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Here’s a pretty simple point but one that seems to be getting lost in the “discussion.”
Insurance is plagued by an incentive problem. In an ideal insurance contract the insuree receives, in the event of a loss or unanticipated expense, a payment that equals the full value of that loss. This smooths out risk and improves welfare. The problem is that by eliminating risk the contract also removes the incentive to take actions that would reduce that risk. This lowers welfare.
In order to combat this problem the contracts that are actually offered are second-best: they eliminate some risk but not all. The insured is left exposed to just enough risk so that he has a private incentive to take actions that reduce it. The incentive problem is solved but at the cost of less-than-full insurance.
But building on this idea, there are often other instruments available that can do even better. For example suppose that you can take prophylactic measures (swish!) that are verifiable to the insurance provider. Then at the margin welfare is improved by a contract which increases insurance coverage and subsidizes the prophylaxis.
That is, you give them condoms. For free. As much as they want.
This is worth your Friday (or your employer’s as the case may be.) Check out Jarrett playing/talking Bach (1:30ish), Manfred Eicher’s take (5:10ish), Keith Jarrett listening to Jack DeJohnette and Gary Peacock playing a piano duet! (7:00ish), KJ’s hippie brother (14:00 ish), small hands (3:45ish on part 2), obligatory squeaking questions (6:15 part 2), Miles Davis (part 3), Koln (halfway part 3), Chick Corea (end of part 3-part 4), playing soprano sax (middle part 4), American quartet (end part 4), European quartet (part 5), chronic fatigue (part 6).
Thanks to Tobias Schmidt for the link.
Not even your thought experiments are safe.
Saul Kripke resigned yesterday from his position as Distinguished Professor of Philosophy at the CUNY Graduate Center. While similar allegations have been circulating in unpublished form for years, a team of philosophers from Oxford University has just released a damning report claiming that they were systematically unable to reproduce the results of thought experiments reported by Kripke in his groundbreaking Naming and Necessity.
(…) The report, forthcoming in Philosophical Studies, claims that 74% of the book’s thought-experimental results could not be reproduced using the standard philosophical criteria for inter-researcher agreement. A second version of the analysis, employing a generous application of the principle of charity, still left 52% of the results unverified.
That’s from fauxphilnews. Skullcap skip: Marciano Siniscalchi.
As the director of recruiting for your department you sometimes have to consider Affirmative Action motives. Indeed you are sympathetic to Affirmative Action yourself and even on your own your recruiting policy would internalize those motives. But in fact your institution has a policy. You perceive clear external incentives coming from that policy.
Now this creates a dilemma. For any activity like this there is some socially optimal level and it combines your own private motivations with any additional external interests. But the dilemma for you is how these should be combined. One possibility is that the public motive and your own private interest stem from completely independent reasons. Then you should just “add together” the weight of the external incentives you feel plus those of your own. But it could be that what motivates your Dean to institutionalize affirmative action is exactly what motivates you. In this case he has just codified the incentives you would be responding to anyway, and rather than adding to them, his external incentives should perfectly crowd out your own.
There is no way of knowing which of these cases, or where in between, the true moral calculation is. That is a real dilemma, but I want to think of it as a metaphor for the dilemma you face in trying to sort out the competing voices in your own private moral decisions.
Say you have a close friend and you have an opportunity to do something nice for them, say buy them a birthday gift. You think about how nice your friend has been to you and decide that you should be especially nice back. But compared to what? Absent that deliberative calculation you would have chosen the default level of generosity. So what your deliberation has led you to decide is that you should be more generous than the default.
But how do you know? What exactly determined the default? One possibility is that the default represents your cumulative wisdom about how nice you should be to other people in general. Then your reflection on this particular friend’s particular generosity should increment the default by a lot. But surely that’s not the relevant default. He’s your friend, he’s not just an arbitrary person (you would even be considering giving a gift to an arbitrary person.) No doubt your instinctive inclination to be generous to your friend already encodes a lot of the collected memory and past reflection that also went into your most recent conscious deliberation. And as long as there is any duplication, there should be crowding out. So you optimally moderate the enthusiasm that arises from your conscious calculation.
But how much? That is a dilemma.
