How Rich Is Rich Enough?

June 13, 2010 in Uncategorized | Tags: , | by | 3 comments

Ryan Avent’s self-styled populist post takes to task a rich man’s tax-conscious balance sheet dance:

As far as I can tell, this is entirely within the law. But I don’t think it’s improper to declare it obscene. Shameful, even. With a fortune of that size, additional wealth is about little more than score-keeping.

Everyone has this natural response to a rich person desiring to avoid taxes.  We all think like Ryan does:

But let’s be honest for a moment. According to this Bloomberg story, Mr Lampert is worth $3 billion. If he earns just 1% per year on that fortune—and he certainly earns much more—then he takes home $30 million in income. Per year. That’s 600 times the median household income in America. It’s more money than a person can reasonably spend. With that much money you can binge every day, and yet the money will just keep accumulating.

But you don’t have to think much longer than that to see a different side of things.  Since Mr. Rich is beyond the binge-every-day constraint, there are lots of other things he can do with his money besides bingeing.  For example, if you were Mr. Rich you could probably think of a lot of loved ones you would like to make happy by sharing your wealth with them. Or perhaps you understand that money is what determines what gets done in the world and maybe you have very strong feelings about what should get done.

Like maybe you want to be able to donate to artists or schools or libraries.  Maybe you want to help prevent HIV infection. Is it so obvious that a rich man, already beyond bingeing, who wants an extra dollar is being more greedy than a middle-class man who wants to get a dollar closer to the bingeing stage?

Let me be clear that I don’t believe that all of the Mr. Riches are trying to be Bill and Melinda Gates.  But I don’t see how you can conclude just from the fact that someone is rich that they don’t have reasons that we would be completely sympathetic to if we knew them.

And if I were a smart do-gooder who thought that everyone on Wall Street was evil the obvious thing to do would be to start a hedge fund, rip them off, and spend their money to meet my goals.

Ghutrah greeting:  gappy3000.

In Defense of Teacher Evaluations

June 12, 2010 in Uncategorized | Tags: , | by | 11 comments

Everyone is jumping on the bandwagon, including Tyler Cowen, Greg Mankiw, and even Sandeep.  They are all trumpeting this study whose bottom line is that student evaluations of teachers are inversely related to the teacher’s long-run added value.  The conclusion is based on two findings.  First, if my students do unusually well in my class they are likely to do badly in their followup classes.  Second, if my students evaluate me highly it is likely that they did unusually well in my class.

I am not jumping on the bandwagon.  I have read through the paper and while I certainly may have overlooked something (and please correct me if I have) I don’t see any way the authors have ruled out the following equally plausible explanation for the statistical findings.  First, students are targeting a GPA.  If I am an outstanding teacher and they do unusually well in my class they don’t need to spend as much effort in their next class as those who had lousy teachers, did poorly this time around, and have some catching up to do next time.  Second, students recognize when they are being taught by an outstanding teacher and they give him good evaluations.

The authors of the cited study are every time quick to jump to the following conclusion:  older, experienced teachers, and especially those with PhD’s know how to teach “lasting knowledge” whereas younger teachers “teach to the test.”  That’s a hypothesis that sounds just right to all of us older, experienced teachers with PhD’s.  But is it any more plausible than older experienced teachers with tenure don’t care about teaching and as a result their students do poorly?  Not to me.

Dear 310-2 students who will be filling out evaluations this week:  please don’t hold it against me that I am old, experienced, and have a PhD.

Sordid Links

June 11, 2010 in Uncategorized | by | Leave a comment

  1. Expect a fatwa.
  2. Lesbros.
  3. Once you’ve been an extra in a rap video, what else is left but to run for President?
  4. After watching this you won’t be in the mood for kissing.
  5. How not to tell someone they have food on their face.
  6. Presidential prose:  $#@*!

The Placebo Effect Is Part of Medicine

June 11, 2010 in Uncategorized | Tags: | by | 2 comments

Compare two studies of a medicine’s effectiveness.  In the first study there was a placebo control group.  Subjects who actually got the medicine believed with 50% probability that they were taking a sugar pill.  In the second study there was no placebo control.  Those who got the medicine knew it.

Those who actually got the medicine had better outcomes when they knew it than when they were unsure.

Our group at Columbia has completed preliminary work involving metaanalyses of randomized controlled trials comparing antidepressant medications to a placebo or active comparator in geriatric outpatients with Major Depressive Disorder (Sneed et al. 2006). In placebo controlled trials, the medication response rate was 48% and the remission rate 33%, compared to a response rate of 62% and remission rate of 43% in the comparator trials (p < .05). The effect size for the comparison of response rate to medications in the comparator and placebo controlled trials was large (Cohen’s d = 1.2).

Do Good Student Evaluations Mean You are a Good Teacher?

June 11, 2010 in economics | Tags: | by | 8 comments

The lead article in the June 2010 edition of the Journal of Political Economy is

Does Professor Quality Matter? Evidence from Random Assignment of Students to Professors
Scott E. Carrell and James E West

Student evaluations may not be a good signal of teaching quality because

“Professors can inflate grades or reduce academic content to elevate student evaluations.”

