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Please don't trickle down off the fiscal cliff

In June of 1988 in Sweden it was announced that survivorship benefits, a sort of government provided life insurance paid to a wife whose husband dies, would be discontinued. There was one interesting exception:  an unmarried couple with a child together born before the change could take up survivorship insurance if they married before Jan 1 1990.  The spike in new marriages in the graph shows the response to this incentive.

That’s the basis for Petra Persson‘s job market paper. Petra points out that the spike is somewhat mysterious because for all of these couples the promise of survivorship insurance wasn’t enough to induce them to marry previously and only when the option was going to disappear did they exercise it.

Of course some of these new marriages were couples that planned eventually to marry (and take up benefits) and who moved their marriage date earlier. But Petra credibly demonstrates that a large proportion of these marriages were marriages that never would have happened had the reform not been announced. What explains those “extra” marriages?

Petra’s theory is that these couples were still uncertain about whether they were a good match and were planning to live together longer before deciding later whether to marry.  After the reform was announced this option to wait and see was no longer costless and therefore many of these couples rushed into a marriage that, given enough time, they might have eventually decided against.

There’s an alternative story that fits equally well. Consider a couple where  there is no uncertainty at all about whether the match is good:  its a bad match and that’s why they are not married.  (Or it could be that they are perfectly happy together but just see no value in being legally wed.) This couple optimally plans to wait until the husband is close to death and then (if he hasn’t married somebody else) get married in order to take up survivorship insurance.  Now once the reform is announced that option is removed and they re-optimize and marry December 31, 1989.  Many of these are extra marriages because if they waited he might die unexpectedly or marry somebody else.

This theory (like Petra’s) also explains some other facts. For example, conditional on the husband not dying shortly after the reform the divorce rate for these marriages was unusually high. And even after controlling for everything a private insurance company would use to assess risk, takeup of the survivorship insurance via marriage is a good predictor of earlier-than-expected death.

I wonder what we could look for in the data to distinguish the two theories.

It’s a great paper and there’s lots more in there, you should definitely take a look. If I were making a list this year (I am not) Petra would definitely be on it.  (Check out her paper on information overload.)

She complained that when I practice the piano late at night I play too loud and it wakes her up every time.  So I said oh I didn’t realize that, did I wake you up last night.  She said yes.  Ha, I said but I didn’t practice last night.  Oh.  She was caught.  Thing is, I actually did practice last night.

A limited time deal on South Africa’s Kulula airlines in celebration of President Jacob Zuma’s recent wedding:

Inspired by regular VIP travellers with sizeable spousal entourages, the offer is open to all fourth wives when the family travels together on the Jo’burg to Cape Town route.

There are of course some peskys Tees and Cees to go with our less than pesky offer:

- The offer is valid on Joburg to Cape Town route from Monday 23rd April ‘til April 30th
– The family must have already bought a kulula.com ticket for all wives and husband
– Simply present ticket and proof of marriage and ID at kulula counter before departure
– A refund will then be made on the fourth wife’s ticket.
– Happy happy

Kufi carom:  Toomas Hinnosaar

Sandeep wrote one of our most popular posts on this topic.  There was a survey that showed some correlation between pre-marital cohabitation and divorce.  Sandeep said its probably just a selection effect.

First, suppose one partner is reluctant to get married and has doubts about the relationship. More information would be helpful to decide whether to stay together or break up. If the couple cohabit, that will give them valuable information.  On the other hand, couples who are more confident about their relationship are more likely to get married straight away.  Hence, more stable couples are less likely to live together before marriage than less stable couples.  Living together per se is not the problem.  The real problem is that a deeper source of instability is correlated with cohabitation.

Second – and this theory is implicit in the research – more religious couples are less likely to get divorced and less likely to live together before marriage.  Again, selection explains the data and not cohabiting per se.

Now the Internet is back again with a new theory:  “sliding in.”

She was talking about what researchers call “sliding, not deciding.” Moving from dating to sleeping over to sleeping over a lot to cohabitation can be a gradual slope, one not marked by rings or ceremonies or sometimes even a conversation. Couples bypass talking about why they want to live together and what it will mean.

As in, no-sliding-in before marriage.  Because if you do, you might actually get locked in:

Sliding into cohabitation wouldn’t be a problem if sliding out were as easy. But it isn’t. Too often, young adults enter into what they imagine will be low-cost, low-risk living situations only to find themselves unable to get out months, even years, later. It’s like signing up for a credit card with 0 percent interest. At the end of 12 months when the interest goes up to 23 percent you feel stuck because your balance is too high to pay off. In fact, cohabitation can be exactly like that. In behavioral economics, it’s called consumer lock-in.

Does this make any sense?  Isn’t a couple who goes straight to the sliding in before getting married ultimately just as locked in as a couple who completely abstains from sliding in until they are locked in by the bonds of wedlock?

In most of the US there is “no-fault” divorce.  Either party can petition for divorce without having to demonstrate to the court any reason to legitimize the petition. The divorce is usually granted even if the other party wants to remain married.

