to establish different political structures compete, who will win? Here is a simple model. Let’s say one group wants (full) democracy and one group wants a theo-autocracy. The winner will be determined in large part by the costs these groups are willing to incur. That is limited by the long run benefit of keeping the winning system in place.
When both groups are strong, the value of democracy is handicapped by the fact that the authoritarians will be granted participation in the process and this will be a constant threat to the system. By constrast the authoritarians internalize more of the benefits from winning the struggle because it is a defining feature of that system that the supporters of democracy will be excluded.
This means that the incentives of even a small minority of authoritarians may outweigh a majority who seek democracy.
Iran is clearly not a full democracy like the United States – there is a Supreme Leader, currently Ayatollah Khamenei, who controls foreign and nuclear policy and is not subject to general election. There is a President who is (or was?) elected and controls domestic policy. There is a council, the Assembly of Experts, that ostensibly determines who is Supreme Leader. However, they have never acted to remove anyone! Moreover, the Supreme Leader via the Guardian Council can veto candidates who stand for election for President or the Assembly of Experts! Confused? I am. But here are three excellent depictions of the political systems.
– Jeff found this one
– The prettiest but most confusing is from the UK Guardian news paper, above.
Once you work it all out it boils down to one thing – Khamenei is the man in charge and always has been (Ahmadinejad is more colorful and has a bigger press presence but he is just the face of the regime).
What is still not clear is whether the election was stolen removing even the veneer of democracy or whether there is a vocal minority in Tehran that does not support Ahmadinejad but Ahmadinejad actually won.
In the past, Khamenei has managed to live with a reformist President, Ayatollah Khatami, by sabotaging his policies behind the scenes. If he can no longer do that and is behind the stolen election, it means Khamenei is weaker than before. Weak dictators or even democratic leaders with a weak hold on power do crazier things that a strong dictator because they need some support, e.g. from the army, to survive in power. Starting a war is one way to try to generate enough support to survive. (E.g. Galtieri in Argentina). Drumming up popular hatred of an enemy the country must oppose is another related strategy. So if Khamenei is weaker than before, Iran just got more dangerous. This means Obama must not give Khamenei/Ahmadinejad an excuse to increase their hold on power by taking bellicose actions that allow them to weaken internal opposition. For example, making pro-democracy statements can be made to seem like outside interference. This will lead to people “rallying around the flag” and hence lead to less chance of democracy flowering.
Obama does seem to be keeping a low profile so far. Let’s wait and see what happens.
From an excellent article in the Washington Post:
The election results in Iran may reflect the will of the Iranian people. Many experts are claiming that the margin of victory of incumbent President Mahmoud Ahmadinejad was the result of fraud or manipulation, but our nationwide public opinion survey of Iranians three weeks before the vote showed Ahmadinejad leading by a more than 2 to 1 margin — greater than his actual apparent margin of victory in Friday’s election.
The fact that, in the run-up to the election, expectations were low for any change in Iran is also pretty good evidence that what we are seeing is, sadly, less a reflection of majority opinion than a vocal, and highly motivated minority. The implications are a little scary just weeks after the anniversary of Tiananmen…
The article concludes with some political dangers:
Allegations of fraud and electoral manipulation will serve to further isolate Iran and are likely to increase its belligerence and intransigence against the outside world. Before other countries, including the United States, jump to the conclusion that the Iranian presidential elections were fraudulent, with the grave consequences such charges could bring, they should consider all independent information. The fact may simply be that the reelection of President Ahmadinejad is what the Iranian people wanted.
Update: There may be reason to remain suspicious even in light of this poll. See Marciano’s comment below.
Suspicious graph of Ahmadinejad’s vote share? No, says Nate Silver
An excellent analysis from a former National Security Council member.
Where did I find all these? Huffington Post.
The possibility is nearing that you can take a pill and remove some memories. (This evening I opened a nice bottle of Yangarra Old Vine Grenache 2005 and removed some memories but that doesn’t count because they will come back tomorrow.)
Media treatment of these advances always focuses on enabling us to erase bad memories. But its not so obvious that bad memories are the ones you want to lose. Bad memories often serve an important purpose. They record a lesson learned. It may be a lesson about what not to do (memories of car accidents after opening a nice bottle of…) It may be a lesson about people not to trust (memories of abuse.)
