You are currently browsing jeff’s articles.
What happens when you put someone in a dense forest, tell them to walk for an hour in a straight line and track them with GPS? They do this (top left.)
Their walking patterns were similar those of blindfolded walkers (right) and very different from those walking in a desert (bottom.) The results suggest that a good reference point (the sun in the case of the desert) helps. And the lack of a consistent turning direction rules out the hypothesis (believe it or not) that the tendency to walk in circles is due to asymmetrical leg lengths.
Read the article from Not Exactly Rocket Science.
Addendum: I bet that if they were swimming instead of walking you would see consistent circles.
- Performance degrading drugs. Also, how to make love and not war.
- A book on wine to retail for $1 million. (Comes with wine.)
- Inkonomics.
We have all heard about problems of overfishing and how quotas and incentive mechanisms have been effective in slowing the depletion of stocks of endangered fish. But while over-utilization of a common resource can be addressed with such measures, it is trickier to implement schemes that incentivize investment toward actively replenishing depleted fisheries. The problem is that any actor bears all of the investment cost but, given the common pool, enjoys only a small fraction of the benefits.
Enter Giant Robotic Roaming Fish Farms. These are essentially mobile fences in the sea that have the potential of bringing the benefits of coastal fish farming to the open waters solving a number of traditional problems.
Traditional fish farms typically consist of cages submerged in shallow, calm waters near shore, where they are protected from the weather and easily accessible for feeding and maintenance.
But raising fish in such close quarters can contribute to the spread of disease among the animals, and wastes may foul the waters. Cages must be moved to keep the waters clean and the fish healthy.
Deepwater cages offer cleaner, more freely circulating ocean water and natural food, which can yield tastier fish.
Fences create property rights and property rights solve incentive problems. As an illustration, here is a remarkable paper demonstrating the rapid advances in agricultural development in the American plains that coincided with the invention of barbed wire.
Suppose I want to send you an email and be sure that it will not be caught in your spam filter. What signal can I use to prove to you that my message is not spam? It must satisfy (at least) two requirements.
- It should be cheaper/easier for legitimate senders to use than for spammers.
- It should be cheap overall in absolute terms.
The first is necessary if the signal is going to effectively separate the spam from the ham. The second is necessary if the signal is going to be cheap enough for people to actually use it.
It is easy to think of systems that meet the first requirement but very hard to think of one that also satisfies the second. Now researchers at Yahoo! have an intriguing new idea that has received a great deal of attention, CentMail. According to this article, Yahoo! is planning to roll it out soon.
The sender pays a penny to have a trusted server to affix an electronic “stamp” to the message. Given that spammers could not afford to pay even one cent per message given the massive volume of spam, the receiver can safely accept any stamped message without running it through his spam filter.
Now here is the key idea. The penny is paid to charity. How could this matter? Because most people already make sizable donations to charity every year, they can simply route these donations through CentMail making the stamps effectively free. Thus, condition 2 is satisfied.
The first question that comes to mind is the titular one. (Settle down Beavis.) Remember, we still have to worry about condition 1 and whatever magic we use to make it cheap for legitimate email better not have the same effect on spam. But just like you, any spammer who makes donations to charity will be able to send a volume of spam for free. Apparently the assumption is that spam=evil and evildoers do not also contribute to charity. And we must also assume that Centmail doesn’t encourage entry into the spamming business by those marginal spammers for whom the gift to charity is enough to assuage their previous misgivings.
But these seem like reasonable assumptions. The more tricky issue is whether the 1 penny will actually deter spammers. It is certainly true that at current volume levels, the marginal piece of spam is not worth 1 penny. But for sure there is still a very large quantity of spam that is worth significantly more than 1 penny. For proof, just take a look in your snailbox. Even at bulk rates the cost of junk-mail advertising is several pennies per piece. With Centmail your Inbox would have at least as much stamped spam as the amount of junk mail in your snailbox.