In England, you must prove to the judge that there is valid reason for the divorce, even if both parties want to separate. This is particularly problematic when only one party wants to separate but doesn’t have a valid reason for it. Then they must make the marriage sufficiently unpleasant for the spouse so that the spouse will a) want a divorce and b) have a verifiable good reason for it.  For example:

One petition read: “The respondent insisted that his pet tarantula, Timmy, slept in a glass case next to the matrimonial bed,” even though his wife requested “that Timmy sleep elsewhere.”

 or

The woman who sued for divorce because her husband insisted she dress in a Klingon costume and speak to him in Klingon. The man who declared that his wife had maliciously and repeatedly served him his least favorite dish, tuna casserole.

and most egregious of all

“The respondent husband repeatedly took charge of the remote television controller, endlessly flicking through channels and failing to stop at any channel requested by the petitioner,” one petition read.

Those examples and more here.  Gat get Markus Mobius.

Consider a Man and a Woman. Time flows continuously and the horizon is infinite. At time T=0 they are locked in an embrace, and every instant of time t>0 their lips draw closer. Let \delta_t be the distance at time t, it declines monotonically over time.  At each t, the two simultaneously choose actions a^i_t which jointly determine the speed at which they close the space that separates them, governed by the rule

\frac{d \delta_t}{d t} = - f(a^M_t, a^W_t)

where f is strictly increasing in both arguments. In addition, both the Man and the Woman can pull away at any moment by choosing action a_0, thereby spurning the kiss and ending the game.

The closer they get the clearer they can see into one another’s eyes, revealing to each of them the true depth of their love, captured by the state of the world \theta which they receive private, and increasingly precise signals about as the game unfolds.

In this game, the lovers have common interests. Each wants to kiss if and only if their love is true, i.e. \theta >0.  However, they know the risks of opening their heart to another:  neither wants to be the one left unrequited. When \theta > 0, each prefers kissing to breaking the embrace, but each prefers to pull away first if they expect the other to pull away.

Along the equilibrium path their lips move fleetingly close. At close proximity every tiny fluctuation in the speed of approach communicates to the other changes in the private estimates \hat \theta_i each lover i is updating continuously over time, i.e.  a^i_t varies monotonically with the estimate \hat \theta_i.

But then: does he see doubt in her eyes? Did she blink? He cannot be sure. A bad signal, a discrete drop in his estimate and this causes him to hesitate.  And since \theta is a common state of the world, his hesitation is informative for her and so she pauses too. Not just because his hesitation raises doubts that their love is everlasting, but worse:  he may be preparing to turn away.  She must prepare herself too.

But she doesn’t. She sees deeper than that and instead she lurches ahead ever so slightly. He is looking into her eyes:  he can see that she believes with all her heart that \theta is positive. And now he knows that these are her true beliefs because if in truth her estimate of \theta was close to the negative region, his hesitation would have pushed her over and she would have turned away pre-emptively. Instead her persistence implores him to have faith in their love and to stay there in her arms with his lips so tantalizingly close to hers.

His doubts are vanquished. He loves her. She knows that he knows that she loves him too. And at last it is common knowledge that their love is true and they will kiss and in their moment of deepest passion they discover something about their payoff functions they haven’t before. This moment is the first moment in the rest of their lives together. They will not rush. Time is standing still now. Together, as if coordinated by the eternal spirit of amor, they allow a_t^i to fall gradually to zero, just slow enough that their lips finally meet, but just fast enough that, when they do,

\frac{d \delta_t}{d t} \rightarrow 0

so that their convergence occurs smoothly but still in finite time.

Happy Anniversary Jennie

(drawing:  Chemistry from www.f1me.net)

  1. Among the males in my family tree, underwear preference alternates generations:  briefs then boxers then briefs…
  2. Smoking guns for this theory.  Italians who pronounce the hard b in the word “subtle”, and pronounce “differ” as in “diffAIR”  (they have no trouble with water, later, etc.)  Also, the hard p in “psychology.”
  3. Here’s the best way to get your wife to agree to a parenting strategy X:  “My mother tried not-X and that didn’t work.”
  4. I want to play a negative drum:  it makes a sound except when I hit it.
  5. What is the effect on equilibrium search models and assortative matching when once-matched, husbands can use headscarves to hide the quality of their mate from potential poachers?

The MILQs at Spousonomics riff on the subject of “learned incompetence.” It’s the strategic response to comparative advantage in the household:  if I am supposed to specialize in my comparative advantage I am going to make sure to demonstrate that my comparative advantage is in relaxing on the couch. Examples from Spousonomics:

Buying dog food. My husband has the number of the pet food store that delivers and he knows the size of the bag we buy. It would be extremely inconvenient for me to ask him for that number.

Sweeping the patio. He’s way better at getting those little pine tree needles out of the cracks. I don’t know how he does it!

A related syndrome is learned ignorance. It springs from the marital collective decision-making process.  Let’s say we are deciding whether to spend a month in San Diego.  Ideally we should both think it over, weigh and discuss the costs and benefits and come to an agreement. But what’s really going to happen is I am going to say yes without a moment’s reflection and her vote is going to be the pivotal one.

The reason is that, for decisions like this that require unanimity, my vote is only going to count when she is in favor.  Now she loves San Diego, but she doesn’t surf and so she can’t love it nearly as much as me.  So she’s going to put more weight on the costs in her cost-benefit calculation.  I care about costs too but I know that conditional on she being in favor I am certainly in favor too.

