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Stan Reiter had a standard gripe about statistics/econometrics. Imagine you there is a cave in front of you and you want to map out its dimensions. There are many ways you could do it. One thing you could do is go inside and look. Another thing you could do is stand outside and throw into the cave a bunch of super bouncy balls and when they bounce out, take careful note of their speed and trajectory in order to infer what walls they must have bounced off of and where. Stan equated econometrics with the latter.
That’s not what I am going to say but it is a funny story and its the first thought that came to my mind as I began to write this post.
But I do have something, probably even more heretical, to say about econometrics. Suppose I have a hypothesis or a model and I collect some data that is relevant. If I am an applied econometrician what I do is run some tests on the data and report the results of the tests. I tell you with my tests how you should interpret the data.
My tests don’t contain any information in them that isn’t in the raw data. My tests are just a super sophisticated way to summarize the data. If I just showed you the tables it would be too much information. So really, my tests do nothing more than save you the work of doing the tests yourself.
But I pick the tests. You might have picked different tests. And even if you like my tests you might disagree with the conclusion I draw from them. I say “because of these tests you should conclude that H is very likely false.” But that’s a conclusion that follows not just from the data, but also from my prior which you may not share.
What if instead of giving you the raw data and instead of giving you my test results I did something like the following. I give you a piece of software which allows you to enter your prior and then it tells you what, based on the data and your prior, your posterior should be? Note that such a function completely summarizes what is in the data. And it avoids the most common knee-jerk criticism of Bayesian statistics, namely that it depends on an arbitrary choice of prior. You tell me what your prior is, I will tell you (what the data says is) your posterior.
Pause and notice that this function is exactly what applied statistics aims to be, and think about why, in practice, it doesn’t seem to be moving in this direction.
First of all, as simple as it sounds, it would be impossible to compute this function in all practical situations. But still, an approach to statistics based on such an objective, and subject to the technical constraints would look very different than what is done in practice.
A big part of the explanation is that statistics is a rhetorical practice. The goal is not just to convey information but rather to change minds. In an imaginary perfect world there is no distinction between these goals. If I have data that proves H is false I can just distribute that data, everyone will analyze it in their own favorite way, everyone will come to the same conclusion, and that will be enough.
But in the real world that is not enough. I want to state in clear, plain language terms “H is false, read all about it” and have that statement be the one that everyone focuses on. I want to shape the debate around that statement. I don’t want nuances to distract attention away from my conclusion. In the real world, with limited attention spans, imperfect reasoning, imperfect common-knowledge, and just plain old laziness, I can’t get that kind of focus unless I push the data into the background and my preferred intepretation into the foreground.
I am not being cynical. All of that is true even if my interpretation is the right one and the most important one. As a practical matter if I want to maximize the impact of the truth I have to filter it.
Still it’s useful to keep this perspective in mind.
I read the transcript and it is a very eloquent clarification of his views on game theory’s role and even the game theorist’s role. Worth checking out.
“You know an Asian restaurant is good if all Asians go there.”
This was Mallesh Pai last month:
Everyone here has heard about price discrimination. I know something about your willingness to pay (from other data about you or people like you), and use that to charge you a ‘better’ price. This has mostly been restricted by some combination of ethics, vague legal standards and technology to use ‘coarse’ information, e.g. your age (student/ senior discounts), your address (mailed coupons), and so on. As we pointed out a few months back there are cleverer methods on the way. But today, I think I’ve seen the best yet. A company calledKlout (indubitably with the cooler K-based variant of the spelling) looks into your social network and offers a ‘score’ estimating the influence you have. Some geniuses have decided that one’s ‘Klout score’ might be a good way to discriminate on what website you see (and indeed, what free swag you get offered): http://mashable.com/2011/06/22/klout-gate/ .
And this is Spotify this week proving him right.
The Spotify invites are part of the Klout Perks program, which rewards top influencers with special deals based on their interests and comprehensive Klout score rating. People who are rated as influential on Klout get access to the free trial version of the music service. They can also get a free month of Spotify’s premium service if enough people within their community sign up for the music service.