This leads to the crucial questions. Any system of screening by monetary payments should be viewed with the following model in mind. First, ask how many pieces of spam you would expect to receive per day at the specified price. Next, ask how many spam you are willing to receive before you turn on your spam filter again. If the first number is larger than the second, then the system is not going to substitute for spam filtering and this undermines the reason to opt-in in the first place. For Centmail and me these numbers are 50 and 1.
Now continued spam filtering won’t necessarily destroy the system’s effectiveness. The stamp can be used in conjunction with standard filtering rules to reduce the chance your ham gets classified as spam. Then the question will be whether this reduction is enough to induce senders to adopt the setup costs of opting in.
Finally there is no reason theoretically that the total volume of spam would be reduced. Providing spammers with a second, higher class of service might only add to their demand.
Some of the trade-offs, both mathematical and psychological are discussed in this article from The Numbers Guy. My favorite idea:
• Dilip Soman: “I have a radical solution. Once a shopper is ready to check out, she wheels her cart into an area where she gets a number, and is directed to a lounge. Staff members scan and generate ‘invoices’ and once ready, the numbers are called out into the lounge area so that the customer can pay. The one thing that I don’t know is whether customers will feel some anxiety about not being in front of their groceries when they are being scanned, but if they don’t, I think this will be the most efficient solution!”
When animals move, forage or generally go about their lives, they provide inadvertent cues that can signal information to other individuals. If that creates a conflict of interest, natural selection will favour individuals that can suppress or tweak that information, be it through stealth, camouflage, jamming or flat-out lies. As in the robot experiment, these processes could help to explain the huge variety of deceptive strategies in the natural world.
The article at Not Exactly Rocket Science, describes an experiment in which robots competed for food at a hidden location and controlled a visible signal that could be used to reveal their location. The robots adapted their signaling strategy by a process that simulates natural selection. Eventually, the robots learned not to pay attention to others’ signals and the signals become essentially uninformative.
Paul Kedrosky is intrigued by a claim about golf strategy
While eating lunch and idly scanning subtitles of today’s broadcast of golf’s PGA Championship, I saw an analyst make an interesting claim. He said that the best putters in professional golf make more three putts (taking three putts to get the ball in the cup) than does the average professional golfer. Why? Because, he argued, the best putters hit the ball more firmly and confidently, with the result that if they miss their ball often ends up further past the hole. That causes them to 3-putt more often than do “lag” putters who are just trying to get the ball into the hole with no nastiness.
The hypothesis is that the better putters take more risks. That is, there is a trade-off between average return (few putts on average) and risk (chance of a big loss: three putts.)
His is a data-driven blog and he confronts the claim with a plot suggesting the opposite: better putters have fewer three-puts. However, there are reasons to quibble with the data (starting a long distance from the green, it would be nearly impossible to hole out with a single putt. In these cases good putters will two-putt, average putters will three-putt. The hypothesis is really about putting from around 10 feet and so the data needs to control for distance, as suggested to me by Mallesh Pai. Alternatively, instead of looking at cross-sectional data we could get data on a single player and compare his risk-taking behavior on easier greens, where he is effectively a better putter, versus more difficult greens.)
And anyway, who needs data when the theory is relatively straightforward. Any individual golfer has a risk-return tradeoff. He can putt firmly and try to increase the chance of holing out in one, at the cost of an increase in the chance of a three-putt if he misses and goes far past the hole. The golfer chooses the riskiness of his putts to optimize that tradeoff. Now, we can formalize what it means to be a better putter: for an equal increase in risk of a three-putt he gets a larger increase in the probability of a one-putt. Then we can analyze how this shift in the PPF (putt-possibility-frontier) affects his risk-taking.
