What will Commitment Technology do for the Credit Card Market?

August 16, 2010 in economics | by | 2 comments

Mastercard inControl allows a credit card user to set up a monthly budget so charges are rejected once the user’s expenditures per month reach the budget. Useless for the fully rational consumer and a godsend for the accidentally-profligate and the constantly-tempted shopper.

Citibank is set to introduce this product in the U.S. in partnership with Mastercard, Visa and Amex do not have similar products. The Mastercard network and Citi are in a great position to capture consumers from their competitors. The segment that is creditworthy and lives beyond its means is the most profitable for the credit card companies. It is precisely this segment that will value the inControl feature to limit their consumption. They may be willing to pay for the feature and there is also the possibility that they will spend a lot on their cards so there are plenty of fees to be collected from merchants who accept the cards.

Sounds good for credit card companies. But what’s good for one firm is not good for the industry. If Citi/MC capture consumers from competitors, the competitors will adopt similar practices and adopt the same technology to retain existing user or entice new adopters. Just the sort of competition that is good for consumers and bad for firms.

Perhaps new consumers will get credit cards because of the inControl feature. There must be some consumers who do not even have a credit card as they are have gone overboard using them in the past. If they get one, the additional purchases will generate more merchant fees.

Isn’t that good for the credit card companies? Even that is not clear. More purchases will generate more merchant fees. The fess are set by Mastercard and Visa and accrue mainly to them. The banks may not see much of this additional revenue.

All in all inControl will be good for the networks but bad for banks who will lose the interest fees they generate from outofControl credit card user. The mystery is why MC or Visa did not introduce a similar product earlier. There are good reasons for banks to oppose them….maybe that’s why?

Is Farmville Evil?

August 16, 2010 in Uncategorized | Tags: , | by | 1 comment

This guy thinks so.

There it is: Zynga’s dirty technique for making its $500 million. It ropes players into the game with the promise that absolutely anyone can play. It will even float you coins the first time you run out, not unlike the casino that gives a high-roller luxury accommodations in anticipation of making back the house’s stake. It dangles the prospect of a bigger, prettier, better farm; as the game loads, you’re faced with idyllic images of well-off farms, not unlike the glossy ads for high-end residences. But it’s nearly impossible to get some of those goods without ponying up a buck or two here and there. When Zynga’s got a user base of 61 million digital farmers, it’s easy enough to make ends meet, to say the least.

The argument seems to be:  it sucks your time, it gets your friends hooked too, it’s stupid.  Like TV, reading blogs, talking on the phone, etc. I do recommend reading the article though because its a fine case study in how to try and substitute a logical argument in place of “Why do people have tastes that are so different from mine?”  (Full disclosure:  some people very close to me play Zynga games.  I think Zynga games are really stupid.)

Ten Gallon Greeting:  GeekPress.

Truly Metered Parking

August 15, 2010 in Uncategorized | Tags: | by | 3 comments

Even as parking meter technology improves to handle credit cards and flexible pricing, one relic remains:  pay-in-advance.  You have to commit to a period of time and pay the meter at the beginning of that time interval.  You are fined if you don’t move before your pre-specified time expires.

Wouldn’t it be better if you paid only at the end and only for the amount of time you actually occupied the parking space?  This is easily implemented in smart parking meters:  you swipe your card when you park and you swipe it again when to pay when you are done.  To prevent scofflaws, if you never swipe the second time the rest of the day’s parking is on you (sorta like the lost ticket fee in parking lots), and if you are parked in a meter that wasn’t swiped the first time you get a ticket.

Holding fixed the meter rate and demand for parking such a switch would lower your total parking bill and hence revenues.  To show this you could try writing down a model where the parker has a probability distribution over waiting times and chooses optimally his parking time, but there is a simpler argument.  With pay-in-advance two things can happen:  either you pay for more time than you actually use or you get a ticket and pay a fine!

But switching to pay-as-you-leave parking must surely increase overall demand for parking and may even increase individual parking spells so the net effect on revenue is not so clear.

While we are on the subject I liked Tyler Cowen’s bit about free parking.  But I think that there is a second-best logic that justifies mandatory free parking in the suburbs.  Homeowners want their streets free of cars (but still the option to park on the street when necessary) and they don’t want parking meters on their sidewalks.  This makes strip-mall parking a public good.  The private incentive of commercial developers is to provide too little parking.