“The Spotify guys actually reached out to us about launching in the U.S. They had been using Klout and thought it was really cool,” said Klout CEO Joe Fernandez. “We talked a lot about how to hit the people in middle America that are also early adopters but don’t read the tech blogs and stuff.”
Experiments concerning the effect of publishing calorie counts on restaurant menus tend to show little effect on choices. In the experiments that I know of, choices before and after publishing calorie counts are compared. But this form of test cannot be considered conclusive. Some people were overestimating the calories and they might cut back, some were underestimating and they might eat more. There is no reason to expect that the aggregate change should be positive or negative.
A better experiment would be to use a restaurant where calorie counts are already published and manipulate them. Will people change their choices when you add 5% to the reported calories? 10%? What is the elasticity? It’s a safe guess that there would be little response for small changes and a large response for very large changes. Any response at all would prove that their is value is publishing calorie counts because it would prove that this information is useful for choices.
The only question that would remain is how those welfare gains measure up against the cost of collecting and publicizing the information.
Courtney Conklin Knapp, the bloggers’ muse, offers up this link on The Eternal Shame of Your First Online Handle. It reminds me of my personal favorite storage space for unwanted reputations: USENET. USENET was the earliest internet social network consisting of mostly-unmoderated discussion groups on just about any topic you can think of.
Did you know that Google has archived all of USENET and provided a search interface through its own Google Groups? Talk about eternal shame. Look around your department for your geekiest 40-something colleague and chances are he has a USENET trail and it may not be pretty.
I’ll leave it up to you to find the dirty laundry, but while we are here, a few notable (and perfectly respectable) USENET trails for your amusement. You can probably guess who posted this to the group rec.sport.soccer in 1997:
I am a professor of economics doing a study of penalty kicks in soccer. Does anyone know where I might find data on whether a kicker goes to the right or the left on a penalty kick, or whether the goalie dives right or left?
Any information would be greatly appreciated.
But can you guess who posted this to rec.music.collecting.vinyl in 1996?
Dear Readers:
I am looking for an LP copy of Night by Night, an obscure
issue by Harry Nilsson, or the soundrack to The World’s
Greatest Lover, which he also did, or other Nilsson rarities
(I do have Flash Harry, however).CD copies are fine as well, although I do not think they exist.
Hint: he apparently frequented the groups soc.culture.haiti, rec.music.classical.recordings, and rec.sport.basketball.pro and he also posted this to rec.arts.movies.current-films in 1998.
Of all 1998 American movies, which are some prominent examples of movies with foreign non-American directors? An example of a French director would be especially useful. Any assistance would be most appreciated…I am aware of Peter Weir (an Australian) directing The Truman Show, any other examples?
His full USENET trail is here, but guess before you look!
I implore you not to look at mine, and instead browse the trails of people that really matter like Hal Varian (he was writing a lot about pricing the Internet!), Sergey Brin (he seemed to be having trouble getting DOOM to run on his 486DX), Mark Zuckerberg (not much on his mind apparently) and Austan Goolsbee.
Normally we understand the (near) 50-50 male/female population sex ratio with this simple model: if there were more males than females then individuals who are genetically disposed to have female children will have more grandchildren because their female children will find more mates. Thus females will increase in proportion, restoring the balance.
But here’s the interesting thing. That model doesn’t work for humans (and many other species) and in fact 50-50 is highly unstable, with potentially catastrophic consequences.
Suppose that a male has a mutation on his Y chromosome which causes him to produce Y-chormosome sperm that swim faster than his X-chromosome sperm. Then he will have only boys. And his boys will have the same gene and the same super Y-chromosome sperm.
Now suppose that his male children have an equal chance of mating as all other males in the population. Then our original mutant will have more male grandchildren than other males of his generation. Thus, the proportion of this super-Y gene increases in the population, and this trend continues generation after generation.
The balance is not being restored anymore. In fact eventually the super-Y’s dominate the male population. And that means that all offspring in all matings are boys. That means very little reproduction can happen because there are so few females. And the species goes exctinct.
