Yes, Boldrin and Levine keep saying the same thing over and over again, but they sure get better and better at saying it:
If a well-designed patent system would serve the intended purpose, why recommend abolishihg it? Why not, instead, reform it? To answer the question we need to investigate the political economy of patents: why has the political system resulted in the patent system we have? Our argument is that it cannot be otherwise: the “optimal” patent system that a benevolent dictator would design and implement is not of this world and it is pointless to advocate it as, by doing so, one only offers an intellectual fig-leaf to the patent system we actually have, which is horribly broken. It is fine to recommend reform but, if politics make it impossible to accomplish that reform, if they make it inevitable that if we have a patent system it will fail, then abolition – preferably by constitutional means as was the case in Switzerland and the Netherlands prior to the late 19th century – is the proper solution and proposals of reform are doomed to fail. This logic of political economy brings us to the view that we should work toward a progressive dismantlement of the patent system.
Read the article here.
Scott Adams writes on his blog:
[Obama] is putting an American citizen in jail for 10 years to life for operating medical marijuana dispensaries in California where it is legal under state law. And I assume the President – who has a well-documented history of extensive marijuana use in his youth – is clamping down on California dispensaries for political reasons, i.e. to get reelected. What other reason could there be?
One could argue that the President is just doing his job and enforcing existing Federal laws. That’s the opposite of what he said he would do before he was elected, but lying is obviously not a firing offense for politicians.
Personally, I’d prefer death to spending the final decades of my life in prison. So while President Obama didn’t technically kill a citizen, he is certainly ruining this fellow’s life, and his family’s lives, and the lives of countless other minor drug offenders. And he is doing it to advance his career. If that’s not a firing offense, what the hell is?
A new joint paper with Alex Frankel and Emir Kamenica. The talk begins with tennis, the discussion of American Idol begins at 12:14, how to write a mystery novel is at 15:51, the M. Night Shamyalan dilemma is at 17:32, the ESPN Classic dilemma is at 18:50, and the optimal sporting contest is at 28:37.
- How many Connect Four game pieces can be missing without affecting the outcome? (ht: Adriana LLeras-Muney)
- I want reverse autocorrect: if I receive a nonsense message on my phone I want to be able to highlight any word and get a list of the most likely typos that would have been autocorrected into that word.
- I have never seen a Singaporean restaurant in the United States. I have never seen Laksa in the United States. I don’t understand this.
- When a plumber or other fixit guy comes, you will almost always want to call him back a few days later to make some minor adjustments, or fix something they forgot to, or to ask them some questions. But the second visit will cost you. So when they are there the first time, steal one of their tools. Then call them back a few days later and tell them they left something behind and they can come pick it up.
Some time ago I had half-written a post calling for a Nobel prize for Al Roth. It was after he gave his Nancy Schwartz lecture at Kellogg and I decided not to publish it because I thought maybe it was just a little too soon. Not too soon to get the prize but too soon to expect the Nobel folks to give it to him. I am glad I was wrong.
Don’t forget his very important co-authors Tayfun Sonmez, Attila Abdulkadiroglu, and Utku Unver. These guys, Tayfun especially, were still working on matching theory when nobody else was interested and before all the practical applications (mainly coming out of their collaboration with Al) started to attract attention.
This is a time for microeconomics to celebrate. When you are on a plane and you tell the person next to you that you’re an economist, they ask you about interest rates. Everyone instinctively equates economics with macroeconomics. And that’s probably because most people have the impression that macroeconomics is where economists have the biggest impact.
But actually microeconomic theory has already had a bigger impact on your life that macroeconomic theory ever will. And there’s no politics tangled up in microeconomics. When you meet a microeconomic theorist it never once occurs to you to check the saline content of their nearest body of water.
There are no fundamental disagreements about basic principles of microeconomics. And I would say that Al Roth epitomizes what’s great about microeconomics. He has no “field:” he does classical game theory/bargaining theory and he does behavioral economics. He does theory and experiments. He theorizes about market design and he actually designs markets.
Al is the second blogger to win a Nobel prize. Compare their fields and their blogs.