Over time spouses come to know who is the marginal decision maker on all kinds of decisions.  Once that happens there is no incentive for the other party to do any meaningful deliberation.  Then all decisions are effectively made unilaterally by the person who is least willing to deviate from the status quo.

The MILLTs at Spousonomics are calling on spouses to look for Pareto improvements in our marital transactions.  Paula offers this list for her husband on Valentine’s day.

1. Help with garbage night.
2. Join you in the 30-day meditation challenge.
3. Not remind you when you have to make up a work shift at the food coop.
4. Use my Petzl head lamp when I’m reading in bed and you’re already asleep.
5. Work on my tone of voice when I’m frustrated.
6. Pick my battles.
7. Entertain notion that my way isn’t the only way.
8. Try again to make braised pork shoulder.
9. Give Sonny & the Sunsets another chance.
10. Let things go.

I’m as keen on free lunches as the next guy (I’m looking at you Asher), but at the risk of throwing cold water on Paula’s Valentine’s Day overtures, let me bring a little dose of tradeoffs to this home economics lesson.  First of all, Paula is shortchanging her generosity on many of these because very few of them are literal Pareto improvements.  Garbage night?  Who isn’t better off keeping their hands clean, not to mention taking a pass on the sub-freezing walk to the curb. And I am not sure what exactly a Petzl head lamp is but I’d be worried about waking up to the fragrance of molten hair after dozing off with one of those on.

No those are genuine sacrifices.  Indeed Pareto improvements are pretty hard to come by even if you are otherwise a selfish pig.  Especially if you are a selfish pig.  Because as long as you are already doing everything that would make you better off, the only room left for Pareto improvements is spanned by the knife’s edge of indifference.

There is a second category represented on the list:  proposals that take a long-run view. These are a bit more subtle.  Give Sonny and the Sunsets another chance.  This qualifies as a Pareto improvement even though the implicit suggestion is that Sonny and the Sunsets didn’t cast a warm glow the first time. If the clouds part for Paula the second time around then she and her husband are both better off.  But again Paula’s pure self interest already takes care of this one so long as she’s thinking ahead.  Anyway, if even Sonny and the Sunsets can grow on us after a few listenings then anything can.  Why not just spend 30 days meditating?  Oh wait…

And let’s not forget that a Pareto improvement has to make the other party better off, at least weakly.  Given what we can all infer from the pledge itself, “Try again to make braised pork shoulder” seems to fail on that count.

Then there’s the issue of narrow framing.  Pareto efficiency for the household may entail violence against the rest of the world.  Not reminding him about food co-op is nice but what about the poor slobs waiting for their food at the co-op? Heck why not replace this one with “Encourage you to pilfer more food from the co-op?”

The last set of proposals all relate to improving conflict resolution.  Most appear superficially to be obvious Pareto improvements.  Work on my tone of voice when I am frustrated.  Paula is probably truly indifferent to how her own voice sounds when she’s frustrated, but I would bet that her husband has a clear preference.  So this does seem to require a little more than pure self-interest to implement.  “Let things go” is another.

But it’s for exactly this kind of household constitutional amendment that the logic of Pareto efficiency can be turned on its head.  The concept of renegotiation in repeated games holds a key lesson.  Marriage is a partnership that requires individual sacrifice in order to reach the efficient frontier.  The temptation to cheat on the relationship must be deterred with the threat of moving below from the frontier as a reprisal.  Once there it is tempting to re-negotiate back to the frontier.  But as soon as we get used to doing that, the incentive keeping us at the frontier in the first place goes away.

Best not to “Let Go” so quickly, Paula.  Sorry Mr. Paula.  Try to have a Happy Valentine’s day anyway.

There is a new blog, Spousonomics, written by two MILRs, Paula Szuchman and Jenny Anderson.  The topics are near and dear to the Cheap Talk heart: “Using economics to master love, marriage, and dirty dishes.”  You can read about The Definition of A Good Marriage, Wiki-Marriage-Leaks, and Signaling for Sex.

They are doing a series on “Economists in Love” and based on my post on Hormone Neutraility, they assumed I was a sensitive guy and so they asked me a few questions like “Why are you an economist?” and “Is marriage a repeated game?” Of course the reality is that I am emotionally stuck in the 7th grade and so you can see my smart-ass answers here.

Also, there is a picture of me and my wife (she looking hot, me looking like I need a nap.)

In the wake of the Nobel for the search theory of unemployment, let’s talk about the search models that really matter:  hooking up.

Everybody who reads this blog understands the Prisoner’s Dilemma.  Play it just once and neither side will cooperate.  So a simple theory of relationships is based on a repeated Prisoner’s Dilemma.  When the relationship can potentially continue, there is now an incentive to cooperate today in order to maintain cooperation in the future.  Put differently, the threat of a future breakdown of cooperation enforces cooperation today.

But things get interesting when we embed this into a search and matching model.  Out of the large pool of the unmatched, two singles get “matched” and they start a relationship, i.e. a repeated prisoner’s dilemma.  As long as the relationship continues each decides whether to cooperate or defect and at any stage either party can break-up the relationship and go find another match.

