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Interesting conference at BU and view from conference room
From The McKinsey Quarterly:
Long before behavioral economics had a name, marketers were using it. “Three for the price of two” offers and extended-payment layaway plans became widespread because they worked—not because marketers had run scientific studies showing that people prefer a supposedly free incentive to an equivalent price discount or that people often behave irrationally when thinking about future consequences. Yet despite marketing’s inadvertent leadership in using principles of behavioral economics, few companies use them in a systematic way. In this article, we highlight four practical techniques that should be part of every marketer’s tool kit.
Among the key points, the one that stands out is “Make a product’s price less painful.” This includes profiting from hyperbolic discounting and exploiting mental accounting. Manipulating default options and harnessing choice-set-dependent preferences also figure prominently.
Evidently marketing will soon supplant finance as the relevant outside option for new Economics PhD’s bargaining over academic salaries.
Like me, ants like dark houses/nests with small entrances. Facing a choice between a dark nest with a large entrance (option A) and a light nest with a small entrance (option B), an ant colony faces a trade-off. Some go this way to A and some go that way to B. Suppose we add a third decoy nest option D. Option D is as dark as A but has an even larger entrance. It is thus dominated by A but not by B. How will the ant colony’s behavior change when they face the three options together versus just A and B?
Rational choice theory says that the fractions choosing A and B should not change. Option D is dominated and should never chosen and hence is an irrelevant alternative. Its presence or absence should not affect the choice between A and B.
One psychological theory suggests that the proportion choosing A should go up. Option D helps to crystallize the advantages of option A (the smaller entrance). This may increase the perception of the advantages of A over B as well leading to a change in the proportion of ants choosing A over B.
So what actually happens?
A controlled experiment by Edwards and Pratt answers this question. Edwards and Pratt built nests with the properties above and made ant colonies make repeated binary and ternary choices. They randomized the order of choices, where the nests were located etc. And because they were experimenting with ants, they could cruelly force the choice of nest upon the ants by destroying the old nest the ants lived in by removing it’s roof.
They find no significant change in the proportions choosing A vs B when the decoy D is present. Ant colonies are rational and do not violate the axiom of independence of irrelevant alternatives (IIA).
In other work, Pratt shows that ant colonies obey transitivity (i.e. if a colony prefers A to B and B to C, it prefers A to C).
Why are ant colonies more rational than individual humans? The authors offer a cool hypothesis: choice between colonies is typically made by sending independent scouts sent to the different options. No scout visits different locations. The scouts reports are simply compared and the best option is chosen. A human being contemplates all the choices by herself and has a harder time comparing the attributes independently leading to a violation of IIA.
An ant colony is like a well performing and coordinated decentralized firm with employees passing information up the hierarchy and efficient decisions coming down from the center Can we import lessons into designing firms? Alas, I believe not. A human scout evaluating a decision/option will not be as impartial an ant scout. He will exagerrate its qualities, hoping his option “wins”. He hopes to get the credit for finding the implemented option, get promoted, receive stock options and retire young to the Bay Area. In other words, career concerns ruin a simple transfer of ant colony principles to firms. If we eliminate career concerns within the firm, we will induce moral hazard as there is no incentive to exert costly effort to find the best decisions for the firm. Ants in the same colony do not face the same issue as they are genetically related and have “common values”.
Still, a thought-provoking paper and it has many references to other papers that it builds on. I am going to read more of them.
(Hat tip to Christophe Chamley for the reference)
Via Barker, a pointer to a theory from evolutionary psychology that tears are a true signal that the person crying is vulnerable and in need.
Emotional tears are more likely, however, to function as handicaps. By blurring vision, they handicap aggressive or defensive actions, and may function as reliable signals of appeasement, need or attachment.
Usually you should be skeptical that signaling is evolutionarily stable. For example if tears convince another that you are defenseless then there is an evolutionary incentive to manipulate the signal. Convince someone you are defenseless and then take advantage of them.
A typical exception is when the signal is primarily directed toward a family member. Family members have common interests because they share genes. Less incentive to manipulate the signal means that the signal has a better chance of being stable. And babies of course have few other ways of communicating needs.
Of course children eventually do start manipulating the signal. They learn before their parents do that they are becoming self-sufficient but they still have an incentive to free-ride on the parents’ care. Fake tears appear. But this is a temporary phase until the parents figure it out. Not surprisingly, once the child reaches adulthood, crying mostly stops: Nature takes away a still-costly but now-useless signal.