On the other hand, many good memories just get in the way. I remember vividly the film Leolo. But because of that memory I will never get to enjoy that film again. Likewise I remember the first time I heard Chick Corea’s Children’s Song #6, how to juggle, the end of The Naked and the Dead and the smell of my wife. These are all novelties that are no longer available to me, unless I could erase some good memories.
The good/bad distinction is less important than the following distinction. Is the memory affecting my decisions or not? Whether the memory is good or bad, I want to keep it if it encodes an important lesson helping me continue to make good decisions and avoid bad ones. And I want to erase it if its function is pure consumption. The bad memories I want to lose forever, the good memories I want to repeat.
Thursday night we had another overtime game in the NBA finals. For the sake of context, here is a plot of the time series of point differential. Orlando minus LA.
A few of the commenters on the previous post nailed the late-game strategy behind the eye-popping animation. First, at the end of the game, the team that is currently behind will intentionally foul in order to prevent the opponent running out the clock. The effect of this in terms of the histogram is that it throws mass out away from zero. But the ensuing free-throws might be missed and this gives the trailing team a chance to close the gap. So the total effect of this strategy is to throw mass in both directions.
If the trailing team is really lucky both free throws will be missed and they will score on the subsequent possession and take the lead. Now the other team is trailing and they will do the same. So we see that at the end of the game, no matter where we are on that histogram, mass will be thrown in both directions, until either the lead is insurmountable, or we land right at zero, a tie game.
Once the game is tied there is no more incentive to foul. But there is also no incentive to shoot (assuming less than 24 seconds to go.) The leading team will run the clock as far as possible before taking one last shot.
So there are two reasons for the spike: risk-taking strategy by the trailing team increases the chance of landing at a tie game, and then conservative strategy keeps us there. The following graphic (again due to the excellent Toomas Hinnosaar) illustrates this pretty clearly.
In blue you have the distribution of point differences that we would get if we pretented that the teams’ scoring was uncorrelated. This is what I referred to as the crude hypothesis in the previous post. In red you see the extra mass from the actual distribution and in white you see the smaller mass from the actual distribution. We see that the actual distribution is more concentrated in the tails (because there is less incentive to keep scoring when you are already very far ahead), less concentrated around zero (because of risk-taking by the trailing team) and much more concentrated at the point zero (because of conservative play when the game is tied.)
Now, this is all qualitatively consistent with the end-of-regulation histogram and with the animation. The big question is whether it can explain the size of that spike quantitatively. Obviously, not all games that go into overtime follow this pattern. For example, Thursday’s game did not feature intentional fouling at the end. How can we assess whether sound strategy alone is enough to explain the frequency of overtime?
David Pogue does not call it demand elasticity but that is what he’s talking about when he explains why Apple is selling it’s new OS upgrade for $29 rather than the usual $130:
The App Store Effect says this: if you cut a software program’s price in half, you sell far more than twice as many copies.
If he had only said something like this ten weeks ago, I would have had a great example for class!
We used to be in denial that there were any bubbles, now everything is a bubble. This article in the Chronicle of Higher Education sounds the alarm on higher education (tassle twirl: lone gunman.)
Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.
With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center’s president, has warned that low-income students will find college unaffordable.
Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up.
The analogy to the housing bubble is certainly tempting. Pell grants and Stafford Loans are to Colleges what Fannie and Freddie are to housing. It is undeniable that easy access to credit fueled rises in tuition. It is not a stretch to think of these loan programs as essentially subsidies to Universities as they raise tuition dollar for every dollar of loans that are essentially forgiven.
But the analogy doesn’t go any farther than that. There is no speculation fueling demand for higher education. There is a permanent and measurable difference in earnings for college graduates. There will continue to be a robust market for credit to students because, to borrow a phrase, consumption wants to be smoothed. And unlike subsidized loans for housing, there is a real externality that justifies continued federal presence in the student loan market.
Although men and women follow a similar number of Twitter users, men have 15% more followers than women. Men also have more reciprocated relationships, in which two users follow each other. This “follower split” suggests that women are driven less by followers than men, or have more stringent thresholds for reciprocating relationships. This is intriguing, especially given that females hold a slight majority on Twitter: we found that men comprise 45% of Twitter users, while women represent 55%. To get this figure, we cross-referenced users’ “real names” against a database of 40,000 strongly gendered names.