(Based on a conversation with Nageeb Ali)
When you are selecting seats on a flight and you have an open row should you take the middle seat or the aisle? Even if you prefer the aisle seat you are tempted to take the middle seat as a strategic move. People who check in after you will try to find a seat with nobody next to them and if you take the middle seat they will choose a different row. The risk however is that if the flight is full you are still going to have someone sitting next to you and you will be stuck in the middle seat.
Let’s analyze a simple case to see the tradeoffs. Suppose that when you are checking in there are two empty rows and the rest of the plane is full. Let’s see what happens when you take the middle seat. The next guy who comes is going to pick a seat in the other row. Your worst fear is that he takes the middle seat just like you did. Then the next guy who comes along is going to sit next to one of you and the odds are 50-50 its going to be you. Had you chosen the aisle seat the next guy would take the window seat in your row.
If instead the guy right after you takes a window seat in the other row then your strategy just might pay off. Because the third guy will also go to the other row, in the aisle seat. If nobody else checks in you have won the jackpot. A whole row to yourself.
But this is pretty much the only case in which middle outperforms aisle. And even in this case the advantage is not so large. In the same scenario, had you taken the aisle seat, the third guy would be indifferent between the two rows and you’d still have a 50-50 chance of a row to yourself. Even when he takes your row he’s going to take the window seat and you would still have an empty seat next to you.
Worse, as long as one more person comes you are going to regret taking the middle seat. Because the other row has only a middle seat left. The fourth guy to come is going to prefer the window or aisle seat in your row. Had you been sitting in the aisle seat the first four passengers would go aisle, aisle, window, window and you would be safe.
Wealthy kids are usually wealthy because their wealthy parents left them a lot of money. You might think that’s because parents are altruistic towards their kids. Indeed every dollar bequeathed is a dollar less of consumption for the parent. But think about this: if parents are so generous towards their kids why do they wait until they die to give them all that money? For a truly altruistic parent, the sooner the gift, the better. By definition, a parent never lives to see the warm glow of an inheritance.
A better theory of bequests is that they incentivize the children to call, visit, and take care of the parents in their old age. An inheritance is a carrot that awaits a child who is good to the parent until the very end. That’s the theory of strategic bequests in Bernheim, Shleiffer and Summers.
But even with that motivation you have to ask why bequests are the best way to motivate kids. Why not just pay them a piece rate? Every time they come to visit they get a check. If the parent is even slightly altruistic this is a better system since the rewards come sooner.
To round out the theory of strategic bequests we need to bring in the compound value of lump-sum incentives. Suppose you are nearing the bitter end and its likely you are not going to live more than another year. You want your kids to visit you once a month in your last year and that’s going to cost you 12*c where c is your kid’s opportunity cost per weekly visit. You could either implement this by piece-rate, paying them c every time they come, or in a lump sum by leaving them 12c in your will if they keep it up the whole time.
But now what happens if, as luck would have it, you actually survive for another year? With the piece rate you are out 12c and still have to cough up another 12c if you want to see your kids again before you die. But a bequest can be re-used. You just restart the incentives, and you get another year’s worth of visits at zero additional cost.
Is it credible? All you need is to commit to a policy that depends only on their devotion in the last year of your life. Since you are old your kids know you can’t remember what happened earlier than that anyway so yes, it’s perfectly credible.
(Idea suggested by Mike Whinston.)
Not 100% sure this is real. Here’s his blurb for Miss Timmins School for Girls by Nayana Currimbhoy:
“Beautifully written, atmospheric…contains entire worlds. I couldn’t put it down.”
—Gary Shteyngart
And Flatscreen by Adam Wilson:
“OMFG, I nearly up and died from laughter when I read Flatscreen. This is the novel that every young turk will be reading on their way to a job they hate and are in fact too smart for.”
—Gary Shteyngart
He even blurbs his own blurb:
“Gary Shteyngart’s blurbs are touching, funny, and true. This is a blurber to watch”
Here’s some blurb-related research I’d like to see. There is a widespread suspicion that editors write the blurbs and the blurber just agrees to sign his name to it. It would be great to use text-pattern-recognition software to group blurbs according to apparent authorship and check whether this is really true.
