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We saw The Fantastic Mr Fox a few weeks ago. It was a thoroughly entertaining movie and I highly recommend it. But this is not a movie review. Instead I am thinking about movie previews and why we all subject ourselves to sitting through 10-plus minutes of previews.
The movie is scheduled to start at the top of the hour, but we all know that what really starts at the top of the hour are the previews and they will last around 10 minutes at least. Why don’t we all save ourselves 10 minutes of time and show up 10 minutes late?
Maybe you like to watch previews but I don’t and in any case I can always watch them online if I really want to. I will assume that most people would prefer to see fewer previews than they do.
One answer is that the theater will optimally randomize the length of previews so that we cannot predict precisely the true starting time of the movie. To guarantee that we don’t miss any of the film we will have to take the chance of seeing some previews. But my guess is that this doesn’t go very far as an explanation and anyway the variation in preview lenghts is probably small.
In fact, even if the theater publicized the true start time we would still come early. The reason is that we are playing an all-pay auction bidding with our time for the best seats in the theater. Each of us decides at home how early to arrive trading off the cost of our time versus the probability of getting stuck in the front row. The “winner” of the auction is the person who arrives earliest, the prize is the best seat in the theater, and your bid is how early to arrive. It is “all pay” because even the loser pays his bid (if you come early but not early enough you get a bad seat and waste your time.)
In an all pay auction bidders have to randomize their bids. Because if you knew how everyone else was bidding you would arrive just before them and win. But then they would want to come earlier too, etc. The randomizations are calibrated so that you cannot know for sure when to arrive if you want to get a good seat and the tradeoffs between coming earlier and later are exactly balanced.
As a result most people arrive early, sit and wait. Now the previews come in. Since we are all going to be there anyway, the theater might as well show us previews. Indeed, even people like me would rather watch previews than sit in an empty theater, so the theater is doing us a favor.
And this even explains why theater tickets are always general admission. Let’s compare the alternative. The theater knows we are “buying” our seats with our time. The theater could try to monetize that by charging higher prices for better seats. But it’s a basic principle of advertising that the amount we are willing to pay to avoid being advertised at is smaller than the amount advertisers are willing to pay to advertise to us. (That is why pay TV is practically non-existent.) So there is less money to be made selling us preferred seats than having us pay with our time and eyeballs.
I’m attending a conference in Madrid so I will either describe either papers in words or a tourist guide in equations.
Actually, I can’t translate either papers or anything else into equations so I will stick to words. As the conference just started but we arrived a few days ago, I will start with the tourism. When we arrived on Saturday morning, we decided to try to stay awake and adjust to the new time zone. So we sleepily rolled into a taxi and made our way to Plaza Santa Ana. The kids were vivacious before we climbed into the taxi and the older one was sleepy ten minutes later when we emerged. We went into the closest open place, Cerveceria Santa Ana. Plaza Santa Ana has many bars, one of which was frequented by Hemingway but it wasn’t the one we wandered into. The bar is modest, it has part where you stand and enjoy lower prices and one where you can sit. Modest or not, the tapas were great. And it was quiet enough that a child can sleep.
But the real treat was Matritum that evening. It does innovative takes on well-known tapas and then wacky creative ones (though not Adria level wacky!). If you’re going to do traditional tapas at all, you have to make patatas bravas and so one can rank restaurants in terms of the quality of this staple: Matritum is excellent on this scale Boiled new potatoes with mildly spicy tomato sauce and a mayonnaise with delicious mystery spices. Other things we tried: chicken and ginger samosas, deep fried pancakes with tiny shrimp, toasted bread with tomato and jamon iberico and chocolate brownie with violet ice cream and chocolate sauce. The only weak point was a potato gratin with five cheeses which was a bit generic. Oh: the wine list in excellent. Imports of Spanish wine into the Chicago area at least can be overoaked and fruity. At Matritum I had a delicate and floral Monastrell. We’re going back before we move to Barcelona
Musicians and academics are promiscuous collaborators. They flit from partnership to partnership sometimes for one-off gigs, sometimes for ongoing stints. In academia, regardless of the longevity of the group, the individual author is always the atomic unit. Co-authorships are identified simply with the names of the authors. Whereas musicians eventually form bands.
Bands have identities separate from the individuals in the bands. The name of the band stores that identity. It also solves a problem we face in academia of how to order the names of the contributors. You don’t. (There is evidence that the lexical ordering of names is good for Andersons and bad for Zames.) We should form bands too.
The idea of a band is important enough that sometimes even solo musicians incorporate themselves as bands. Roger Myerson is the Nine Inch Nails of game theory.