I learned this from a paper by W. D. Hamilton called Extraordinary Sex Ratios.
Have you heard that saying “Writing about music is like dancing about architecture” ? It always stuck in my mind because for one thing I like the poetry of it, but mainly because it confused me. I think I got the point it was trying to make but I wasn’t sure that it really made that point. Then I figured out my confusion. The best way to explain my confusion is with the following reply.
Dancing about architecture is like fencing around landscaping.
The weather in Chicago sucks but at least there are real seasons (there’s only one in SoCal where I am from.) Here’s a thought about seasons.
Everything gets old after a while. No matter how much you love it at first, after a while you are bored. So you stop doing it. But then after time passes and you haven’t done it for a while it gets some novelty back and you are willing to do it again. So you tend to go through on-off phases with your hobbies and activities.
But some activities can only be fun if enough other people are doing it too. Say going to the park for a pickup soccer game. There’s not going to be a game if nobody is there.
We could start with everyone doing it and that’s fun, but like everything else it starts to get old for some people and they cut back and before long its not much of a pickup game.
Now, unlike your solo hobbies, when the novelty comes back you go out to the field but nobody is there. This happens at random times for each person until we reach a state where everybody is keen for a regular pickup game again but there’s no game. What’s needed is a coordination device to get everyone out on the field again.
Seasons are a coordination device. At the beginning of summer everyone gets out and does that thing that they have been waiting since last year to do. Sure, by the end of the season it gets old but that’s ok summer is over. The beginning of next summer is the coordination device that gets us all out doing it again.
- Canada’s English language test for immigrants.
- Upon reflection, Twisted Sister might be persuaded to take it.
- Mustards inspired by Russian nemesises.
- Food Carts inspired by literature.
- Recreating Dock Ellis’ LSD-fueled Major League no-hitter.
- Sarah Palin’s movie debuts to an empty house in Orange County, California, home of John Wayne Airport.
It is a challenge for evolutionary theory to explain the prevalence of sexually reproducing species. That’s because of the twofold cost of sex: a sexually reproducing species produces half as many offspring per generation as an asexually reproducing population of the same size. So not only must there be some other advantage to sexual reproduction, it has to be large enough to outweigh that substantial cost.
One theory is that the genetic mixing that comes from sex allows a species to shed disadvantageous mutations. An asexual species can only accumulate them. This advantage can be large enough to overcome the twofold cost of sex. But the problem with this theoretical explanation is that in these models the advantage of sex is too large, so large that the kind of sex we see universally among all sexually reproducing species, sex between two parents, is dominated by tri-parental sex. This was shown by Perry, Reny, and Robson who consider a particular kind of menage a trois in which each mating requires two males and one female, and each offspring receives half of its genetic material from the mother and one quarter from each of the fathers.
This avoids a tri-fold cost of sex:
Because the cost of males is determined not by the ratio of males to females in each mating instance but, rather, by the population ratio of males to females, de-termining the population ratio is central. We therefore turn to Fisher’s celebrated equilibrium argument (Fisher, 1930). Applying the same logic to 1/2 – 1/4 – 1/4 sex, we note first that the total reproductive value of all of the males in any generation is precisely equal to that of all of the females in that generation. This is because, un-der 1/2-1/4-1/4 sex, all of the females supply half of the genes of all future generations. But then the remaining half must be supplied by all of the males. Consequently, as Fisher argued, equilibrium requires the offspring sex ratio to equate parental expenditure on male and female offspring. Maintaining the usual assumption that offspring of either sex are equally costly to raise to maturity, we conclude that the equilibrium sex ratio must be one–each male therefore mates with two females and vice versa. But this means that the cost of males is twofold–there is no additional cost of males over biparental sex.
I bring this up because (in an older working paper version) they also considered the leading competing theory for the advantage of sexual reproduction, The Red Queen hypothesis. Here the argument is that species are constantly trying to out-evolve parasites. Genetic mixing makes them a moving target. Perry, Reny, and Robson showed that, unlike the deleterious mutations theory, the Red Queen story rationalizes biparental sex over other forms of sex. Thus, from the point of view of sex as an evolved mechanism for solving some problem, only the Red Queen can explain the kind of sex we see.