Even more interesting is who follows whom. We found that an average man is almost twice more likely to follow another man than a woman. Similarly, an average woman is 25% more likely to follow a man than a woman. Finally, an average man is 40% more likely to be followed by another man than by a woman. These results cannot be explained by different tweeting activity – both men and women tweet at the same rate.
And this makes Twitter different than other social networks:
These results are stunning given what previous research has found in the context of online social networks. On a typical online social network, most of the activity is focused around women – men follow content produced by women they do and do not know, and women follow content produced by women they knowi
(See the article here. via MR.) Actually this may not be stunning at all because there is probably a very simple explanation for both observations. Twitter is a one-way social network. If I want to follow you I do not need your permission. Unless you block everybody and require followers to ask permission.
Regardless of the social network, women are less willing than men to allow unsolicited followers and so they are more inclined to require permission. So for example if I just randomly selected 100 Twitter users to follow, there will be many of those 100 whom I will be unable to follow because they require permission. Most of those will be women. Thus, on Twitter the ratio between the number of followers of a random woman to the number of followers of a random man will be smaller than the same ratio on, say, Facebook. And everybody will follow more men on Twitter than on Facebook.
There have been quite a few overtime games in the NBA playoffs this year. We have had one in the finals already and in an earlier series between the Bulls and Celtics, 4 out of 7 games went into overtime, with one game in double overtime and one game in triple overtime!
How often should we expect a basketball game to end tied after 48 minutes of play? At first glance it would seem pretty rare. If you look at the distribution of points scored by the home teams and by the visiting teams separately, they look pretty close to a normal distribution with a large variance. If we made the crude hypothesis that the two distributions were statistically independent, then ties would indeed be very rare: 2.29% of all games would reach overtime.
But the scoring is not independent of course. Similar to a marathon, the amount of effort expended is different for the team currently in front versus the team trailing and this amount of effort also depends on the current point differential. But such strategy should have only a small effect on the probability of ties. The team ahead optimally slows down to conserve effort, balancing this against the increased chance that the score will tighten. Also, conservation of effort by itself should generally compress point differentials, raising not just the frequency of ties, but also the frequency of games decided by one or two points.
But overtime is almost 3 times more frequent than this: 6.26% of all NBA games are tied at the end of regulation play. And games decided by just a few points are surprisingly rare: It is more likely to have a tie than for the game to be decided by two points, and a tie is more than twice as likely as a one-point difference. These statistics are quite dramatic when you see them visually.
Here is a frequency histogram of the difference in points between the home team and visiting team at the end of regulation play. These are data from all NBA games 1997-2009. A positive number means that the home team won, a zero means that the game was tied and therefore went into overtime. Notice the massive spike at zero.
(There is also more mass on the positive end. This is the well-known home team bias.)
What explains this? A star PhD student at Northwestern, Toomas Hinnosaar, and I have been thinking about this. Our focus in on the dynamics and strategy at the end of the game. To give you some ideas, Toomas created the following striking video. It shows the evolution of the point differential in the last 40 seconds of the fourth quarter. At the beginning, the distribution looks close to normal. This is what the crude hypothesis above would predict. Watch how the spike emerges in such a short period of time.
By contrast, here is the same animation at the end of halftime. Nothing unusual.
Apple always claimed its computers were better than PCs. Yet, PCs became ubiquitous and Apple’s share of the computer market is small.
Q: Why did the supposedly inferior product win out?
A: Network effects. PCs became cheap, Microsoft let developers loose on its operating system and so there are more useful applications available for the PC than Apple. Steve Jobs did not want to let developers have control over his product and his product withered away as a result.
Apple has learned its lesson this time around with the iPhone. Apps take the phone to a different level. I can’t survive without my G-Park app that tells me where I parked my car in the vast array of Northwestern carparks. I let my kids play JellyCar to distract them when we’re on a long trip. As Slate puts it, the irony is that the network effects that killed the Apple computer make the iPhone impregnable:
For years, Apple fans claimed that the company made the best PCs in the world, hands down. Nevertheless, it was hard to argue with the fact that Windows PCs simply ran more programs. Now Apple is in the position once occupied by Microsoft. Over the next few years, Palm, Research in Motion, Nokia, Sony, and others are sure to create some transcendent mobile devices. But the hardware hardly matters anymore. How is anyone going to compete with all these amazing apps?
