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Is it an infinite number of monkeys, or is it infinitely-lived monkeys? If what you want is Shakespeare with probability 1 it matters. Because Hamlet is a fixed finite string of characters. That means the monkey has to stop typing when the string is complete. If we model the monkey as a process which every second taps a random key from the keyboard according to a fixed probability distribution, then to produce the Dithering Dane he must eventually repeat the space bar (or equivalently no key at all) until his terminal date.
If that terminal date is infinity, i.e. the monkey is given infinite time, then this event has probability zero. On the other hand, an infinite number of monkeys who each live long enough, but not infinitely long, will Exuent with probability 1 as desired.
(If your criterion is simply that the text of Hamlet appear somewhere in the output string, then a) you are sorely lacking in ambition and b) it no longer matters which version of infinity you have.)
Mortarboard Missive: Marginal Revolution.
From an excellent blog, Neuroskeptic, here is a survey of some data on mental illness incidence and suicide rates across countries. The correlation is surprisingly low:
So what’s the story? Take a look -
In short, there’s no correlation. The Pearson correlation (unweighted) r = 0.102, which is extremely low. As you can see, both mental illness and suicide rates vary greatly around the world, but there’s no relationship. Japan has the second highest suicide rate, but one of the lowest rates of mental illnesses. The USA has the highest rate of mental illness, but a fairly low suicide rate. Brazil has the second highest level of mental illness but the second lowest occurrence of suicide.
Perhaps I am reacting too much to the examples in the excerpt, but one possible explanation comes from noting that there is a difference between incidence of mental illness and detection. In countries where mental illness is readily diagnosed you will see more reports of it and also (assuming it does any good) less suicide. The US must be the prime example. And as I understand it, mental illness is highly stigmatized in Japan so the effect there is exactly what the data would suggest. I don’t know about Brazil.
A basic tenet of micro theory: a firm should shut down if the price for its output is so low that it cannot even cover variable costs. Alligator skins are fetching “prices far lower than in the past and lower even than the price of raising an alligator.” Budding alligators farmers should turn their firms into zoos not Jimmy Choos.
At least inputs into alligator bags, shoes and watch straps are very cheap and competition between producers should make Choos and Blahniks cheaper, offering one possible resolution to the annual Xmas shopping conundrum for many confused men. Typically but not in this case:
“Every time I go to Neiman Marcus and say every year the price is going up, they fight me tooth and nail,” said George D. Malkemus III, the president of Manolo Blahnik. “They say, ‘I’m not going to spend $4,000 for an alligator shoe.’ ”
One popular theory: Hermes is fast becoming the dominant player in the supply chain from Florida to Paris. The firm has scarfed up many tanneries and has the market power to set the price to farmers low and the price to Blahniks high. The middleman reaps the rents.
I don’t think they are any men’s Choos and anyway I’m quite happy in my Merrell’s. But the Xmas shopping issue awaits….
“You’re a cad if you break up around Christmas. And then there’s New Year’s — and you can’t dump somebody right around New Year’s. After that, if you don’t jump on it, is Valentine’s Day,” Savage says. “God forbid if their birthday should fall somewhere between November and February — then you’re really stuck.
“Thanksgiving is really when you have to pull the trigger if you’re not willing to tough it out through February.”
That’s from a story I heard on NPR about turkey dropping: the spike in break-ups at Thanksgiving followed by a steady period (for the surviving pairs) through the Winter months. If there is a social stigma against cutting it off between Thanksgiving and Valentine’s Day, then there may be value in that. Often social rules emerge arbitrarily but persist only if they serve a purpose, even if that purpose is unrelated to the spirit of the social norm. The post-turkey taboo plays the role of a temporary commitment that can strengthen those relationships that are still worth maintaining.
The value of a relationship fluctuates over time. Not just the total value of the partnership relative to autarky but also the value to the individual of remaining committed. The strength of a relationship is precisely measured by the maximum temptation each partner is willing to forego to keep it alive. The moment a jucier temptation appears, the relationship is doomed.
Unless there is commitment. Commitment is a way of pooling incentive constraints. A relationship becomes stronger if each partner can somehow commit in advance to resist all temptations that will arise over the length of the commitment. This transforms your obligation. Now the strength of the relationship is equal to the expected temptation rather than the most severe temptation actually realized. A social stigma against ending the relationship over certain intervals of time aids such a commitment.
Its good that commitments are temporary, but you want their beginning and end dates to be arbitrary, or at least independent of the arrival process of temptations. The total value of the relationship also fluctuates and you want the freedom to end the relationship when it begins to lag the value of being single. This is especially true in the early stages when there is still a lot to learn about the match. Over time when the value of the relationship has clarified, the length of commitment intervals should increase.