And I bring that up because just last week I heard this story about a new experiment that validates the Red Queen hypothesis.
On Tuesday, in the sixth round of the MLB Draft, the San Diego Padres selectedoutfielder Kyle Gaedele (who the Tampa Bay Rays had previously drafted in the 32nd round of the 2008 draft). Gaedele plays center field and shows good signs of hitting for power, but what most writers, sports fans, and guys named Bradley talk about is Gaedele’s great uncle.
Casual fans probably do not know about Kyle’s great uncle, Eddie Gaedel (who removed the e off his last name for show-business purposes). We nerds can forgive the casual fan for forgetting a player who outdid, in his career, only the great Otto Neu. Gaedel took a single at-bat, walked to first, and then left for a pinch runner.
What makes Eddie Gaedel a unique and important part of baseball history, however, is not his statistics, per se, but his stature. Gaedel stood 3’7″ tall, almost half the height of his great nephew. Gaedel was the first and last little person to play in Major League Baseball, and the time has come for that to change.
In baseball, the strike zone (effectively the target that a pitcher must aim for) is defined relative to the size of the hitter. A very small player has a very small strike zone, so small that many pitchers will have a hard time throwing strikes. Insert such a batter at a key moment, he walks to first base and then you replace him with a fast runner. Why doesn’t every team have such a player on their roster?
Cap Clutch: Vinnie Bergl.
I went out for a run and left some instructions for my daughter.
By the way, running is the suckiest form of exercise there is. The only thing worse than my jog up and down the street is running on a treadmill, if only for the change of scenery. Very slow change of scenery. But I will admit that the boredom involved adds a dimension that you don’t get from actual, useful exercise like playing sports. I can run around on a tennis court for hours but I am embarrassed to tell you that after about a year of regular running I can’t comfortably run more than a mile. There being no assistance whatsoever from competitive spirit or just plain old enjoyment, running is a pure exercise of the will to prolong immediate suffering and boredom in return for some abstract, delayed benefit.
And that mile takes me more than 10 minutes. I think. I am too ashamed to time myself.
But nevertheless not so long as to make me feel uncomfortable leaving my 10 year old at home for the duration (I actually don’t know what the law is, I hope I am not incriminating myself.) And she had an assignment that she needed to finish so I suggested that she work on it while I was out.
Now there were also some other things that needed to be done. And you never know what’s going to happen when she sits down to do her assignement. Does she have all the stuff she needs, is she going to need some help? etc. So ideally I would give her a contingency plan. If for whatever reason you can’t do the assignment, do the other thing in the meantime.
But this is not always a good idea. Just mentioning the contingency turns a clearly defined instruction into one which invites subjective interpretation, and wiggle room at the margin of acceptable contingincies. “You said I should do the other thing so I did.”
Of course there is a tradeoff. First of all, there’s the basic second-best trade-off. Without a plan B, when it turns out to be truly impossible to do plan A, you come home to find her on plan Wii.
But more importantly, she’s gotta learn how to judge the contingencies on her own, eventually. The thing is, rightly or wrongly I think parents instinctively believe that in the early stages of that process kids read a lot, indeed too much, into the items put into the menu of options. There is an excessive distinction between an unmentioned, and hence implicitly disallowed option and one which is mentioned but discouraged.
Unlearning that kind of inference, clearly a necessary step in the long run, can be tricky in the short run.
Heh, short run.
Hume has been locked out of the room and he is not allowed to re-enter in the form of Parfit having a dialogue with Cho and Kreps.
That’s from Tyler’s review of a book called On What Matters Vol. I (a title, which in my opinion can be gainfully edited down to “SW Swell.”)
We never had them when I was a kid. There was “Adult Swim” but that was like a 3 hour block of time on a week night, legitimately so that adults could swim without being terrorized by cannonballs, marco polos, jacknifes, watermelons, palm geysers and the dreaded depth charge.