I never met Shapley and I only saw him give a couple talks when he was already way past his prime. But gappy3000 reminds me that he and John Nash invented a game called Fuck Your Buddy. So that’s something. And now he has a Nobel Prize. And of course without his work there would be no prize for Roth either. David Gale should have shared the prize but he died a few years ago.
Temporary parking sign spotted near the Stanford GSB/Economics department by Michael Ostrovsky (via Google+)
In a now annual event, economists at Kellogg and the NU Econ Dept have been polled for their forecasts of who will win the Econ Nobel Prize next Monday. Jeff and I forgot to vote for each other but the rest of the predictions are below (the full write up is on the Kellogg Expertly Wrapped blog):
The Thomson-Reuters citation based predictions are Steve Ross, Tony Atkinson and Angus Deaton, and Robert Shiller.
NU and Kellogg have a large group of IO specialists and theorists. There is also a rich tradition in innovative work in incentive theory – Myerson, Holmstrom and Milgrom were at Kellogg in my department and did some of their best work here in the early 1980s.
So, I am somewhat discounting the latter three candidates with one caveat below. Tirole is also a perennial favorite given the IO bias. While I think all these researchers will get this prize eventually, their age works against them – they are too young. they did seminal work at a time when Duran Duran ruled the airwaves or perhaps the Smiths in the case of Tirole. The Nobel Committee is still sorting out the time when ABBA was Number One and Bjorn Borg won Wimbledon. (Note Swedish influence on pop culture was high in the 1970s!)
Surely there is the odd foray into the 1980s when a field has been overlooked (e.g. Krugman for new trade theory). Mechanism design, incentives have won several times so this works against them. But one might argue Tirole is the Krugman of IO (or that Krugman is the Tirole of trade given that new trade theory used oligopoly models!).
So, that brings Tirole back in as a prediction.
The age factor also means Bob Wilson, an intellectual hero for all of us who do economic theory, is more likely than others on this list. Holmstrom and Milgrom (and Roth?) are his students and they were inspired by his tutelage and research agenda. He also worked with David Kreps. So, some prize organized around Wilson might be another possibility.
I am completely discounting the Thomson-Reuters predictions because (1) finance people can’t get the prize so soon after the financial crisis even if they do behavioral fiance like Shiller and (2) there was a recent Growth and Development Nobel Symposium and it is too soon to give a prize to Deaton or Atkinson after that – the Committee needs to think it over.
I personally think the prize will go to Econometrics because there hasn’t been one since Engel and Granger. I have no expertize in the field so I won’t hazard a guess.
Lee Crawfurd emails me about events in Sudan. North and South Sudan have agreed to a price at which the North will supply oil to the South. On his blog, Roving Bandit, Lee writes:
So – whilst this seems like a good deal for North Sudan in the short run and a good deal for South Sudan in the long run, my main concern is the hold-up problem. What is stopping North Sudan ripping up the agreement in 3 years, demanding a higher cut, and just confiscating oil (again).
In his email he adds:
As it turns out, the South’s strategy is to resume piping oil through the North, but also to simultaneously build a pipeline through Kenya, giving them an extra option.
The fact that the North can hold up later makes it less likely that the North and South will invest and trade in their relationship now. This makes both the North and South worse off. For this difficulty to be resolved, the North has to be able to commit not to exploit the South in the future. But the Kenyan pipeline gives them this commitment power to some extent: If the North threatens to raise prices, the South can go the Kenya route. This means the North will not raise prices in the future and that is good for trade and the welfare of both parties. Paraphrasing the wrods of the great philosopher Sting, “If Someone Does Not Trust You, Set Them Free“.
One issue is that the South may overinvest in the pipeline to get more bargaining power. That could lead to inefficiency as the North then has bad incentives.
Another classic Williamsonian solution is to use hostages to support exchange. I don’t know enough about North and South Sudan to know what they might transfer that is of little value to the recipient and high value to the donor. This sort of solution has been attempted recently in the US in the debt reduction negotiations. Automatic cuts in defense (bad for Republicans) and entitlement expenditures (bad for Democrats) go into force in January if Republicans and Democrats do not agree in debt negotiations. This has not worked so far. First, this is because there are crazy types who are willing to send the country over the “fiscal cliff”. Second, this is because there is no commitment and the automatic cuts can be delayed by Congress and so they are not real hostages.