The authors argue that if a student takes Calculus I, say, their performance in Calculus II is a good signal of how well they learned the material in Calculus I.  So their study:

“uses a unique panel data set from the United States Air Force Academy (USAFA) in which students
are randomly assigned to professors over a wide variety of standardized core courses. The random assignment of students to professors, along with a vast amount of data on both professors and students, allows us to
examine how professor quality affects student achievement free from the usual problems of self-selection. Furthermore, performance in USAFA core courses is a consistent measure of student achievement
because faculty members teaching the same course use an identical syllabus and give the same exams during a common testing period. Finally, USAFA students are required to take and are randomly assigned
to numerous follow-on courses in mathematics, humanities, basic sciences, and engineering. Performance in these mandatory follow-on courses is arguably a more persistent measurement of student learning.
Thus, a distinct advantage of our data is that even if a student has a particularly poor introductory course professor, he or she still is required to take the follow-on related curriculum.”

Their methodology:

“We start by estimating professor quality using teacher value-added in the contemporaneous course. We then estimate value-added for subsequent classes that require the introductory course
as a prerequisite and examine how these two measures covary. That is, we estimate whether high- (low-) value-added professors in the introductory course are high- (low-) value-added professors for student
achievement in follow-on related curriculum. Finally, we examine how these two measures of professor value-added (contemporaneous and follow-on achievement) correlate with professor observable attributes
and student evaluations of professors. These analyses give us a unique opportunity to compare the relationship between value-added models (currently used to measure primary and secondary teacher quality) and
student evaluations (currently used to measure postsecondary teacher quality).

Their findings:

Results show that there are statistically significant and sizable differences in student achievement across introductory course professors in both contemporaneous and follow-on course achievement. However,
our results indicate that professors who excel at promoting contemporaneous student achievement, on average, harm the subsequent performance of their students in more advanced classes. Academic rank,
teaching experience, and terminal degree status of professors are negatively correlated with contemporaneous value-added but positively correlated with follow-on course value-added. Hence, students of less
experienced instructors who do not possess a doctorate perform significantly better in the contemporaneous course but perform worse in the follow-on related curriculum.

For example:

As an illustration, the introductory calculus professor in our sample who ranks dead last in deep learning ranks sixth and seventh best in student evaluations and contemporaneous value-added, respectively.

Required reading for all serious teachers and students and Deans.  Ungated version

Penalty Shootout Before Extra Time in Soccer

June 10, 2010 in Uncategorized | Tags: , | by | 4 comments

The World Cup starts tomorrow and I just filled out my bracket.  In academia Americans are a minority and people are intensely nationalistic.  So the optimal bracket strategy is to have USA advance as far as I can before even I burst out laughing  (it turns out that’s the semi-finals this year) and also give preference for under-represented countries.  Based on a cursory survey of our department’s demographics, the team that maximizes quality per department representative is Spain.  So Spain is my team to win it all this year.

The World Cup is paradoxical because the group stage is exciting and the elimination stage is extremely boring.  There are probably many reasons for this but often people focus on the penalty shootout.  You hear arguments like this.  Playing it safe gives you essentially a coin flip.  And if the other team is playing it safe, taking risks and playing offensively can actually be worse than waiting for the coin flip.

I have heard proposals to hold the penalty shootout before extra time.  The winner of the shootout will be the winner of the match if it remains tied after extra time.  The uncertainty is resolved first, then they play.

The rule would have ambiguous effects on the quality of play.  For sure, the team that won the shootout would play defensively and the disadvantaged team would be forced to play an attacking game.  There would be exactly one team attacking.

But that would be less exciting than a game in which both are attacking so the rule change would be a net improvement only if most extra-time games would otherwise have neither team attacking.

Here is a theoretical analysis of the question by Juan Carillo.  I am not sure I can summarize his conclusions so help would be appreciated.  Here is an empirical analysis.

Setting up a State (Part 2)

June 10, 2010 in Uncategorized | Tags: , , | by | Leave a comment

My first post on this topic was prompted by reading newspaper stories about Afghanistan and having lunch with Jim Robinson shortly afterwards.  (For example, Karzai is sacking trusty lieutenants and moving to form a coalition with the Taliban and perhaps Pakistan.)  But who has thought deeply about this issue and come up with some interesting insights?  The answer is of course: Roger Myerson.  He has an informal overview of his thoughts on state-building.  To understand his ideas fully, you have to read the overview.  Here are a few insights I pulled out that are most related to my earlier post.

One issue I raised was: How do you ensure political competition is constructive not destructive? Myerson says the key is that the losers in any political competition feel they have the opportunity to win a future competition.   Otherwise, what choice to they have but to compete from outside the political system and trigger conflict?

An alternative might be to install a puppet dictator who faces no competition.  But here I repeat my earlier point: this dictator will be rapacious and steal from his citizens.  To keep him in line, constructive political competition is necessary.

Myerson’s overview has his thoughts on how to build constructive national and local competition.  Again, I recommend you take a look.

Setting up a New State

June 8, 2010 in Uncategorized | by | 3 comments

With news of a shaky, insecure Hamid Karzai and bad news coming out of Afghanistan every day, it may be too late to ask how a new system of goverment should be created.  But it’s an interesting question nevertheless!   Here are some possibilities.