Textbook Econ-1 micro tells us that there are two effects that go in opposite directions. First, the substitution effect tells us that because a better putter faces a lower relative price (in terms of increased risk) from going for a lower score, he will take advantage of this by taking more risk and consequently succumbing to more three-putts. (This assumes diminishing Marginal Rate of Substitution, a natural assumption here.) But, there is an income effect as well. His better putting skills enable him to both lower his risk and lower his average number of putts, and he will take advantage of this as well. (We are assuming here that lower risk and lower score are both normal goods.) The income effect points in the direction of fewer three-putts.
So the theoretical conclusions are ambiguous in general, but there is one case in which the original claim is clearly borne out. Consider putts from about 8 feet out. Competent golfers can, if they choose, play safely and virtually ensure they will hole out with two putts. Competent, but not excellent golfers, have a PPF whose slope is greater than 1: to increase the probability of a 1-putt, they must increase by even more the probability of a three-putt. Any movement along such a PPF away from the sure-thing two-putt not only increases risk, but also increases the expected number of putts. Its unambiguosly a bad move. So competent, but not excellent golfers will be at a corner solution on 8 foot putts, always two-putting.
On the other hand, better golfers have a flatter PPF and can, at least marginally, reduce their average number of putts by taking on risk. Some of these better golfers, in some situations, will choose to do this, and run the risk of three-putting.
Thanks to Mallesh Pai for the pointer.
The link I posted previously was somewhat outdated as it mentioned only that furloughs were under consideration. As a part of the recent budget agreement, the UC furlough is now a done deal. Here are some more recent stories.
I have heard that, system-wide, professors will take an 8% cut in pay. The word “furlough” usually means something like a temporary layoff. Here it means that workers will have shorter hours and commensurately lower pay. For example, UC non-faculty staff will have a few days off each month.
What are the marginal hours where Professors will be furloughed? Saturdays. That is, no classes will be cut, all administrative duties remain intact, pay is cut 8%. Presumably this means that my colleagues in UC system will be doing 8% more surfing the web when they are not in the classroom.
At Legoland, admission is discounted for two-year-olds. But a child must be at least three for most of the fun attractions.
At the ticket window the parents are asked how old the child is. But at the ride entrance the attendants ask the children directly.
The parents lie. The children tell the truth.
Via kottke.org, an article in New Scientist on the mathematics of gambling. One bit concerns arbitrage in online sports wagering.
Let’s say, for example, you want to bet on one of the highlights of the British sporting calendar, the annual university boat race between old rivals Oxford and Cambridge. One bookie is offering 3 to 1 on Cambridge to win and 1 to 4 on Oxford. But a second bookie disagrees and has Cambridge evens (1 to 1) and Oxford at 1 to 2.
Each bookie has looked after his own back, ensuring that it is impossible for you to bet on both Oxford and Cambridge with him and make a profit regardless of the result. However, if you spread your bets between the two bookies, it is possible to guarantee success (see diagram, for details). Having done the calculations, you place £37.50 on Cambridge with bookie 1 and £100 on Oxford with bookie 2. Whatever the result you make a profit of £12.50.
I can verify that arbitrage opportunites abound. In my research with Toomas Hinnosaar on sorophilia, we investigated an explanation involving betting. In the process we discovered that the many online bookmakers often quote very different betting lines for basketball games.
How could bookmakers open themselves up to arbitrage and still stay in business? Here is one possible story. First note that, as mentioned in the quote above, no one bookmaker is subject to a sure losing bet. The arbitrage involves placing bets at two different bookies.
Now imagine you are one of two bookmakers setting the point spread on a Clippers-Lakers game and your rival bookie has just set a spread of Lakers by 5 points. Suppose you think that is too low and that a better guess at the spread is Lakers by 8 points. What spread do you set?
Lakers by 6. You create an arbitrage opportunity. Gamblers can place two bets and create a sure thing: with you they take the Clippers and the points. With your rival they bet on the Lakers to cover. You will win as long as the Lakers win by at least 7 points, which is favorable odds for you (remember you think that Lakers by 8 is the right line.) Your rival loses as long as the the Lakers win by at least 6 points, which is unfavorable odds for your rival. You come away with (what you believe to be) a winning bet and you stick your rival with a losing bet.