My memory is terrible but I vaguely recall papers relating to investment in changing outside options in hold up models. These would be the most relevant to the Sudan scenario.
The abstract:
This is a line-by-line analysis of the second verse of 99 Problems by Jay-Z, from the perspective of a criminal procedure professor. It’s intended as a resource for law students and teachers, and for anyone who’s interested in what pop culture gets right about criminal justice, and what it gets wrong.
For example:
E. Line 7
So I pull over . . . At this point, Jay-Z has been seized, for purposes of Fourth Amendment analysis, because he has submitted to a show of police authority. He has thus preserved his Fourth Amendment claims. If you are stopped illegally and want to fight it later, you have to submit to the show of authority. In this case, if the police find the contraband, he’ll be able to challenge it in court. Smart decision here by Jay-Z.
The full paper is here, I thank the organic Troy Kravitz for the link.
You are planning a nice dinner and are shopping for the necessary groceries. After having already passed the green onions you are reminded that you actually need green onions upon discovering exactly that vegetable, in a bunch, bagged, and apparently abandoned by another shopper. Do you grab the bag before you or turn around and go out of your way to select your own bunch?
- This bag was selected already, and from a weakly larger supply. It is therefore likely to be better than the best you will find there now.
- On the other hand, it was abandoned. You have to ask yourself why.
- You would worry if the typical shopper’s strategy is to select a bag at random and then only carefully inspect it later. Because then it was abandoned because of some defect.
- But this a red herring. Whatever she could see wrong with the onions you can see too. The only asymmetry of information between you and your pre-shopper is about the unchosen onions. The selection effect works unambiguoulsy in favor of the scallions-in-hand.
- You can gain information based on where the onions were abandoned.
- First of all the fact that they were abandoned somewhere other than the main pile of onions reveals that she was not rejecting these in favor of other onions. If so, since she was going back to the onion pile she would have brought these with her. Instead she probably realized that she didn’t need the onions after all. So again, no negative signal.
- If these bunched green onions were abandoned in front of the loose green onions or the leeks or ramps, then this is an even better signal. She thought these were the best among the green onions but later discovered an even better ingredient. A sign she has discerning tastes.
- It is true though that compared to a randomly selected new bunch, these have been touched by on average one additional pair of human hands.
- And also she might be trying to poison you.
- But if she was trying to poison someone, is it her optimal strategy to put the poisoned onions into a bag and abandon them in a neighboring aisle?
- In equilibrium all bunches are equally likely to be poisoned and the bagging and abandoning ploy amounts to nothing more than cheap talk.
- But, she might not be trying to poison just any old person. She might really be targeting you, the guy who wants the best bunch of onions in the store.
- Therefore these onions are either logically the best onions in the store and therefore poisoned, or they are worse than some onions back in the big pile but then those are poisoned.
- Opt for take-out.
A great argument by Acemoglu and Robinson:
Another aspect is the divide between what the academic research in economics does — or is supposed to do — and the general commentary on economics in newspapers or in the blogosphere. When one writes a blog, a newspaper column or a general commentary on economic and policy matters, this often distills well-understood and broadly-accepted notions in economics and draws its implications for a particular topic. In original academic research (especially theoretical research), the point is not so much to apply already accepted notions in a slightly different context or draw their implications for recent policy debates, but to draw new parallels between apparently disparate topics or propositions, and potentially ask new questions in a way that changes some part of an academic debate. For this reason, simplified models that lead to “counterintuitive” (read unexpected) conclusions are particularly valuable; they sometimes make both the writer and the reader think about the problem in a total of different manner (of course the qualifier “sometimes” is important here; sometimes they just fall flat on their face). And because in this type of research the objective is not to construct a model that is faithful to reality but to develop ideas in the most transparent and simplest fashion; realism is not what we often strive for (this contrasts with other types of exercises, where one builds a model for quantitative exercise in which case capturing certain salient aspects of the problem at hand becomes particularly important). Though this is the bread and butter of academic economics, it is often missed by non-economists.