What is the point of a big speech outlining your intentions when everybody already knows that when push comes to shove you are just going to do what’s in your interest? Usually such a speech is all about the reasons for your stated intentions. If you can change people’s minds about the facts then you can change their minds about your intentions.
But the public facts are already that, public. There’s no changing minds about those. At best you can change minds about how you perceive the public facts or about facts that only you know. But here we are in the realm of private, unverifiable information and any speech about that is pure cheap talk. You will invent facts to support whatever intentions you would like people to believe.
Except for two wrinkles.
- Making up a coherent set of facts that support your case and survive scrutiny is not easy. On the other hand, the truth is always a coherent set of facts.
- You can only say things that you can think of. That’s a small subset of the set of all things that could possibly be true and the truth is always in that subset.
Together these imply that cheap talk always reveals information. It reveals that the story you are telling is one of the few coherent stories you could think of. And if that story is complicated enough it becomes more and more likely that this is the only story that complicated that a) is coherent and b) you could think of. Since the truth always satisfies a) and b), this makes it ever more likely that what you are saying is the truth.
This is why when we want to change minds we make elaborate speeches full of detail. It convinces the listener that we are telling the truth. And this is why when we want to be inscrutable the listener will pepper us with questions in order to require so much detail that only the truth will work.
About twice a year the Chicago “classic rock” station does something strange. Instead of its regular programming sequence, it sets aside about a week to play through all the greatest songs in alphabetical order. And this is advertised as a big event, a restoration of order out of chaos that the audience has apparently been desperate for since the last time they did it. They are at it again this week and in between “Boys of Summer” and “Brain Damage/Eclipse” I started to wonder why this was thought to be a good marketing strategy.
- There is the possibility of coordination failure between audience and programmer at certain time slots. If everybody tuning in at noon is expecting late 70′s prog rock then they better play that or lose their audience. The A to Z is a way to break the trap.
- It works as a commitment not to repeat a song for a whole week.
- It’s really just a negotiation tactic with the program director. The station proves publicly that the program director’s choice of playlist on a daily basis is completely irrelevant to the listeners.
- The station is just pruning its library and it takes a week to do that every 6 months. While they are at it, they might as well play the songs that made the cut.
- It gets the listeners into the game of predicting the next song. (They just played “Back Door Man” by the doors. We know “Back in the USSR” is coming soon. Is there anything in between that we are forgetting? Let’s stay tuned and find out!)
If it is any one of the demand-side explanations (like 2 and 5) there is a residual puzzle. Presumably listeners have some given satiation point for classic rock and this trick is just getting them to inter-temporally substitute their listening. They listen more now, less later. Why is that good for the station?
I think the answer has to do with the convex value of advertising. Advertisers’ willingness to pay increases more than proportionally with the size of the audience. This is due to “bandwagon” and “water cooler” effects. (Michael Chwe has a paper about this.) With that in mind the station would prefer everyone listen this week and nobody listen next week rather than half and half.
You can see the whole list (up to now) here.
Threeway merger that is. Or more accurately, how does a two firm merger depend on the possibility that one of the firms can merge with a third if their deal falls through?
This is the key issue in the potential United-Continental merger. The deal has stalled because they cannot agree on the price. Things were going well just after Continental learned that United was in merger talks with U.S. Airways. Talks between United and U.S. Airways have collapsed because United started talking to Continental. And as the United-U.S. Airways talks have collapsed, so have the Continental-United talks.
A man who has many girlfriends must find it hard to keep all their names straight. I have a similar issue with this threeway merger post. Back to the economics which I am also having a hard time keeping straight but here goes.
If two firms merge, the third firm standing outside gains:
The merged firms cut capacity and raise prices. This is the main incentive to merge in the first place. In the airline industry with its overcapacity and low profits, consolidation and merger is a key strategy to regain profitability. No wonder these firms flirt with each other periodically. But if the merged firms consolidate, everyone else in the industry gains as prices go up. The firms in merger talks do not take this positive externality into account in their flirtation. They merge less than is ideal from the perspective of industry profitability. They date but don’t commit and the industry stays too large and unprofitable.
This analysis is consistent with the U.S. Airways strategy. In a letter to employees, the C.E.O. says:
Whether we participate in a merger or not, consolidation will create a more efficient domestic industry that can better withstand economic volatility, global competition and the cyclical nature of our industry as a whole. As I have said many times, it is not necessary for us to be direct participants in a merger because the entire industry benefits when consolidation occurs.