Now this begs the question of why your rival stuck his neck out and posted his line early. The reason is that he gets something in return: he gets all the business from gamblers wishing to place bets early. Put differently, when you decided to wait you were trading off the loss of some business during the time his line is active and yours is not versus the gain from exploiting him if he sets (what appears to you to be) a bad line.
Since both of you have the option of playing either the “post early” or “wait and see” strategy, in equilibrium you must both be indifferent so the costs and benefits exactly offset.
Of course, with online bookmaking the time intervals we are talking about (the time only one line is active before you respond, and the time it takes him to adjust to your response, closing the gap) will be small, so the arbitrage opportunities will be fleeting. (As acknowledged in the New Scientist article.)
Blame it on the binding constraint.
Let me explain. Has it ever struck you how peculiar it is that the price of so much writing these days is zero? No, I don’t mean that it is suprising that blogs don’t charge a price. There is so much supply that competition drives the price down to zero.
What I mean is, why are so many blogs priced at exactly zero. It would be a complete fluke for the optimal price of all of the blogs in the world to be at exactly the same number, zero.
And indeed the optimal price is not zero, in fact the optimal price is negative. Bloggers have such a strong incentive to have their writings read that they would really like to pay their readers. But for various reasons they can’t and so the best they can do is set the price as low as possible. That is, as it often happens, the explanation for the unlikely bunching of prices at the same point is that we are all banging up against a binding constraint.
(Why can’t we set negative prices? First of all, we cannot verify that you actually read the article. Instead we would have people clicking on links, pretending to read, and collecting money. And even if we could verify that you read the article, most bloggers wouldn’t want to pay just anybody to read. A blogger is usually interested in a certain type of audience. A non-negative price helps to screen for readers who are really interested in the blog, usually a signal that the reader is the type that the blogger is after.)
Now, typically when incentives are blunted by a binding constraint, they find expression via other means, distortionary means. And a binding price of zero is no different. Since a blogger cannot lower his price to attract more readers, he looks for another instrument, in this case the quality of the writing.
Absent any constraint, the optimum would be normal-quality writing, negative price. (“Normal quality” of course is blogger-specific.) When the constraint prevents price from going negative, the response is to rely more heavily on the quality variable to attract more readers. Thus quality is increased above its unconstrained optimal point.
So, the next time you are about to complain that the blogs you read are too interesting (at the margin), remember this, grin and bear it.
The NY Times has an article about a new wave of independent films and their marketing.
When “The Age of Stupid,” a climate change movie, “opens” across the United States in September, it will play on some 400 screens in a one-night event, with a video performance by Thom Yorke of Radiohead, all paid for by the filmmakers themselves and their backers. In Britain, meanwhile, the film has been showing via an Internet service that lets anyone pay to license a copy, set up a screening and keep the profit.
The article is about the variety of roll-your-own distribution and marketing campaigns employed by filmmakers who lack studio backing. But the lede is buried:
Famous fans like Courtney Love were soon chattering online about the film. And an army of “virtual street teamers” — Internet advocates who flood social networks with admiring comments, sometimes for a fee, sometimes not — were recruited by a Web consultant, Sarah Lewitinn, who usually works the music scene.
Here is wikipedia on street teams. The origin is traced back to the KISS army, a grass-roots fan club that aggressively promoted the band KISS and later “vertically integrated” with the KISS marketing machine where they had access to exclusive promotional merchandise.
Today you can hire a consultant to assemble a street team to promote your band, movie, (hmmm… blog?), … A good consultant will find (or make) fans with a selected personality type, street-cred, and social network and organize them into a guerilla marketing squad armed with swag.