Sordid Links

August 13, 2010 in Uncategorized | by | 1 comment

1. What will Israel do if Iran gets close to going nuclear?  Interesting article by Jeffrey Goldberg in the Atlantic.

2. What does the future hold for your lying toddler?

3. What do Buzz Aldrin and Leon Panetta have in common?

4. Brookline-Palestine beer connection.

Nobel Links

August 13, 2010 in Uncategorized | by | Leave a comment

1. Kenneth Arrow on healthcare and climate change.

2. Thomas Schelling on climate change.

Thoughts Left Lying Around

August 12, 2010 in Uncategorized | by | 8 comments

  1. There is diversity in sexual preference (same-sex or opposite-sex) but most people are at corner solutions.
  2. The ideal temperature in San Diego is 66F.  You will worry in the morning when its cloudy but once the marine layer burns off the sun by itself will keep you warm.  The air will keep you cool.
  3. It is not possible to define ‘fitness’ in a way that doesn’t make “survival of the fittest” into a tautology.
  4. People who argue that tenure should disappear should begin by saying what they think the market failure is that prevents that from happening by itself.

Cheap Talk: Opinions as Incentives

August 11, 2010 in art of office politics | Tags: , | by | Leave a comment

Jeff discussed a seminal game theoretic analysis of Cheap Talk in an earlier post: “Strategic Information Transmission” by Crawford and Sobel studies a decision-maker, the Receiver, who listens to a message from an informed advisor, the Sender, before making a decision.  The optimal decision for each player depends on the information held by the Sender. If the Sender and Receiver have the same preferences over the best decision, there is an equilibrium where the Sender reports his information truthfully and the Receiver makes the best possible decision.

What if the Sender is biased and wants a different decision, say a bit to the left of the Receiver’s optimal decision? Then the Sender has an incentive to lie and move the Receiver to the left and always telling the truth is no longer an equilibrium.  Crawford and Sobel show that this implies that in equilibrium information can only be conveyed in lumpy chunks and the Receiver takes the best expected decision for each chunk.  The bigger the bias, the less information can be transmitted in equilibrium and the larger each lump must be.

The Crawford-Sobel model has differences of opinion generated by differences in preferences.  But individuals who have the same preferences but different beliefs also have differences of opinion.  The Sender and Receiver may agree that if global warming is occurring drastic action should be taken to slow it down.  But the Sender may believe it is occurring while the Receiver believes it is not.  Differences in beliefs seem to create a similar bias to differences in preferences and hence one might conjecture there is little difference between them.  A lovely paper by Che and Kartik shows this is not the case.  If the Sender with a belief-based bias acquires information, his belief changes.  If signals are informative, his beliefs must move closer to the truth and his bias must go down.  If  Sender with a preference-based bias acquires information, his bias by definition does not change.  So, when there are belief-based differences in opinion, information acquisition changes the bias, indeed it reduces it.  This allows the Sender to transmit more information in equilibrium and improve the Receiver’s decision implementation (this is the Crawford-Sobel intuition but in a different model).  The Sender values this influence and has good incentives to acquire information.  Hiring an advisor with a different belief is valuable for the decision-maker, better than having a Yes-Man. Some pretty cool and fun insights.  And it is always nice when the intuition is well explained and it is related to classical work

There is lots of other subtle stuff and I am not doing justice to the paper.  You can find the paper Opinions as Incentives on Navin’s webpage.

Blogging Something I Know Nothing About

August 10, 2010 in Uncategorized | Tags: , | by | 5 comments

Here is a theory of why placebos work.  I don’t claim that it is original, it seems natural enough that I am surely not the first to suggest it.  But I don’t think I have heard it before.

Getting better requires an investment by the body, by the immune system say. The investment is costly: it diverts resources in the body, and it is risky: it can succeed or fail.  But the investment is complementary with externally induced conditions, i.e. medicine.  Meaning that the probability of success is higher when the medicine is present.

Now the body has evolved to have a sense of when the risk is worth the cost, and only then does it undertake the investment.  Being sick means either that the investment was tried and it failed or that the body decided it wasn’t worth taking the risk (yet! the body has evolved to understand option value.)