Commitments can also solve an unraveling problem. If you know that your partner will succumb to a juciy temptation and you know that its just a matter of time before a juicy temptation arrives, you become willing to give over to a just-a-little-juicy temptation. Knowing this, she is poised to give it up for just about anything. The commitment short-circuits this at the first step.
Mind Your Decisions looks at the game theory of the classic Thanksgiving showdown between Lucy and Charlie Brown.
Time after time, Lucy would bring her football to the park and entice Charlie Brown to practice some place kicks. Lucy would hold the ball, Charlie Brown would run full-steam to kick it only to have Lucy snatch the ball away at the last minute sending Charlie Brown flying, yelling ARRRRGGGHHH and landing in a heap. What a blockhead. Sure you can understand his willingness to trust her the first time, maybe even the first two times, but after that it’s pretty clear what Lucy’s objective is.
You may try to make excuses for Charlie Brown by arguing that subgame-perfection requires a great deal of strategic sophistication. But you don’t need to invoke any refinements here. The unique Nash equilibrium action for Charlie Brown is to say no. Even worse, not yanking the ball is a weakly dominated strategy for Lucy and after that strategy is eliminated, Charlie Brown has a strongly dominant strategy to walk away.
So it is not surprising that in It’s The Great Pumpkin Charlie Brown, he has finally figured this out and flatly refuses to play Lucy’s game. That’s when she goes contract theory on him.
Now we are reaching higher-order blockheadness. First of all, whether or not the contract is valid, its terms are not verifiable to a court. And Charlie Brown should be able to figure out there is something fishy about this contract. Lucy would only offer a contract if she preferred the outcome (run, don’t yank) to the outcome (walk away). But even though Lucy has never directly revealed any preference between these two outcomes, there is pretty good evidence that the worst possible outcome for Lucy would be to see Charlie Brown successfully kick.
Indeed, Lucy knew from the beginning that Charlie Brown would eventually figure out her intention to yank the ball. After that, she knows Charlie Brown will refuse to play. So if Lucy really preferred (run, don’t yank) to (walk away) then she would prevent this evaporation of trust by allowing Charlie Brown to kick the ball at least a few times, but she never did.
The only way to rationalize Lucy’s steadfast insistence on sending him flying is to assume either that (run, don’t yank) is her least-preferred outcome, or that she thinks that Charlie Brown is indeed a blockhead and unable to deduce her intentions. In either case, Charlie Brown should have viewed Lucy’s contract with deep suspicion.
1. Leaked documents reporting British commanders’ “special relationship” with US commanders and much more. The summary of the documents is here.
2. Social networking 1950s style.
3. NYT Guide to mid-level Chicago restaurants (Big Star Taqueria, Xoco, and Great Lake menus)
Happy Thanksgiving.
Jackson, NH
Here’s my measure of creativity. Try it before reading on. Time yourself. Let’s say 30 seconds. You are going to think of 5 words. Your goal is to come up with 5 words that are as unrelated to one another as possible. Go.
Via Jonah Lehrer, I found this article that would give some backstory to my test. I will paraphrase, but it’s worth reading the article. First of all, our memory is understood to work by passive association (as opposed to conscious recollection.) You have a thought or an experience, and memory conjures up a bunch of potentially relevant stuff. Then, subconsciously, a filter is applied which sorts through these passive recollections and finds the ones that are most relevant and allows only these to bubble up into conscious processing.
Now, there are patients with damage to areas of their brain that effectively shuts off this filter. When you ask these patients a question, they will respond with information that is no more likely to be true as it is to be completely fabricated from related memories, or even previously imagined scenarios. These people are called confabulators.
The article discusses how especially creative people with perfectly healthy brains achieve their heights of creativity by reducing activity in that area of the brain associated with the filter. The suggestion is that creativity is the result of allowing into consciousness those ideas that less creative people would inhibit on the grounds of irrelevance. And this makes sense when you realize that thought does not “create” anything that wasn’t already buried in there somewhere. Observationally, what distinguishes a creative person from the rest of us is that the creative person says and does the unexpected, “outside the box,” “out of left-field” etc.
It reinforces the view that creative work doesn’t come from active “research.” At best you can facilitate its arrival.
Apparently, financial firms seem to believe that this is the case:
An increasing number of hedge funds and brokerages are scrutinizing professional poker to find talent and analytical tools, according to financial recruiters including Options Group, a New York-based executive-search company. Susquehanna International Group LLP, the Bala Cynwyd, Pennsylvania-based options and equity trading company, uses poker to teach strategic thinking.
“Someone who has made a successful living as a poker player for a few years would more likely be a good trader than someone who hasn’t,” said Aaron Brown, a 53-year-old former poker pro who is now a risk manager at AQR Capital Management LLC in Greenwich, Connecticut, which oversees $23 billion. “They know to push when they have the edge and they know how not to bust, and that’s a tough combination to find.”