(There’s another recent development in swimming pool administration. At my community pool whenever anything is even slightly amiss the lifeguard is supposed to give three sharp whistles which in turn alerts the entire crew of 20 or so lifeguards each stationed at her own corner of the pool [yes the pool does have 20 or so corners] to also emit three sharp whistles, repeatedly, while pointing in the direction of the other lifeguard whose whistle it was that alerted them.
That way, in the midst of the cacophony of whistles you can look at any random lifeguard, see where they are pointing, follow the trail of shrieking, pointing lifeguards until you find the root of the tree and then you know where all the trouble is. At least that’s the theory. Meanwhile over the loudpseaker the lifeguard who appears to have been selected for this job on account of having the most panic-stricken-yet-somehow-deeply-caring voice is sooth-screaming “Attention swimmers. Three whistles have been blown, please leave the pool. 7 year old Dennis is missing. He is wearing a red swim suit, a blue mask and snorkel. He is not wearing his plastic pants.”
This is followed every 30 seconds or so by further announcements of additional information that might be useful to us in our search for Dennis, “Attention swimmers [she hasn’t seemed to have noticed that we stopped swimming 5 minutes ago and in fact we are now more appropriately addressed like “Attention patrons who were previously swimming and who are now digging through your beach bags for earplugs”] we are looking for Dennis. Dennis has a My Little Pony beach towel and he was last seen by his 5 year old sister when she was holding him down so his friends could give him a plastic pants wedgie.” Then “Attention swimmers, we are looking for Dennis. Dennis is going through a bed-wetting phase at home.”
Finally Dennis, who of course had just been undergoing repeated Whirlys in the bathroom emerges and the whistles fall silent but the cackling doesn’t.)
But the “Adult Safety Break” has very little to do with adults and nothing at all to do with their safety. Every 90 minutes all children under the age of 16 are required to leave the pool for 15 minutes. In the meantime, adults can swim but since nobody goes to this pool to swim in the literal sense of prostrating and propelling yourself through water with a well-defined origin and destination, what happens instead is that all of the adults leave the pool too and the lifeguards are the ones that get a break.
And that is precisely the rationale. Not the break for the lifeguards, but the temporary evacuation of the pool. Now note that this is a community pool, run by the community association so we have a situation in which the community is voluntarily destroying 15 minutes of pool value. So there must be a good reason.
And the good reason is that admission to the pool is by flat fee with no marginal time-use pricing. This means that the admission fee can be adjusted only to meter the number of people entering the pool but it provides no means to stop them from staying all day long. And indeed while their marginal value declines over time it appears to stay bounded away from zero until either nightfall or lightning strikes, whichever comes first.
The safety break makes us decide whether its worth it to sit through 15 idle minutes before climbing back onto the marginal utility slide. A large number of families by now already on the very flat end of that slide, its no wonder that the safety break culls a significant segment of the pool’s patronage in one fell swoop. It helps that the safety break consolidates all the kids in one place making the exit that much easier.
Bad for them but good for the community at large. Their tiny residual marginal utility is dwarfed by the externality of their presence multiplied by the number of other swimmers in the pool. Absent any way to expose them to their externality through prices, a community-imposed waste of time is the second-best solution.
Unfortunately for Dennis though, giving Whirlys only gets better and better.
Daniel, Diermeier, our Kellogg colleague has a new blog called Reputation Rules. Daniel is a noted researcher and a star teacher at Kellogg. Should be an interesting blog.
Tyler Cowen quotes Richard Dawkins:
Isn’t it plausible that a clever species such as our own might need less pain, precisely because we are capable of intelligently working out what is good for us, and what damaging events we should avoid? Isn’t it plausible that an unintelligent species might need a massive wallop of pain, to drive home a lesson that we can learn with less powerful inducement?
There is an alternative to pain as an incentive mechanism: dispensing with incentives altogether and just programming the organism with instructions to follow. And if the organism doesn’t already have “feelings” as a part of its infrastructure then the instructions are the only alternative. The big question for theories of pain and pleasure as an incentive mechanism is why mother nature as Principal bothers with incentives at all.