A state must at the very least protect property rights.  Citizens must be protected from each other and contracts must be enforced to facilitate trade.  More subtly, citizens must be protected from the state itself.  Otherwise, the fruits of their labor can simply be confiscated by the state and they will have little incentive to engage in productive economic activity.

This kind of state exists in many Western democracies.  A judicial system enforces contracts.  A politician who interferes in lawful activity faces checks and balances to limit his ability to be rapacious.  The checks and balances can come from other branches of government or through political competition.  This is about the best system found so far.  If it could be established in Afghanistan and Iraq, it would be great!

Another kind of state has an elite (or a dictator) which enforces property rights.  They tax their citizens for the enforcement.  The elite is tempted to steal from the citizens: there are no checks and balances.  What potentially restrains the elite is that any expropriation will lead to a loss of reputation.   The citizens know they stand of being ripped off tomorrow if they work hard today.   A patient, far-sighted elite which is secure in power might then have the right incentives not to steal from its citizens.

The third scenario is a little like the first.  The state/government does not have monopoly power, it faces competition.  But the competition instead of leading to better behavior leads to worse behavior.  To stay in power, the government has to kill off other warlords.  The threat of being thrown out of power generates short-sighted rational strategies.  Exploitation and theft are widespread.  This most resembles present-day Afghanistan.

How do we go from one kind of state to another?  Which is the best system to set up from an outsider’s perspective?

If You Don’t Have Something Nice To Say… Dither.

June 8, 2010 in Uncategorized | Tags: , , | by | 2 comments

“If you don’t have something nice to say, don’t say anything at all.”  That is usually bad advice.  Because then when you say nothing at all it is understood that you have only unkind things to say.

If you are trying to maximize pleasantry then your policy should depend on your listener’s preferences.  Based on what you say she is going to revise her beliefs over what you think about her.  What matters is her preferences over these beliefs.

A key fact is that you have only limited control over those beliefs.    Some of the time you will say something kind and some of the time you will say something unkind.  These will move her beliefs up and down but by the law of total probability the average value of her beliefs is equal to her prior.  You control only the variance.

If good feelings help at the margin more than bad feelings hurt then she is effectively risk-loving.  You should go to extremes and maximize variance.  Here the old adage applies:  you should say something nice when you have something nice to say and you should not say anything nice when you don’t.  In terms of her beliefs, it makes no difference whether you say the unkind thing or just keep quiet and allow her to infer it.  But perhaps politeness gets a lexicographic kick here and you should not say anything at all.

(On thing the standard policy ignores is the ambiguity.  Since there are potentially many unkind things you might be witholding, if she is pessimistic you might worry that she will assume the worst.  Then you should consider saying slightly-unkind things in order to prevent the pessimistic inference.  Still there is the danger of unraveling because then when you say nothing at all she will know that what is on your mind is even worse than that.)

If she is risk-averse in beliefs then you want to go to the opposite extreme and never say anything.  She never updates her beliefs.

But prospect theory suggests that her preferences are S-shaped around the prior:  risk-averse on the upside but risk-loving on the downside.  Then often  it is optimal to generate some variance but not to go to extremes.  You do this by dithering.  Your never give outright compliments or insults.  Your statements are always noisy and subject to interpretation.  But the signal to noise ratio is not zero.

A full analysis of this problem would combine the tools of psychological game theory with persuasion mechanisms a’ la Gentzkow and Kamenica.

Freeganism

June 7, 2010 in Uncategorized | Tags: , , | by | Leave a comment

A primer in the New York Times.

Kit is a freegan. He maintains that our society wastes far too much. Freeganism is a bubbling stew of various ideologies, drawing on elements of communism, radical environmentalism, a zealous do-it-yourself work ethic and an old-fashioned frugality of the sock-darning sort. Freegans are not revolutionaries. Rather, they aim to challenge the status quo by their lifestyle choices. Above all, freegans are dedicated to salvaging what others waste and — when possible — living without the use of currency. “I really dislike spending money,” Kit told me. “It doesn’t feel natural.”

Its kinda like composting as a lifestyle, only with someone else’s waste and instead of making fertilizer you either eat it or live in it.  An entertaining read from start to finish with cameos by roadkill, frozen toilets and even property rights.

Economics of Afghan Security: Demand Creates its Own Supply and Supply Creates its Own Demand

June 7, 2010 in Uncategorized | Tags: , , , , | by | 5 comments

Afghan security firms provide armed escorts for NATO convoys.  Some firms lost their employment because of violent incidents where they killed civilians.  But NATO Convoys them suffered greater attacks and the security firms were re-employed.  There is an obvious incentive problem:

“The officials suspect that the security companies may also engage in fake fighting to increase the sense of risk on the roads, and that they may sometimes stage attacks against competitors.

The suspicions raise fundamental questions about the conduct of operations here, since the convoys, and the supplies they deliver, are the lifeblood of the war effort.

“We’re funding both sides of the war,” a NATO official in Kabul said. The official, who spoke on the condition of anonymity because the investigation was incomplete, said he believed millions of dollars were making their way to the Taliban.”