Here is the abstract of a paper by Christian Roessler and Sandro Shelegia:
In Rome, if you start digging, chances are you’ll find things. We consider a famous complaint that justifies the underdeveloped Roman metro system: “if we tried to build a new metro line, it would probably be stopped by archeological finds that are too valuable to destroy, so we would have wasted the money.” Although this statement appears to be self-contradictory, we show that it can be rationalized in a voting model with diverse constituents. Even when there is a majority preference for a metro line, and discovery of an antiquity has the character of a positive option, a majority may oppose construction. We give sufficient conditions for this inefficiency to occur. One might think it arises from the inability to commit to finishing the metro (no matter what is discovered in the process). We show, however, that the inefficient choice is made in voting over immediate actions precisely when there is no Condorcet winner in voting over contingent plans with commitment. Hence, surprisingly, commitment cannot really solve the problem.
The problem is how to build a majority coalition in favor of digging. There’s no problem when the probability of an antiquity is low because then everyone who favors the Metro but not the antiquity will be on board. When the probability of an antiquity is high there is again no problem but now because you have the support of those who are hoping to find one. Rome’s problem is that the probability of an antiquity is neither low enough nor high enough.
I think this says something about flyouts in Junior Recruiting, and in turn it says something about how candidates should market themselves.
A question raised over dinner last week. A group of N diners are dining out and the bill is $100. In scenario A, they are splitting the check N ways, with each paying by credit card and separately entering a gratuity for their share of the check. In scenario B, one of them is paying the whole check.
In which case do you think the total gratuity will be larger? Some thoughts:
- Because of selection bias, it’s not enough to cite folk wisdom that tables who split the check tip less (as a percentage): At tables where one person pays the whole check that person is probably the one with the deepest pockets. So field data would be comparing the max versus the average. The right thought experiment is to randomly assign the check.
- Scenario B can actually be divided into two subcases. In Scenario B1, you have a single diner who pays the check (and decides the tip) but collects cash from everyone else. In Scenario B2 the server divides the bill into N separate checks and hands them to each diner separately. We can dispense with B1 because the guy paying the bill internalizes only 1/Nth of the cost of the tip so he will clearly tip more than he would in Scenario A. So we are really interested in B2.
- One force favoring larger tips in B2 is the shame of being the lowest tipper at the table. In both A and B2 a tipper is worried about shame in the eyes of the server but in B2 there are two additional sources. First, beyond being a low tipper relative to the overall population, having the server know that you are the lowest tipper among your peers is even more shameful. But even more important is shame in the eyes of your friends. You are going to have to face them tomorrow and the next day.
- On the other hand, B2 introduces a free-rider effect which has an ambiguous impact on the total tip. The misers are likely to be even more miserly (and feel even less guilty about it) when they know that others are tipping generously. On the other hand, as long as it is known that there are misers at the table, the generous tippers will react to this by being even more generous to compensate. The total effect is an increase in the empirical variance of tips, with ambiguous implications for the total.
- However I think the most important effect is a scale effect. People measure how generous they are by the percentage tip they typically leave. But the cost of being a generous tipper is the absolute level of the tip not the percentage. When the bill is large its more costly to leave a generous tip in terms of percentage. So the optimal way to maintain your self-image is to tip a large percentage when the bill is small and a smaller percentage when the bill is large. This means that tips will be larger in scenario B2.
- One thing I haven’t sorted out is what to infer from common restaurant policy of adding a gratuity for large parties. On the one hand you could say that it is evidence of the scale effect in 5. The restaurant knows that a large party means a large check and hence lower tip percentage. However it could also be that the restaurant knows that large parties are more likely to be splitting the check and then the policy would reveal that the restaurant believes that B2 has lower tips. Does anybody know if restaurants continue to add a default gratuity when the large party asks to have the check split?
- The right dataset you want to test this is the following. You want to track customers who sometimes eat alone and sometimes eat with larger groups. You want to compare the tip they leave when they eat alone to the tip they leave when part of a group. The hypothesis implied by 3 and 5 is that their tips will be increasing order in these three cases: they are paying for the whole group, they are eating alone, they are splitting the check.
(Thanks to those who commented on G+)
- (Mathematics) Not very good. He spends a good deal of time apparently in investigations in advanced mathematics to the neglect of his elementary work. A sound ground work is essential in any subject. His work is dirty.
- (Greek) He seems to find the subject a very hard one & most of his work has been very poor in quality. I think he tries.
- (Latin) His Latin work is for the most part careless & slovenly: he can do much better when he tries.
- (“House report”) No doubt he is a strange mixture: trying to build a roof before he has laid the foundations. Having secured one privileged exemption, he is mistaken in acting as if idleness and indifference will procure further release from uncongenial subjects.