But the same logic should apply to Continental: if the other two firms merge, Continental gains. So, why did they go back to the negotiating table when they learned the other two firms were in merger talks? There has to be some negative externality to Continental caused by a United-U.S. Airways merger. Continental and United coördinate heavily even now – they are both in the Star Alliance, their flights link up etc. (I just flew to Newark on some joint Continental-United flight). Antitrust authorities are going to take another look at the Continental-United relationship if the merger with U.S. Airways goes through. A U.S. Airways merger can cause the Continental-United marriage to collapse. So Continental has the incentive to work even harder at the marriage.
But of this was true before, it is still true now: if Continental and United can’t agree on a price, United can always go back to U.S. Airways. This should lend some urgency to the merger talks. To make a United-Continental merger more likely, the U.S. Airways C.E.O. should go back to talks with United. The arrival of the ex-girlfriend can make the new girlfriend nervous and willing to commit.
Here’s an interesting experiment I would like to see. Look at adults who learned a second language as a child from one of their parents. For example, the father speaks only English but the mother speaks English and Hungarian. English is the standard language outside of the home.
Profile the personalities of the parents. Now have a Hungarian speaker interview the subject and profile his personality and separately have an English speaker profile the subject’s personality. Is the subject’s personality different in the two languages and is he more like his mother when speaking Hungarian?
Round the corner from where we live right now but as we are closer to Anna’s Taqueria we never ventured the extra couple of blocks. When we decided Anna’s offerings were limited and greasy, we did eventually go in to Dorado.
It was great and very reasonable. The cemitas are particularly good. Burger style bread with a black bean paste, chipotle salsa, guacamole and you filling of choice – I’m partial to the spicy mushrooms. All for $6. The yucca chips are great. You can ask for the super-hot sauce if you dare. Other things we like: the steak cemita, the quesadilla and shrimp taco. Get the frequent buyer card as you’ll be going twice a week if you live nearby.
1. Market Design meets the N.F.L. draft.
2. Gaming the credit rating agencies.
From Barking Up The Wrong Tree:
What determines reciprocity in employment relations? We conducted a controlled field experiment and tested the extent to which cash and non-monetary gifts affect workers’ productivity. Our main finding is that the nature of the gift, not its monetary value, determines the prevalence of reciprocal reactions. A gift in-kind results in a signicant and substantial increase in workers’ productivity. An equivalent cash gift, on the other hand, is largely ineffective or even though an additional experiment showed that workers would strongly favor the gift’s cash equivalent.
It probably has nothing to do with reciprocity. If I pay you money you have to share it with your family and then buy a car out of your share. If I give you a car it is all yours.
This logic also often provides a psychology-free explanation of the endowment effect. You are willing to pay at most $10,000 for a car. But if I give you that car for free and offer to buy it back from you, you require $20,000, because you will get to keep only half of that money.
(inspired by discussions with my Behavioral Economics class.)
Update: See Ben’s comment below for another variation on the theme which also came up in class. If you have present-biased preferences you have an endowment effect because cash will be shared with future selves, whereas instantaneous consumption is all for your present self.
Tyler (you can call him T, you can call him C, you can call him TC, you can call him Professor TC, you can call him Dr. Ty, you can call him Ty Cow, you can call him Tyce, you can call him T-Dice, you can call him Dr. T Dice Disco Dorang…) asks how California might redesign its constitution.
The underlying problem here is that California is simply a beautiful place to live. It’s not just the climate, or the people, or the geography. It’s that something floating around in the air that just makes you happy all the time you are there. And then the second problem is that there is free entry.
So it really doesn’t matter what you do with the constitution. You can fix the referendum system, you could change the budget process, you could turn the government into Singapore. But that only means that something else has to get hosed to bring the quality of life again back down to the level that maintains the zero-rent equilibrium condition with free entry.
Given that the question boils down to which part of California do you want to screw up in order to achieve that? This is mostly a distributional question. Bad state government saps rents in one way. Give those back and bad local governments will do just fine to take up the slack.
Of course all that is really required for equilibrium is that the quality of life of the marginal resident (or resident-to-be) is sufficiently low. This is completely consistent with high average quality of life but its not clear to me why a well-functioning government would be better at achieving such a distribution than the one they’ve got now. That is, who but the marginal resident is more affected by high taxes and dysfunctional government?