Catch me on the public radio program Marketplace this evening. I will be talking about pinball.
I sat here in Northwestern’s high-tech studio and talked into that thing to Kai Ryssdal.
- More than modern equipment, what the studio needs is a few candles and some incense. Also someone to look at me and pretend that everything I am saying is really interesting. A person instantly gains about 10 IQ points whenever he believes somebody is into what they are talking about.
- I don’t think I did a very good job but that’s ok. Things like this tend to feel like impending doom to me. I congratulated myself that for the first time in my life I would try to be detached and take note of what impending doom feels like.
- Like standing in front of a big class for the first time, or the first job-market seminar, or a first date the overwhelming feeling is that it’s bizarre that anyone would actually care what I am talking about. My advice when you feel that way is to embrace it as an absurd commentary on life and use that thought to help yourself smile your way through it.
Cute video from Tim Harford on the information economics of office politics.
(My theory is that in fact the managers will get stuck with cleaning coffee pots. The wage-earners are already held to reservation utility while the managers are likely earning rents. And, as illustrated in the video’s epilogue, there is no fully separating equilibrium in the “threaten to resign” game.)
I just attended an interesting NBER conference on organizational economics. I discussed a very nice paper by Giacomo Calzolari of the University of Bologna, Italy’s best public university. Bologna is in Emilia Romagna which has given the world Parma ham, Parmesan cheese, mortadella, prosciutto and, of course, tortellini. Food generates much happiness for consumers and high income for producers. It even greases the wheels of the finance:
The vaults of the regional bank Credito Emiliano hold a pungent gold prized by gourmands around the world — 17,000 tons of parmesan cheese. The bank accepts parmesan as collateral for loans, helping it to keep financing cheese makers in northern Italy even during the worst recession since World War II. Credito Emiliano’s two climate-controlled warehouses hold about 440,000 wheels worth €132 million, or $187.5 million.
Alas, like gold, Parmesan attracts thieves:
Thieves tunneled into one warehouse in February and made off with 570 pieces before they were apprehended by the police. “Thank heavens we caught the robbers before they grated it,” said William Bizzarri, who manages the warehouses.
Little wonder then that food is a local obsession. Giacomo told me that he himself organized a tortellini tasting competition. He and his friends purchased tortellini from around thirty shops that sell handmade pasta in Bologna. Just imagine living in a city where there are that many places specializing in one artisanal culinary product!
As all economists would know, to truly study which store makes the best products, you have to control all other variables apart from the store-induced variation. As far as I understood from Giacomo, they did this by buying the same kind of classic tortellini from all the stores. The story is that a chef from Bologna peeked through a keyhole to see the naked Venus but all he could glimpse was her navel. His view is immortalized in the shape of the tortellini. There is only one way to improve on Venus – by adding a lot of components of the noble pig: the filling is pork loin, mortadella, parma ham and of course parmesan cheese in just the right proportions. The recipe is registered by the Chamber of Commerce in Bologna. (Even a baconatarian (i.e vegetarian except for cured pork products) might be put off by the meatiness but I’m willing to give it a shot.) To control for any bias of the people sampling the tortellini, Giacomo had a blind tasting.
The winner: Boutique de Tortellini.
They did not publish the results but word-of-mouth alone helped to increase sales at the Boutique.
Of course, there are many great food regions in Italy. Giacomo himself actually prefers Sicilian cuisine because of its great variety and incorporation of ingredients from all across the Mediterranean.
Mayonnaise by hand is pretty easy and a big improvement over stuff in a jar. A great workout too. Recipes usually seem too cautious, guarding against disaster when the emulsion doesn’t work. Mine always came together without a hitch until recently I have had two occasions when it “broke” as they say. (I guess I was getting a little lax.)
In a recipe book called Vegetarian Cooking for Everyone by (whatshername who was the Chef at Greens in San Francisco) there is given a method to bring a failed mayonnaise back from the dead. Tonight (making Tuna Burgers with Harissa Mayonnaise out of Fish Without a Doubt [great book!] was the occasion of my second failure and, remembering the tip, I gave it a try.
Pour 1-2 tablespoons of boiling water into the goopy mess (it really looks ugly when it goes wrong) and whisk. Viola, mayonnaise reborn. Simple as that.
Kids love harissa mayonnaise.
- The right time to shoplift.
- Fact: there was a Mr. Ely on the Mayflower. Fiction: everything written here.
You are playing in you local club golf tournament, getting ready to tee off and there is last-minute addition to the field… Tiger Woods. Will you play better or worse?
The theory of tournaments is an application of game theory used to study how workers respond when you make them compete with one another. Professional sports are ideal natural laboratories where tournament theory can be tested. An intuitive idea is that if two contestants are unequal in ability but the tournament treats them equally, then both contestants should perform poorly (relative to the case when each is competing with a similarly-abled opponent.) The stronger player is very likely to win so the weaker player conserves his effort which in turn enables the stronger player to conserve his effort and still win.