The Obama campaign claims that the Romney tax plan would result in an increase in taxes on the middle class, if you take it at its word that it would be revenue neutral. I took a look at an analysis done by the Tax Policy Center to get a more objective view. One of the authors, William Gale, worked in the CEA during the Bush I administration and another, Adam Looney, during the Obama administration. Their description of the Romney plan is:
This plan would extend the 2001-03 tax cuts, reduce individual income tax rates by 20 percent, eliminate taxation of investment income of most taxpayers (including individuals earning less than $100,000, and married couples earning less than $200,000), eliminate the estate tax, reduce the corporate income tax rate, and repeal the alternative minimum tax (AMT) and the high-income taxes enacted in 2010’s health-reform legislation.
Their preliminary conclusion:
We estimate that these components would reduce revenues by $456 billion in 2015 relative to a current policy baseline.
Therefore, over ten years this comes to 4.56 trillion. The Obama estimate seems to add in interest payments to round it out to 5 trillion dollars.
Since the Romney plan is meant to be revenue neutral where is this money coming from? First, some of it is recouped by eliminating various corporate tax breaks. Second, if the tax changes trigger greater growth this would generate tax revenue. Third it could come from closing other tax breaks on individuals. Once the TPC analysis accounts for the first two factors, they come up with a figure of $360 billion per annum of reduction in federal revenue from reducing income tax and eliminating the estate tax. This favors the rich. Even if deductions like mortgage interest tax deduction, tax free health insurance tax are adjusted or eliminated to raise revenue, this still leaves a hole of $86 billion/annum to be raised by increasing taxes on low and middle income taxpayers. The precise definition of middle class is a matter of debate. The TPC uses incomes below 200k and Marty Feldstein uses incomes below 100k and looks at 2009 data not a 2015 forecast like the TPC. There are other differences between the calculations but they are really not inconsistent: tax deductions would have to be eliminated to make up for the tax cuts. In Feldstein’s analysis, the burden falls on those with incomes between $100-200k.
The TPC does a robustness test on its growth estimates. If you use growth rates proposed by Romney advisor Greg Mankiw, federal revenue would fall by $307 billion still leaving $33 to be covered by people making less that $200k/annum.
But there are two points one can add which are implicit in the TPC analysis.
If you cut taxes but then eliminate deductions, there is no tax cut in aggregate – you give with one hand and take with the other. This means the impact on the work/leisure tradeoff is minimal, hence so is the impact on economic incentives and hence so is the impact on economic growth. Hence, the main impact of the Romney tax plan is distributional along the lines suggested by the TPC. A nice clear article from the American Enterprise Institute explains why reducing taxes while eliminating deductions does not have much effect on work incentives.
More dramatically, if the Romney plan gives with one hand and takes with the other, his whole economic plan collapses. It is founded on having tax cuts and triggering trickle down. But there is no real tax cut as deductions are eliminated at the same time taxes are cut. Hence, there is no Romney tax cut plan to stimulate growth.
Updates: Linked to TPC article and also an AEI article about revenue neutral tax policy.
On the definitions of Pareto efficiency and surplus maximization and their connection. I have also updated my slides for this lecture, presenting things in a different order in a way that I think makes a bigger impact. You can find them here.
[vimeo 50833662 w=500&h=280]
When you grade exams in a large class you inevitably face the misunderstood question dilemma. A student has given a correct answer to a question but not the question you asked. As an answer to the question you asked it is flat out wrong. How much credit should you give?
It should not be zero. You can make this argument at two levels. First, ex post, the student’s answer reveals some understanding. To award zero points would be to equate this with writing nothing at all. That’s unfair.
You might respond by saying, tough luck, it is my policy not to reward misunderstanding the question. But even ex ante it is optimal to commit to a policy which gives at least partial credit to fortuitous misunderstanding. The only additional constraint at the ex ante stage is incentive compatibility. You don’t want to reward a student who interprets the question in a way that makes it easier and then supplies a correct answer to the easier question.