Bands work in the studio (writing papers) and then tour (giving seminars.) Musicians have two typical ways of organizing these. Jazz and pop bands create and perform as a group. Classical music is usually performed by specialists rather than the composer herself.
Our bands do something in between which is hard to understand when you think of it this way. We compose as a band but then perform as individuals. That’s weird because you would think that either you want to hear the composer do the performing or a performance specialist. If it is always the composer then it must be because the composer has a special insight into the performance. But then why not all of them? We should tour as bands some times. And we should also reward performance specialists who perform others’ work.
I want to name my bands. I want my next co-authored paper to be “by (insert name of band here) ” Sandeep, what do you say? Our torture paper will be “by Cheap Talk.” I look forward to making petulant demands and trashing hotel rooms.
In that other post, I was being serious. But here, just for fun, let’s name some of the great economics bands. I will start.
- Fudenberg and Levine: The Gossamer Anvil, an early 70s jam band.
- Gul and Pesendorfer: Mixtürhëad.
- Morris and Shin: Eskalator, prog rock.
When I read this (via Ryan Sager) about the classic good cop/bad cop negotiating ploy:
BUT there was also a twist we did not address in our research, and in fact, would have been tough to do as we were studying people in “the wilds” of organizational life. Their research shows that starting with a good cop and then using a bad cop was not effective, that the method only was effective for negotiating teams when the bad cop went first and the good cop followed. So, this may mean it really should be called “The Bad Cop, Good Cop Technique.”
it brought to mind some famous studies of Daniel Kahneman on perception and the timing of pleasure and pain. There is one you will never forget once you hear about it. Proctologists randomly varied the way in which they administered a standard colonoscopy procedure. Some patients received the usual treatment in which a camera was plunged into their rectum and then fished around for a few minutes. The fishing around is extremely uncomfortable.
An experimental group received a treatment which was identical except that at the very end <you can do better than that Beavis> the camera was left in situ <ok that’s pretty good> for an extra 20 seconds or so. The subjects were interviewed during the procedure and asked to report their level of pain, and after the procedure to report on the procedure overall. As intended, those in the experimental group reported that the final 20 seconds were less painful than the main part of the procedure. But the headline finding of the experiment was that those subjects receiving the longer treatment found the procedure overall to be more tolerable than the control group.
Regular readers of this blog will know that I consider that a good thing.
The financial crisis is motivating a search for new models of asset markets and their interaction with the real economy. It seems obvious that, for example the housing bubble can only be explained by a model in which asset prices are bid up by the activity of highly optimistic investors or speculators. Models which build in these divergent beliefs (and not just differences in information) are, perhaps very surprisingly to outsiders, only recently coming to mainstream economic theory.
Alp Simsek asks whether the presence of optimistic traders can inflate the price of assets, say housing prices. It seems obvious, but remember that investment in housing is leveraged using collateralized loans where the house itself is the collateral. If the optimists are borrowing from the “realists” to buy houses at overinflated prices, and they are offering up the house as collateral, then surely the realists aren’t willing to lend?
Alp shows that this logic sometimes holds, but not always. And he formalizes a precise way of measuring optimism which determines whether the presence of optimists will inflate asset prices, or alternatively their optimism will be filtered due to realists’ witholding of credit.
Suppose that you are a realist and you are making a loan to me to purchase a house. A year later we will see whether housing prices have gone up or down. If they go up, I will pay off the loan and realize a profit. If they go down I will default on the loan. A key idea is to understand that the loan effectively makes us partners in the purchase of the house. I own it on the upside (and I pay you back your loan) and you own it on the downside. We pay for the house together too: you contribute the loan amount and I contribute the down pament.
The equilibrium price of the house will be determined by how much we, as partners, are willing to pay. I am an optimist and I would like to pay a lot for it, but I am financially constrained so my contribution to the total price is some fixed amount, my down payment. Thus, our total willingness to pay is determined by how much you are willing to pay to enter this partnership.
Now we can see how my optimism plays a role. Suppose I am more optimistic than you in the sense that I think there is a lower probability of default than you. It turns out this doesn’t make our willingness to pay any higher than it would be if I were a realist just like you. That’s because you own the house in the event of default so it’s the probability that you assign to default that enters into our total value, not the probability that I assign. It’s true that I assign a higher probability to the good event that the price goes up, but I am already putting all of my cash into the partnership. I can’t do anything more to leverage this form of optimism.