Virtual street teams operate in online social networks. Presumably then, actual people are no longer required. A good consultant can manufacture online identities, position them in a social network, getting Twitter followers and Facebook friends and cultivate the marketing opportunities from there. You can imagine the pitch: “We can mobilize 10,000 follower-tweets per day…”
Here is the web site of ForTheWin.com, the agency of Sara Lewitinn who coordinated the virtual street team for the film Anvil! The Story of Anvil.
For The Win! is an cooperative of club urchins and nightlife denizens charged with the task of defending the best of pop culture from the daily onslaught of the whack. At night we comb the streets in search of the best fashion, art, music, and movies New York City has to offer. By day we make sure we spread the word to the world by any and all means necessary of the internet to it’s biggest platforms without skipping a step or taking anything for granted. Each of our campaigns is as unique as the artist it represents.
Note they also count Slighly Stoopid, Electrocute, and The Pet Shop Boys (!) as clients.
Mindhacks has the scoop:
…in summary it seems that the brain simulates of the outcomes of actions based on your intentions to move because the actual sensory information from the body takes so long to arrive that we’d be dangerously slow if we relied only on this.This slower information is used for periodic updates to keep everything grounded in reality, but it looks like most of our action is run off the simulation.
We can also use the simulation to distinguish between movements we cause ourselves and movements caused by other things, on the basis that if we are causing the movement, the prediction is going to be much more accurate.
If the prediction is accurate, the brain reduces the intensity of the sensations arising from the movement – for good safety reasons, perhaps – we want to be more aware of contact from other things than touches from ourselves.
There is strategy involved in giving and interpreting compliments. Let’s say you hear someone play a difficult –but not too difficult– piece on the piano, and she plays it well. Is it a compliment if you tell her she played it beautifully?
That depends. You would not be impressed by the not-so-difficult piece if you knew that she was an outstanding pianist. So if you tell her you are impressed, then you are telling her that you don’t think she is an outstanding pianist. And if she is, or aspires to be, an outstanding pianist, then your attempted compliment is in fact an insult.
This means that, in most cases, the best way to compliment the highly accomplished is not to offer any compliment at all. This conveys that all of her fine accomplishments are exactly what you expected of her. But, do wait for when she really outdoes herself and then tell her so. You don’t want her to think that you are someone who just never gives compliments. Once that is taken care of, she will know how to properly interpret your usual silence.
In the world of blogs, when you comment on an article on another blog, it is usually a nice compliment to provide a link to the original post. This is a compliment because it tells your readers that the other blog is worth visiting and reading. But you may have noticed that discussions of the really well-known blogs don’t come with links. For example, when I comment on an article posted at a blog like Marginal Revolution, I usually write merely “via MR, …” with no link.
That’s the best way to compliment a blog that is, or aspires to be, really well-known. It proves that you know that your readers already know the blog in question, know how to get there, and indeed have probably already read and pondered the article being discussed.
Think of the big events that came out of nowhere and were so dramatic they captured our attention for days. 9/11, the space shuttle, the Kennedy assassination, Pearl Harbor. If you were there you remember exactly where you were.
All of these were bad news.
Now try to think of a comparable good news event. I can’t. The closest is the Moon landing and the first Moon walk. But it doesn’t fit because it was not a surprise. I can’t think of any unexpected joyful event on the order of the magnitude of these tragedies. On the other hand, it’s easy to imagine such an event. For example, if today it were announced that a cure for cancer has been discovered, then that would qualify. And equally significant turns have come to pass, but they always arrive gradually and we see them coming.
What explains this asymmetry?
1. Incentives. If you are planning something that will shake the Earth, then your incentives to give advance warning depend on whether you are planning something good or bad. Terrorism/assassination: keep it secret. Polio vaccine, public.
2. Morbid curiosity. There is no real asymmetry in the magnitude of good and bad events. We just naturally are drawn to the bad ones and so these are more memorable.
3. What’s good is idiosyncratic, we can all agree what is bad.
I think there is something to the first two but 1 can’t explain natural (ie not ingentionally man-made) disasters/miracles and 2 is too close to assuming the conclusion. I think 3 is just a restatement of the puzzle because the really good things are good for all.