There is a paper by Kellogg professor Jennifer Brown that examines this effect in professional golf tournaments. She compares how the average competitor performs when Tiger Woods is in the tournament relative to when he is not. Controlling for a variety of factors, Tiger Woods’ presence increases (i.e. worsens, remember this is golf) the score of the average golfer, even in the first round of the tournament.
There are actually two reasons why this should be true. First is the direct incentive effect mentioned above. The other is that lesser golfers should take more risks when they are facing tougher competition. Surprisingly, this is not evident in the data. (I take this to be bad news for the theory, but the paper doesn’t draw this conclusion.)
Also, since golf is a competition among many players and there are prizes for second, third etc., the theory does not necessarily imply a Tiger Woods effect. For example, consider the second-best player. For her, what matters is the drop-off in rewards as a player falls from first to second relative to second to third. If the latter is the steeper fall, then Tiger Woods’ presence makes her work harder. Since the paper looks at the average player, then what should matter is something like concavity vs. convexity of the prize schedule.
Also, remember the hypothesis is that both players phone it in. Unfortunately we don’t have a good control for this because we can’t make Tiger Woods play against himself. Perhaps the implied empirical hypothesis says something about the relative variance in the level of play. When Tiger Woods is having a bad season, competition is tighter and that makes him work harder, blunting the effect of the downturn. When he is having a good season, he slacks off again blunting the effect of the boom. By contrast, for the weaker player the incentive effects make his effort pro-cyclical, amplifying temporal variations in ability.
Jonah Lehrer (to whom my fedora is flipped) prefers a psychological explanation.
I went to a totally fascinating talk at MIT given by Kevin Woods from the Institute for Defense Analyses. Woods interviewed Saddam’s key henchmen, like Chemical Ali and Tariq Aziz, who were captured after the invasion. He also has access to documents in Saddam’s palaces and intelligence offices. Saddam also has the “Nixon disease” and taped everything. Woods and his team are busy listening to all of the tapes. There were many fascinating anecdotes and I list all of them I can remember:
1. Delusions At a meeting in the mid-ninetees with leading generals and strategic thinkers, one officer offered a subtle and nuanced theory of how an invading army might be forestalled and defeated by an attrition strategy using small, fast-moving decentralized groups (a little like the fedayeen that plagued US troops in Gulf War II). The officer compared this to the strategy used by the Russians against Napoleon. ( I assume extreme heat replaces extreme cold as the weather component of the strategy.) Saddam dismissed the strategy. His argument was that the fact that he, Saddam, was still standing and alive meant that he had defeated the U.S. coalition in Gulf War I. A coalition of thirty odd nations had been brought to its knees by him. Therefore, since he had a winning strategy in 1991, there is was no reason to replace it for the next invasion. Notice that Saddam also wants to learn from his mistakes – that is why he had the after-event analysis done, just like the analysis done for the US by Woods. But Saddam is subject to so much overconfidence that he cannot use any useful information that might come out of the analysis.
From the U.S. perspective, Saddam was deliberately left in power to prevent a collapse of the country and the growth in the influence of Iran. Saddam’s perspective was obviously different.
Saddam became more and more delusional over time. Initially, he used to defer to his generals but by the end he started writing memos on how to organize even small groups soldiers. Woods said that such memos are written by sergeants in the US Army so Saddam had reached this level of micromanagement.
2. Information
2.1 Every Thursday, all the cars used by the key players in the army and government had to be taken in for “maintenance”. It was common knowledge that the batteries were being replaced in the “secret” recorders in the cars.
2.2 Saddam’s key fear was a coup. He was suspicious if officers talked too much in case they were plotting something. Officers at the same lateral level did not talk, fearing repercussions. Vertical communication was OK, especially as the top brass were insiders who were most likely to have Saddam’s support.
2.3 A key player, the head of research into WMDs, was asked: Is it possible that there was a WMD program and you did not know about it? He said it was quite possible. First, information was compartmentalized and no-one knew anything. After Gulf War I, many documents, resources etc were destroyed so inspectors would not find them and hold Saddam in contempt of various UN resolutions. But this process was haphazard and no-one really knew what was and was not destroyed and whether some WMDs had been hoarded secretly.
Why did he believe that Saddam had WMDs? Because “little Bush”, as Saddam called him, had said there were WMDs. And if he invaded and there were no WMDs, Little Bush would be very embarrassed so he would make sure there were WMDs before saying it!