This is a Mafia tactic: To get people to pay from protection, you have to create the demand for protection.  Supply creates its own demand.  There is also a reverse effect:  The security firms sometimes bribe the Taliban to keep away from the convoys.  With this source of steady income, the Taliban have no incentive to disband and may even have an incentive to expand.  Demand creates its own supply.

The second circle seems less pathological than the first.  If we cannot find the Taliban ourselves and kill them or bribe them then to stay away from the convoys, we have to use a local security firm.  The security firm is an intermediary, adding value and generating surplus.  The first circle is destroying surplus, like the Mafia.  It is creating a public bad, a security problem, to generate a transfer.

Beyond punishing anyone who is caught planning a deliberate attack, it is hard to see any simple solution.  Fewer and fewer countries want to be involved in Afghanistan and so using our own troops is difficult.  The Taliban might prefer to be employed in the real economy.  But the main alternative to attacking NATO convoys is growing opium.  Is that any better than attack and theft?

The entire episode signals that Afghanistan is a Mafia state with leaders acting an profit maximizers, destroying surplus to capture a bigger slice of what’s left of the economic pie.   A depressing state of affairs after eight years of war.

The Reckless Kid Theorem

June 6, 2010 in Uncategorized | Tags: , | by | 1 comment

Here is a good metaphor for a problem Mother Nature has to solve.  A small child is playing on the equipment at the playground.  The child knows what she is physically capable of but doesn’t know what is safe.  If Nature knew about swings and see-saws and monkey bars she would just encode their riskiness into the genes of the child and let the child do the optimization.

But these things came along much too recently for Nature to know about them. Fortunately Nature knows that whatever is in the child’s world was pretty likely also in the parents’ world and by now the parents have learned what is safe. So Nature can employ the parent as her agent.

But in this family-firm, the child is a specialist too.  For one thing she has up-to-the-minute information about her physical abilities which change too quickly for the parents to keep track of.  But just as importantly the child is the cheapest source of information about what’s in front of her.  Nature could press the parent into service again to investigate the set of possible activities available to the child, but this would be costly to the parent (for whom this carrier of only half of his genes is just one of many priorities) and so would require extra incentives and anyway that information is more directly accessible to the child.

So Nature’s organizational structure utilizes a tidy division of labor.  The child’s job is to identify the feasible set and the parent’s job is to veto all the alternatives that are too dangerous.  One last constraint explains the reckless kid.   The child cannot communicate the feasible set to the parent.  This leads to the third-best solution. The child just picks something nearby, say the rope bridge, and starts climbing on it. The parent is stationed nearby ready to intervene whenever the child’s first choice is too dangerous.

And thus the seeds of much later conflict are sown.

Try Your Hand at Synesthesia

June 5, 2010 in Uncategorized | Tags: , | by | 1 comment

Heather Christle tweeted:

Pacifico beer tastes like it’s mad at me.

On the other hand, Elk Cove 2007 Wilamette Valley Pinot Noir tastes like it’s embarrassed by me.  Almost as if we met once before on chatroullette and sensed immediately that we were bound by some primitive psychic traction and for the briefest instant we realized how all of history had in fact led us to this seemingly random moment, face to digitized face; only to be stopped, not more than an instant later by the simultaneous fear that our common epiphany could not be real but instead just a projection of our own deep sense of unfulfillment which now was out in the open plainly readable on our faces, the shame of which brought an end, by synchronized Nexting, to our only chance at untying life’s eternal knot, and as if now we have bumped into each other again at a party, introduced by mutual friends, and Elk Cove 2007 Wilamette Valley Pinot Noir glanced at its watch and escaped, avoiding eye contact and stammering about late hours and lost sleep.


While we are on the subject, you would be well-advised not to follow me on Twitter. Here is the link not to follow. Here are the kinds of things you are better off avoiding.

Dutifully Sordid Links

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

  1. Mike Tyson has a relationship with cannoli.
  2. Creative Uses of the BP logo.
  3. FMRI in 1000 words.
  4. Frank Sinatra tells George Michael to chill out.
  5. How to tell someone he has B.O.

Unlimited Use Wireless Data Plans

June 3, 2010 in Uncategorized | Tags: , , | by | 8 comments

The big news is that AT&T will be discontinuing its unlimited use data plans effective next week which happens to coincide with Steve Jobs worst-kept-secret announcement of the next-generation iPhone.  People are up in arms.

Unlimited, all-you-can-eat wireless data was a beautiful thing for Apple devices on AT&T, delivering streams of Pandora, YouTube videos, a million tweets, and hundreds of webpages without worry. And now it’s dead.

AT&T’s new, completely restructured mobile data plans for both iPhones and iPads have officially launched the era of pay-per-byte data, which we’ve known was coming. We just hoped it would take a little longer. It’s the anti-Christmas.

One thing to keep in mind is that unlimited use tariffs are not part of an efficient or profit-maximizing pricing policy whether you consider monopoly or perfect competition.  It is hard to imagine a model under which unlimited use makes sense unless there is zero marginal cost.  (If marginal cost is positive then under unlimited use your usage will typically go beyond the point where your marginal value exceeds marginal cost. Whatever the market structure, this would be replaced by marginal cost pricing possibly with a reduced fixed fee.)