The pointer came from Josh Gans on Google+
It can land you in jail.
Despite growing up nowhere near an ocean, Rex Flodstrom fell in love with surfing at an early age on trips to the West Coast. It’s a spiritual experience, pushing the Chicagoan to brave even the punishing snow and ice on Lake Michigan for the thrill of a winter wave.
But a chilly ride last month landed Flodstrom, 40, in trouble with police. He was arrested Jan. 17 near Oak Street Beach on misdemeanor ordinance violations of surfing more than 50 yards from shore, unlawful presence on a closed beach and jeopardizing the safety of others on the beach.
I lived in view of Lake Michigan for 4 years and I never once saw a surfable wave. And if the hilarious video at the link is any indication, neither has Rex, bless his frozen heart.
Here’s a card game: You lay out the A,2,3 of Spades, Diamonds, Clubs in random order on the table face up. So that’s 9 cards in total. There are two players and they take turns picking up cards from the table, one at a time. The winner is the first to collect a triplet where a triplet is any one of the following sets of three:
- Three cards of the same suit
- Three cards of the same value
- Ace of Spaces, 2 of Diamonds, 3 of Clubs
- Ace of Clubs, 2 of Diamonds, 3 of Spades
Got it? Ok, this game can be solved and the solution is that with best play the result is a draw, neither player can collect a triplet. See if you can figure out why. (Drew Fudenberg got it almost immediately [spoiler.]) Answer and more discussion are after the jump.
It’s the canonical example of reference-dependent happiness. Someone from the Midwest imagines how much happier he would be in California but when he finally has the chance to move there he finds that he is just as miserable as he was before.
But can it be explained by a simple selection effect? Suppose that everyone who lives in the Midwest gets a noisy but unbiased signal of how happy they would be in California. Some overestimate how happy they would be and some underestimate it. Then they get random opportunities to move. Who is going to take that opportunity? Those who overestimate how happy they will be. And so when they arrive they are disappointed.
It also explains why people who are forced to leave California, say for job-related reasons, are pleasantly surprised at how happy they can be in the Midwest. Since they hadn’t moved voluntarily already, its likely that they underestimated how happy they would be.
These must be special cases of this paper by Eric van den Steen, and its similar to the logic behind Lazear’s theory behind the Peter Principle. (For the latter link I thank Adriana Lleras-Muney.)
He was just promoted to Full Professor. It’s about time!
Here for your amusement is a collection of Facebook postings by people who don’t seem to understand that The Onion is fake news. Now, remember that The Onion is satire. And a piece of satire works best when it bears some resemblance to the object of satire. If a story in The Onion were not believed to be true by anybody then that would be a clear indication that it was poor satire. In other words, the credibility of a story in The Onion is optimally chosen so that inevitably a minimal fraction of people will believe it.
So it should not be amusing that some people fall for stories in The Onion, anymore than it is amusing that the Sun rises on Wednesdays. What would be amusing is finding out exactly who it is that lives in that tail of the gullibility distribution. However the web site is anonymized. So to me what is amusing about all of this is discovering how many exactly which people find this site amusing.
Models of costly voting give rise to strategic turnout: in a district in which party A has a big advantage, supporters of party A will have low turnout in equilibrium in order to make the election close. That’s because only when the election is close will voters have an incentive to turnout and vote, which is costly.
Looking at elections data it is hard to identify strategic turnout. Low turnout is perfectly consistent with non-strategic voters who just have high costs of voting.
Redistricting offers an interesting source of variation that could help. Suppose that a state has just undergone redistricting and a town has been moved from a district with a large majority for one party into a more competitive district. Non-strategic voters in that town will not change their behavior.
But strategic voters will have different incentives in the new district. In particular we should see an increase in turnout among voters in the town that is new to the district. And this increase in turnout should be larger than any change in turnout observed for voters who remained in the district before and after redistricting.
There are probably a slew of testable implications that could be derived from models of strategic turnout based on whether the new district is more or less competitive than the old one, whether the stronger party is the same or different from the stronger party in the old district, and whether the town leans toward or against the stronger party in the new district.
Consider a Man and a Woman. Time flows continuously and the horizon is infinite. At time 
where 
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 
In this game, the lovers have common interests. Each wants to kiss if and only if their love is true, i.e. 