(The cheapest way to target the marginal resident is to make it infinitely costly to enter. But that gives huge rents to those lucky enough to live there already and the temptation to take those away would be too great for any government.)
I loved Mark Bittman’s no-knead bread recipe. The inventor is New York breadmaker Jim Lahey. Lahey reviews the new Domino’s Pizza.
People have analyzed strategic thinking long before the academic field of game theory started in the 1950s. I argue that Jane Austen’s six novels, among the most widely beloved in the English language, can be understood as a systematic analysis of strategic thinking. Austen’s novels do not simply provide interesting “case material” for the game theorist to analyze, but are themselves very ambitious and wide-ranging theoretically, providing insights not yet superseded by modern social science.
That is the abstract of a talk that Michael Chwe will give at UCLA on April 23. Unfortunately for those of us who can’t attend, there doesn’t seem to be a paper available. But Michael Chwe is an extremely creative and broad-minded theorist so you can bet that it’s going to be good. And if we can’t read his thoughts on Jane Austen, there’s always Michael’s paper “Why Were the Workers Whipped? Pain in a Principal-Agent Model.”
You are an ambitious, young Presidential-wannabe. This makes you a trifle immodest and you decide to write an autobiography, Volume 1. It’s going to set the stage for your Presidential bid. Some may say you have yet to do anything so said volume may not sell too well, even though you have an exotic cocktail of a family background and were President of Harvard Law Review. They may be right so you are not willing to pay a lump sum fee to employ an agent to sell your manuscript: not only might your book not work out, you would be stuck with a bill from an agent to add to your law school debts.
Luckily for you, pretty much every guy who writes a book is in the same position as you: immodest enough to write a book and yet knowing that it might not sell. So, there is a standard contract that is signed with a book agent: they work for you to get you a contract and if the book actually sells they get 15%. This way you share the risk: if the book fails, at least you do not also lose the amount you paid the agent; in return, if it succeeds, you do not get to keep all the benefits. The 15% contract gives you a form of insurance. Plus, it gives the agent the incentive to work hard, helping to alleviate the moral hazard problem.
Miracle of miracles, the book does actually sell eventually. It lies ignored but you become kind of famous anyway and then people buy it. Now you’re ready for Volume 2. Is the old book agent contract still the best option for you?
Well, Volume 2 is almost certainly going to fly off the shelves. You do not need to share the risk. All you care about is the getting the best price and you don’t need protection in case of failure as it ain’t going to fail. Best just to go with a great negotiator. In fact, a well-connected Washington lawyer might be just the thing. You just pay him upfront and he calls his contacts. And he’s done it before. It’s expensive if your book fails and you don’t get the rest of your advance or even have to give back the chunk they gave you. But Volume 2 is your road to the Presidency, Volume 1 was just laying the foundation. Everyone will read it as you’re intriguing and you’ll get to keep your advance and even get royalties. Now, you can afford to be President as your law school debts are paid and you can even send your kids to a spiffy private school.
I am starting a new club. Charter membership is hereby bestowed upon everyone who would never be in a club that would have them as a member. You may quit for $100.
(By the way, I asked around nobody wants you in the club consisting of the complement of my club.)
Agatha Christie didn’t decide who did it until most of the story was already written.
I always assumed she just knew who did it, in the same way that, well, a murderer knows exactly who they want to kill. Certainly, at the end of her books, she always made you feel that the story couldn’t have happened any other way. It had only ever seemed otherwise because you couldn’t see it. But it turns out that for many of her books, Christie often ran through multiple scenarios for the victim, the method of death, and the identity of the murderer. Curran finds that even the denouement of Endless Night, in which you innocently follow the narrator until you find in the last few pages that he is the murderer, was one of the later parts of the plot to be sorted out.
Isn’t that the easiest way to do it? Just like multiplying numbers is easier than factoring, it would be simpler to take some facts as given and thread a murder plot through them than to start with the plot and think up facts that fit. After all it is supposed to be a surprise in the end. Writing the facts before you know the mystery ensures you don’t give away the surprise. via kottke.
Is solving a coordination problem part of libertarian paternalism?
In a complicated undertaking, the FDA would analyze the salt in spaghetti sauces, breads and thousands of other products that make up the $600 billion food and beverage market, sources said. Working with food manufacturers, the government would set limits for salt in these categories, designed to gradually ratchet down sodium consumption. The changes would be calibrated so that consumers barely notice the modification.