This possibility of breaking up the match adds a new friction to relationships. The threat of a breakdown in the current relationship is not enough anymore to incentivize cooperation because that threat can be avoided by leaving.  And indeed, it’s not an equilibrium anymore for relationships to work efficiently because then any partner can cheat in his current relationship and then immediately go find another partner (who, expecting cooperation, is the next sucker, etc.)

Something has to give to maintain incentives.  What’s the best way to make relationships just inefficient enough to keep as much cooperation as possible? A simple solution is to “start small:” At the beginning of any relationship there is a trial phase where the level of cooperation is purposefully low, and only after both partners remain in the relationship through the trial phase do they start to get-it-, er, cooperate.

This courtship ritual is privately wasteful but socially valuable.  Once I am in a relationship I am willing to wait through the trial phase because the reward of cooperation is waiting for me at the end.  And once the trial phase is over I have no incentive to cheat because then I would just have to go through the trial phase again with my new partner.  Equilibrium is restored.

There are a number of different spins on this idea in the literature.  There was an early series of papers by Joel Watson based on a model with incomplete information.  I remember really liking this paper by Lindsey, Polak, and Zeckhauser on “Free Love, Fragile Fidelity, and Forgiveness.”  And this quarter, we heard David McAdams with a new perspective on things, including some conditions under which courtship can be dispensed with altogether and partners can get right down to business.

The seminal (economist’s!) answer to this question has been offered by my old teacher in grad school and my colleague till a few years ago, Kathy Spier, in her paper “Incomplete Contracts and Signaling”.  As her title suggests, her core idea is based on signaling: an informed party making an offer in a game signals his private information via the offer.  An offer that carries a negative inference may not be made.  Kathy’s model is quite complex but it’s central logic is captured in a passage from her paper:

A fellow might hesitate to ask his fiancée to sign a prenuptial agreement…. because to do so would lead her to believe that the quality of the marriage – or the probability of divorce – are higher than she had thought.

In the new century, roles are reversed – the wealthy partner might be female and the poor one male.  If there is no pre-nup, the man can extract a large fraction of his ex-wife’s wealth after a divorce.  In that situation, to signal his love, the man should offer to sign a pre-nup that gives him none of his ex-wife’s fortune.  If he is confident the marriage will survive, divorce is impossible anyway , so why worry about income in an impossible event?

Alas, as the poets have long told us, the path of true love does not run smooth – the most well-intentioned and loving couple can find their marriage has hit the rocks.  Then, there will be much regret and perhaps desperate, legal action to extract enough cash to live in the style to which one has become accustomed.

And so I turn finally to this sad case in the British courts:

When Katrin Radmacher and Nicolas Granatino married in 1998, she insisted it had been for love, not for money. That was why the wealthy German heiress had ensured that her banker husband signed a prenuptial agreement promising to make no claims on her fortune if the marriage failed. It was, she said, “a way of proving you are marrying only for love”.

Once the love had gone, however – the couple separated in 2006 – the fortune remained, and Granatino, by then a mature student at Oxford, decided to challenge the prenup, which they had signed in Germany before marrying and divorcing in Britain, arguing it had no status in English law.

But Granatino lost.

I’m sure a research paper can come out of this: two-sided incomplete information, two-sided signaling and optimal contracting…..I’m too busy keeping my marriage alive to have the time to write it.

An eternal puzzle is how a husband/father handles visits by his mother without agonizing conflict between the wife and her mother-in-law.  Here is my Machiavellian solution.  The husband should engineer a conflict with his mother that puts him in the wrong.  Then the wife and her mother-in-law will naturally bond in the face of a mutual enemy.  Don’t forget the key condition that the crime has to be egregious enough so the wife does not come to your defense.  This is why the conflict should not be with the wife:  your mother, being your mother,  is naturally more inclined to side with you.  Added bonus:  husband is conveniently ostracized!

Consider the game among a couple and their male marriage counselor.  The problem for the marriage counselor is to prove that he is unbiased.  It is common-knowledge at the outset that the wife worries that a male marriage counselor is biased and will always blame the wife.

Indeed if 10 weeks in a row they come in for counseling and talk about the week’s petty argument (how to stack dishes in the dishwasher, whether it matters that the towels are not folded corner-to-corner, etc.) he everytime sides with the husband, eventually the wife will want to find a new counselor.

So what happens after 9 weeks of deciding for the husband?  Now all parties know that the counselor is on his last leg.  He must start siding with the wife in order to keep his job, even if the husband is actually in the right (i.e. even if throwing out the 3-day old soggy quesadilla in the refrigerator was the right thing to do.)  But that means that he’s now biased in favor of the wife and so the husband will fire him.

We have just concluded that if he decides for the husband 9 times in a row he will be fired.  So what happens on week 9 in the rare event that he has decided for the husband 8 times in a row.  Same thing,  he is strategically biased in favor of the wife and he will be fired.

By induction he is biased even on week 1.

(NB: my marriage is beautiful (no counseling) and there is nobody who can fold a towel faster than me.)

If this is all obvious, forgive me I came late to this (I grew up in Orange County, CA where it last snowed in December of Yeah Right.)