I favor this one, suggested by my brother-in-law.
4 . Excessive optimism. There is no real asymmetry. But the good events appear less dramatic than the bad ones because we generally expect good things to happen. The bad events are a shock to our sense of entitlement.
Two related observations that I can’t help but attribute to #4. First, the asymmetry of movements in the stock market. The big swings that come out of the blue are crashes. The upward movements are part of the trend.
Second, Apollo 13. Like many of the most memorable good news events this was good news because it resolved some pending bad news. (When the stock market sees big upward swings they usually come shortly after the initial drop.) When our confidence has been shaken, we are in a position to be surprised by good news.
I thank Toni, Tom, and James for the conversation.
The Bagel Shack. There are two locations, the original in San Clemente and a second one in Mission Viejo off of El Toro. The bagels are big, toothsome, and fresh (due to their fast turnover.) I would go so far as to say that these are the best bagels I have ever had West of the Hudson River (and East of The Dead Sea.) I like that the bagels are shelved so that you can grab your own and quickly pay for them if you are not having them toasted or with cream cheese. Go for the jalapeño bagels.
Make the NPR Weekend Edition on-air puzzle with Will Shortz more fun. Cover your ears when he describes the format of the puzzle. Then, listen to the series of puzzles and try to guess the format quickly enough and see how many of the puzzles you can get right after that.
Via MR, this article describes the obstacles to a market for private unemployment insurance. Why is it not possible to buy an insurance policy that would guarantee your paycheck (or some fraction of it) in the event of unemployment? The article cites a number of standard sources of insurance market failure but most of these apply also to private health insurance, and other markets and yet those markets function. So there is a puzzle here.
The main friction is adverse selection. Individuals have private information about (and control over!) their own likelihood of becoming unemployed. The policy will be purchased by those who expect that they will become unemployed. This makes the pool of insured especially risky, forcing the insurer to raise premiums in order to avoid losses. But then the higher premiums causes a selection of even more risky applicants, etc. This can lead to complete market breakdown.
In the case of unemployment insurance there is a potential solution to this problem which borrows from the idea of instrumental variables in statistics. (Fans of Freakonomics will recognize this as one of the main tools in the arsenal of Steve Levitt and many empirical economists.) The idea behind instrumental variables is that it sidesteps a sample selection problem in statistical analysis by conditioning on a variable which is correlated with the one you care about but avoids some additional correlations that you want to isolate away.
The same idea can be used to circumvent an adverse selection problem. Instead of writing a contract contingent on your employment outcome, the contract can be contingent on the aggregate unemployment rate. You pay a premium, and you receive an adjustment payment (or stream of payments) when the aggregate unemployment rate in your locale increases above some threshold.
Since the movements in the aggregate unemployment rate are correlated with your own outcome, this is valuable insurance for you. But, and this is the key benefit, you have no private information about movements in the aggregate unemployment rate. So there is no adverse selection problem.
The potential difficulty with this is that there will be a lot of correlation in movements in unemployment across locations, and this removes some of the risk-sharing economies typical of insurance. (With fire insurance, each individual’s outcome is uncorrelated with everyone else, so an insurer of many households faces essentially no risk.)
Challenge: re-design speed bumps. They should still induce drivers to slow down, but without making them drive over a bump. How do you do it? Answer after the jump.
Read the rest of this entry »
In the last lecture we demonstrated that there was no way to efficiently provide public goods, whether via a market or any other institution. Now we turn to private goods.
We start with a very simple example: bilateral trade. A seller holds an object that is valued by a potential buyer. We want to know how to bring about efficient trade: the seller sells the object to the buyer if, and only if, the buyer’s willingness to pay exceeds the seller’s.
We first analyze the problem using the Vickrey-Clarke-Groves Mechanism. We see that the VCG mechanism, while efficient, is not feasible because it would require a payment scheme which results in a deficit: the buyer pays less than the seller should receive.