Here is the link. I guess this is the theory: if all foods have less salt then our taste buds adjust. (This seems true anecdotally. Is it really?) So there is at least some small coordinated reduction in salt that would make everyone better off. But this only works if you prevent unraveling at the individual level. I.e. ban salt shakers.
Trilby trill: Doktor Frank.
She, like many artists, doesn’t want to raise the price of her concert tickets even though there is excess demand. By keeping the price low she allows fans who could not afford the market clearing price to see her concerts. She is effectively paying to allow them to enjoy her shows. Does this make her an altruist?
A textbook argument against, but one that is wrong, is the following. At the low price there is a market for ticket scalpers. Ticket scalpers will raise the price to the market-clearing level. Those fans who would sell their tickets to scalpers reveal that they prefer the money to the tickets. And they get the money in exchange for the tickets. Likewise those that buy tickets from scalpers reveal that they value the tickets more than the money. So the secondary market makes everyone better off. So if Miley Cyrus were truly an altruist she would allow this to happen rather than paying a price to prevent it.
The problem with the argument is that it works only because the ticket scalper was unanticipated. If all parties knew that tickets would sell at the market clearing price then the “true fans” that Miley is targeting would never actually get a ticket in the first place and this would make them worse off. They would never get a ticket either because they couldn’t afford it, or if they were originally allocated by lottery, the additional rents would attract more entrants to that lottery.
So we can’t argue that Miley is not an altruist. But we can argue that Miley’s refusal to raise prices is perfectly consistent with profit maximization. Here is a model. A fan’s willingness to pay to see Miley Cyrus in concert is a function of who else is there. It’s more fun if she is singing to screaming pre-teen girls because they add to the experience. It’s no fun if she is singing to a bunch of rich parents and their kids who don’t know how to cut loose.
With this model, no matter how much Miley would like to raise the price to take advantage of excess demand, she cannot. Because the price acts as a screening instrument. Higher prices select a less-desirable composition of the audience, lowering willingness to pay. The profit maximizing price is the maximum she can charge before this selection effect starts to reduce demand. At that price and everywhere below there is excess demand.
This is related to a paper by Simon Board on monopolistic pricing with peer effects.
Republican leader, Senator Mitch McConnell, opposes the current version of the financial reform bill. He claims that the bill generates “moral hazard” by creating a fund that bails out banks if they fail:
Mr. McConnell has framed the Republican opposition as an attempt to prevent future bailouts, and has specifically criticized a $50 billion fund, to be created with a tax on banks, that would help cover the costs of dealing with failing firms in the future. Mr. McConnell said the mere existence of the fund is an invitation to banks to take on risk that could lead them to fail. The White House does not support the fund, which is being pushed by Congressional Democrats.
Democrats have countered that the fund is intended pay for dismantling such firms and putting them out of business – and that setting up in advance would help ensure that the financial industry, rather than taxpayers, would cover the expense of future failures.
Note that the White House does not support the fund either and recently advised the Congressional Democrats to ditch the provision from the bill. As far as I can tell, the White House view is that the fund is too small and its existence would complicate efforts to raise extra money should it be needed. If McConnell is right, a bigger fund would exasperate the moral hazard problem so the White House’s preferences would make things even worse.
Also, the Democrats’ faith that firms would be dismantled if they fail may turn out to be mistaken. The same executives who get their firm in trouble by taking risky bets are in the best position to disentangle them if they go bad. That’s what happened with A.I.G.
All that leaves just one feature of the current bill to discuss: the fund is to be created by taxing financial firms in good times to help them out in bad times. Depending on how the tax is designed, it can mitigate risk-taking. The tax would have to affect the marginal incentive to make a risky bet and cannot be a lump-sum tax. A successful tax would basically work by decreasing the upside to a trade to compensate for the fact that the firm is insured on the downside by the fund. This brings up the whole question of what the optimal incentive scheme might be. I was puzzling about this but then I realized I was trying to reinvent the wheel. Much attention has already been paid to these issues in the finance literature and our very own Jeff Ely linked to a blog where Eric Maskin gave his five recommendations for great papers to read for guidance about the financial crisis.
To summarize some of the main points: Banks must take equity in the bets they take to reduce moral hazard and this may have to be regulated (Holmstron and Tirole). Depositors and small shareholders do not have good incentives to monitor so the government may have to set capital requirements to substitute for them (Dewatripont and Tirole). Tight monetary policy can be used reduce the profitability of lending, much like a tax. There are lots of other points but they are less relevant for the topic of this post. I have not read a couple of these papers myself (eg Kiyptaki-Moore) but I intend to!