The first thing to do, obviously is to make a snowball.  Your enemy combatant will do the same.  You each now have one snowball in your stockpile.  What next?

If you throw your snowball you will be unarmed and certain to pay the consequences.  So you don’t.  Neither does she.  You are at a standoff, but very soon you figure out what to do while you wait for the standoff to resolve.  Make another snowball.  Of course she does the same.

Now you each have an arsenal of two snowballs.  Two is very different from one however because if you throw your snowball you still have one to defend yourself with.  But you will have one fewer than she.  This still puts her at an advantage because once you use your last snowball you are again unarmed.  So you will only throw your first snowball if you have a reasonable chance of landing it.

The alternative is to make another snowball.  Which of these is the better option depends on what she is expecting.  If she knows you will throw, she is prepared to dodge it and then press her advantage.  If she knows you will make another one she will wait for you to reach down into the snow when you are most vulnerable and she will draw first blood.

So you have to randomize.  So does she.  There are two possible outcomes of these independent randomizations.  First, one or two snowballs may fly resulting in a sequence of volleys which eventually deplete your stocks down to one or two snowballs left.  The second possibility is that both of you increase your stockpile by one snowball.

Thus, equilibrium of a well-played snowball fight gives rise to the following stochastic process.  At each stage, with a certain positive probability, the stockpiles both increase by one snowball.  This continues without bound until, with the complementary probability in each stage, a fight breaks out depleting both stockpiles and beginning the process again from zero.

Special mention should be made of a third strategy which is to be considered only in special circumstances.  Rather than standing and throwing, you can charge at her and take a shot from close range.  This has the obvious advantages but clearly leaves you defenseless ex post.  Running away should be ruled out because you will be giving up your entire store of snowballs and eventually you will have to come back.  No, the only option at this point is to tackle her, landing you both deep in the snow.  With the right adversary, this mutually assured destruction could be the best possible outcome.

Sex is a puzzle for evolutionary biologists.  It seems to be a waste of reproductive output.  A population of a fixed size which requires two members to produce offspring reproduces, and therefore grows, at half the rate of the same sized asexsual population (which requires only one member to produce one offspring.)

So to explain the prevalence of sexual reproduction in nature we need to find some advantage to offset this so-called two-fold cost of sex.  There are two prominent theories.  The first is that sexual reproduction allows a species to shed disadvantageous mutations.  Sexual reproduction thus ensures that offspring loses any harmful mutation with probability 1/2 (we are assuming that the parents do not have mutations of the same gene, a good approximation when there are many genes.)  But with asexual reproduction, these mutations just accumulate.

Another theory is that sexual reproduction, by mixing around genes, ensures genetic diversity which enables a species to survive changes in the environment.

Not Exactly Rocket Science reports on an experiment designed to test these theories.

Like humans, C.elegans has two sexes but unlike us, they are males and hermaphrodites (with males making up just one in every two thousand individuals).  Equipped with both sets of genitals, hermaphrodites worms can fertilise themselves without male help – far from being rude, telling C.elegans to go &$&! itself is a feasible lifestyle suggestion. Hermaphrodites could also mate with males, but they do that on less than one in 20 occasions.

The biologists manipulated the genetics of a population of these worms so that half would always mate with themselves and the others would always mate sexually.  Next, they exposed the worms to a chemical that raised their rate of mutations.  As the theory predicts, the sexually reproducing worms were more successful.

Next, they exposed the worms to a deadly bacterium.  Consistent with the second theory, the sexually reproducing worms also fared better in this experiment.

Now the big puzzle.  If sexual reproduction is beneficial, why do all sexually reproducing species in nature do it in pairs?  This paper by economists Motty Perry, Phil Reny, and Arthur Robson proves that, at least with respect to the harmful mutation theory, a particular form of tri-parental sex dominates bi-parental sex.   In the Perry-Reny-Robson world, reproduction requires two males and one female.  The offspring receives genes with half-probability from the mother and 1/4-probability from each of the fathers.

(With this particular menagerie, in every reproductive cycle each female gets two partners per encounter but each male gets two encounters.  Not only does this ensure that the “cost of sex” is again two-fold and not three-fold, but it also maintains equity in the gettin’ busy department.  Only fair.)

You are out for dinner and your friend is looking at the wine list and gives you “There’s a house wine and then there’s this Aussie Shiraz that’s supposed to be good, what do you think?”

How you answer depends a lot on how long you have known the person.  If it was my wife asking me that I would not give it a moment’s thought and go for the Shiraz.  If it was someone I know much less about then I would have to think about the budget, I would ask what the house wine was, what the prices were, etc.  Then I would give my considered opinion expecting it to be appropriately weighed alongside his.

This is a typical trend in relationships over time.  As we come to know one another’s preferences we exchange less and less information on routine decisions.  On the one hand this is because there is less to learn, we already know each other very well.  But there is a secondary force which squelches communication even when there is valuable information to exchange.