Still the specific form of the tariff– zero per-MB cost up to some limit and then a steep price after that– annoys many people.  In fact, there are theories that show that this kind of pricing is the best way to exploit consumers who don’t accurately forecast their own usage.

But this brings me to the second thing to keep in mind.  Those exploits take advantage of people who underestimate their usage.  But here is the actual pricing menu.

I bet that you actually overestimate your usage.  I use my phone a lot for browsing the web, maps, etc. and I average under 200 MB per month.  Because some months I do go above 200MB, I will buy the 2GB plan for $25 (I don’t need tethering.)  My wife on the other hand never goes above 200MB.  So the new plan is a better deal for us.

Here’s how to check your usage.

Ticket Scalping: Why is Neil Diamond worth so Much?

June 3, 2010 in economics | Tags: | by | 2 comments

Neil is a great businessman as well as a popular songwriter (though he’s unlucky in love and that cost him).  In an earlier post, I wondered why artists do not simply price discriminate and not let scalpers get the rents.  If they do not want to look exploitative, then can try to use some other instruments (e.g. a refund to loyal fans) to avoid just letting scalpers exploit the fans.

Another answer is that artists actually do perform price discrimination using the scalper as the intermediary:

Less than a minute after tickets for last August’s Neil Diamond concerts at New York’s Madison Square Garden went on sale, more than 100 seats were available for hundreds of dollars more than their normal face value on premium-ticket site TicketExchange.com. The seller? Neil Diamond.

Ticket reselling — also known as scalping — is an estimated $3 billion-a-year business in which professional brokers buy seats with the hope of flipping them to the public at a hefty markup.

In the case of the Neil Diamond concerts, however, the source of the higher-priced tickets was the singer, working with Ticketmaster Entertainment Inc., which owns TicketExchange, and concert promoter AEG Live. Ticketmaster’s former and current chief executives, one of whom is Mr. Diamond’s personal manager, have acknowledged the arrangement, as has a person familiar with AEG Live, which is owned by Denver-based Anschutz Corp.

Selling premium-priced tickets on TicketExchange, priced and presented as resales by fans, is a practice used by many other top performers, according to people in the industry. Joseph Freeman, Ticketmaster’s senior vice president for legal affairs, says that the company’s “Marketplace” pages only rarely list tickets offered by fans.

According to the lead singer of Nine Inch Nails:

the true market value of some tickets for some concerts is much higher than what the act wants to be perceived as charging. For example, there are some people who would be willing to pay $1,000 and up to be in the best seats for various shows, but MOST acts in the rock / pop world don’t want to come off as greedy pricks asking that much, even though the market says its value is that high. The acts know this, the venue knows this, the promoters know this, the ticketing company knows this and the scalpers really know this. So…

The venue, the promoter, the ticketing agency and often the artist camp (artist, management and agent) take tickets from the pool of available seats and feed them directly to the re-seller (which from this point on will be referred to by their true name: SCALPER). I am not saying every one of the above entities all do this, nor am I saying they do it for all shows but this is a very common practice that happens more often than not. There is money to be made and they feel they should participate in it. There are a number of scams they employ to pull this off which is beyond the scope of this note.

StubHub.com is an example of a re-seller / scalper. So is TicketsNow.com.

Of course, the danger is that the fans find out what the artist is doing – e.g. Neil Diamond’s strategy has been fully revealed thanks to the WSJ.  Either this leads to a counter-reaction or fans just get used to it and accept the new norms.  Hard to say what is happening but the Bon Jovi VIP pricing without using a scalper as a middleman suggests more fans are accepting direct price discrimination by the artist.

(Hat Tip: Troy Kravitz and Mallesh Pai)

Perverse Incentives?

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

Jonah Lehrer has a post

about why those poor BP engineers should take a break. They should step away from the dry-erase board and go for a walk. They should take a long shower. They should think about anything but the thousands of barrels of toxic black sludge oozing from the pipe.

He weaves together a few stories illustrating why creativity flows best when it is not rushed.  This is something I generally agree with and his post is good read but I think one of his examples needs a second look.

In the early 1960s, Glucksberg gave subjects a standard test of creativity known as the Duncker candle problem. The problem has a simple premise: a subject is given a cardboard box containing a few thumbtacks, a book of matches, and a waxy candle. They are told to determine how to attach the candle to piece of corkboard so that it can burn properly and no wax drips onto the floor.

Oversimplifying a bit, to solve this problem there is one quick-and-dirty method that is likely to fail and then another less-obvious solution that works every time.  (The answer is in Jonah’s post so think first before clicking through.)

Now here is where Glucksberg’s study gets interesting. Some subjects were randomly assigned to a “high drive” group, which was told that those who solved the task in the shortest amount of time would receive $20.

These subjects, it turned out, solved the problem on average 3.5 minutes later than the control subjects who were given no incentives.  This is taken to be an example of the perverse effect of incentives on creative output.

The high drive subjects were playing a game.  This generates different incentives than if the subjects were simply paid for speed.  They are being paid to be faster than the others.  To see the difference, suppose that the obvious solution works with probability p and in that case it takes only 3.5 minutes.  The creative solution always works but it takes 5 minutes to come up with it. If p is small then someone who is just paid for speed will not try the obvious solution because it is very likely to fail.  He would then have to come up with the creative solution and his total time will be 8.5 minutes.