Giving a placebo tricks the body into thinking that conditions have changed such that the investment is now worth it.  This is of course bad in that conditions have not changed and the body is tricked into taking an unfavorable gamble.  Still, the gamble succeeds with positive probability (just too low a probability for it to be profitable on average) and in that case the patient gets better due to the placebo effect.

The empirical implication is that patients who receive placebos do get better with positive probability, but they also get worse with positive probability and they are worse off on average than patients who received no treatment at all (didn’t see any doctor, weren’t part of the study.)  I don’t know if these types of controls are present in typical trials.

The News That Didn’t Bark

August 9, 2010 in Uncategorized | Tags: | by | 1 comment

I liked this post from Dan Reeves.

Remember, if it’s in the news don’t worry about it. The very definition of news is “something that almost never happens.” When something is so common that it’s no longer news — car crashes, domestic violence — that’s when you should worry about it.

The truth of that[1] hit home recently when I saw a news feature on the abduction of a four-year-old girl from her front yard in Missouri. Candlelight vigils, nation-wide amber alert, police blockades where every single car was stopped and questioned, FBI agents swarming the house. I think the expected reaction from parents is “oh my god, I need to be so vigilant, even in my own front yard!” My reaction was the opposite: Wow, this sort of thing really does essentially never happen. Let the kids run free!

While I generally have similar reactions, it is easy to take this too far. The weather is the prime counter-example. Valuable minutes of every nightly newscast in Southern California are devoted to repeating the same weather-mantra “Late Night and Early Morning Low Clouds and Fog” which indeed happens every single day.

Also, your interpretation of news depends on your implicit model of competition between news sources. A perfectly plausible model would be consistent with abductions happening every day but being reported only once in a while because we have a taste for variety in our stories of tragedy.

Optimal Strategy in “Cold Wars” Episode of Top Chef

August 9, 2010 in art of office politics | Tags: , | by | 3 comments

In a recent episode of Top Chef, the remaining contestants were split into two groups, say A and B.  Group A had to vote for the best and worst dishes in Group B and vice-versa.  One the two contestants with the worst dishes gets eliminated by the usual judges, i.e.not the contestants.

All the contestants cooked in the same kitchen so they could match each dish to each chef (and, in any case, each chef introduced his own dish). So, each voter knows which chef’s chances of surviving she is affecting by voting for or against his dish.  In the next episode, each voter – if they survive till the next round – competes with the remaining chefs.  So, other things being equal, the optimal strategy is simple: each voter should vote for the weakest candidate in the other group and against the strongest candidate. There have been enough episodes for everyone to pretty much agree on who the best and worst cooks are in each group.  The “rational choice” calculation: you want to maximize the chances of winning so you want to be matched up against the worst chefs in future rounds and get rid of the best chefs if possible.

One caveat is that in future rounds, contestants will be judged by the usual crew of Tom, Padma etc so you might care about your reputation with them.  But the evidence from past series strongly suggests that they do not vote against “strategic” contestants.  Food is important and, for the producers, drama.   Strategic behavior might actually help you survive longer if you create drama.

This “rational choice” prediction had at most a 50% success rate.  One group did choose one of the strongest contestants, Kenny, from the other group for the worst dish.  And he did claim that he’d been put on the chopping block to eliminate a future threat.  But the strongest guy in the other group, Angelo, did not get close to elimination.  And maybe Kenny did have the worst dish.

It’s interesting to speculate on why the obvious rational choice prediction is not borne out.  Perhaps people are honest or it is very hard to lie about a dish when its obviously good – the verifiable information makes it difficult to dissemble.  It’s also hard to be disliked.  The contestants all live in the same house.  In some episodes they cook together and have to coöperate.  Everyone cam remember the hated Marcel from an earlier season!  Voting is sequential which exasperates the problem – the first person to vote does not want to come out as an evil strategic player and the later people to vote know they can’t impact the outcome anyway. So, perhaps reputation among the contestants themselves is important.

If they use the same Cold War conceit next season, I would love to have anonymous voting.  Behind the veil of ambiguity, people might be more strategic.  It would add to the drama – the following week’s episode will be full of intrigue if a good chef gets knifed (figuratively!) in the back.