Then, following the lines of the public goods problem from the previous lecture we show that in fact there is no mechanism for efficient trade. This is the dominant strategy version of the Myerson-Satterthwaite theorem. In fact, we show that the best mechanism among all dominant-strategy incentive compatible and budget balanced mechanisms (i.e. the second-best mechanism) takes a very simple form. There is a price fixed in advance and the buyer and seller simply announce whether they are willing to trade at that price.
We see the first emergence of something like a market as the solution to the optimal design of a trading institution. We also see that markets are not automatically efficient even when there are no externalities, and goods are private. There is a basic friction due to information and incentives that constrains the market.
Next we consider the effects of competition. Our instincts tell us that if there are more buyers and more sellers, the inefficiency will be reduced. By a series of arguments I show the first sense in which this is true. There exists a mechanism which effectively makes sellers compete with one another to sell and buyers compete with one another to buy. And this mechanism improves upon the fixed price mechanism because it enables the traders themselves to determine the most efficient price. I call this the price discovery mechanism (it is really just a double auction.)
Finally, in one of the best moments of the class, what was previously some random plots of values and costs on the screen coalescees into supply and demand curves and we see how this price discovery mechanism is just another way of seeing a competitive market. This is the second look at how markets emerge from an analytical framework that did not presuppose the existence of markets at the beginning.
Here are the notes.
Developer Kalid Shaikh has been banned from the iPhone App Store. By conventional welfare measures this would seem to be a big blow to efficiency:
As the MobileCrunch article points out, a search at AppShopper.com shows 854 apps by Shaikh. The majority of Shaikh’s apps seemed to be data on a specific subject simply pulled from the web without providing any other original or unique content. Most apps were priced at $4.99 and this banishment could represent lost sales of thousands of dollars per day. Shaikh reportedly has admitted that the goal was not to produce valuable apps but to focus on monetization instead. All of Shaikh’s apps have already been removed from the App Store and can no longer be purchased.
Perhaps conventional welfare measures would need to be amended in this case. Note however, that removing one large supplier of what is essentially spam from the App Store will not affect the equilibrium quantity of spam. (And this is not Apple’s stated reason for removing him.)
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.
Jonah Lehrer writes an intriguing post about the primacy of tastes. He argues that the tastes we are wired to detect through our tongue are more strongly conditioned by evolution than tastes which rely more heavily on the olfactory dimension. As a result, foods that stimulate the receptors in our tongue require less elaborate preparations than foods that we appreciate for their aroma.
His leading example is ketchup vs. mustard.
So here’s my theory of why ketchup doesn’t benefit from fancy alternatives, while mustard does. Ketchup is a primal food of the tongue, relying on the essential triumvirate of sweet, sour and umami. As a result, nuance is unnecessary – I don’t want a chipotle ketchup, or a fancy organic version made with maple syrup. I just want the umami sweetness.
Mustards, in contrast, are foods of the nose, which is why we seek out more interesting versions. I like tarragon mustards, and dark beer mustards, and spicy brown mustards, because they give my sandwiches an interesting complexity. They give my nasal receptors something to sense.
This explains why the market shelves are stocked with countless varieties of mustard but all ketchups are basically the same.
Now what about mayonnaise? Its primary payload is fat (mayonnaise is emulsified vegetable oil.) We are strongly conditioned to desire fat in our diet and its attraction is just as primitive as the attraction to sugar and salt. And yet mayonnaise undergoes even more transformations than mustard does.
How does this relate to the fact that the desire for fat is not wired through taste buds, but rather through mouthfeel?
How do you cut the price of a status good?
Mr. Stuart is among the many consumers in this economy to reap the benefits of secret sales — whispered discounts and discreet price negotiations between customers and sales staff in the aisles of upscale chains. A time-worn strategy typically reserved for a store’s best customers, it has become more democratized as the recession drags on and retailers struggle to turn browsers into buyers.