Vaughan Bell comes through with a steady-handed (Beavis!!) take-down of Naomi Wolf’s neuro-hyped story about porn and the brain. Wolf wrote:
Since then, a great deal of data on the brain’s reward system has accumulated to explain this rewiring more concretely. We now know that porn delivers rewards to the male brain in the form of a short-term dopamine boost, which, for an hour or two afterwards, lifts men’s mood and makes them feel good in general. The neural circuitry is identical to that for other addictive triggers, such as gambling or cocaine.
And here’s Vaughan:
But the reward is not the dopamine. Dopamine is a neurochemical used for various types of signalling, none of which match the over-simplified version described in the article, that allow us to predict and detect rewards better in the future.
One of its most important functions is reward prediction where midbrain dopamine neurons fire when a big reward is expected even when it doesn’t occur – such as in a near-miss money-loss when gambling – a very unpleasant experience.
But what counts as a reward in Wolf’s dopamine system stereotype? Whatever makes the dopamine system fire. This is a hugely circular explanation and it doesn’t account for the huge variation in what we find rewarding and what turns us on.
This is especially important in sex because people are turned on by different things. Blondes, brunettes, men, women, transsexuals, feet, being spanked by women dressed as nuns (that list is just off the top of my head you understand).
It doesn’t take much to win a tennis match no matter how strong your opponent is. It’s enough to win just one point, the last one.
There is an analogous saying about economics research, I heard it originally attributed to Roger Myerson. The paper is finished as soon as you have the right notation. This is exactly right because economic theory is about crafting the model and assumptions to highlight just the point you are trying to convey, nothing more nothing less. There is a continual back and forth between formulating assumptions, proving results, changing the setup, checking how the results are affected, etc. until you have it just exactly perfect (Don’t get cynical now.) How the notation is chosen, i.e. which concepts in the model get their own basic symbol and which concepts are expressed as derivatives, is a key linchpin. By grouping the right concepts with well-chosen notation you can turn an opaque argument into one that transparently lets the main idea through, i.e. just exactly perfect.
Here is the report from Eran Shmaya, with a digression that begins with humus:
And speaking of food, the humus you get in the cafeteria near the law school is an offense to all taste and decency, though non-Israelis still enjoyed it (no surprise, it’s still better than of what you get in the states under `humus’). If you go to Jerusalem, Lina (just near the via dolorosa, where Jesus of Nazareth has walked twenty centuries ago) was pretty good. The best of the best is Ali Karawan in Jaffa, but I didn’t get to go there this time. And speaking of Jaffa, Rann Smorodinsky got our everlasting admiration for suggesting Haj Kahil for dinner. And btw, Rann didn’t invent Kalai-Smorodinsky bargaining solution when he was six, as somebody suggested to me. That Smorodinsky is the father.
Via Marginal Revolution, an essay exploring the psychology of watching a sporting event after the fact on your DVR. Is it less enjoyable than watching the same game live when it happens? I love this question and I love the answers he gives. Strangely though, he divides his reasons into the “rational” and the “irrational” and with only one exception I would give the opposite classification. Here are his rational ones:
- Removing commercials reduces drama. I suppose he calls this rational because he thinks that its true and perfectly sensible. The unavoidable delay before action resumes builds suspense. But even though I agree with that, I call this an irrational reason because of course I can always watch the commercials or just sit around for 2 minutes if I’d rather not see yet another Jacob’s Creek wine commercial. If in fact I don’t do that, then that’s irrational.
- If you know it has already happened then it is less interesting. Again, this may be true for many people, but to make it into the rational category it has to be squared with the fact that we watch movies, TV dramas, even reality TV shows whose outcomes we know are already determined.
- Recording gives me too much control. Same as #1.
Now for the irrational ones:
- I don’t get to believe that my personal involvement will affect the game. This one I agree with. Many people are under this illusion and it would be hard to call it rational for someone to think they are any less in control when the event is already over.