But you should reward a student who invents a harder question and answers that. And you should make it known in advance that you will do so. Indeed, taken to its limit, the optimal exam policy is to instruct the students to make up their own question and answer it, with harder questions (correctly answered) worth more than easier ones.
Incidentally I was once in a class where a certain professor asked exactly such a question.
I wrote about it here. I had a look at the video and it was the right call given the rule, but as I argued in the original post the rule is an unnecessary kludge. At best, it does nothing (in equilibrium.)
- Here’s another video of a cool and educational thing to do with your kids for you to bookmark for later but never actually do.
- I can name a few people who really are this obsessed with font spacing.
- I don’t even want to guess what you’re supposed to do in the one with the tandem bidet.
- The Shining with a laugh track and Seinfeld bumper music.
From an interview in Rolling Stone:
Oh, yeah, in folk and jazz, quotation is a rich and enriching tradition. That certainly is true. It’s true for everybody, but me. There are different rules for me. And as far as Henry Timrod is concerned, have you even heard of him? Who’s been reading him lately? And who’s pushed him to the forefront? Who’s been making you read him? And ask his descendants what they think of the hoopla. And if you think it’s so easy to quote him and it can help your work, do it yourself and see how far you can get. Wussies and pussies complain about that stuff. It’s an old thing – it’s part of the tradition. It goes way back. These are the same people that tried to pin the name Judas on me. Judas, the most hated name in human history! If you think you’ve been called a bad name, try to work your way out from under that. Yeah, and for what? For playing an electric guitar? As if that is in some kind of way equitable to betraying our Lord and delivering him up to be crucified. All those evil motherfuckers can rot in hell.
Read Gary Shteyngart’s painfully comic post-mortem following a surreal transatlantic flight on American Airlines:
At Heathrow, fire trucks met us because we landed “heavy,” i.e., still full of fuel we never got to spend over the Atlantic. At the terminal, a woman in a spiffy red American Airlines blazer was sent to greet us. But the language she spoke — Martian — was not easily understood, versed as we were in Spanish, English, Russian and Urdu.
Using her Martian language skills, the American Airlines woman proposed to take us “through the border” at Heathrow, for a night of rest before we resumed our journey the next morning. An apocalyptic scenario: an employee of the world’s worst airline assigned to the world’s worst border crossing at the world’s worst airport.
The Martian took us to one immigration lane, which promptly closed. Then another, with the same result. A third, ditto. Despite her blazer, the Martian was obviously not the ally we had made her out to be. So, ducking under security ropes, knocking some down entirely, we rushed the border with our passports held aloft, proclaiming ourselves the citizens of a fading superpower.
There seems to be something going on at American Airlines. As a part of bankruptcy proceedings they are trying to get concessions from the pilot’s union. The pilots appear to have found a clever way to fight back: obey the letter of the contract and in so doing violate its spirit with extreme prejudice:
Long story short, American is totally screwed. What management is discovering right now is that formal contracts can’t fully specify what it is that “doing your job properly” constitutes for an airline pilot. The smooth operation of an airline requires the active cooperation of skilled pilots who are capable of judging when it does and doesn’t make sense to request new parts and who conduct themselves in the spirit of wanting the airline to succeed. By having the judge throw out the pilots’ contract, the airline has totally lost faith with its pilots and has no ability to run the airline properly. It’s still perfectly safe, but if your goal is to get to your destination on time, you simply can’t fly American. The airline is writing checks it can’t cash when it tells you when your flights will be taking off and landing.
Taqiyah tap: Mallesh Pai
Its the same reason the lane going in the opposite direction is always flowing faster. This is a lovely article that works through the logic of conditional proportions. I really admire this kind of lucid writing about subtle ideas. (link fixed now, sorry.)
This phenomenon has been called the friendship paradox. Its explanation hinges on a numerical pattern — a particular kind of “weighted average” — that comes up in many other situations. Understanding that pattern will help you feel better about some of life’s little annoyances.