There are lots of other ideas floating out there (Volker rule, breaking up banks, reinstating Glass-Steagal). Which is truly the best is hard to say. But the basic principle is clear: If banks are going to be bailed out as a bank failure would cause systemic risk, they do have the incentive to take on riskier bets (let’s call this the “McConnell effect”). Then, there has to be a countervailing effort to reduce the upside of risky bets (let’s call this the Olympia Snowe/Susan Collins/Scott Brown effect as we know who’s in the driving seat).
This brings me to my final point: While such a policy is designed for the long run, it will create pain in the short run. Banks are pretty reluctant to lend right now (I assume?). They do not need a tax to dis-incentivize them. They may need the reverse. How does financial reform deal with this? Do we delay the implementation of the restrictive legislations? This would create the incentive to invest and lend now rather than delay if profits from future lending are going to be taxed. Probably there is some old finance paper that already discussed this too! But I do not know it.
I buy these bags of hardwood charcoal from Whole Foods. They are sewn closed at the top and a little thread hangs out at one end. Every so often I grab the thread, offer a prayer to the grilling gods and pull; and the most beautiful thing happens: the thread unravels end to end and the bag is open. And if this has ever happened to you, the sound of it, the feel of it, and the pure joy of being admitted entrance, at a subconscious level all remind you of your other favorite thing to unzip.
But like that other thing it almost never works out that way and it seems to be determined by nothing more than pure randomness. When it fails you can try yanking in either direction or unraveling it by hand for a bit to get it started but to no avail. Eventually you have to get the scissors.
So I am asking you, dear readers. Does anybody know what is the trick to get these threaded seams to unravel? (I already tried plying it with tequila.)
What explains Jamiroquai? How can an artist be talented enough to have a big hit but not be talented enough to stay on the map? You can tell stories about market structure, contracts, fads, etc, but there is a statistical property that comes into play before all of that.
Suppose that only the top .0001% of all output gets our attention. These are the hits. And suppose that artists are ordered by their talent, call it τ. Talent measures the average quality of an artist’s output, but the quality of an individual piece is a draw from some distribution with mean τ.
Suppose that talent itself has a normal distribution within the population of artists. Let’s consider the talent level τ which is at the top .001 percentile. That is, only .001% of the population are more talented than τ. A striking property of the normal distribution is the following. Among all people who are more talented than τ, a huge percentage of them are just barely more talented than τ. Only a very small percentage, say 1% of the top .001% are significantly more talented than τ, they are the superstars. (See the footnote below for a precise statement of this fact.)
These superstars will consistently produce output in the top .0001%. They will have many hits. But they make up only 1% of the top .001% and so they make up only .00001% of the population. They can therefore contribute at most 10% of the hits.
The remaining 90% of the hits will be produced by artists who are not much more talented than τ. The most talented of these consist of the remaining 99% of the top .001%, i.e. close to .001% of the population. With all of these artists who are almost equal in terms of talent competing to perform in the top .0001%, each of these has at most a 1 in 10 chance of doing it once. A 1 in 100 chance of doing it twice, etc.
_____________________
(*A more precise version of this statement is something like the following. For any e>0 as small as you wish and y<100% as large as you wish, if you pick x big enough and you ask what is the conditional probability that someone more talented than x is not more talented than x+e, you can make that probability larger than y. This feature of the normal distribution is referred to as a thin tail property.)
Is it a superstition that babies born in a Year of the Dragon will have good luck? The Taiwanese government wanted to dispell the superstition.
The demographic spike in 1976 was sufficiently large that governments decided to issue warnings in 1987 against having babies in Dragon years because of the problems they caused for the educational system, particularly with respect to finding teachers and classroom space. Editorials were issued that claimed no special luck or intelligence for Dragon babies and a government program in Taiwan was designed to alert parents to the special problems faced by children born in an unusually large cohort (Goodkind, 1991, p. 677 cites multiple newspaper accounts of this).
But the effort failed and another spike was seen in 1988. Why? Because the dragon superstition is true. In this paper by Johnson and Nye, among Asian immigrants to the US, those born in Dragon years are compared to those born in non-Dragon years. Dragon babies are more successful as measured in terms of educational attainment. And the difference is larger than the corresponding difference for other US residents.