3. Nepotism, Cowardice and Stupidity
Saddam lived in fear of a coup mounted by the Republican Guard. His solution was to create the Special Republican Guard, whose main remit was to protect him against coups particularly from the Republican Guard. You would think that the head of this outfit would be a fearsome figure who would terrify any budding coup plotters. Woods asked other leading figures if this was indeed the case and the answer was a resounding NO! Why? Saddam was well aware of the “who monitors the monitor problem” – what is the head of the Special Guard mounted a coup himself? Saddam’s solution was not original: appoint a relative. Make sure the appointee is a coward so he would not dream of mounting a coup. Just in case he is tougher than you might think, choose someone stupid so he cannot mount a successful coup and is too stupid to recognize someone else’s good ideas for a coup.
4. WMDs
Saddam did not have them in 2003 and hid that fact and in 1991 he had them but did not use them. Why did he not use them in 1991? He thought the U.S.has lots of chemical weapons and would not hesitate to use them. Ditto Israel. Why did he not reveal that he had no weapons in 2003? That would embolden aggressors and leave him naked in the face of an internal coup or an external threat like Iran. This is the part of Woods’ work I was familiar with and is cited in my paper Strategic Ambiguity and Arms Proliferation with Tomas Sjostrom.
For an economist, some of Saddam’s strategies are reminiscent of themes in the economics of organizations…promotion of dumb managers, though for quite different reasons, the difficulties of coordinating across divisions…
Another theme is also familiar to game theorists though we have no clear answer: it is very hard for one player to understand the strategic intent of another. It is very hard for one player to communicate his strategic intent to the other indirectly: presumably Big Bush thought it was obvious which side had defeated the other and could not imagine that Saddam would even consider Gulf War I a win for the Iraqi regime! This leads the players to have two quite different interpretations of the same event and creates room for future errors.
How should one player credibly communicate his strategic intent and beliefs to another? This is the fundamental question for the US from this excellent and interesting study by Woods and his team.
R. Duncan Luce has been elected fellow of the Econometric Society in the year 2009. He is 84. How could it take so long?
Here’s a model. There is a large set of economists and each year you have to decide which to admit to a select group of “fellows.” Assume away the problems of committee decision-making and say that an economist will be admitted if his achievements are above some standard. The problem is that there are many economists and its costly to investigate each one to see if they pass the bar.
So you pick a shortlist of candidates who are contenders and you investigate those. Some pass, some don’t. Now, the next problem is that there are many fellows and many non-fellows and its hard to keep track of exactly who is in and who is out. And again it’s costly to go and check every vita to find out who has not been admitted yet.
So when you pick your shortlist, you are including only economists who you think are not already fellows. Someone like Duncan Luce, who certainly should have been elected 30 years ago most likely was elected 30 years ago so you would never consider putting him on your shortlist.
Indeed, the simple rule of thumb you would use is to focus on young people for your shortlist. Younger economists are more likely to be both good enough and not already fellows.
You have a great need for other people to like and admire you. You have a tendency to be critical of yourself. You have a great deal of unused capacity which you have not turned to your advantage. While you have some personality weaknesses, you are generally able to compensate for them. Your sexual adjustment has presented problems for you. Disciplined and self-controlled outside, you tend to be worrisome and insecure inside. At times you have serious doubts as to whether you have made the right decision or done the right thing. You prefer a certain amount of change and variety and become dissatisfied when hemmed in by restrictions and limitations. You pride yourself as an independent thinker and do not accept others’ statements without satisfactory proof. You have found it unwise to be too frank in revealing yourself to others. At times you are extroverted, affable, sociable, while at other times you are introverted, wary, reserved. Some of your aspirations tend to be pretty unrealistic. Security is one of your major goals in life.
Thanks to Jeroen for being our first guest blogger. His posts were as fun and insightful as we expected. What a surprise to find our shared admiration for all things Tito. I am sure he regrets the association with us Palin-baiters and Asian-sweet-dissers, but if he is in the mood for some pinball, now he knows where to go.
Obama is close to a decision on the U.S. strategy is Afghanistan. What is the rational way to approach this decision assuming the U.S. is maximizing its own payoff? This is the “realist” assumption rather than one incorporating a moral component, though it is not too hard to jazz up some of the analysis to deal with this objective function too.
First, think through whether we should be there in the first place. What is the threat to the U.S. if Afghanistan falls to the Taliban? Will Al Qaeda move back in or not? If the belief is that the Taliban is not a threat to the U.S. and Al Qaeda will not move in, the realist conclusion is to withdraw and focus on counterterrorism. This is the debate taking place within the Obama adminstration
Second, what if the Taliban is a threat and/or Al Qaeda will flourish in a Taliban-led Afghanistan? This is the more interesting case from the strategic perspective and an analysis has been provided by Nolan Miller. He applies it to Iraq as his paper was written during the election but it could equally be applied to Afghanistan.
The U.S. strategy affects two other players, Karzai and the Taliban. If the U.S. adopts an aggressive approach and commits to a large military presence, this reduces the incentive of the Taliban to be aggressive and their effort is more likely to be futile. But equally there is a free rider problem for Karzai: if the U.S. is exerting effort anyway, this reduces the incentive of Karzai to do so.