For example, imagine going to the gym. When you look around, does it seem that just about everybody there is in better shape than you are? Well, you’re probably right. But that’s inevitable and nothing to feel ashamed of. If you’re an average gym member, that’s exactly what you should expect to see, because the people sweating and grunting around you are not average. They’re the types who spend time at the gym, which is why you’re seeing them there in the first place. The couch potatoes are snoozing at home where you can’t count them. In other words, your sample of the gym’s membership is not representative. It’s biased toward gym rats.
The Romney campaign has been telegraphing that Mitt has been practicing zingers for the last two months. This brings to mind lessons from macro.
According to the Friedman/Lucas theory of monetary policy, money supply changes are only effective if they are unexpected. If they are expected, then nominal wages adjust to compensate for inflation so there is no change in the real wage and hence unemployment remains at the “natural rate” or the non-accelerating inflation rate of unemployment (NAIRU). But an unexpected increase in the money supply leads to surprise inflation, a decrease in the real wage and less unemployment. An unexpected decrease in the money supply leads to surprise deflation, an increase in the real wage and more unemployment. This is the expectations augmented Philips’ curve if I remember my macro correctly. And so it goes with zingers.
If Mitt’s zingers are unexpected, the audience responds with a better opinion of Mitt. If Mitt meets expectations, then there is no gain on net because there is no surprise. If he delivers fewer zingers than expected, then the audience is disappointed. (I believe Jeff, Emir Kamenica and Alex Frankel are working on a model of this sort of thing. Hopefully, the model can easily be extended to offer a theory of zingers.)
So, the campaign has deliberately set a high “natural rate” of zingers (NRZ) for Mitt. Then, Mitt definitely has to deliver zingers to meet the NRZ to avoid deflation and really he should deliver a huge amount so he exceeds NRZ. The Romney campaign should have downplayed zingers and Mitt’s NRZ, so their man is under less pressure. In fact, that is what the Obama team has been doing for their candidate.
There is the possibility that the Romney team was bluffing to scare the Obama team or to focus their attention on zinger defense rather than answers to real issues of jobs, foreign policy etc. But such a strategy is not costless because zingers are graded on an expectations augmented zinger curve.
- Is it that women like to socialize more than men do or is it that everyone, men and women alike, prefers to socialize with women?
- A great way to test for strategic effort in sports would be to measure the decibel level of Maria Sharapova’s grunts at various points in a match.
- If you are browsing the New York Times and you are over your article limit for the month, hit the stop button just after the page renders but before the browser has a chance to load the “Please subscribe” overlay. This is easy on slow browsers like your phone.
- Given the Archimedes Principle why do we think that the sea level will rise when the Polar Caps melt?
A confusing article in the New York Times discusses a possible tomato trade war with Mexico. First, it says:
The United States Department of Commerce signaled then that it might be willing to end a 16-year-old agreement between the United States and some Mexican growers that has kept the price of Mexican tomatoes relatively low for American consumers. American tomato growers say the price has been so low that they can barely compete.
Later, the article adds more detail:
As part of a complex arrangement dating to 1996, the United States has established a minimum price at which Mexican tomatoes can enter the American market. Over the years, Florida’s tomato sales have dropped as low as $250 million annually, from as much as $500 million, according to Reggie Brown, executive vice president of the Florida Tomato Exchange, which has led the push to rescind the agreement. The state is the country’s largest producer of fresh market tomatoes, followed by California.
In the meantime, Bruno Ferrari, the economy minister of Mexico, said the value of Mexico’s tomato exports to the United States had more than tripled to $1.8 billion since the agreement was signed, and the tomato industry there supports 350,000 jobs.
Note the agreement established a MINIMUM price. If the agreement is dropped, then prices can go down further. In this interpretation, the agreement has not “kept the price of Mexican tomatoes relatively low for American consumers”. It has kept them high. This is probably good for Mexican farmers because it moves prices away from perfect competition and towards the monopoly price. It is also good for Florida producers who are competing with more expensive Mexican tomatoes. Obviously, it is bad for American consumers. Overall, we should expect both Mexican and Floridian (?) producers to oppose the end of this agreement.
If the agreement is being dropped to be replaced by free trade, it seems I will be buying cheaper tomatoes.