Peak-Load Parking Meter Pricing

August 9, 2010 in Uncategorized | Tags: , | by | 3 comments

In San Francisco no less

San Francisco has been working on making parking “smarter” for quite a while now, and it’s just recently taken another big step in that direction by starting to replace over 5,000 older parking meters with the snazzy new model pictured above. Those will not only let you pay with a credit or debit card (and soon a special SFMTA card), but automatically adjust parking rates based on supply and demand, which means you could pay anywhere from $0.25 to $6.00 an hour depending on how many free spaces there are. Those rates are determined with the aid of some sensors that keep a constant watch on parking spaces, which also means you’ll be able to check for free spaces in an area on your phone or your computer before you even leave the house.

fedora flip:  rob jefferson.

Sordid Links

August 6, 2010 in Uncategorized | by | Leave a comment

  1. Teaching Koreans how to cuss in English.
  2. Prepare yourself before asking her if she is pregnant.
  3. Mary Carillo knows a thing or two about badminton.

Rush Limbaugh’s Referee Report for “Environmental Concern and the Business Cycle: The Chilling Effect of Recession,” by Matthew E. Kahn at UCLA and Matthew J. Kotchen at Yale.

August 5, 2010 in Uncategorized | by | 3 comments

Limbaugh quotes from a Times article about the paper (gated link) and critiques it:

“Using survey data, it finds that high unemployment rates are associated with less concern for the environment and greater skepticism about global warming.”  I don’t think unemployment has nothing to do with it.  It has to do with the fact that we have now learned that man-made global warming is a hoax that has been perpetrated by a bunch of leftists, and the guys participating in it at the Hadley Centre for Climate Prediction and Research at the University of East Anglia have been found out.  And even though the partisan political operative media has yet to report on this, we have — and more and more people are understanding now what a fraud this whole thing has been, like much of liberalism is. “The Chilling Effect of Recession.”

He adds:

Despite all their efforts over the last 20 to 30 years to make you feel guilty for causing all this destruction, now we have a recession that’s come along and, damn it, you are being so selfish that you’ve given up the notion that you have to save the planet.  Now you want a job instead, and these ruling class professors are distressed. By the way, as we have previously noted on this program, Google searches themselves cause global warming.  “From national surveys…” This is from the abstract:  “From national surveys, we find that an increase in a state’s unemployment rate is associated with a decrease in the probability that residents think global warming is happening and reduced support for the US to target policies intended to mitigate global warming. Finally, in California, we find that an increase in a county’s unemployment rate is associated with a significant decrease in county residents choosing the environment as the most important policy issue.”

So now you, you selfish people, are so concerned about finding a job while you’re unemployed that you are forgetting about global warming.  You are forgetting about environmentalism.  “From the study’s abstract: ‘[W]e find that an increase in a state’s unemployment rate decreases Google searches for “global warming” and increases searches for “unemployment,” and that the effect differs according to a state’s political ideology.'” So this scientific survey is using Google searches for their data?  This is hilarious.  This is actually from the study by these two university professors: “We find that an increase in a state’s unemployment rate decreases Google searches for ‘global warming’…”  They’re actually judging public interest in global warming by examining Google searches, and they’re ticked off more of you people are entering the search term “unemployment” than you are “global warming.”

Limbaugh grudgingly/sarcastically admits:

I am not making this up.  These are learned, high-education, ruling class members — the best and the brightest, the smartest — and they’re out there researching why it is that you don’t care about global warming.

We are all used to such reports, delivered behind the veil of anonymity furnished by peer-reviewed journals.  But to have infamy delivered in public and by Rush Limbaugh.  Surely, a mark of honor.

A Mating Dance Continues: Avis, Hertz and Dollar Merger Game

August 4, 2010 in economics | Tags: , | by | 3 comments

Hertz made a merger offer to Dollar, an offer that made it difficult for Dollar to approach another suitor.  But Dollar is trying to wriggle out of its chastity belt and flirt with Avis.  Each marriage carries the risk that the Feds step in before the relationship is fully consummated.  After all the merged firms might have the market power to hike up prices.  A preliminary analysis suggests given the current segmentation of the rental market into leisure and premium classes, antitrust issues are less of a threat to merger to Hertz than for Avis:

“The rental car market is segmented into two categories: premium and travel/leisure. Hertz and Avis classify themselves as premium car rental companies renting to travelers on business and those who otherwise are less sensitive to price and more attuned to service and car quality. Both companies also operate in the leisure market. Budget is Avis’s leisure market subsidiary, while Hertz has its Advantage leisure subsidiary. Hertz has offered to divest itself of this subsidiary as part of this transaction and in response to any antitrust objections.