These two effects go in opposite directions. If Karzai is weaker than the Taliban in the absence of intervention, the reduction in his effort after U.S. intervention is outweighed by the reduction in the effort of the Taliban. In that case, it is better to adopt an “output-based” strategy where the U.S. commits to a security level that it tries to achieve regardless of the Karzai government’s and insurgent’s effort.
This appears to be the pertinent case if the belief is that we should pursue counterinsurgency rather than counterterrorism. Miller also explores more complex solutions.
The full title of the Dylan tune is “Stuck Inside of Mobile With the Memphis Blues Again.” When you have listened to that song as much as I have you start to notice the patterns. Check out the lyrics.
- Two four-line verses with xAyA rhyme scheme, followed by the chorus “Oh Mama, can this really be the end?…”
- The first verse in the pair introduces a character and a scene and there is some hint of strangeness about it. As with a lot of Dylan tunes the character is often a vague literary reference or some generic symbol of authority. Sometimes both.
- The narrator usually first appears in the second verse of the pair, possibly alongside a new character.
- In the second half the narrator has some sense of disconnection with the scene/character and
- It resolves in the last line with the narrator being tricked and we are left with a feeling of hopelessness or isolation. (the notable exception to this is the 6th verse were the narrator turns the tables on the character, the preacher. still this somehow makes for even more hopelessness.)
For example, the last verse in the song:
Now the bricks lay on Grand Street
Where the neon madmen climb. (#2a)
They all fall there so perfectly,
It all seems so well timed. (#2b)
An’ here I sit so patiently (#3) (#4)
Waiting to find out what price
You have to pay to get out of
Going through all these things twice. (#5)
You can almost use this as a recipe and write verse after verse of your own. I have some kind of strange disease that makes me like to do stuff like that, so here goes. My very own Memphis Blues verse:
Well the barrister wrote to Ahab
Pleading for his vote
And offering to serenade
At the launching of his boatAnd the rickshaw driver said to me
Speeding to the dock
“They’ll tempt you with blue oysters
But serve you Brighton Rock.”
Oh, Mama…
In his first study, each year, for four years, Mr. Hodgson served actual panels of California State Fair Wine Competition judges—some 70 judges each year—about 100 wines over a two-day period. He employed the same blind tasting process as the actual competition. In Mr. Hodgson’s study, however, every wine was presented to each judge three different times, each time drawn from the same bottle.
The results astonished Mr. Hodgson. The judges’ wine ratings typically varied by ±4 points on a standard ratings scale running from 80 to 100. A wine rated 91 on one tasting would often be rated an 87 or 95 on the next. Some of the judges did much worse, and only about one in 10 regularly rated the same wine within a range of ±2 points.
The article was published in the January issue of the Journal of Wine Economics. The Wall Street Journal has a fun writeup. The same researcher showed that the distribution of medal winners in a sample of wine competitions matched what you would get if the medal was awarded by a fair lottery.
Will…You…Play…Black Knight Again??
There is a reason I live in Winnetka and not in Evanston. And it’s not because, as Sandeep would put it, I like to get up 30 minutes earlier than otherwise so that my daughters can put their hair up and dress like beautiful little dolls to match all the other dolls in their classes. No, its because after all the dolls are asleep we get to go to their parents’ mansions for parties and there’s always at least one parent who makes a living doing something incredibly interesting.
Tonight I met the guy who once made a living designing the classic pinball machines. And he designed the two pinball machines, Black Knight in 1980 and High Speed in 1986 that are bookends for a period when the most important stuff I was learning about life was learned within a few feet of at least one of these machines.
It turns out these were also major turning points in the history of pinball itself. In 1980, pinball went digital, multi-ball, and multi-media starting with the game Black Knight. Black Knight brought pinball to a new level, literally speaking because it was among the first games with ramps and elevated flippers, but even more importantly because it brought a new challenge that drew in and solidified a pinball crowd. In doing so it also set the pinball market on a path that would eventually lead to its demise.
In 1986, Williams High Speed changed the economics of pinball forever. Pinball developers began to see how they could take advantage of programmable software to monitor, incentivize, and ultimately exploit the players. They had two instruments at their disposal: the score required for a free game, and the match probability. All pinball machines offer a replay to a player who beats some specified score. Pre-1986, the replay score was hard wired into the game unless the operator manually re-programmed the software. High Speed changed all that. It was pre-loaded with an algorithm that adjusted the replay score according to the distribution of scores on the specified machine over a specific time interval.