But if he is competing to be the fastest then he is not trying to maximize his expected speed.  As a matter of fact, if he expects everyone else to try the obvious solution and there are N others competing, then the probability is 1 - (1-p)^N that the fastest time will be 3.5 minutes.  This approaches 1 very quickly as N increases.  He will almost certainly lose if he tries to come up with a creative solution.

So it is an equilibrium for everyone to try the quick-and-dirty solution, and when they do so, almost all of them (on average a fraction 1-p of them) will fail and take 3.5 minutes longer than those in the control group.

The Reputational Unravelling of Marriage Counselors

June 2, 2010 in Uncategorized | Tags: , | by | 9 comments

Consider the game among a couple and their male marriage counselor.  The problem for the marriage counselor is to prove that he is unbiased.  It is common-knowledge at the outset that the wife worries that a male marriage counselor is biased and will always blame the wife.

Indeed if 10 weeks in a row they come in for counseling and talk about the week’s petty argument (how to stack dishes in the dishwasher, whether it matters that the towels are not folded corner-to-corner, etc.) he everytime sides with the husband, eventually the wife will want to find a new counselor.

So what happens after 9 weeks of deciding for the husband?  Now all parties know that the counselor is on his last leg.  He must start siding with the wife in order to keep his job, even if the husband is actually in the right (i.e. even if throwing out the 3-day old soggy quesadilla in the refrigerator was the right thing to do.)  But that means that he’s now biased in favor of the wife and so the husband will fire him.

We have just concluded that if he decides for the husband 9 times in a row he will be fired.  So what happens on week 9 in the rare event that he has decided for the husband 8 times in a row.  Same thing,  he is strategically biased in favor of the wife and he will be fired.

By induction he is biased even on week 1.

(NB: my marriage is beautiful (no counseling) and there is nobody who can fold a towel faster than me.)

Does Regret signal a Bad Decision?

June 1, 2010 in Uncategorized | by | 6 comments

David Leonhardt had an interesting column on underestimation of risk.  BP’s possible underinvestment in protecting against a gross accident is exhibit one.:

The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.

Perhaps the easiest way to see this is to consider what BP executives must be thinking today. Surely, given the expense of the clean-up and the hit to BP’s reputation, the executives wish they could go back and spend the extra money to make Deepwater Horizon safer. That they did not suggests that they figured the rig would be fine as it was.

But this does not prove the case.  You may buy a stock given the odds of it going up or down.  If it goes down you will regret your investment.  This does not prove it was wrong to invest in the first place.  It might have been right given your initial assessment. The same logic applies to BP.

This is a simple point: regret does not imply that the ex ante decision was bad.  Leonhardt is  a great economics commentator and journalist.  The fact that he makes this elementary mistake shows how easy it is to make.

But there is another factor at work.  It is impossible to determine BP’s probability assessment after the fact.  They can always claim the chance of a disaster was low.  There is no historical data against which to measure their assessment.   All we are left with is the option to blame them even if their decision was perfect from an ex ante perspective.  Blame involves saying them made a bad decision and holding them to account.  This was the key element in Jeff’s earlier post on the Blame Game.

Doing The Opposite

June 1, 2010 in Uncategorized | Tags: , , | by | 7 comments

I spent one year as an Associate Professor at Boston University.  The doors in the economics building are strange because the key turns in the opposite way you would expect.  Instead of turning the key to the right in order to pull the bolt left-to-right, you turn the key to the left.  For the first month I got it wrong every morning.

Eventually I realized that I needed to do the opposite of my instinct.  And so as I was just about to turn the key to the right I would stop myself and do the opposite.  This worked for about a week.  The problem was that as soon as I started to consistently get it right, it became second nature and then I could no longer tell what my primitive instinct was and what my second-order counter-instinct was.  I would begin to turn the key to the left and then stop myself and turn the key to the right.

I have since concluded that it is basically impossible to “do the opposite” and that we are all lesser beings because of it.  We could learn from experience much faster if we had the ability to remenber what our a) what our natural instinct is b) whether it works and c) to do the opposite when it doesn’t.

We could be George Castanza:

Chicken Everywhere: J.F.K.

June 1, 2010 in economics | Tags: , | by | 2 comments

John F Kennedy was born in Brookline and attended Devotion School.  Our kids are attending Devotion this year and our third-grader took part in a lovely event at JFK’s birthplace last week.  There were some nice speeches, including one by the head of the JFK Presidential Library .  It involved this story:

When Jack was quite young but old enough to ride a bike, he played a game of Chicken with his older brother Joe, perhaps on the very street of his birthplace.  In classic fashion, they raced towards each other on their bikes.  Joe expected some respect from his younger brother.  Joe thought Jack would swerve and let him win the game.  No such luck.  They slammed into each other and had to go to hospital.

I had never heard this story before.  I mentioned it to several Americans but they had never heard it either.  Everyone knows the famous Chicken story: Khrushchev vs Kennedy during the Cuban Missile Crisis.

Schelling could always take commonplace strategic interactions and draw fundamental lessons from them.  Similarly, it would be nice to think that JFK’s childhood experience gave him some insight into how to play Chicken when the stakes were high.