Dollar Thrifty classifies itself as travel/leisure.

At first blush, this would appear to give Hertz a free pass, as the company does not define itself as being in Dollar Thrifty’s market segment and the Advantage subsidiary is quite small.”

But even in this scenario, market power issues arise.  In the existing market structure, Dollar sets its prices ignoring the impact they have on Hertz and Avis profits and focussing on just its own profits.  In particular, Dollar captures some premium customers from Hertz and Avis if its prices are sufficiently low.  This kid of cutthroat competition is the essence of capitalism and is to be lauded.

But of there is a Dollar-Hertz merger say, the competition from the leisure car rental division cannibalizes the profits of the premium car division.  There is less of an incentive for Dollar-Hertz to cut prices and leisure rental from the firm will become more expensive.  Now, Avis can raise the price of Budget cars.  This will allow Dollar-Hertz to raise leisure car prices more and a lovely – for firms! – spiral of rising prices will ensure.  And this is without any collusion between the firms- the basic forces of competition are dampened by the merger.

How big is this effect?  It’s going to depend on substitution effects between premium and leisure segments.  All my colleagues who do empirical I.O. will be gainfully employed and I hope I will be drinking good wine at their houses (yes, they will each have multiple houses).

Ridge Vineyards at Dinner with Julia

August 4, 2010 in Uncategorized | by | Leave a comment

One of my favorite vineyards.  Ridge wine is undervalued because their vineyards are largely in the Santa Cruz Mountains not in ever-trendy Napa.  Watch Paul Draper their iconic wine maker with Julia Child:

Snow Nookie

August 3, 2010 in economics | Tags: , | by | Leave a comment

Cable T.V. is boring, the sky is dark and it’s snowing.  What can you do to entertain yourself? One answer:

When Nancy Bonnell, 31, thinks of her baby girl due next month, she recalls the December snow that she and her husband, Brian, endured: “We lived in the apartment and had nothing to do.”
So they cooked in their Derwood home, they grew restless and then they — well, you know.
The couple had been trying to have a baby and originally thought it might happen during a post-Christmas vacation to the Cook Islands in the South Pacific. They could nickname her “Cookie Girl,” they thought.
Then Bonnell learned during the second week of January that she was expecting. She deduced that she had conceived sometime during the snowstorm. Time for a new nickname.
“It was more like ‘Snow Angel,’ ” she said.
But:
Yet that theory was quashed in a 1970 paper by Richard Udry, a demographer at the University of North Carolina at Chapel Hill. He found no statistically significant upswing in births associated with the blackout. “It is evidently pleasing to many people,” he concluded, “to fantasize that when people are trapped by some immobilizing event which deprives them of their usual activities, most will turn to copulation.”
Someone should go back and look at the data and see if it was analyzed correctly.  Surely a Q.J.E. if you can show convincingly that snow leads to nookie.

The First-Response Mechanism

August 2, 2010 in Uncategorized | Tags: , , , | by | 1 comment

How to allocate an indivisible object to one of three children, it’s a parent’s daily mechanism design problem. Today I used the first-response mechanism.  “Who wants X?”  And whoever says “me!” first gets it.

This dimension of screening, response time,  is absent from most theoretical treatments.  While in principle it can be modeled, it won’t arise in conventional models because “rational” agents take no time to decide what they want.

But the idea behind using it in practice is that the quicker you can commit yourself the more likely it is you value it a lot.  Of course it doesn’t work with “who wants ice cream?”   But it does make sense when its “We’ve got 3 popsicles, who wants the blue one?”  We are aiming at efficiency here since fairness is either moot (because any allocation is going to leave two out in the cold) or a part of a long-run scheme whereby each child wins with equal frequency asymptotically.

It’s not without its problems.