The early versions of this algorithm were crude, essentially targeting a weighted moving average. But later implementations were more sophisticated. The goal was to ensure that a fixed percentage, say the top 5% of all scores would win a free game. The score level that would implement this varies with the machine, location, and time. The algorithm would compute a histogram of scores and set the replay threshold at the empirical cutoff of 5%. Later designs would allow the threshold to rise quickly to combat the wizard-goes-to-the-cinema problem. The WGTTC problem is where a machine has adjusted down to a low replay score because it is mostly played by novices. Then anytime an above average player gets on the machine, he’s getting free games all day long.
The other tool is the match probability: you win a free game if the last two digits of your score match an apparently random draw. While adjustments to the high-score threshold is textbook price theory, the adjustments to the match probability is pure behavioral economics. Let’s clear this up right away. No, the match probability is not uniform and yes, it is strategically manipulated depending on who is playing and when. For example, if the machine has been idle for more than three minutes, the match probability is boosted upward. You will never match if you won a free game by high score. And it gets more complicated than that. Any time there are two or more players and they finish a game with no credits left, one player (but only one) is very likely to match. Empirically, the other players will more often than not put in another quarter to play again.
(The tilt tolerance, by contrast has always been controlled by a physical device which is adjusted manually and rarely in response to user habits.)
Pinball attracted a different crowd than video games like Defender (my new pal designed Defender and Stargate too,) and this is the fundamental theorem of pinball economics. Pinball skill is transferrable. If you can pass, stall, nudge, and aim on one machine you can do it on any machine. This is both a blessing and a curse for pinball developers. The blessing is that pinball players were a captive market. The curse was that to keep the pinball players interested the games had to get more and more intricate and challenging.
Pinball developers struggled with this problem as pinball was slowly losing to video games. Video games competed by adding levels of play with increasing difficulty. Any new player could quickly get chops on a new game because the low levels were easy. This ensured that new players were drawn in easily, but still they were continually challenged because the higher levels got harder and harder. By contrast, the physical nature of pinball, its main attraction to hardcore players, meant that there was no way to have it both ways.
Eventually, to keep the pinballers playing, the games became so advanced that entry-level players faced an impossible barrier. High-schoolers in 1986 were either dropouts or professionals in 1992 and without inflow of new players that year essentially marked the end of pinball. In 1992 The Addams Family was the last machine to sell big. By this time, pinball machines used a free-game system called replay boost. After any replay, the score required was increased by some increment. Apparently, only hardcore pinballers were left and this was the only way to prevent them playing indefinitely for free.
Today Williams owns Bally but they make slot machines and video poker. There currently exists one botique manufacturer of pinball machines but its fair to say that innovation stopped in 1992.
My new best friend has a basement full of Black Knight, High Speed, Defender, Pac Man, Asteroids, and everything else you inserted quarters into when you were 16. Now I just have to find a supplier of C45, Djarums, and gooney-birds and I’ll be ditching class to hear sirens and “Pull Over Buddy.”
I haven’t pre-ordered the Saran Palin “Going Rogue”. Many of the juicy details have already leaked out. She did the disastrous Katie Couric interview because she “felt sorry” for her. The McCain campaign manager Steve Schmidt gets slammed for shouting at her over the phone after Palin gets tricked into taking a fake call from Nicolas Sarkozy etc. etc.
In fact, according to the Times:
The most sustained and vehement barbs in this book are directed not at Democrats or liberals or the news media, but at the McCain campaign. The very campaign that plucked her out of Alaska, anointed her the Republican vice-presidential nominee and made her one of the most talked about women on the planet — someone who could command a reported $5 million advance for writing this book.
It all smacks of paranoid high school behavior. Tina Fey not only did a great Palin on SNL but also the sense of Palin we see in the book reviews was captured in Fey’s movie “Mean Girls”. This Venn Diagram captures it all:
News Corp., parent company of Fox News is reported to have made an offer for NBC Universal in competition with Comcast. Who should be willing to pay more for an upstream supplier (NBC), the downstream monopolist (Comcast), or an upstream competitor (News Corp.)?
There were no fire engines, horse-drawn or otherwise. The citizens were the fire department. Each house had its own firebuckets and in the event of a fire, everyone was meant to pitch in. That meant taking your firebucket and joining the line of people from the water tank to the fire.
Does the story so far give you a warm, fuzzy feeling? Friendly folk working together, helping each other out and living by the Kantian categorical imperative. Let me rain on your parade – I am an economist after all. The private provision of public goods is subject to a free-rider problem: The costs of helping someone else outweigh the direct benefits to me so I don’t do it. Everyone reasons the same way so we get the good old Prisoner’s Dilemma and a collectively worse equilibrium outcome.
People have to come up with some other mechanism to mitigate these incentives. In Concord, they chose a contractual solution. Each fire-bucket had the owner’s name and address on it. If any were missing from the fire, you could identify the free-rider and they were fined.