But suppose instead that the way in which I am more optimistic than you is slightly different. We both assign the same probability to default, i.e. the event that the price falls. Where we differ is in terms of our beliefs conditional on the price going up. In particular I think that conditional on the upside, the expected price increase is higher than you think it is. Now we have a new way to leverage our partnership. Since I expect to have a higher upside, I am prepared to offer you a higher payment in the event of that upside. (That is, I am willing to pay back a larger loan amount.) And the promise of that higher payment on the upside coupled with the same old house on the downside makes this a strictly more attractive partnership for you and you are willing to pay more to enter it. (That is, you are willing to loan more to me.)
Indeed these collateralized loans seem to be the ideal contracts for us to make the most of our differences in beliefs. And once we see how that works, it is easy to go from there to a theory of a dynamic housing bubble. Tomorrow there might be optimistic investors who will partner will creditors to bid up housing prices. Today, you and I might have differences in beliefs about the probability that those optimistic investors might materialize. If I am more optimistic than you about it, you and I can enter into a partnership which leverages our different beliefs about tomorrow’s differences in beliefs, etc.
There is an important thing to keep in mind when considering models with heterogenous beliefs. We don’t have a good handle on welfare concepts in these models. For example, in Simsek’s model the efficient allocation is to give the asset to the optimists. Indeed, the financial friction is only an impediment to achieving an efficient allocation. A planner, faced with the same constraint, would not do anything different than the market. If we apply standard welfare notions like this, then these models are not a good framework for discussing financial reform.
- The applied physics of pizza tossing.
- Video of Glenn Gould playing the Goldberg Variations. Starts at around 6:30 and goes on for six clips. Really good.
- Charles Mingus’ cat toilet training program.
- The sexual battles of ducks.
- On behalf of the two spaces between sentences I would like to say I think they are beautiful.And that it must be lonely to be one space.And I know this is wrong.
Government organizations often compete not cooperate. They compete for funding from the central government and if say the C.I.A. succeeds in some task and the N.C.T.C. does not, money, status, access etc. might move naturally towards the former from the latter. If the N.C.T.C. helps the C.I.A. catch a terrorist, ironically, their own hard work is punished. On the other hand, competition helps to give the bureaucracies the incentive to work hard. That is, the positive effect that must be counterbalanced against the negative effect on incentives to cooperate. What is the optimal incentive scheme?
This seems like a pretty important question and someone has studied an important part of it. The classic paper is Hideshi Itoh’s Incentives to help in Multi-Agent Situations.
Suppose the marginal cost of helping is zero at zero effort of helping. Then, if one agent’s help reduces the other’s marginal cost of effort at his main task, it is optimal to incentivize teamwork. How do you do that? One agent has to be paid when the other succeeds. The assumptions that efforts are complements and that the marginal cost of help is zero at zero do not seem to be a big stretch in the present circumstances. The benefits of greater competition, lower resource costs, must be traded off against the costs, less cooperation and hence more chance of a successful terrorist attack if “dots are not connected” across organizations.
Itoh also shows that if the marginal cost of helping is positive at zero help, the optimal scheme either involves total specialization or, more surprisingly, substantial teamwork. This is because giving agents the incentive to help each other just a little is very costly, given the cost condition. So, if you are going to incentivize teamwork at all, it is optimal incentivize large chunks of it. If the benefits of catching terrorists is large, this logic also pushes the optimal scheme towards teamwork.
With much information classified, it is impossible to know how much intra-bureaucracy competition contributed to intelligence failure. But whether it did not or not, it is worth ensuring that good mechanisms for cooperation are in place.
Out now is a collection of academic essays on The Big Lebowski.
Where cult films go, academics will follow. New in bookstores, and already in its second printing, is “The Year’s Work in Lebowski Studies,” an essay collection edited by Edward P. Comentale and Aaron Jaffe (Indiana University Press, $24.95). The book is, like the Dude himself, a little rough around the edges. But it’s worth an end-of-the-year holiday pop-in. Ideally you’d read it with a White Russian — the Dude’s cocktail of choice — in hand.
Chullo chuck: gappy3000. And here is a Big Lebowski random quote generator.
Here’s a purely self-interested rationale for affirmative action in hiring. An organization repeatedly considers candidates for employment. A candidate is either good or just average and there are minority and non-minority candidates. The quality of the candidate and his race are observable. The current members decide collectively whether to make a job offer to the candidate.
What’s not observable is whether the applicant is biased against the other race. A biased member prefers not to belong to an organization with members of the other race. In particular, if hired, he will tend to vote against hiring them.
Unbiased non-minority members of such an organization will optimally hold minority applicants to a lower quality standard, at least initially. The reason is simple. An organization with no minority members will have their job offers more often accepted by biased non-minority candidates who will then make it harder to hire high quality minority candidates in the future. Since bias is not observable, affirmative action is an alternative instrument to ensure that the organization is not hospitable to those who are biased.