- If this were a really exciting game I would have found out about it independently by now no matter how hard I tried to avoid it. I would call this the one truly rational reason and I think its a big problem for most major sports. If something really exciting happened that information is going to find you one way or another. So if you are sitting down to watch a taped event and the information didn’t find you, then you know it can only be so good. Even worse, if the game reaches a state where it would take a dramatic comeback to change the outcome, you know that comeback isn’t going to happen.
I would add two of my own, one rational and one irrational. First, you don’t watch a DVR’d sporting event with friends. The whole point of recording it is to pick the optimal time to watch it and that’s not going to be your friend’s optimal time. Plus he probably already saw it, plus who is going to control the fast-forward? Watching with friends adds a dimension to just about anything, especially sports so DVR’d events are going to be less interesting just for the lack of social dimension having nothing to do with the tape delay.
Second, there is something very strange about hoping for something to happen when in fact it has either already happened or already not. Now, this is irrelevant for people who easily suspend disbelief watching movies. Those people can yell at the fictitious characters on the screen and feel elation and despair when their pre-destined fate is played out. But people who can’t find the same suspense in fiction look to sports for the source of it. For those people too many existential questions get in the way of enjoying a tape-delayed broadcast.
A great guest blogger. We should do more of these.
A mother I know was looking into a week of golf camp for her son. She was quoted a price and it sounded reasonable to her but the fact is she doesn’t really know what a reasonable price is for golf camp. Think about your own experience in a situation like this. Somehow, whether this is rational or not, the price itself tells you what a reasonable price is. Once you hear the price you are anchored to it. For sure anything more than that would be unreasonable.
Now back to the mother who is the subject of this story. Having been quoted a reasonable price she is inclined to go for it. But first, she has some further inquiries. What happens if it rains? Will there be a refund for that day?
There is some checking with higher ups and a return phone call with the answer in the negative. Camp is rain or shine. In the event of rain the children will play board games in the clubhouse.
Now the pro-rated daily fee is, by basic arithmetic, a reasonable price for a day of golf camp but not a reasonable price to pay for day care. Thus, given the non-negligible probability of rain, the value of golf camp has just dropped by a non-negligible amount. And indeed this price which was a reasonable price for 5 days of golf camp is not reasonable for an expected 4.25 days of golf camp.
No golf camp for junior.
Here is the lesson for optimal pricing policies. A fully informed, risk-neutral expected utility maximizer sees two equivalent ways of pricing golf camp. Way #1: Price is fixed and set at the value of the expected number of non-rain days. Way #2: A higher price but with refunds on rain days.
But given the inherent reference-dependence that comes from the natural tendency to interpret any price as just on the threshold of reasonable, Way #2 is clearly superior. This has many implications. Think shipping costs, all-inclusive holidays, etc.
You receive a notice in the mail reminding you that your subscription to Food and Wine Magazine is about to expire. Don’t miss out on everything you have come to love about Food and Wine Magazine, renew today!
I received one of these last week. Thing is, I don’t subscribe to Food and Wine Magazine and I never have. Still, for the briefest moments I think I did start to worry that I would miss out on everything I love about it.
In the end, I didn’t “renew” but I would bet that lots of people do.
He is expecting regular raises. Not every month, maybe not even every year but he expects a raise and he has his own timetable for when you should give it to him. No matter how hard you try to keep to a fair schedule of raises, uncertainty about his expectations together with other random factors mean that at some point you are going to fall behind.
As time passes and no raise he is going to start slacking off. Maybe just a little bit at first but it’s going to be noticeable. Now from your perspective it just looks like he is not working as hard as when you first hired him. You tell yourself stories about how gardeners start out by working hard to get your business and then slack off over time. You might even consider that maybe he is slacking off because you aren’t giving him a raise but what are you going to do now? You can’t possibly give him a raise and reward him for slacking off. If anything your raise is going to come even later now.
And so he slacks off even more. In fact he has been through this before so the very first slack-off was a big drop because he knew it was the beginning of the end. He’s gonna be fired pretty soon.
You remember that game where you ask your friends which of two unbearable acts they would rather endure? The more incomparably unspeakable the acts the more torturous it is to decide. The game gets its irresistable charm from the way it tests our ability to decide beween alternatives we would never admit to being able to tolerate.