This is the story we got from the excellent tour guide at the Old Manse house in Concord. Home to William Emerson, rented by Nathaniel Hawthorne and overlooking the North Bridge, the location of the first battle of the American Revolution. (We were carefully told that earlier that same historic day in Lexington, although the Redcoats fired, the Minutemen did not fire back so that was not a real battle.) The house has the old firebuckets hanging up by the staircase.
I assume that “dessert” in the sweet-stuff-eaten-after-the-meal sense is not a regular part of Chinese and Indian cuisines. So in some ways this is not a fair question, but they have sweets and they are generally uninspiring and often downright gross. My caricature, not too much of a stretch, is that at the end of a meal in a Chinese restaurant, the leftovers are brought back into the kitchen where they are mixed with sugar and possibly liquified or gelatenized before being returned to the table as dessert. Here is the very popular Cantonese dessert, red bean soup.
Mmmm… . Variations of this dessert appear in many East Asian cuisines. Indian sweets, in my limited experience, are similar.
The few exceptions I have encountered are Vietnamese and Cambodian where the desserts are essentially French.
It’s been a pretty darn good research week, and so there hasn’t been the time to think of something with real economic content. So, instead, something close to my heart. Tito’s claims to make the best vodka in America. Based on fairly extensive research, I agree. It’s also half the price of other premium vodkas.
It is a puzzle to me exactly why one vodka is better than another (my tongue certainly agrees). The claim is typically made that the purer the better. Tito’s tells us that the secret to their vodka is the precise control offered by their pot still (a batch production process), the fact that they run it through the still 6 times, and their charcoal filtering.
It happens that I know a very good chemical engineer (my father, to be precise). He tells me that if you want incredibly pure flavorless alcohol, getting to it on an industrial level is not very hard: you run down the street to a your local oil refinery, borrow their fractioning column, and get as precise a cut as you want.
In fact, one feature of the pot still used by the vaunted small batch vodka producers is that the temperature rises a bit from one end of the run to the other, and so some things can get through. In the end, it seems likely to my consultant and I that the key to a really good vodka is in fact having some good stuff survive the process. This can happen, because some flavor components have boiling temperatures near those of the right alcohol, and so will survive even multiple distilings. Even charcoal filtration, which only absorbs some flavor components, can leave some of this behind.
In any event, though, Tito’s is incredibly good. Our guess: very pure ingredients, meticulously clean equipment, and lots of attention to temperature control and cut off points.
We have spent most of the course using the tools of dominant-strategy mechanism design to understand efficient institutions and second-best tradeoffs. These topics have a normative flavor: they describe the limits of what could be achieved if institutions were designed with efficiency as the goal.
But most economic activity is regulated not by efficieny-motivated planners but by self-interested agents. This adds an additional friction which potentially moves us even further from the first-best. Self-interested mechanism designers will probably introduce new distortions into their mechanisms because as they try to tilt the distribution of surplus their way.
In this lecture we use the model of an auction to see the simplest version of this. We consider the problem of designing an auction for two bidders with the goal of maximizing revenue rather than efficiency. We do not have the tools necessary to do the full-blown optimal auction problem but we can get intuition by studying a narrower problem: find an optimal reserve price in an English auction.
With a diagram we can see the tradeoffs arising from adjusting the reserve price above the efficient level. The seller loses because sometimes the good will go unsold but in return he gains from receiving a higher price when the good is sold. The size and shape of the regions where these gains and losses occur suggest that it should be profitable to raise the reserve price above cost.
Without solving explicitly for the optimal reserve price we can give a pretty compelling, albeit not 100% formal, argument that this is indeed the case. At the efficient reserve price (equal to the cost of selling) total surplus is maximized. A graph of total expected surplus as a function of the reserve price should be locally flat at the efficient point. (We are implicitly assuming differentiability of total expected surplus which holds if the distribution of bidder values is nice.) Buyers’ utility is unambigously declining when the reserve price increases. Since total surplus is by definition the sum of buyers’ utility and seller profit, it follows that seller profit is locally increasing as the reserve price is raised above the efficient level.
Thus, while we know that in principle this allocation problem can be solved efficiently, when the allocation is controlled by a profit maximizer, there is a new source of inefficiency. The natural next question is whether competition among profit-maximizing sellers will mitigate this.
The sandwiches at the Kellogg cafe come with a choice of homemade chips or an apple. Perhaps reflecting an overdose during my summers picking fruit in the Okanagon valley, the apple typically ends up sitting un-eaten.
There are better and worse home-made potato chips, but even the worst of them push many of my buttons. It thus marks a true culinary achievement that when I choose the chips, I typically eat a couple of them, and then throw the rest away. And, it turns out, I derive a lot of pleasure from this! It makes me feel all self-controlly and healthy.
Given a choice between not eating something you will feel guilty about, and not eating something that suffuses you with a feeling of virtue, I strongly recommend the second.
I am atingle to think what I shall non-consume next.