The effect is weaker in the opposite direction. Even if there are minority applicants who are biased in favor of minorities, their effect on the organization’s decision-making will be smaller because they are in the minority. So at the margin there is a gain to practicing at least some affirmative action.
(This also explains why every economics department should have at least one structural and one reduced-form empirical economist.)
The New York Times has another great story about the credit/debit card market. The main idea is that Visa pushed up merchant fees (e.g. it’s charge to the grocery store, gas station etc. where you shop) and split the revenue with the issuing bank (e.g. the Bank of America Visa card). Mastercard soon followed and prices charged to merchants increased because of competition:
“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”
If consumers see lower prices when Mastercard undercuts Visa on merchant fees, the traditional model of competition would apply. There are two reasons this cannot happen (1) prices are not allowed to differ between cash and cards, let alone one network or bank to another, and (2) the merchant would have to pass on the lower cost to buyers.
The simplest way to remedy this would be to allow merchants to charge different prices for different methods of payment. If your Mastercard gets you gas for cheaper than your Visa, you’ll use your Visa and Visa will not be able to raise fees so easily. If paying by cash gets you a better price, this disciplines both Visa and Mastercard and issuing banks.
Update: Here is an interesting article by Josh Gans about this topic. He seems to suggest that allowing merchants to charge surcharges for credit card rules would help to cut merchant fees and has papers on the topic. Allowing surcharges is similar to allowing different prices for different payment methods. And I noticed that there is some lively dialog at Marginal Revolution.
To those following me on Twitter, I am not losing my mind. (Or at least not any faster than always.)
- Don’t go near that tree, there’s a guy who looks just like Danny Bonaduce perched up there hurling pears at unsuspecting passersby. (Partridge in a pear tree.)
- 11th-hour negotiations avert war between the two great superpowers of the turtle world. (Two turtle doves, get it? 🙂 )
- Frottez les trois poules avec du romarin, puis faites-les revenir dans une poêle profonde avec de l’ail. (Three french hens)
- This is getting out of hand. Four times already this morning! How do I register for the avian do-not-call list? (Four calling birds.)
- five golden rings
- I was frozen with terror. But then I had a vision. Half a dozen geese. All my fears were put to rest. (Six geese allaying.)
- Someone threw my favorite Sufjan Stevens album into Lake Michigan. (See here.)
- Sir great news from the servants in the dairy. I know you’ve been worried about the cows, but today 8 made some milk, King Hexanoel. (Say out loud “8 made some milk King.”)
- Madame, we have shoes for your Christmas ball somewhere in these boxes. hmm…Men’s running? No. Ah here it is, Size 9 Ladies’ Dancing.
- Let’s get this party started, where are those lords I keep hearing about? What, sleeping?? Off with their heads! Wait, what? Oh never mind. (10 lords a leaping, not sleeping.)
- I feel like a sewer rat being pulled in 11 different directions. (11 pipers piping.)
- Hey you two elves, grab your sticks and give me a drum roll. This is the grand finale…#twelvetweetsofchristmas. (Two elf drummers drumming.)
Nolan Miller, a professor at Urbana-Champaign and I wrote a prospective op-ed which we submitted to the New York Times. It was written around the time Obama made his big speech about Afghanistan and the date he was suggesting for starting to draw down forces. You’ll find it below. After we submitted, there were some op-eds the Times itself published – they did not accept our’s. Check out this one after reading our attempt:
The President’s long-awaited Afghanistan policy has been revealed: a “surge” of 30,000 more troops with an “exit ramp” beginning in July 2011. Leading Republicans praised the surge but condemned the preordained departure date , claiming that the Taliban will lie low and reemerge when we leave.
The Obama administration says that the Republicans are missing the bigger picture: the Afghan government needs to step up, and if we give them a “blank check”, they will never do their job. Obama says that the withdrawal date is “locked in” and that our hard deadline forces Karzai to build a security force rather than rely on us to spend our own precious resources and lives on his behalf. And the 18-month surge gives us the breathing room to help Karzai man and train his army.
However, other administration officials, most notably Secretaries Clinton and Gates and General McChrystal are singing a different, more nuanced, song. They say that although July 2011 is the expected turning point in Afghanistan, when we can begin to leave without risking another backslide, this date is flexible. The President’s strategy is to begin leaving only if conditions on the grounds are favorable. According to McChrystal, “We will not decrease coalition forces without the increase of Afghan national security forces capability.” In other words, we have initiated an open-ended surge, and we will stay there for at least eighteen more months. If Karzai hears this message, he will think withdrawal is not locked in, and he would be right to interpret it as, if not a blank check, also not a last chance.
