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Counterfeiting money is the stuff of television, movies, and lore, but hardly seen by most of us – for only about one in ten thousand notes is found to be counterfeit annually.  But long ago, it was a big deal – for instance, playing a major role in the Revolutionary and Civil Wars. And nowadays, while it only directly costs Americans about $60-$80 million a year, the Treasury acts as if it is a multibillion dollar potential crime. And of course, counterfeit checks is a major crime, and source of the Nigerian schemes that pepper our email spam boxes.

My coauthor, Elena Quercioli (visiting Bocconi, soon teaching at Central Michigan), experienced the reality of counterfeiting beyond our borders in Mexico City. A merchant once informed her that a few hundred dollars worth of pesos that she had just been issued at an ATM was all counterfeit. In the USA, she would have lost the money, and been questioned by police. But there, she retained her pesos, and proceeded to find a “greater fool” upon whom to unload her losses – the crime of “uttering” (which we are told is extremely hard to prosecute even in the USA).

Elena saw that her misadventure pointed to an interesting paper on counterfeit money that might atone for her mild transgressions. The small literature on this topic never modeled the costly vigilance choice of individuals in dealing with counterfeiting. She proceeded to convince the Secret Service to give her a data trove on counterfeit dollars.  She pieced together a larger and hitherto partially unknown picture about the two flavors of counterfeit money – namely, seized money – that is confiscated from bad guys before it enters circulation – and passed money that is found at a later stage, and leads to losses by the public. Among her findings:

#1. The ratio of all counterfeit money to passed counterfeit money rises, but less than proportionately with the note.

#2. The per transaction passed rate (as a fraction of the circulation) is small for low notes, dramatically rises, and then levels off or drops. In Europe, for instance, the counterfeiting of the 500 Euro note is miniscule compared to the 200 Euro note.

(The Secret Service is under the mistaken impression that the $20 is the most counterfeit, as it fails to understand that the $50 and $100 notes circulate much less often. Go figure.)

#3. Since the 1970s, the  ratio of all counterfeit money to passed counterfeit money has drammatically fallen about 90%.

#4. The fraction of counterfeit notes found by Federal Reserve Banks falls in the note.

Cat and Mouse

I found these facts and intimations of a new theory very appealing. Our joint paper creates what may be the first multi-market “large game”, i.e. two interacting games each with a continuum of players. First, “bad guys” do battle with “good guys” in a massive game of cat and mouse. In it, good guys choose their vigilance effort  and bad guys choose their counterfeit quality – where greater quality better frustrates counterfeiting efforts. Second, since some fake money inexorably passes into circulation, a collateral game is induced, this one pitting good guys against one another. Such a hot potato game is one of “strategic complements”: Fixing the counterfeiting rate, the more carefully I expect the next guy to examine his notes, the more carefully I must. We show that this second market fixes the counterfeiting rate.

The whole exercise has proved an exploration of nanoeconomics – for instance, we can deduce that individuals expend at most ¼ a cent of vigilance attention looking at the $100 note, and much less for lesser notes. I must say that the paper has reinforced my faith in economics. For despite such miniscule attention costs, the theory does a decent job of simultaneously explaining all the above patterns in counterfeiting – for instance, even the nonmonotone one emerges, that the passed rate rises and then falls. We even do a darn good job absolving the Secret Service of any incompetence in the plummeting seizure rates.

  1. “I have given up. Letters have gone to both referees requesting the return of your manuscript to this office right away. I hope to God I can have better luck with the next people. I don’t know whether this is a matter of concern to you, but let me assure you that it is my intention not to publish the paper by Arrow and Debreu (which has also been submitted) before the publication of your paper (if both are found acceptable). I think this would only be fair to you.” Econometrica Editor Robert Strotz’ 1953 letter to Lionel McKenzie on his existence proof for general equilibrium
  2. I had a fun conversation over dinner with Alessandro Lizzeri (outgoing AER coeditor) at the 2011 Winter Meetings in Denver. He had a fine insight about the economics graduate education: Economics grad students start out learning the classics in first year, absorb the stock of highlights from the last ten years in second year, and then start coming to field seminars, seeing the quasi-shitty flow of marginal new ideas … and we wonder why they are jaded.
  3. “Wanna see who lives in Einstein’s House now? Visit Princeton on Hallowe’en night ….. the current genius, Dr. Eric Maskin dresses up like Einstein and gives treats out to Princeton kids.”
  1. SOPHOMORE = SOPHOS + MOROS = “wise” + “foolish” (Greek)
  2. I just learned that (1) Thomas Crapper did not invent the toilet, and (2) the word “crap” does not come from his name. Now I feel totally disillusioned about my knowledge base. Bummer!
  3. My car takes 91 octane. Gas is sold locally in octanes 87, 89 and 92 or 93 octane. So I must average octanes. One would think that gas stations would have figured this arbitrage out. But it is always strictly more profitable for me to mix 92 and 87 octane than 92 and 89 octane. So drivers: avoid 89 octane!
  4. I am such a sucker for Venn diagrams. This one categorizing all drugs is for the ages.
    Disclaimer: For me, caffeine is a stimulant and alcohol is a depressant (my nightly glass of red wine, angel face). I have had nitrous oxide (hallucinogen & depressant) two or three times. I have fended off the peer pressure to consume all others – does that make me a geek or a nerd? Curiously, cannabis – or marijuana (Mary Jane) – is  simultaneously a stimulant, hallucinogen, depressant, & anti-psychotic.