  1. Free disposal is hard to prevent.  Eventually the precocious child figures out to shout first and think later, reneging if she realizes she doesn’t want it.
  2. There’s also ex-post negotiation.  You might think that this can only lead to Pareto improvements but not so fast.  Child #1 can “strongly encourage” child #2 to hand over the goodies.  A trade of goods for “security” is not necessarily Pareto improving when the incentives are fully accounted for.
  3. It prevents efficient combinatorial allocation when there are externalities and/or complementarities.  Such as, “who’s going in Mommy’s car?”  A too-quick “me!” invites a version of the exposure problem if child #3 follows suit.

Still, it has its place in a parent’s repertoire of mechanisms.

Random Text Generators

July 31, 2010 in Uncategorized | by | 2 comments

1. Wine tasting note generator.

2. Postmodern essay generator.

Arbitrarily Sordid Links

July 30, 2010 in Uncategorized | by | 1 comment

  1. The art of 1-star Amazon reviews.  I have been looking for a new hobby…
  2. Stanley Milgram, the TV show, starring William Shatner.
  3. History of the laugh track.
  4. Massaging your oppossum properly.

Why Do Specializations Get “Slots” in an Academic Department?

July 29, 2010 in art of office politics | Tags: , | by | 4 comments

Suppose in a Department in a university there are two specializations, E and T.  The Department has openings coming up over time and must hire to fill the slot when it appears or let it lapse, perhaps with some chance of getting it the following year.

The Department can hire on the “best athlete” criterion: just choose the best candidates, regardless of specialization.  Or it could have a “Noah’s Ark” approach and let in one E specialist for each T specialist (perhaps this is done intertemporally if there are less than two slots/year).  Both approaches are used in hiring in practice.  How does the best approach depend on the environment?

To think this through, let’s suppose the Department uses the best athlete criterion.  There are two problems.  First, if specialty T has lower standards than specialty E, they will propose more candidates.  They may exaggerate their quality if it is hard to assess.  Or specialty T may simply want to increase in size – there will be more people to interact with, collaborate with etc.  How should specialty E respond?  They know that of they stick to their high standards, the Department will be swamped by Ts.  So, they lower their bar for hiring, reasoning that their candidate has to be better than the marginal candidate brought in by the Ts, a weaker criterion.  In other words, the best athlete hiring system leads to a “race to the bottom”.

Hiring by the Noah’s Ark system prevents this from happening.  The two groups might have different standards or want to empire build.  But the each group is not threatened by the other as their slots are safe.  This comes at a cost – if the fraction of good candidates in each field differs from the slot allocation in the Department, it will miss out on the best possible combination of hires.  So, if the corporate culture is good enough and everyone internalizes the social welfare function, it is better to have the best athlete criterion.

Game Theory For Linguistics

July 29, 2010 in Uncategorized | Tags: , | by | Leave a comment

This is in fact an excellent introduction to game theory full stop.  It covers strategic and extensive games, complete and incomplete information, sequential rationality, etc.  Very nicely.  And then on page 64 it gets really interesting, applying evolutionary game theory to pragmatics, a field in linguistics concerned with the contextual meaning of language.

Information Projection

July 28, 2010 in Uncategorized | Tags: , , | by | Leave a comment

After a disaster happens the post-mortem investigation invariably turns up evidence of early warning signs that weren’t acted upon.  There is a natural tendency for an observer to “second-guess,” to project his knowledge of what happened ex post into the information of the decision-maker ex ante.  The effects are studied in this paper by Kristof Madarasz.

To illustrate the consequences of such exaggeration, consider a medical example. A radiologist recommends a treatment based on a noisy radiograph. Suppose radiologists differ in ability; the best ones hardly ever miss a tumor when its visible on the X-ray, bad ones often do. After the treatment is adopted, an evaluator reviews the case to learn about the radiologist’s competence. By observing outcomes, evaluators naturally have access to information that was not available ex-ante; in that interim medical outcomes are realized and new X-rays might have been ordered. A biased evaluator thinks as if such ex-post information had also been available ex-ante. A small tumor is typically difficult to spot on an initial X-ray, but once the location of a major tumor is known, all radiologists have a much  betterchance of finding the small one on the original X-ray. In this manner, by projecting information, the evaluator becomes too surprised observing a failure and interprets success too much to be the norm. It follows that she underestimates the radiologistís competence on average.

The paper studies how a decision-maker who anticipates this effect practices “defensive” information production ex ante, for example being too quick to carry out additional tests that substitute for the evaluator’s information (a biopsy in the medical example) and too reluctant to carry out tests that magnify it.