Should We Expect Tennis Serves To Be Serially Independent?

June 1, 2010 in Uncategorized | Tags: , | by | 9 comments

In a famous paper, Mark Walker and John Wooders tested a central hypothesis of game theory using data on serving strategy at Wimbledon.  The probability of winning a point conditional on serving out wide should equal the probability conditional on serving down the middle.  They find support for this in the data.

A second hypothesis doesn’t fare so well. Walker and Wooders suggest that the location of the serve should be statistically independent over time, and this is not borne out in the data.  The reason for the theoretical prediction is straightforward and follows from the usual zero-sum logic.  The server is trying to be unpredictable.  Any serial correlation will allow the returner to improve his prediction where the serve is coming and prepare.

But this assumes there are no payoff spillovers from point to point.  However it’s probably true that having served to the left on the first serve (and say faulted) is effectively “practice” and this makes the server momentarily better than average at serving to the left again.  If this is important in practice, what effect would it have on the time series of serves?

It has two effects.  To understand the effects it is important to remember that optimal play in these zero-sum games is equivalent to choosing a random strategy that makes your opponent indifferent between his two strategies.  For the returner this means randomly favoring the forehand or backhand side in order to equalize the server’s payoffs from the two serving directions.  Since the server now has a boost from serving, say, out wide again, the returner must increase his probability of guessing that direction in order to balance that out. This is a change in the returner’s behavior, but not yet any change in the serving probabilities.

The boost for the server is a temporary disadvantage for the returner.  For example, if he guesses down the line, he is more likely to lose the point now than before.  He may also be more likely to lose the point even if he guesses out wide, but lets say the first outweighs the second.  Then the returner now prefers to guess out wide. The server has to adjust his randomization in order to restore indifference for the returner.  He does this by increasing the probability of serving down the line.

Thus, a first serve fault out wide increases the probability that the next serve is down the line.  In fact, this kind of “excessive negative correlation” is just what Walker and Wooders found.  (Although I am not sure how things break down within-points versus across-points and things are more complicated when we consider ad-court serves to deuce-court serves.)

(lunchtime conversation with NU faculty acknowledged, especially a comment by Alessandro Pavan.)

Evidence

May 30, 2010 in Uncategorized | Tags: | by | Leave a comment

background here.

Night Market Corn

May 30, 2010 in Uncategorized | Tags: | by | 3 comments

I found this recipe on a now-defunct foodie blog a few years ago.  It’s a pretty good replica of the grilled corn you find at Taipei Night Markets.  Sweet, spicy and savory, it’s the definition of summer at our house.

The preparation is very simple, provided you have an immersion blender.  You can make it by hand but its a fair bit of work.

To make about 6 ears of corn, dissolve 2t of sugar in 2T of soy sauce in the plastic vessel that goes with your immersion blender.  Add 1 minced garlic clove, 1 minced shallot and 2T vegetable oil.  (If you don’t have the blender, you will have to first pulvarize the garlic and shallot until they form a paste.)  Blend until you have a thick sauce.  Add cayenne pepper to taste.

Peel the corn fully and baste with the sauce.  Place on a medium-hot grill.  Continually turn and baste until they look like this (pictured alongside grilled lobster tails and a lovely Sauvignon Blanc from Quincy.)

Total grilling time is about 10-15 minutes.

Bacon for Vegetarians

May 28, 2010 in food and wine | by | 1 comment

So good that it’s worth the hypocrisy:

1. Best Chocolate

2. Best Salami (downside – somewhat complicated to order and hard to slice unless you invest in your own salami slicer)

3. Best Bacon Products (especially the Speck)

Wonderfully Sordid Links

May 28, 2010 in Uncategorized | by | Leave a comment

  1. Three Saviors walk into a padded cell…
  2. What the fuck should I make for dinner?
  3. A movie that is also a poem.
  4. Things to do after you commit murder.
  5. How to poop in space:  the movie.
  6. Salt + screeching = art.

This Daily Nuisance Is Brought To You By British Petroleum

May 27, 2010 in Uncategorized | Tags: , , , , , | by | 8 comments

Naming rights raise a lot of money.  Think of professional sports stadiums like Chicago’s own US Cellular Field  (does US Cellular still exist??)  The amazing thing to me is that when Comiskey Park changed names to “The Cell,” local media played right along and gave away free advertising by parroting the name in their daily sports roundups.  Somehow the stadium knew that this coordination/holdup problem would be solved in their favor.

We should seize on this.  But not by selling positive associations to corporations that want to promote their brand.  Instead lets brand badly-behaving corporations with negative associations.

The Exxon Valdez oil spill is a name that stuck.  Every single time public media refer to that event they remind us of the association between Exxon and the mess they made.  No doubt we will continue to refer to the current disaster as the BP Gulf spill or something like that.  That is good.

But why stop there?  (Positive) advertisers have learned that you can slip in the name of a brand before, after, and in-between just about any scripted words and call it an ad.  The Tostitos Fiesta Bowl.  The Bud Lite halftime show. The X brought to you by Y.  These are positive associations.