But, finally the article says:
The agreement, which has been amended since it was struck, sets the floor price for Mexican tomatoes at 17 cents a pound in the summer and 21.6 cents in the winter. American growers say they cannot compete at that price.
So, really what is on the cards is even higher minimum prices. This could still be good for Mexican growers as it should raise prices even more towards the monopoly price. But the problem is that more Florida farmers could then afford to grow and sell tomatoes. Then, the rationing rule that determines who makes the sale becomes important. If domestic growers are favored disproportionately, Mexican farmers will suffer. And I will be buying more expensive tomatoes or growing my own.
There should be some diagram that illustrates this so we can all use it in our Micro classes.
Nate Silver’s 538 Election Forecast has consistently given Obama a higher re-election probability than InTrade does. The 538 forecast is based on estimating vote probabilities from State polls and simulating the Electoral College. InTrade is just a betting market where Obama’s re-election probability is equated with the market price of a security that pays off $1 in the event that Obama wins. How can we decide which is the more accurate forecast? When you log on in the morning and see that InTrade has Obama at 70% and Nate Silver has him at 80%, on what basis can we say that one of them is right and the other is wrong?
At a philosophical level we can say they are both wrong. Either Obama is going to win or Romney is going to win so the only correct forecast would give one of them 100% chance of winning. Slightly less philosophically, is there any interpretation of the concept of “probability” relative to which we can judge these two forecasting methods?
One way is to define probability simply as the odds at which you would be indifferent between betting one way or the other. InTrade is meant to be the ideal forecast according to this interpretation because of course you can actually go and bet there. If you are not there betting right now then we can infer you agree with the odds. One reason among many to be unsatisfied with this conclusion is that there are many other betting sites where the odds are dramatically different.
Then there’s the Frequentist interpretation. Based on all the information we have (especially polls) if this situation were repeated in a series of similar elections, what fraction of those elections would eventually come out in Obama’s favor? Nate Silver is trying to do something like this. But there is never going to be anything close to enough data to be able to test whether his model is getting the right frequency.
Nevertheless, there is a way to assess any forecasting method that doesn’t require you to buy into any particular interpretation of probability. Because however you interpret it, mathematically a probability estimate has to satisfy some basic laws. For a process like an election where information arrives over time about an event to be resolved later, one of these laws is called the Martingale property.
The Martingale property says this. Suppose you checked the forecast in the morning and it said Obama 70%. And then you sit down to check the updated forecast in the evening. Before you check you don’t know exactly how its going to be revised. Sometimes it gets revised upward, sometimes downard. Soometimes by a lot, sometimes just a little. But if the forecast is truly a probability then on average it doesn’t change at all. Statistically we should see that the average forecast in the evening equals the actual forecast in the morning.
We can be pretty confident that Nate Silver’s 538 forecast would fail this test. That’s because of how it works. It looks at polls and estimates vote shares based on that information. It is an entirely backward-looking model. If there are any trends in the polls that are discernible from data these trends will systematically reflect themselves in the daily forecast and that would violate the Martingale property. (There is some trendline adjustment but this is used to adjust older polls to estimate current standing. And there is some forward looking adjustment but this focuses on undecided voters and is based on general trends. The full methodology is described here.)
In order to avoid this problem, Nate Silver would have to do the following. Each day prior to the election his model should forecast what the model is going to say tomorrow, based on all of the available information today (think about that for a moment.) He is surely not doing that.
So 70% is not a probability no matter how you prefer to interpret that word. What does it mean then? Mechanically speaking its the number that comes out of a formula that combines a large body of recent polling data in complicated ways. It is probably monotonic in the sense that when the average poll is more favorable for Obama then a higher number comes out. That makes it a useful summary statistic. It means that if today his number is 70% and yesterday it was 69% you can logically conclude that his polls have gotten better in some aggregate sense.
But to really make the point about the difference between a simple barometer like that and a true probability, imagine taking Nate Silver’s forecast, writing it as a decimal (70% = 0.7) and then squaring it. You still get a “percentage,” but its a completely different number. Still its a perfectly valid barometer: its monotonic. By contrast, for a probability the actual number has meaning beyond the fact that it goes up or down.