As we learn one another’s preferences, we learn where those preferences diverge.  The lines of disagreement become clearer, even when the disagreement is very minor.  For example, I learn that I like good wine a little bit more than my wife.  Looking at the menu, she sees the price, she sees the alternatives and I know what constellation of those variables would lead her to consider the Shiraz. Now I know that I have a stronger preference for the Shiraz, so if she is even considering it that is enough information for me to know that I want it.

Sadly, my wife can think ahead and see all this.  She knows that merely suggesting it will make me pro-Shiraz.  She knows, therefore, that my response contains no new information and so she doesn’t even bother asking.  Instead, she makes the choice unilaterally and its house wine here we come.  (Of course waiters are also shrewd game theorists.  They know how to spot the wine drinker at the table and hand him the wine list.)

In every relationship there will be certain routine decisions where the two parties have come to see a predictable difference of opinion.  For those, in the long run there will be one party to whom decision-making is delegated and those decisions will almost always be taken unilaterally.  Typically it will be the party who cares the most about a specific dimension who will be the assigned the delegate, as this is the efficient arrangement subject to these constraints.

Some relationships have a constitution that prevents delegation and formally requires a vote.  Take for example, the Supreme Court.  As in recent years when the composition of the court has been relatively stable, justices learn each others’ views in areas that arise frequently.

Justice Scalia can predict the opinion of Justice Ginsburg and Scalia is almost always to the right of Ginsburg.  If, during delibaration, Justice Ginsburg reveals any leaning to the right, this is very strong information to Scalia that the rightist decision is the correct one.  Knowing this, Ginsburg will be pushed farther to the left:  she will express rightist views only in the most extreme cases when it is obvious that those are correct.  And the equal and opposite reaction pushes Scalia to the right.

Eventually, the Court becomes so polarized that nearly every justice’s opinions can be predicted in advance.  And in fact they will line up on a line.  If Breyer is voting right then so will Kennedy, Alito, Roberts, Scalia, and Thomas.  If Kennedy is voting left then so are Breyer, Souter, Ginsberg, and Stevens.  Ultimately only the centrist judges (previously O’Connor, now Kennedy) are left with any flexibility and all cases are decided 5-4.

When a new guy rotates in, this can upset the equilibrium.  There is something to learn about the new guy.  There is reason to express opinion again, and this means that something new can be learned about the old guys too.  We should see that the ordering of the old justices can be altered after the introduction of a new justice.  (Don’t expect this from Sotomayor because she has such a long paper trail.  Her place in line has already been figured out by all.)

He tottered over to the thermostat and there it was: treachery. Despite a long-fought household compromise standard of 74 degrees, someone — Adler’s suspicions instantly centered on his wife — had nudged the temperature up to 78.

For the sleepy freelance writer, it was time to set things right . . . right at 65 degrees. “I just kept pushing that down arrow,” he said of his midnight retaliation. “It was a defensive maneuver.”

The article suggests that women generally prefer higher thermostat settings than men.  (It is the opposite in my household.) The focus is on air conditioning in the summer and I wonder whether this ranking reverses in the winter.  (My wife prefers more moderate temperatures:  cooler in the summer, warmer in the winter. )

Repeated game exam question:  will this make the climate wars better or worse? Give your answers and reasons in the comments. Ushanka Shake: Knowledge Problem.

Millions of internet users who use Skype could be forced to find other ways to make phone calls after parent company eBay said it did not own the underlying technology that powers the service, prompting fears of a shutdown.

Why are there firms?  A more flexible way to manage transactions would be through a system of specific contracts detailing what each individual should produce, to whom it should be delivered and what he should be paid.  It would also be more efficient:  a traditional firm makes some group of individuals the owners and a separate group of individuals the workers.  The firm is saddled with the problem of motivating workers when the profits from their efforts go to the owners.

The problem of course is that most of these contracts would be far too complicated to spell out and enforce.  And without an airtight contract, disputes occur.  Because disputes are inefficient, the disputants almost always find some settlement which supplants the terms of the contract.  Knowing all of this in advance, the contracts would usually turn out to be worthless.  The strategy of bringing spurious objections to existing contracts in order to trigger renegotiation at more favorable terms is called holdup. The holdup problem is considered by some economic theorists to be the fundamental friction that shapes most of economic organization.

Case in point, Skype and eBay.  eBay acquired the Skype brand and much of the software from the founders, JoltId, but did not take full ownership of the core technology, instead entering a licensing agreement which grants Skype exclusive use.  Since that time, Skype has become increasingly popular and a strong source of revenue for eBay.  Now eBay is being held up.  JoltId claims that eBay has violated the licensing agreement, citing a few obscure and relatively minor details in the contract.  Litigation is pending.

Not coincidentally, eBay has publicly stated its intention to spinoff Skype and take it public, a sale that would bring a huge infusion of capital to eBay at a time when it is reinventing its core business.  That sale is in turn being heldup because Skype is worthless without the license from JoltId.  This puts JoltId in an excellent bargaining position to renegotiate for a better share of those spoils. (On the other hand, had Skype not done as well as it did, JoltId would not have such a large share of the downside.)

Whatever were the long-run total expected payments eBay was going to make to JoltId in return for exclusive use of the technology, it should have paid that much to own the technology outright, become an integrated firm, and avoided the holdup problem.

And don’t worry.  You got your Skype.  Holdup may change the terms of trade, but it is in neither party’s interest to destroy a valuable asset.