And of course it turns out that this is due to the self-fulfilling nature of the superstition. Asian Dragon babies have parents who are more successful and they are more likely to have altered their fertility timing in order to have a baby in a Dragon year. Is this because the smarter parents were more likely to be dumb enough to believe the superstition?
Or is it because of statistical discrimination? Since the Dragon superstition is true, being a Dragon is a signal of talent and luck. Unless these traits are observable without error, even unlucky and untalented Dragons will be treated preferentially relative to unlucky and untalented non-Dragons. Smart parents know this and wait until Dragon years.
Thanks to Toomas Hinnosaar for the pointer.
This weekend we attended a charity auction for my kids’ pre-school. What does a game theorist think about at a charity auction?
- There is a “silent auction” (sealed bid), followed by a live auction (open outcry). How do you decide which items to put in the live auction?
- The silent auction is anonymous, so items with high signaling value should be moved to the live auction. A 1 week vacation in Colorado sold for less than $1000 (who would want to signal that they don’t already have their own summer home?) wheras a day of working as an assistant at Charlie Trotter’s sold for $2500.
- There is a raffle. You sell those tickets at the door when people are distracted and haven’t started counting how much they have spent yet. But what price do you set?
- The economics of the charity auction are such that vendors with high P-MC markups can donate a high value item (high P) for a low cost (low MC). This explains why the items usually have a boutique quality to them.
- In the silent auction, you write down your bids with a supplied pen on the bid sheet. Sniping is pervasive. Note for next year: bring a cigarette lighter. You make your last minute bids and then melt the end of the pen just enough to stop the ink from flowing.
- When you are in suburban Winnetka on Chicago’s North Shore, for which kind of item is the winner’s curse the strongest: art or sports tickets/memorabilia?
- One of the live auction side-events is a pure signaling game where you are asked to give an amount of money to a special fund. They start with a very high request and after everyone who is willing to give that much has raised their hand, they continually lower the request. I think this is the right timing. With the ascending version the really big donors will give too early.
- How do you respond when asked to pay to enter a game with the rules to be announced later? Answer: treat it like a raffle. Surprise answer: A chicken will be placed in a cage. The winner of the game is the player whose number the chicken poops on.
That didn’t turn out to be such a good idea. Someone forgot to put a lid on the cage and the chicken, well-versed in the hold-up problem, found a way to use his monopoly power:
That is an actual-use, signed and engraved hockey stick from Patrick Kane of the Chicago Blackhawks. It subsequently sold for over $1000. The chicken was unharmed and eventually spent the evening perched on a rafter high above the proceedings threatening to select a winner directly.
1. We have no clear strategy to deal with Iran’s nuclear ambitions.
2. The Taliban want peace.
3. Graham Allison gives Obama an “incomplete” on one aspect of his policy on nuclear arms.
4. Osama loves volleyball, de Gaulle and Field Marshall Montgomery.
About a year ago I posted a link to a YouTube video of the Golden Balls “Split or Steal” game, hailing it as a godsend for teachers of game theory and the Prisoners’ Dilemma. That video has made its way around the web in the year since and I sat down to prepare my introductory game theory lecture yesterday looking for something new.
Well, it turns out that now there are many, many new videos of Split or Steal on YouTube and you can spend hours watching these. Here is my favorite and the one I used in class today.
I also heard from Seamus Coffey who has analyzed the data from Split or Steal games and finds:
- Women are more cooperative than men, non-whites more than whites, the old more cooperative than the young.
- There is more cooperation between opposite-sex players than when the players are of the same sex.
- The young don’t cooperate with the old, and the old discriminate even more against the young.
- Blonde women cooperate a lot. Men cooperate less with blondes than with brunettes.
Here is a link to a paper by John List who looks at similar patterns in the game Friend or Foe.
It’s always nice when you get a comment from someone you recognize but do not know personally. So it was a nice surprise to see that Andrew Gelman left a comment on my earlier post and then wrote his own blog post. Andrew says:
[I]f this “cheap talk” is useless, why it’s done at all! Or, conversely, why it wasn’t done earlier. Baliga’s analysis seems to me to rely on there being some “suckers” somewhere who don’t realize what’s going on.