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 
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
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
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 
so that their convergence occurs smoothly but still in finite time.
Happy Anniversary Jennie
(drawing: Chemistry from www.f1me.net)
(It used to be 4 and 5.)
A student in her 5th year who doesn’t have a stellar job market paper is always tempted to stay another year and try to produce something better. This is the ex post incentive of an individual student.
But ex ante the department as a whole would like to enforce a commitment for all students to go on the market in 5, even those whose job market paper at that stage leaves something to be desired. The basic reason is risk aversion. Every year they spend in grad school they produce another signal for the market. Good signals improve their prospects but bad signals make them worse. They would avoid the additional risk by committing to stay only 5 years rather than 6.
Now consider a student whose job market paper in year 5 leaves something to be desired. If she stays another year and produces a good paper, then although she is better off, she raises the bar for her colleagues and thereby strengthens their incentives to stay another year. A department policy that strongly incentivizes students to finish in 5 is needed to prevent the implied unraveling.
But that’s MIT. Then there’s everybody else. Students in other departments have to compete with MIT students for top jobs. At a department like Yale, only the best students will be able to compete for top jobs and this makes them risk loving not risk averse. Instead of wanting to minimize signals, the best Yale students want to produce enough signals in hopes that at least one of them is good enough to give them a shot at a top department job.
So one should expect funding, TAships, and face time with advisors to drop after 5 years at MIT but continue into the 6th year at Yale. (Note: I have no data on this.)
To provide some interpretation, consider a set of equidistant urinals in a washroom and men who enter the room sequentially. Men dislike to choose a urinal next to another urinal which is already in use. If no urinal providing at least basic privacy is available, each man prefers to leave the room immediately. Each man prefers larger distances to the next man compared to smaller distances. The men enter the bathroom one by one in rapid succession, so men will only consider the privacy they have after no further men decides to use a urinal (e.g., the privacy the first man enjoys before the second man enters is too short to influence the first man’s utility).
One of the paper’s main results is that maximizing throughput (Beavis!) of a washroom may, paradoxically, entail restricting total capacity. Consider a wall lined with 5 urinals. The subgame perfect equilibrium has the first gentleman take urinal 2 and the second caballero take urinal 5. These strategies are pre-emptive moves that induce subsequent monsieurs to opt for a stall instead out of privacy concerns. Thus urinals 1, 3, and 4 go unused. If instead urinals 2 and 4 are replaced with decorative foliage, and assuming that gentleman #1 is above relieving himself into same, then the new subgame perfect equilibrium has him taking urinal 1, and urinals 3 and 5 hosting the subsequently arriving blokes. See the example on page 11.
Free cowboy hat tip: Josh Gans
“Improvisational theater” always means comedy. There doesn’t seem to exist any improvisational tragedy/drama. Why? I don’t think its because improvised drama would not be as interesting or entertaining as improvised comedy.
- Its just selection. People become comedians because they are funny in real life. To be funny in real life you have to know how to create humor out of the random events that happen around you. People become dramatic actors if they are good at understanding and reflecting dramatic themes in text.
- Its just training. Improvisation is what you practice if you want to do comedy. Its not a useful skill for dramatic actors (absent an already existing market for improvising tragedians.)
- Improvisation is by its nature funny. Seeing something you don’t expect is usually going to be funny even if it is nominally tragic. Like slipping on a banana peel. So improvised tragedy is just a contradiction in terms.
- To make drama work the players must have a high degree of coordination in terms of the development of the story and that is too hard to achieve through improvisation. By contrast, absurd plotlines add to the comedic effect of improvisation.
- Improvised drama would indeed be no worse than improvised comedy but that’s not the relevant comparison. It would be much worse than scripted drama. In other words drama has a larger range of quality than comedy and to hit the highs you need a script.
- Improvisation inevitably breaks the fourth wall. The audience is wondering “can they do it?” and the actors are self-consciously playing on that tension. Breaking the fourth wall tends to heighten comedy but cheapen drama.
(Plundered from a conversation I had with Chris Romeo.)