Tom Schelling has a famous example illustrating how to solve coordination problems.  Suppose you are supposed to meet someone in New York City but you forgot to specify a location to meet.  This was before the era of cell phones so there is no opportunity for cooperation before you pick a place to go.  Where do you go?  You go where your friend thinks you are most likely to go, which is of course where she thinks you think she thinks you are most likely to go, etc.

Notice that convenience or taste or proximity have no direct bearing on your choice.  These considerations may indirectly influence your choice, but only if she thinks you think she thinks … that they will influence your choice.

There was an old game show called the Newlywed Game where I learned some of my very early training as a game theorist in my living room roughly at the age of 7.  Here is how the show works.  4 pairs of newlyweds were competing.  The husbands, say, would be on stage first, with the wives in an isolated room.  The husbands would be asked a series of questions about their wives, say “What wedding gift from your family does your wife hate the most?” and the husbands would have to guess what the wives would say.  (This was the 70’s so every episode had at least one question about “making whoopee,” like “what movie star would your wife say you best remind her of when you’re makin’ whoopee?”)

When you watch this show every night for as long as I did you soon figure out that the way to win this show is to disregard completely the question and just find something to say that you wife is likely to say, which is of course what she thinks you think she is likely to say, etc.  You could try to make a plan with your newlywed spouse beforehand about what to say, something like the first answer is “the crock pot”, the second answer is “burt reynolds” etc.  But this looks awkward when the first question turns out to be “What is your wife’s favorite room to make whoopee?” etc.

So the problem is just like Schelling’s meeting problem.  The truth is of secondary importance.  You want to find the most obvious answer, i.e. the one your wife is most likely to give because she thinks you are most likely to give it, etc.    For example, if the question is, “Which Smurf will your wife say best describes your style of makin’ whoopee?” then even though you think the answer is probably “Clumsy Smurf” or “Sloppy Smurf”, you say “Hefty Smurf” because that is the obvious answer.

smurfs-hefty-smurf-100x100

Ok, all of this is setup to tell you that Gary Becker is clearly a better game theorist than Steve Levitt.  Via Freakonomics, Levitt tells the story of a Chicago economics faculty Newlywed game played at their annual skit party.  (Northwestern is one of the few top departments that doesn’t have one of these.  That sucks.)  Becker and Levitt were newlyweds.  According to Levitt they did poorly, but it looks like Becker was onto the right strategy, but Levitt was trying to figure out the right answers:

The first question was, “Who is Gary’s favorite economist?” I thought I knew this one for sure. I guessed Milton Friedman. Gary answered Adam Smith. (Although he later apologized to me and said Friedman was the right answer.)

Then they asked, “In Gary’s opinion, how many more quarters will the current recession last?” I guessed he would say three more quarters, but his actual answer was two more quarters.

The next question was, “Who does Gary think will win the next Nobel prize in economics?” This is a hard one, because there are so many reasonable guesses. I figured if Becker writes a blog with Posner, he might think Posner would win the Nobel prize, so that was my answer. Gary said Gene Fama instead.

The last question we got wrong was one that was posed to Gary, asking which of the following three people I would most like to have lunch with: Marilyn Monroe, Napolean, or Karl Marx. I know Gary has a major crush on Marilyn Monroe, so that was the answer I gave, even though the question was about who I would want to have lunch with, not who Gary would want to have lunch with. Gary answered Karl Marx (which makes me wonder what he thinks of me), but did volunteer, as I strongly suspected, that he himself would of course prefer Marilyn to either of the other two.

Female orgasm eludes evolutionary explanation.  Most candidate explanations have a hard time reconciling the observation that a large fraction of women do not have orgasm during intercourse and among those that do it is not a consistent occurrence.  Here is a fun paper surveying a variety of just-so stories that “explain” female orgasm.  The authors dispense with

  1. Its a non-adaptive vestige of male orgasm.
  2. It encourages females to have more sex. (then why not always?)
  3. It encourages females to have sex with multiple partners (thus the asymmetry in “arrival times” between males and females.)
  4. It improves chances of fertilization. (empirically false)

and they leave us with an intriguing, relatively new one, the Evaluation Hypothesis.

When Barash was a graduate student  more  than  ten  years  earlier,  he  observed  that  when  subordinate  male  grizzly  bears  copulate,  their heads  are  constantly  swiveling  about  on  the  lookout  for  a  dominant  male,  who,  should  he  encounter  a  couple  in  flagrante,  will  likely dislodge  his  lesser  rival  and  take  its  place.  Not  surprisingly,  subordinate  males  ejaculate very quickly, whereas dominants take their time. If female grizzly bears  were to experience orgasm, with which partner would you expect it to be more  likely? And is it surprising that premature ejaculation is a common problem of  young, inexperienced men lacking in status and self-confidence? Moreover, is it  surprising that women paired with such men are unlikely to be orgasmic?