A tip of the boss of the plains to Nageeb Ali.

Dilbert Learns A Little Game Theory

July 28, 2010 in Uncategorized | Tags: , | by | 1 comment

I thank Presh Talwalker for the pointer.  Pretty soon I won’t have to do any teaching, I’ll just play YouTube clips for 90 minutes, pass out the chocolate and send them on their way.

Why I’m Hoping My Son’s Kindergarten Teacher is Good

July 27, 2010 in Uncategorized | by | Leave a comment

A new study by many authors presented at the N.B.E.R. finds:

“Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

All else equal, they were making about an extra $100 a year at age 27 for every percentile they had moved up the test-score distribution over the course of kindergarten. A student who went from average to the 60th percentile — a typical jump for a 5-year-old with a good teacher — could expect to make about $1,000 more a year at age 27 than a student who remained at the average. Over time, the effect seems to grow, too.”

Correlation is not causation but the study:

“offered a chance to answer these questions because it randomly assigned students to a kindergarten class. As a result, the classes had fairly similar socioeconomic mixes of students and could be expected to perform similarly on the tests given at the end of kindergarten.

Yet they didn’t. Some classes did far better than others. The differences were too big to be explained by randomness. (Similarly, when the researchers looked at entering and exiting test scores in first, second and third grades, they found that some classes made much more progress than others.)

Class size — which was the impetus of Project Star — evidently played some role. Classes with 13 to 17 students did better than classes with 22 to 25. Peers also seem to matter. In classes with a somewhat higher average socioeconomic status, all the students tended to do a little better.

But neither of these factors came close to explaining the variation in class performance. So another cause seemed to be the explanation: teachers.”

Idolatry Bubbles

July 27, 2010 in art of office politics, economics | Tags: | by | Leave a comment

A new C.E.O. is appointed.  What are the opinions of the employees and how are they going to react?

In England, where I grew up, the cliche is that people are looking for excuses to denigrate successful people and pull them down.  Envy is the pertinent sin from the seven deadlies.  My intuition for American norms is poor but my impression is that employees will rally around the C.E.O.  Contradictory data is ignored and a big fan club develops spontaneously.

If employees diss or extol the boss whatever her true qualities, a rational observer cannot infer anything about the C.E.O. in cultural equilibrium.  But if observers herd, there is an idolatry bubble.   In an American bubble, the C.E.O. is a superstar.  When the facts come out, the bubble bursts and the C.E.O.’s collapse is huge.  In an English bubble, once the C.E.O. departs, employees will look back fondly on her tenure while complaining about the new C.E.O.  (Tony Hayward straddles both cultures so it hard to classify him!)

Careful investors should short American firms and go long on English firms.

Death Day

July 27, 2010 in Uncategorized | Tags: | by | 1 comment

Did you know that the number 4, spoken in Chinese, sounds very similar to the Chinese word for death?  For that reason the number 4 is considered unlucky.  (You may also know that the number 8 sounds like money and so it is considered lucky.)  Well it is unlucky.  Indeed, the 4th of the month is the peak day for death by cardiac arrest among Asian Americans.  That is according to this study which I found via my new favorite blog, which I found via my always favorite Twitterer, nambupini.

Posting Prices

July 27, 2010 in Uncategorized | Tags: , | by | 39 comments

Suppose you are selling your house and 10 potential buyers are lined up.  For whatever reason you cannot hold an auction (in fact sellers rarely do) but what you can do is make take-it-or-leave-it price demands.  To be clear:  this means that you can approach buyers in sequence proposing to each a price.  If a buyer accepts you are committed to sell and if he rejects you are committed to refuse sale to this buyer.  All buyers are ex ante identical, meaning that you while you don’t know their maximum willingness to pay, you have the same beliefs about each of them.  How do you determine the profit-maximizing price?

It is somewhat surprising that despite the symmetry, in order to maximize profits you will discriminate and charge them different prices.  What you will do is randomly order them and offer a descending sequence of prices.  The buyer who was randomly put first in the order (unlucky?) will be charged the highest price and this is an essential part of your optimal pricing policy.

Although it sounds surprising at first the intuition is pretty simple, it’s an application of the idea of option value.  When you have only one buyer left you will charge him some price p.  This price balances a tradeoff between high prices conditional on sale and the risk of having the offer rejected.  Since this is the last buyer the cost of that downside is that you will not make a sale.