Let’s join Harvard Sports Analysis for the post-mortem:
But no one knew that his score would decide the game. Before he ran the ball in, the Giants had 0.94 win probability (per Advanced NFL Stats). After the play, the Giants’ win probability dropped to 0.85. Had he instead taken a Brian Westbrook or Maurice Jones-Drew-esque knee on the goal line, the Giants would have had a 0.96 win probability. Assuming the Patriots used their final time out, the Giants would have had 3rd and Goal from the 1-yard line with around 1:04 left to play. At this point, the Giants could either attempt to score a touchdown or take a knee. Assuming the touchdown try was unsuccessful or that Eli Manning kneeled, the Giants could have let the clock run all the way down to 0:25 before using the Giants’ final time out. With 4th and Goal from the 2 with 25 seconds left to play, the Giants would have a 0.92 win probability, 0.07 higher than after Bradshaw scored the touchdown of his life.
I am not sure about all this though. Shouldn’t Bradshaw have just stood there on the 1 (far away enough that he can’t be pushed in) and then cross over at the last second?
Candidates S and R are competing in the opposing party’s primary, and your candidate awaits the winner in the general election. Your candidate beats S in the general election with probability s and beats R in the general election with probability r<s. You would like S to win the primary since s>r. But S is currently the underdog, he beats R in the primary with only probability p. Should you spend money to help S?
Every percentage point you can add to S’s chance of winning the primary increases your candidate’s odds in the general election by s-r < 1.
(you win the general election with total probability ps + (1-p) r. an increase in p by one unit increases this probability by s-r.)
If you save your money for the general election, every percentage point you add to your own chance of winning raises your own chance of winning by, well, 1 percentage point.
- The same analysis goes through with any number of candidates in the primary. So you can add G and P and it won’t change anything.
- This is about the marginal value of influencing a 1 percent change in the election probabilities. That value is larger in the general election. But there may be differences in the marginal cost of influencing a primary versus the general.
- In particular, if the primary is a three-candidate race there may be a lumpy return on your investment. For example, if you increase s by a little bit that could cause G to drop out of the race and then hope that a big chunk of his probability of winning goes into increasing p.
- However, with G currently at about 3% probability at Intrade, at most you can get 3 times s-r. For this to outweigh the 1 you get from the general it must be that s-r > 33%
He seems to have mixed feelings:
There are three lanes, with the left two lanes narrowing into one. A slight bit further ahead, the traffic from Gallows Road merges into the right lane, map here.
Many people from the far left lane merge “unethically,” driving ahead as far as they can, and then asking to be let in at the near-front of the queue. The traffic from Gallows Road, coming on the right, merges ethically, as it is a simple feed of two lanes nto one. They have no choice as to when the merge is, although de facto the construction of the intersection puts many of them ahead of the Rt.50 drivers.
The left lane merge is slightly quicker than the right lane merge, in part because not everyone is an unethical merger. Yet it is more irksome to drive in the left lane, because you feel, correctly, that people are taking advantage of you (unless you are an unethical merger yourself, which I am not).
In recent times, I have switched my choice to the right lane.
Scott Ogawa has the floor:
Consider [a] heterogeneous group of people who have different internal temperatures. In the Summer, people who are really hot complain a lot to the building manager, since building is [the] only source of cool. People who are really cold do not complain so much since there is always the “outside option” (literally) as relief. Things switch in the Winter. A complaint-minimizing building manager will jack the heat up in the Winter, and the A/C in the Summer.I have no data, and it is tough to trust how things “feel” since we are not the best judges of absolute temperature. Nevertheless, I have heard many folks say the temperature inside big buildings always seems negatively correlated with outside temperature, which is extra strange given this costs more than a positive correlation.
Scott’s solution is something like this: since people differ in their hot/cold preferences you want some variation in the temperature inside. Most buildings aim for uniformity. If half of the building is warm and the other half is cool, people will pick their favorite side of the building. Keeping the mean temperature constant but adding a mean-preserving spread raises overall welfare due to sorting.
If you take your placebos on time and never miss a “dose” you are less likely to die.
Here’s the big finding: in the placebo group of 1174 patients, the people who took all of their placebo pills on time (the good adherers), were significantly less likely to die than the patients who missed lots of doses. People who took over 75% as directed were 40% less likely to die than those with less than 75% adherence
Neuroskeptic has the story, and it appears not to be simply because healthy people are also more responsible, they controlled for measures of health.
Cheap Talk is 3 years old today. It feels good. And I am very glad that you are reading.