Perhaps, for example, the leaders of Iran, Russia, etc., aren’t fooled by the cheap talk.–after all, they run countries and have incentives to understand the relevant signaling–but maybe it could sway American voters, who don’t have the time and inclination to gain a deep understanding of power politics. But . . . if it could fool the voters, it could change U.S. policy, and in that sense the stated policy does mean something. Beyond this, there are default effects and status quo effects and costs to violating or altering a stated policy. So I don’t think such public statements are necessarily meaningless, especially considering the many players involved in policymaking in any country.
On the other hand, I know next to nothing about international relations, so I could well be missing something important. I don’t see Baliga’s conclusions as following from basic game theory but maybe there’s something about this particular setting that changes things.
I was a bit terse in my original post and the concept of “cheap talk” is confusing so let me have another stab at an explanation.
Cheap talk is a costless message sent before a game is played. Since it is costless, you might think it never has an impact. That turns out not to be true. But whether and how cheap talk has an impact depends on the game that’s played after the talk.
The simplest and most famous scenario is where the game just involves a decision made by one player, the receiver (this is the famous Crawford-Sobel model). In the background, there is some uncertainty and the receiver would love to fine-tune his decision to the underlying state. If he does not know the state, the receiver makes a decision which works out on average and this is the equilibrium of the game without cheap talk. Now add a player, the sender, who knows the state and whose preferences coincide exactly with the sender’s. Let the sender send a message before the receiver makes his decision. The sender has perfect incentives to tell the truth, so the receiver learns the true state in equilibrium and cheap talk works. That is, the equilibrium set of the game without cheap talk is different than the game with cheap talk. Hence, cheap talk can be effective even if it is costless. It does not require the existence of suckers. And cheap talk is useful as it helps the two players to some to the best decision in each state. (Actually, Jeff has already written about this game.)
But in the nuclear proliferation scenario I claim cheap talk is not useful. I copy my initial response to Andrew:
But there is one key case where cheap talk is useless even in games of incomplete information: when a player i’s preferences over player j’s actions do not depend on player i’s preferences. In the nuclear story, this arises if the player i prefers that player j not acquire nuclear weapons, whether player i is itself rapacious, conciliatory or something in between. Then, player i will always send the message that minimizes the probability that player j arms and cheap talk cannot be informative.
As player i sends the same message whatever his preferences, his message contains no information. Hence, the equilibrium set does not change compared to a nuclear proliferation game with no talk preceding it. Whatever player j’s optimal plan was in the game without cheap talk, it remains optimal with cheap talk. Some message is sent in any case – even saying nothing is a message. There will always be some message, like it or not, once you allow cheap talk before a game. The question is whether it is effective and I claim it is not in my visualization of the nuclear proliferation game.
My analysis is a rational choice analysis, as is analysis in basic game theory. It assumes in particular that Iran is rational. This means they can do backward induction and think through Obama’s strategic incentives to send messages. Then, they can deduce that he always has the incentive to minimize their probability of acquiring weapons whether he intends to be belligerent, conciliatory or not. So, there is no information content in the message as the same message in sent in all cases.
Gelman makes the point that if voters can be fooled, cheap talk may be effective. Also, if Iran is fooled, cheap talk is also effective. This latter possibility is the hypothesis that makes sense of the new nuclear policy in the simplest way – if Iran accepts Obama’s message at face value, it might stop pursuing nuclear weapons. If Obama believes that Iran is naive, he does want to send the message. But, as Andrew suggests, the idea that Iran would be caught out is implausible. If even if Obama believes there is small chance Iran/North Korea is fooled, he may send it anyway – after all I claim the policy has no impact anyway if Iran is rational but if it makes things better with a small probability, why not?
Andrew’s idea that voters might be fooled is plausible and his post built around this idea. (Somewhat confusingly, he suggests I am assuming there are suckers in the model but I think his idea requires them while mine is a rational choice analysis.) But anyway, till we have a good theory of how to fool voters, it is hard to judge how the change in nuclear policy affects nuclear proliferation. If voters think Obama’s policy is a softening of the previous policy and will embolden Iran, as the Cheneys will say, voters may think Obama is weak. Then, Obama may have to signal he is tough by acting tough, not just talking tough. So fooling voters is bad for Obama in the end and he is a sucker too in this scenario. Or we can go the other way and say voters will increase support for Obama as he is a smart foreign policy guy and will reduce nuclear proliferation. Then, the Obama strategy makes sense. We can send the analysis anyway we want by adding players who can be fooled into the story.
But there is an insight to the basic game theory analysis – why might communication not work? It would be good to understand that before moving on to add naive voters, status quo effects and the like.