Now the same tradeoff determines your price to the second-to-last buyer.  Except now the cost of having your offer rejected is lower because you will have another chance to sell.  So you are willing to take a larger chance of a rejected offer and therefore set a higher price.  Now continuing up the list, at every step the option value associated with a rejected offer increases and therefore so does the price.

OK that was easy.  Now consider a model where the seller posts prices and the buyers choose when to arrive.  This should break the symmetry if higher value buyers arrive earlier or later than lower value buyers.  And they will for two reasons.  First, nobody with a willingness to pay that is below the opening price will want to be first.  Second, even among buyers with a high willingness to pay, the higher it is the more you value the increased chance to buy relative to lower prices later.  (There is a “single-crossing property.”) The seller adjusts to this by further steepening the price path, etc.

Thanks to Toomas Hinnosaar for conversations on the topic.  Here is a paper by Liad Blumrosen and Thomas Holenstein on optimal posted prices.

Mysterious Brains Haunt Harvard Economics Web Pages

July 26, 2010 in Uncategorized | Tags: | by | 6 comments

Have you seen these?  They mysteriously lurk at the top right of miscellaneous web pages on the Harvard Econ department web site.  Like here, look Philippe Aghion’s page has brains.  Mankiw?  brains. And there is no caption or explanation given.  I started to think that it was there as some kind of experiment like those guys in gorilla suits that run across the screen when you’re supposed to be counting basketballs?  So I am here to say that I am not blind to these brains.  And I see the word juice there.  You can’t slip anything by me.

The Focusing Illusion

July 25, 2010 in Uncategorized | Tags: , , , | by | 1 comment

I went through a long showdown with tendonitis of the hamstring.  At its worst it was a constant source of discomfort that occupied at least a fraction of my attention at all times.  I knew that I had to heal before I would get back my to usual smiling happy self.  So I worked hard, stretching, walking, running: rehabilitating.

My hamstring doesn’t bother me much anymore.  But you know what?  Now that it no longer dominates the focus of my attention, I am reminded that my back hurts, as it always has.  But I had completely forgotten about that for the last year or so because during that time it didn’t hurt.

So I am not the content, distraction-free person I expected to be.  Now that I have solved the hamstring problem my current distractions draw my attention to the next health-related job:  keep my back strong, flexible, and pain-free.

This is a version of the focusing illusion.  People are motivated by expected psychological rewards that never come.  The classic story is moving to California.  People in Michigan declare that they would be much happier if they lived in California, but as it turns out people in California just about as miserable as people who still live in Michigan.

Pain and pleasure make up the compensation package in Nature’s incentive scheme.  Our attention is focused on what needs to be done using the lure of pleasure and the avoidance of pain.  And if it feels like she is repeatedly moving the goal posts, that may be all part of the plan according to a new paper by Arthur Robson and Larry Samuelson.

They model the way evolution shapes our preferences based on two constraints: a) there’s a limit to how happy or unhappy we can be and b) emotional states are noisy.  Emotions will evolve into an optimal mechanism for guiding us to the best decisions.  Following the pioneering research of Luis Rayo and Gary Becker,  they show that the most effective way to motivate us within these constraints is to use extreme rewards and penalties.  If we meet the target, even by just a little, we are maximally happy.  If we fall short, we are miserable.

This is the seed of a focussing illusion.  Because after I heal my hamstring Nature again needs the full range of emotions to motivate me to take care of my back.  So after the briefest period of relief, she quickly resets me back to zero, threatening once again misery if I don’t attend to the next item on the list. If I move to California, I enjoy a fleeting glimpse of my sought-after paradise before she re-calibrates my utility function, so that now I have to learn to surf before she’ll give me another taste.


How To Reinstate the Estate Tax

July 24, 2010 in Uncategorized | Tags: , , | by | 4 comments

That’s the subject of an article in Slate that leads with:

So, a Treasury secretary, a labor union leader, a hedge-fund billionaire, and an heiress walk into a conference call.

You will recall that the estate tax was temporarily repealed and it will come back in full force in 2011 unless some new legislation is passed. I have praised estate taxes before.

Salakot Slap:  gappy3000.