  1. Jerry Seinfeld (September 1993) clearly beat Laibson (1994) to the punch on (the rebirth of) present-biased preferences, the conflict between future and current selves, and the value of commitment:
    The Glasses   I never get enough sleep. I stay up late at night, cause I’m Night Guy. Night Guy wants to stay up late. ‘What about getting up after five hours sleep?’, oh that’s Morning Guy’s problem. That’s not my problem, I’m Night Guy. I stay up as late as I want. So you get up in the morning, you’re … , you’re exhausted, groggy, oooh I hate that Night Guy! See, Night Guy always screws Morning Guy. There’s nothing Morning Guy can do. The only Morning Guy can do is try and oversleep often enough so that Day Guy loses his job and Night Guy has no money to go out anymore. 

    Hey we can’t let Jerry beat us, so let’s credit this agenda to its rightful originator, Strotz (1956), before his fourteen year presidency of Northwestern.

  2. Gary Becker (1973) only barely edged out Sylvester Stallone (1976) on the importance of strategic complements in the marriage model. Sly had has this wonderful metaphor in Rocky: “I dunno, she’s got gaps, I got gaps, together we fill gaps.”
  3. Patrick Billingsley – who taught me convergence of probability measures at Chicago — was also a part-time actor. I was unaware he was a bailiff in “The Untouchables” (with Kevin Costner, Sean Connery, and Robert De Niro). His Probability and Measure textbook was his chef d’oeuvre. I find it cool that a world-renowned star of probability pursued his passion as an obscure actor.
  4. Why won’t the Happy Days owners release season 5 and later on dvd? After all, I have been waiting over two years to get past season 4.  For the uninitiated, this is the season in which the TV series gave us the timeless metaphorical image to “jump the shark”. Perhaps they do not want to reveal this moment of futility?PS Which research agendas in the profession have also “jumped the shark”. ^_^ And could it be that their ratings (citations) decline long after their fundamentals do?

I lost combination to several old $5 Masterlocks. So I went to their web site. I found an amusing procedure.  The italics are Masterlock’s: I wonder how many prisoners are trying to use the web to unlock their prison cell doors…

Print out the Lost Combination Form from a printer friendly page, or download the PDF file.

Have your Lost Combination Form notarized by a Notary Public to prove that you are the owner of the lock (you can include up to 6 combinations on one notarized form).

Note: Inmates at a correctional facility – in addition to the lost combination form, you must submit your request on official prison letterhead. In lieu of notarization, the form must be signed by a prison official.

Photocopy the serial number on the back case of your combination lock. This copy MUST clearly show that the lock is not attached to anything. Be sure to hand write the serial number on the photocopy.

As a theorist, I can muse about empirical issues generally safe from the fear that I might seriously explore them. Next summer is another Olympic year of competition and commentary. Consider the 100M dash. Victory spells fame and fortune, second place historical obscurity.  Effort expended is real, and competitors can roughly see how their nearest rivals are doing in real time, although admittedly in a bit of a blur. To what extent then can we understand behavior in these races using auction theory? If we regress winning times on times of predecessors, is the second fastest time the best predictor, and does it obviate the power in the other order statistics? And is this more true in the 10,000M run, where events are less of a blur, or less true, because at some point the race is often a foregone conclusion?

Another prediction of auction theory is that the best  times should be more clustered in head to head race, for instance, than if we just asked runners to race alone, not knowing their rivals’ times, and then picked the fastest time.

In the early 1970s, Gary Becker was hitting stride, knocking out economic theories of crime, the allocation of time, discrimination, marriage, and children in rapid succession. His theory of marriage treated the marriage scene like any other economic market, cleared by a price. Men bid for women, and women bid for men. In a shallow view of his model, women sought handsome men, and men beautiful women, and beauty was not in the eye of the beholder. Becker’s main theorem — whose proof he credits to my esteemed colleague Buz Brock — found that the men and women efficiently sorted by their beauty when their beauties were complements.

I visited the Cowles Foundation at Yale for the winter of 2006, and taught a senior elective course. Seven fortunate students took my seminar in information economics. One impressive woman student — who organized the gay and lesbian social scene — asked whether the shallow view of Becker’s model was so unrealistic. Did babes match with hunks?

We brainstormed on data sources and settled on two new web sites: and Facebook allowed users to indicate with whom they were “in a relationship with”. Facebook was still new, and not yet open to all email addresses. So the student asked her friends at various campuses across  America for their logins. And so began our stealth project. Hundreds of photos of matched men and women were downloaded, and then uploaded to HotOrNot, all on the sly. HotOrNot afforded us the average evaluation of about 200 women for every man, and 2000 men for every woman.

The result: Regressing straight men’s or women’s hotness on their partner’s hotness gave a highly significant fit, with a slope of about 0.7 — so that a man rising in hotness from 7 to 8 expects his partner to rise by 0.7 points. But sorting was far closer for gays and lesbians, with a slope for each of about 0.9. As Becker implied, beauty is income in this meat market, and the “richest” men match with the “richest” women.

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