But that ability is the essence of compromise. You have your preferred policy but policy-making requires negotiation and your preferred policy just isn’t in the feasible set. You’ve got to take stock of all the worst-best policies that your negotiating partners would agree to and decide which one is the least worst.
Admitting which one you would settle for is psychologically and strategically hard. Because rhetorically it amounts to approval. Your constituents will ask you how you possibly could have proposed that. In the future your approval will tend to cement this compromise into place. Bargaining frequently reaches impasse just because people have not had enough practice ranking alternatives that are far below their favorites.
That’s what I was thinking about when Courtney Conklin Knapp (guest-blogging this week for Megan Mcardle) wrote about the new death-images to be printed on cigarette packs. The images are revolting. It seems wrong in some basic way to be forcing people to look at those. But in practice we are faced with two choices.
Suppose you had a choice between only two policies: A) grotesque pictures or B) increased per-pack taxes calculated to generate exactly the same reduction in demand. Which do you prefer?
I think I favor the pictures. But look at the 220 comments to Courtney’s post where she asked her readers to choose. They are the roots of gridlock text-onified. Almost nobody actually answers the question. Its like when your friend forgets the rules of the game. You have to pick one.
Cheap Talk has reached 1,000,000 views. Odds are the 1,000,000th guy was learning about how to open a bag of charcoal and is right now engulfed in flames. Thanks 1 millionth-CheapTalk-fireball-dude!
I spent the weekend in bed with the flu. Sunday morning, on the tail end of it, I popped a few Advil to bring the fever down so I could semi-enjoy Father’s Day. Was I making a mistake?
As I understand it, my body elevates its temperature as a defense mechanism. Evolution has been operating long enough to have a pretty well-calibrated trade-off between the losses of reduced activity from the fever versus the speed and probability of a successful recovery. Is my intervention distorting away from the optimum?
- Arguably I have private information about idiosyncratic conditions and Nature is calibrated only to the average state. Note that while this hypothesis justifies my use of Advil on Father’s Day, it also implies that I should go short on Advil on other days.
- And anyway Nature has given me the infrastructure to condition physiology on my knowledge of immediate environmental conditions. For example when I know that I am in danger, the body re-allocates resources to help me escape. What makes this any different?
- My objective is probably different. In Mother Nature’s eyes I am just a vessel from which offspring should spring forth. She could care less whether I get to practice Pink Floyd’s San Tropez on the piano with my daughters. So Nature’s revealed preference for activity is necessarily weaker than mine.
- But wait, my personal preference for non-reproductive activity is also something that Nature shaped. So what would explain the wedge?
- If I am making the wrong decision by taking Advil it’s not because I have the wrong preferences but because Advil is something Nature never expected. She has me well-trained when it comes to the fundamentals but she hasn’t had time to design my direct preference for the intermediate good Advil. She must leave it up to me to do the calculation of its implied tradeoffs in terms of the fundamentals. It’s only because of my miscalculation that I am making a mistake.
Last week Sandeep and I were at the Cowles Summer Microeconomic Theory Conference at Yale, a fantastic conference with many great papers and an All-Star roster of pure attendees. Tomasz Strzalecki presented a provocative new paper on limited attention and asset price volatility (joint with Faruk Gul and Wolfgang Pesendorfer), Olivier Gossner showed us how Fudenberg and Levine’s famous reputation papers should have been written, and Lones Smith presented his paper with Elena Quercioli on The Economics of Counterfeit Money. When pressed with a technical question from the audience he deployed a line that I will certainly be using myself in the future under similar circumstances:
It sounds like you are talking about some subtle math, but I’m just trying to pretend I’m in the 5th grade.
We liked his paper so much we thought about blogging it but then decided to do it one better and ask Lones himself to write about it in a guest post. And he agreed.
Of course, while he is at it we might as well hear what else he has on his mind so we’re going to have him sit in here at Cheap Talk for the week. And if you know Lones, then you know that anything can happen, so it’s going to be fun.
Cheap Talk 