For coffee, Peet’s for me. Better coffee, fewer people (at least in Evanston), and for us in the Midwest, a wistful San Fran ambiance at the height of winter.
Apparently, Zagat‘s readers disagree rating even Dunkin Donuts over Peet’s. Nate Silver at fivethirtyeight solves the mystery: Zagat’s counts an “abstain” vote for Peet’s as a “zero” rating from a 0-3 rating scale. What happens in a binary election where abstainers are eliminated?
I wish Peet’s had the Greek yogurt I get from Starbucks. Then, I would face no dilemma in the morning.
R. Crumb is illustrating The Book of Genesis. An excerpt appears in this week’s New Yorker. Here is a copyright-violating scan. (via BoingBoing)
By the time he came to the story of Noah, though, he was annoyed. He had begun to realize, he says, that “the whole thing is a piece of patriarchal propoganda, engineered to consciously and deliberately suppress matriarchy.”
One of the best movies I have ever seen is Crumb, a documentary about R. Crumb and his two brothers. If you have seen that film you have some context for the quote above. I am pre-ordering my Book of Genesis now.
According to the New York Times:
Mr. Obama answered a question about “dealing with the hawks in the current Israeli government,” by suggesting that Israel’s new, conservative prime minister, Benjamin Netanyahu, might have an opportunity to play a more constructive role than a more liberal leader:
I believe that Prime Minister Netanyahu will recognize the strategic need to deal with this issue. And that in some ways he may have an opportunity that a labor or more left leader might not have. There’s the famous example of Richard Nixon going to China. A Democrat couldn’t have gone to China. A liberal couldn’t have gone to China. But a big, anti-communist like Richard Nixon could open that door. Now, it’s conceivable that Prime Minister Netanyahu can play that same role.
This is the essence of Cukierman and Tomassi’s “Why does it take a Nixon to go to China?” American Economic Review, Mar. 1998, pp. 180-197. Suppose a political knows the “state of the world” and the policy that most voters would support. But voters do not have this information. They cannot tell whether a policy is suggested by a politician because it is the ideal policy for the state of the world or because he has a bias for it. Then, a right-wing politician is more likely to implement a extreme left-wing policy. Voters are likely to believe it is the “right” policy as he is voting against his natural bias. He is then rewarded by being re-elected. Hopefully, there is no Watergate on the horizon for Netanyahu.
Until 2010 that is, whereupon its time to shuffle it:
If Congress doesn’t act, the estate tax will disappear in 2010 but will return in 2011 at the pre-2001 level of $1 million with a tax rate of 55%.
That could generate some interesting data.
After the showstopper that is Arrow’s Theorem, we could just throw in the towel. The motivation for studying social welfare functions was to find a coherent standard by which to judge institutions and to propose policies. Now we see that there is no coherent standard. Well students you are not getting away so easily, after all this is only the second week of the course. We will accept that we must violate one of the axioms. Which one do we choose?
A lot of normative economic theory is implicitly built upon one of two welfare criteria, either Pareto efficiency or utilitarianism. While it is standard to formally define Pareto efficiency in an undergraduate micro class, utilitarianism is often invoked without explicit mention. For example, we are implicitly using some form of utilitarianism when we talk about consumer and producer surplus. And to argue that a monopoly is inefficient in a partial equilibrium framework is a utilitarian judgment (absent compensating transfers.)
So I make it explicit. And I take the time to formally define utilitarianism, explain where it applies and what justifies it and I point out its limitations. In terms of Arrow’s theorem I tell the students that we are dropping the axiom of universal domain (UD.) That is, we are not requiring our social welfare function to apply in all situations, only in those situations in which there is a valid measure of welfare that can be transferred and/or compared inter-personally. In this class, that measure of welfare is willingness to pay, and it applies when there are monetary transfers available and all agents value money in equal terms, i.e. quasi-linear utility.
These lectures contain one important formal result. In the quasi-linear world with monetary transfers utilitarianism coincides with Pareto efficiency. So these two common welfare standards are the same. (Any utilitarian improvement can be made into a Pareto improvement with judiciously chosen transfers and any Pareto improvement is a utilitarian improvement.)
Here are the notes.