For an administration that is known for staying on message, this statement on a critical policy is remarkably muddied. That is, of course, unless the muddied message is the message.
The Obama Afghanistan strategy needs to walk a fine line, playing to multiple constituencies both at home and abroad. The domestic audiences are clear. Abroad, Obama needs Karzai to believe that this is a make-or-break point for him, and that we won’t be there to back him up indefinitely. Hence the need to be “locked in” to a firm withdrawal date.
The target of the other half of the mixed message is not the Afghan government, or even the Taliban, but the third and most difficult player facing the Americans: Pakistan. Once the U.S. ramps up its efforts in Afghanistan, the Taliban will undoubtedly run to the mountains of Pakistan, where they will join their old friend Osama bin Laden. So, we will have to rely on Pakistan to perform the second part of the pincer movement that cuts off our enemies.
Pakistan has always had a complex relationship with the Taliban and Al Qaeda. Fanatics provide a ready supply of volunteers for attacks on India, and Pakistan is reluctant to turn on its former allies. And if Karzai falls, their old allies the Taliban will be back in power and they can go back to living in relative harmony. To persuade Pakistan to turn on its allies who are our enemies, they have to think we are in Afghanistan until the Taliban threat is eliminated. The quickest way to get us out of the region is to give us what we want, and what we want is a stable Afghanistan and the elimination of the Taliban and Al Qaeda.
So, Obama is trying to send one message to Karzai (“Our departure is locked in”) and another to Pakistan (“We are here as long as it takes, so help us or else”). Muddling these two messages together is as confusing to them as it is to us. Worse, there is a danger that each hears the wrong message. If Karzai hears we are flexible and Pakistan hears that departure is locked in, neither will help us. And the Taliban can run across the border and wait and see which of these two strategies Obama will actually employ in 2011.
At best, Obama’s strategy is to send two quite contradictory messages at the same time and have each side hear the message he wants them to hear. At worst, it is a compromise of different views within his administration. In the confusion, the wrong message may get through to each side and American soldiers will have to pick up the slack left by a confusing policy. Then, Obama will regret not choosing one clear transparent strategy where at least one side, either Karzai or Pakistan, would have been forced to step up.
Readers of this blog know that I view that as a very good thing.
Justin Rao from UCSD analyzes shot-making decisions by the Los Angeles Lakers over the course of 60 games in the 2007-2008 NBA season. He collected data on the timing of the shot and identity of the shooter and then recorded additional data such as defensive pressure and shot location by watching the games on video. The data were used to check some basic hypotheses of the decision theory and game theory of shot selection.
The team cooperatively solves an optimal stopping problem in deciding when to take a shot over the course of a 24 second possession. At each moment a shot opportunity is realized and the decision is whether to take that shot or to wait for a possibly better opportunity to arise. Over time the option value of waiting declines because the 24 second clock winds down and the horizon over which further opportunities can appear dwindles. This means that the team becomes less selective over time. As a consequence, we should see in the data that the success rate of shots declines on average later in the possession. Justin verifies this in the data.
Of course, the shot opportunities do not arise exogenously but are the outcome of strategy by the offense and defense. The defense will apply more pressure to better shooters and the offense will have their better shooters take more shots. Both of these reduce the shooting percentage of the better shooters and raise the shooting percentage of the worse shooters. (For example when the better shooter takes more shots he does so by trying to convert less and less promising opportunities.)
With optimal play by both sides, this trend continuues until all shooters are equally productive. That is, conditional on Kobe Bryant taking a shot at a certain moment, the expected number of points scored should be the same as the alternative in which he passes to Vladimir Radmanovic who then shoots. To achieve this, Kobe Bryant shoots more frequently but has a lower average productivity. Also the defense covers Radmanovic more loosely in order to make it relatively more attractive to pass it to him. This is all verified in the data.
Finally, these features imply that a rising tide lifts all boats. That is, when Kobe Bryant is on the court, in order for productivities to be equalized across all players it must be that all other players’ productivities are increased relative to when Kobe is on the bench. He makes his teammates better. This is also in the data.
The equal productivity rule applies only to players who actually shoot. In rare cases it may be impossible to raise the productivity of the supporting cast to match the star’s. In that case the optimal is a corner solution: the star should take all the shots and the defense should guard only him. On March 2, 1962 Wilt Chamberlin was so unstoppable that despite being defended by 3 and sometimes 4 defenders at once, he scored 100 points, the NBA record.
Cheap Talk 