Answer: you don’t, at least not publicly. Status goods have something like an upward sloping demand curve. The higher is the price, the more people are willing to pay for it. So the best way to increase sales is to maintian a high published price but secretly lower the price.
Of course, word gets out. (For example, articles are published in the New York Times and blogged about on Cheap Talk.) People are going to assign a small probability that you bought your Burberry for half the price, making you half as impressive. An alternative would be to lower the price by just a little, but to everybody. Then everybody is just a little less impressive.
So implicitly this pricing policy reveals that there is a difference in the elasticity of demand with respect to random price drops as opposed to their certainty equivalents. Somewhere some behavioral economists just found a new gig.
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.
Via Marginal Revolution, here is a report on an experiment wherein top chess players played a textbook example of a game in which “rational” play is never matched in practice. 6000 chess players picked a number between 0 and 100. The winner was the player whose guess was closest to 2/3 of the average. The winner earns his guess in cash.
Nash equilibrium, or even iterative elimination of dominated strategies implies that no player will guess more than 1. (Nobody should guess more than 66, but then nobody should guess more than 44, but then …)However, in experimental trials, the winning guess is usually around 25.
Most experiments involve volunteers at Universities. Would professional chess players, being generally smarter and also trained to think strategically do “better?” Well, they didn’t. But let’s look at it more carefully.
Casual discussion of the predictions of game theory usually blur an important distinction: between playing rationally and knowing that others will play rationally. To be rational and make smart decisions is one thing, and no doubt the chess players are better at this than college students. But that doesn’t go very far because to make a rational guess just means starting with some hypothesis about how others will guess and then guess 2/3 of the average of that. What really drives a wedge between the theory and the experiments is that experimental subjects have good reason to doubt that the others are rational.
Even a rational player in the beauty contest experiment will not guess anything close to zero if he is not convinced that all of the other players are rational. For example, guessing 33 is rational if you think that most of the other players are not rational and on average they will guess the midpoint of 50.
And it is not enough just to know that everyone else is rational. If you know that everyone else is rational but you are not convinced that everyone else knows that everyone is rational then you would reasonably predict that everyone else will guess 33 and so you should guess 22.
As long as there is some doubt that others have some doubt that others have … that everyone is rational, then even a rational player will guess something far from 0.
To see the effect of this in action, suppose that 100 subjects are playing.
- 10 of them are not rational and will guess 100,
- 10 are rational (but don’t know that others are rational) and guess 66,
- everyone else is as sophisticated as you wish
Then the average guess cannot be less than (100 + 66 )/10 = about 17, and so the winning guess will be no smaller than 11. And since the winning guess will be no smaller than 11, the highly sophisticated players will not guess less than 10. But then this means that the average guess cannot be less than (100 + 66 + 88)/10 = about 25, yielding a winning guess of no more than 16! The iterated reasoning is going in the opposite direction now!
Ultimately, the 80 highly sophisticated players will guess the value x that solves
(100 + 66 + 8x)/10 = 3x/2
which is about 23. (The winning guess in the experiment involving chess players was 21.5)
In my neighborhood trash and recycling are collected separately, on different days, by different entities. On Tuesdays the trash collector drives his little trash shuttle all the way to my garage to empty the trash cans. On Wednesdays, I am required to wheel the recycle bin out to the curb to be collected by the recycling truck.
At first glance the economics would suggest the opposite. The recycling is valuable to the collector, the trash is not, so when bargaining over who has to carry the goods down the driveway, the recycling collector would seem to be in a worse bairgaining position.
But on second thought, it makes perfect sense. Can you see why? For a (admittedly obscure) hint, here is a related fact: another difference between the trash and recycling is that the recycling bin is too small to contain a typical week’s worth of recycling and most households usually have recycling overflowing and stacked next to the bin.
If you are following me on Twitter (and have I suggested recently that you should be following me on Twitter?) you will know the answer. For the rest, follow the jump.
Cheap Talk 