My yoga teacher begins class instructing us to moderate our breathing. Her precise instruction is this: breathe loud enough so that your neighbor can hear you breathe but not so loud that you cannot hear your neighbor’s breath.
How loud should I breathe?
From Language Log:
The opening sentence of George F. Will’s latest column (“Have We Got a Deal for You“, 6/7/2009):
“I,” said the president, who is inordinately fond of the first-person singular pronoun, “want to disabuse people of this notion that somehow we enjoy meddling in the private sector.”
This echoes J.B.S. Haldane’s quip that the creator, if he exists, must be inordinately fond of beetles; and Will, like Haldane, is presumably proposing an inference about someone’s preferences from his actions, not reporting a direct emotional revelation.
So, since I’m one of those narrow-minded fundamentalists who believe that statements can be true or false, and that we should care about the difference, I decided to check. (On Will, not Haldane.)
Based on a few press conferences, it turns out that Obama uses “I” less often than both G.W. Bush and Bill Clinton. By the way it looks like I have found a good resource for searching Presidential cheap talk: The American Presidency Project.
One theory: Broadway is vulnerable to boors because it is under pressure. More new shows opened this past season than at any point in the past 25 years, which means more seats to fill in a recession. In response, shows have been offering steep discounts on tickets, which can normally cost upwards of $100 apiece. BroadwayWorld.com, an entertainment site, is promoting a “Lucky Sevens” discount that offers a “Guys and Dolls” ticket for $7.77 with the purchase of a full-price seat.
That’s the theory. Here are the data:
The litany of misdemeanors is long. During a Saturday matinee of the Holocaust drama “Irena’s Vow,” a man walked in late and called up to actress Tovah Feldshuh to halt her monologue until he got settled. “He shouted, ‘Can you please wait a second?’ and then continued on toward his seat,” recalls Nick Ahlers, a science teacher from Newark, N.J., who was in the audience. He says the actress complied.
During a recent matinee of “God of Carnage,” which explores the lives of two couples, a woman in the mezzanine screamed, “How ’bout those Yankees!” — filling one of the play’s intense silences. At “The Norman Conquests,” an elderly man familiar with the British comedy script recited his favorite lines as the actors read them, prompting audience members to confront him at intermission. Steve Loucks, a theater blogger from Minneapolis who was sitting near the man, was stunned. “What is with people who think they’re in their own living rooms?”
The Kellogg Graduate School of Management at Northwestern has begun syndicating the various blogs published by Kellogg faculty, including Cheap Talk. Its great to have the Kellogg endorsement. And there are many excellent blogs, worth taking a look.
Via MR, some thoughts on carbon taxes:
However, this does not necessarily mean that revenue-neutral CO2 taxes, or auctioned allowance systems, produce a “double dividend” by reducing the costs of the broader tax system in addition to slowing climate change. There is a counteracting, “tax-interaction” effect (e.g., Goulder 1995). Specifically, the (policy-induced) increase in energy prices drives up the general price level, which reduces real factor returns, and thereby (slightly) reduces factor supply and efficiency.
Indeed, a triple dividend. The reason, say, labor supply will fall is that the marginal labor was being sold to buy the marginal output that we have decided should not be produced because of the externality. So this was part of the plan.
Greg Mankiw thinks B-School economists are “practical” and “empirical” while Econ Dept economists are free to be abstract and theoretical.
I don’t think this is true for the research done by economists differs across these two types of schools but it is true that the teaching is different. The MEDS Dept at Kellogg where I work is somewhat different from other business schools as it has always been very theory focused. The Econ group at Stanford GSB is similar. Some of the best work in game theory, contract theory and decision theory came out of these departments.
It is the case, as Mankiw says, that teaching has to be practical and useful in a B School. Whether that drives research or not depends on the philosophy of the school. I have never felt any pressure for my research to be practical.
Mankiw writes his post to answer David Brooks’s query about why B School economists are giving him better answers about the current state of the economy. As finance is a B School specialty, it very natural that B schools profs may know more about what a CDS is without having to look it up on Wikipedia! But again, finance economists are not more “practical” or “empirical” than econ dept economists. I bet Doug Diamond and Milt Harris at Chicago GSB have really perceptive things to say about the financial crisis as has Oliver Hart at Harvard Econ. They will use simple, clear models (hopefully!), to explain their ideas about how to fix incentives in the financial sector. And then maybe somone will give a little theory a chance as much as data analysis!