I try to write three posts per week that are either original ideas or interpretations of research that involves a little original thinking. These usually come Monday-Tuesday-Wednesday in the morning. In the afternoon I post a link or a little thought for fun, nothing heavy. On Thursday I try to revisit a theme, like Thoughts Left Lying Around, or post some reaction to something on another blog. And then on Friday I post the Sordid Links.
When I look back at all of the little ideas I have posted here I am pretty proud. Take a look at the vapor mill tag. There are some real research ideas there, quite a few in fact. It’s amazing to think that without this blog that many ideas would have just gone to waste. (Assuming that blogging them is not a waste.) Makes me think that more people should write blogs.
There have been times when I wondered how long I am going to be able to keep this up. This is not a current events blog, I don’t usually get material from the news, just thoughts that happen at random times and places. Eventually I have to run out of those. But there’s no sign of that yet. I have a pretty safe stock of ideas written down that I flip through at night when I am sitting down to write. I had one just today.
One bummer over the past year is that Google crippled Google Reader and as a result there has been a noticeable sag in the number of rss views. We have over 3,000 subscribers through Google Reader but I think that a lot of people stopped using it after the downgrade. There’s something new called Google Currents for mobile devices. I set up Cheap Talk there but I don’t think many people are using that yet. It’s pretty nice though, you should check it out.
I have three papers now that are based on ideas that would not exist if it were not for the blog. That’s pretty cool.
Naked CDS. Let me define it first. A Credit Default Swap (CDS) is a bet that some debtor, say the government of Argentina, is going to default on their debt. When you buy a CDS you are buying a claim to a payment made in the event that there is a default. When you sell a CDS you are betting that there will be no default and you won’t have to make that payment.
The conventional role of a CDS is an insurance instrument. If you hold Argentinian bonds and are worried about default, you can buy CDS to insure against that risk. (In the event of default you are out one bond but you get compensation in the form of your CDS payout.) Naked CDS refers to an unconventional role: selling a CDS contract to someone who doesn’t actually hold the bond.
There is a very interesting argument that naked CDS can poison the financial well, and I believe it is in this paper by Yeon-Koo Che and Rajiv Sethi. (I haven’t actually read the paper but I discussed it with Ahmad Peivandi and I think I get the gist of it. Fair warning: don’t assume that what follows is an accurate account of the paper, but whether or not it is accurate, it’s an interesting argument.)
Suppose that Argentina needs to issue new bonds in order to roll over its debt. The market for these bonds consists of people who are sufficiently optimistic that Argentina is not going to default. Such people have a demand for bets on the solvency of the Argentinian government. Argentina wants to capitalize on this demand.
In a world without naked CDS the government of Argentina has market power selling bets. You make your bet by purchasing the bonds. Market power enables the Argentinian government to mark up the price of its bonds, selling to the most optimistic buyers, and thus raise more capital for a given issue. This reduces the chance of a default.
A market for naked CDS creates an infinitely elastic, perfectly competitive supply of bets. Someone who is optimistic that there will be no default can now bet their beliefs by selling a naked CDS rather than purchasing bonds. If the Argentinian government tries to exercise its market power, they will prefer to trade competitively priced CDS bets instead. Thus, the market for naked CDS destroys the government’s market power completely. There are welfare effects of this.
- The downside is that the government is less likely to raise enough to roll over its debts and therefore more likely to default.
- But the upside is that people get to make more bets. Without competition from CDS, there are people who are willing to bet at market prices but are excluded due to the exercise of market power. This deadweight loss is eliminated.
But how you evaluate these welfare effects turns on your philosophical stance on the meaning of beliefs. One view is that differences in beliefs reflect differences in information and market prices reflect the aggregated information behind all of the traders’ beliefs. If competition drives the price of bonds down it is because it allows the information behind the pessimists’ beliefs to be incorporated. If you hold this view you are less concerned about 1 because investors who would have bought bonds at marked-up prices must have been at least partially fooled.
Another view is that beliefs are just differences of opinion, more like tastes than information. If the price of beer is low that doesn’t make me like beer any less. If this is your view then you really worry about 1 because those pessimists who drive the price down aren’t any better informed than the optimists. The concern about 1 is a rationale for banning naked CDS. But by the same argument you also care a lot about 2. Every bet between people with different beliefs, people who agree to disagree, is a Pareto improvement.
The bottom line is that arguments against naked CDS based on 1 probably also need to account for 2.
Cheap Talk 