So it doesn’t encourage more sex uniformly, it encourages more sex with the right mate.  And it is inconsistent and slow to arrive, not by accident, as in the vestigal hypothesis, but by design.  And the sorting of men according to, let’s call it patience, seems to be a stable equilibrium as it requires either an exogenous characteristic correlated with “good genes” as in the case of dominant grizzlies, or perhaps in its social incarnation where it requires

sufficient  access  to  resources  to  orchestrate  interactions  that  are  private,  safe,  and gratifying—in a word, romantic—and thus appealing to women’s evolved evaluation  mechanisms.

From the book How Women Got Their Curves and Other Just-So Stories:  Evolutionary Enigmas by David Barash and Judith Lipton. (Cloche Click:  Bookslut.)

Ever notice that food tastes better when your spouse cooked it (controlling for talent of course)?  Why do leftovers often taste better than when the food was fresh?  I believe the same phenomenon explains both of these.

A large part of tasting is actually smelling.  You can verify this by, for example, eating an onion with your nose plugged.  Our sense of smell tends to filter out persistent smells after being exposed to them for awhile so that we cannot smell them anymore.  This means that when you are cooking in the kitchen, surrounded by the aromas of your food, you are quickly de-sensitised to them.  Then when you sit down to eat, it is like tasting without smelling.

When your spouse has done the cooking you were likely in another room, isolated from the aromas.  When you walk into the kitchen to eat, you get to smell and taste the food at the same time.  That’s why it tastes better to you.  The same idea applies to leftovers.  It takes much less time to reheat leftovers than it took to prepare the food in the first place so you retain sensitivity to more of the aromas when it comes time to eat.

I believe that when recipes direct you to “allow the food to rest so that the flavors can combine” what is really happening is that you are induced to leave the kitchen and return with a renewed sensitivity.  This also explains why dinners which you spent all day preparing are often disappointments.  And it implies that when you have guests over for dinner you should entertain them outside of the kitchen so that they will enjoy the food more when it is ready.

When my wife, a rational agent, is preparing to welcome our monthly visitor, she is confronted by a preliminary wave of unwelcome hormones.  The proximate effect of these hormones is to make her a tad more grouchy than she normally is about otherwise mundane events. But because my wife is a rational agent, presumably she is able to forecast this effect and account for it.  In other words, when she has the impulse to feel perturbed about some minor calamity she reasons that her impulse is likely an artificial response brought on by the fluctuating chemistry in her brain.  And this reasoning would lead her to moderate her emotional response.

Indeed I have witnessed my dear wife execute exactly these calculations.  When this happens, the household is always most appreciative.  Sadly, it doesn’t always happen.

My theory therefore is that what is happening is not a uniform variation in the hormonal level, but rather a spike in hormonal volatility that forces my wife into a signal-extraction problem that is inherently prone to error.  For example, when her absent-minded husband leaves the lights on in the kitchen and she detects, in response, an oncoming alteration in her mood, she must determine whether this minor offence is something she would ordinarily be upset about.  My theory is that hormone volatility makes it hard to know exactly the current hormonal level and therefore difficult to back out the baseline appropriate degree of aggravation (in this case, i would argue, none at all.)

And thus hormones, an otherwise purely nominal variable, can have real (cyclical) effects.

  1. Cheaters help cheaters.
  2. Cheaters punish cheaters.

For the game theorists in the room, the difference must boil down to whether we have random matching across populations (case 1) or within a single population (case 2.)

Its a tempting hypothesis.  And its entertaining to look at the wives of your relatives/close friends and theorize which attribute of their mothers they replicate (likewise for husbands/fathers.)  But this seems like a difficult hypothesis to carefully test.  Here is one attempt.  Assemble a dataset of bi-racial families.  We want the race of the father and mother, the sex of the child, and the race of the child’s spouse.  To control for the racial proportions in the population, we compare the probability that a bi-racial male with a white mother marries a white wife to the probabiltity that a bi-racial male with a black mother marries a white wife.  The hypothesis is that the first is larger than the second.

Now, marriage is a two-sided matching market.  This means that we cannot jump to conclusions about the husband’s tastes on the basis of the characteristics of the  wife.  It could be that this husband would prefer a black wife (other attributes equal) but the best match he could find was with a white wife.

For example, an alternative story which would explain the above statistic is that black spouses are generally preferred but having a white father makes you a more attractive match and so bi-racial children with white fathers are more likely to match with their preferred race.  (Any theory would have to explain why there was a difference in the ultimate match between those with white fathers and those with black fathers.)  But the data would enable us to potentially rule this out.  If this alternative story were true then bi-racial daughters with white fathers would also be more likely to marry black husbands than those with black fathers.  That is, girls marrying their mothers rather than their fathers, the opposite of what the original hypothesis would predict.

So if the data showed that boys marry their mothers and girls marry their fathers, we could rule out this particular alternative story.  Of course there will always be some identification problem somewhere, and here the following story would be observationally equivalent:  having a white father makes you a more attractive mate, women like white men, men like black women.  (Allowing men and women to have different racial preferences adds the extra degree of freedom to explain the [hypothetical] data.)

She is packing for a short trip and she bought a book for the plane ride.  Its a historical romance.  She asked me if it was a true story.  I said “You might as well pretend it is, you will enjoy it more.”

Jennie: “What did you say?”

Jeff:  “Yes it is a true story.”

Jennie: “Great, I like to read true stories.”

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