What about InTrade? Well, if the market it efficient then it must be a Martingale. If not, then it would be possible to predict the day-to-day drift in the share price and earn arbitrage profits. On the other hand the market is clearly not efficient because the profits from arbitraging the different prices at BetFair and InTrade have been sitting there on the table for weeks.
The excellent people ant NUIT have helped me put together a series of small videos that complement my Microeconomic Theory course. I start teaching today and I will be posting the videos here as the course progresses. You can find my slides here and eventually all the videos will be there too, organized by lecture. These videos are 5-10 minutes each and are meant to be high-level synopses of the main themes of each lecture. The slides as well as the videos are released to the public domain under Creative Commons (non-commercial, attribution, share-alike) licenses. The first video is on Welfare Economics and features figure skating.
The eternal Kevin Bryan writes to me:
Consider an NFL team down 15 who scores very late in the game, as happened twice this weekend. Everybody kicks the extra point in that situation instead of going for two, and is then down 8. But there is no conceivable “value of information” model that can account for this – you are just delaying the resolution of uncertainty (since you will go for two after the next touchdown). Strange indeed.
Let me restate his puzzle. If you are in a contest and success requires costly effort, you want to know the return on effort in order to make the most informed decision. In the situation he describes if you go for the 2-pointer after the first touchdown you will learn something about the return on future effort. If you make the 2 points you will know that another touchdown could win the game. If you fail you will know that you are better off saving your effort (avoiding the risk of injury, getting backups some playing time, etc.)
If instead you kick the extra point and wait until a second touchdown before going for two there is a chance that all that effort is wasted. Avoiding that wasted effort is the value of information.
The upshot is that a decision-maker always wants information to be revealed as soon as possible. But in football there is a separation between management and labor. The coach calls the plays but the players spend the effort. The coach internalizes some but not all of the players’ cost of effort. This can make the value of information negative.
Suppose that both the coach and the players want maximum effort whenever the probability of winning is above some threshold, and no effort when its below. Because the coach internalizes less of the cost of effort, his threshold is lower. That is, if the probability of winning falls into the intermediate range below the players’ threshold and above the coach’s threshold, the coach still wants effort from them but the players give up. Finally, suppose that after the first touchdown the probability of winning is above both thresholds.
Then the coach will optimally choose to delay the resolution of uncertainty. Because going for two is either going to move the probability up or down. Moving it up has no effect since the players are already giving maximum effort. Moving it down runs the risk of it landing in that intermediate area where the players and coach have conflicting incentives. Instead by taking the extra point the coach gets maximum effort for sure.
Ethan Iverson has an excellent series of posts on the ironically-named Thelonious Monk Piano Competitions and the incentives, perverse and otherwise, they create.
My argument against competitions is basically same thing. To my ears, there had been an astonishing amount of agreement about what jazz really is in most youthful swinging jazz since 1990. That agreement was one reason I rebelled against it. I just couldn’t see it as the jazz tradition — not my jazz tradition, anyway. I was delighted to be lifted out of the discussion entirely by Reid Anderson and David King in 2001.
It is crucial to remember that my writing on DTM reflects my own experience, passions, and blind spots. On Twitter and in the forum, several competition veterans said they played exactly how they wanted to play, in a non-conventional manner, and won anyway.
Kudos. I could have never won a competition. Indeed, my joke about playing “Confirmation” in front of Carl Allen was loaded with my own fears. Even though I’ve recorded “Confirmation” twice, with Billy Hart and Tootie Heath, I still wouldn’t want to play that in front of a bebop jury. Forget it! You couldn’t pay me enough.
I would push him on the basic economics: as long as there is a scarcity of gigs there will be competition in some form. Is it better for that competition to be formalized or to play out in the market alone? If winners gain notoriety and then gigs, and if judges reflect the preferences of audiences then formal competitions can save a lot of rent-seeking. I suppose the more cynical take is that judges have arbitrary standards and winning a contest merely turns the winner into a focal point around which venues and audiences coordinate attention. But if audiences’ tastes are that malleable is this really a loss?
Cheap Talk 