In this case . . . while the challenged packaging contains the word “berries” it does so only in conjunction with the descriptive term “crunch.” This Court is not aware of, nor has Plaintiff alleged the existence of, any actual fruit referred to as a “crunchberry.” Furthermore, the “Crunchberries” depicted on the [box] are round, crunchy, brightly-colored cereal balls, and the [box] clearly states both that the Product contains “sweetened corn & oat cereal” and that the cereal is “enlarged to show texture.” Thus, a reasonable consumer would not be deceived into believing that the Product in the instant case contained a fruit that does not exist. . . . So far as this Court has been made aware, there is no such fruit growing in the wild or occurring naturally in any part of the world.
see here. (Shako shake: BoingBoing)
Today at Peet’s in Evanston I was trying to work out a model for this idea Sandeep and I are working on related to the game theory of torture. I started drawing a litle graph and then got lost in thought. I must have looked a little weird (nothing unusual there) because the woman next to me started asking me what was up with this squiggly plot on my pad of paper.
Most economists dread these moments when someone asks you what you do and you have to tell them you’re an economist and then prepare to deflect the inevitable questions and/or accusations “what’s going to happen with interest rates?” “when’s the economy going to turn around?” Usually I just mumble and wait for the person to get bored and go on with her reading. For some reason I was talkative today.
I told her I was a game theorist. “What’s that for?” I told her I was working on a theory of torture. She looked horrified. “How do you make a theory of torture?”
I told her that using game theory is a lot like screenwriting. Imagine you were a film-maker and you wanted to make a point about torture. You would invent characters and put them in the roles of torturer and torturee and you would describe the events. You would depict how the torturer would plan his torture and how he would the torturee would react and how this would lead the torturer to adjust his approach. If the film was going to be effective it would have believable characters and it would have to show the audience a plausible hypothetical situation and what happens when these characters act out their roles in that situation. In short, its a model.
(As I was saying this I remembered that I learned to think of economics and literature in this way about 20 years ago from Tyler Cowen. And he has a nice paper on it here.)
She looked even more horrified. But I was pretty pleased. I started thinking about Resevoir Dogs (nsfw).
While scripts and models are constrained by a similar requirement of coherence between character and events, there are differences and this makes them complementary. A model necessarily maps out the entire game tree, while a script describes just one path. In a model every counterfactual is analyzed and we see their consequences and this explains why those paths are not taken, but a film is a far more vivid account of the path taken. In a model the off-equilibrium outcomes are the results of mistakes while a well-conceived script can bring in plausible external developments to place the characters in unexpected situations.
Of course film-makers get invited to better parties.
A post at Freakonomics suggests macroeconomics is in more trouble than microeconomics because there is less room for empirical work because there is less data:
In microeconomics, at least there is an abundance of good data, so people who are good at measuring and describing things can succeed. But in macro there is not much data, so most of the rewards are for the mathematics, not the empirics.
As a micro-theorist and hence an outsider, it seems to me that Hari Seldon and other psychohistorians are wrong: events involving large numbers of people and firms are harder to predict than those involving a few. In micro for example, is much harder to understand imperfect competition than it is to understand say monopoly price discrimination. Even if competition is perfect, we know from general equilibrium theory that there is still a multiple equilibrium problem that makes it hard to predict economic trends. And if we allow monopolies so we can predict trends more easily, here is my main prediction: prices will go up, output will go down, the stock market will go up and consumers will be worse off.
A post at Freakonomics (and accompanying article at Slate) advocates protection against price depreciation as a way to prop up housing prices:
Sellers could commit to reimbursing their buyers for any fall in the average value of homes in their area in the year following a sale. Such price protection would give buyers confidence that they won’t regret their purchases even if the market does fall further and cheaper houses come on offer — confidence that they need in order to buy now. And if buyers gain confidence, prices won’t fall, so sellers won’t have to pay. … And it’s natural for sellers to provide the insurance that price protection involves. If they can’t sell their houses, they’re going to end up bearing the house price risk anyway.
Here are some other things sellers could do to keep prices from falling:
- Commit to compensate buyers for future appreciation on the home they move out of
- Throw in tuition for the neighborhood private schools
- Remodel the kitchen
Cheap Talk 