Think of all the negative events and experiences that are just waiting to be put to use as retribution by negative association.  “And today I am here to announce that the BP National Debt will soon reach 15 trillon Dollars.”  Or “The BP recession is entering its fifth consecutive quarter with no end in sight.”

Why are we wasting hurricane names on poor innocents like Katrina and Andrew?  I say for the 2010 hurricane season we ditch the alphabetical order and line em up in order of egregiousness.   “Hurricane Blackwater devastates the Florida Coast.  Tropical Storm Halliburton kills hundreds in Central America.”

The nice thing about negative naming is that supply is virtually unlimited.  Cities don’t go selling the names of every street in town because selling the marginal street requires lowering the price.  But you can put the name of every former VP at Enron and Arthur Andersen on their own parking meter and the last one makes you want to spit just as much as the first.  Hey, what about parking tickets?  This parking ticket is brought to you by Washington Mutual.

Suddenly the inefficiency of city bureaucracy is a valuable social asset.  Welcome to the British Petroleum DMV, please take your place in line number 8.  And some otherwise low-status professions will now be able to leverage that position to provide an important public service.  “There’s some stubborn tartar on that molar, Ms. Clark, I’m going to have to use the Toyota Prius heavy-duty scaler.  You might feel some scraping. Rinse please.”

“Good Afternoon, Pleasant Meadow Morturary, will you be interested in Goldman Sachs cremation services today?” Or  “Mr. Smith we are calling to confirm your appointment for a British Petroleum colonoscopy on Monday.  Please be on time and don’t eat anything 24 hours prior.”

Just as positive name-association is a lucrative business,  these ne’er-do-wells would of course pay big money to have their names removed from the negative icons and that’s all for the better.  If the courts can place a cap on their legal liability this gives us a simple way to make up the difference.

And I am ready to do my part.  As much as I like one-word titles Sandeep and I are going to add a subtitle to our new paper.  Its going to be called “Torture:  Sponsored by BP.”

Why Do Bands let Scalpers get the Rents?

May 27, 2010 in Uncategorized | by | 6 comments

Sean left an interesting comment on my earlier post which got me thinking:  If Springsteen does not price discriminate ticket sales, the resale market will do it for him, charging high prices for rationed tickets and getting surplus from high willingness to pay consumers.  So, even if Bruce wants to sell tickets for cheap to his fans, the fans get screwed by the scalpers.  Then, Bruce should come up with some other way to help his blue collar fans.  One way would be to price-discriminate like a profit-maximizer and then give refunds to loyal fans.  Maybe, you can use your fan club to give refunds to members who attend your concert or something of that ilk.  And fans might even prefer giving money to Bruce than to scalpers: after all they’re probably pirating all his albums and concerts are his main source of revenue!

So, the prevalence of the resale market is puzzling: why don’t bands, plays etc simply price optimally and eliminate the scalpers?   I looked for some research on this and found a paper by Pascal Courty, “Some Economics of Ticket Resale“.  His theory has two parts:  (Part 1) Suppose some people only realize over time whether they are free to attend a concert while other diehard fans know immediately.  At the time you set ticket prices, the late bloomers do not yet know their demand.  If you price too high the diehard fans will not buy as they can’t afford it.  The late-blooming consumers won’t buy as they’re not yet sure they can attend.  So, the promoter prices low and diehard fans and scalpers buy tickets.  As time goes buy the late bloomers who are free to attend the concert demand tickets and scalpers rip them off.  (Part 2) Scalpers are always more flexible than promoters.  If promoters attempt to enter the late-blooming market, scalpers can always undercut them.

And there is some empirical work too.  Connolly and Krueger in Rockonomics present data on ticket pricing and on Krueger’s experience at a Springsteen concert.

The Purpose of RSVP Regrets

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

What do you do in the following awkward situation?  your friend receives an invitation to a party.  The host is also your friend but you haven’t received an invitation.

Was the invitation lost in the mail or were you not invited?  You can’t ask the host directly because it would be too uncomfortable if the answer was you weren’t invited.  But in the event that the invitation was lost in the mail it is in all parties’ interest in having that uncertainty resolved.

There would seem no custom that would allow communication of the good news and at the same time avoid communication of the bad news.

But RSVP does exactly that, as long as the custom is to RSVP both acceptances and regrets.  Then if you were invited but you do not RSVP the host will know you didn’t get the invitation, and send a followup.

Game theorists will notice that the bad news can still be inferred.  If the host does not follow up then you learn that you were not invited.  But the beauty if this system is that it is never common knowledge.  The host never knows with certainty that you know about the party you weren’t invited to.  You know about the party but you know that the host does not know that you know, etc… This higher-order uncertainty goes a long way in alleviating the awkwardness.

More generally there is value in social conventions that allow non-public communication: exchange of information, especially bad news, without making that information common knowledge.

Younger Siblings and Risky Behavior

May 26, 2010 in Uncategorized | Tags: , | by | 1 comment

Younger siblings are said to be more prone to risky behaviors than their elders.  This usually means stuff like drugs and sex, but now it means stealing bases:

For more than 90 percent of sibling pairs who had played in the major leagues throughout baseball’s long recorded history, including Joe and Dom DiMaggio and Cal and Billy Ripken, the younger brother (regardless of overall talent) tried to steal more often than his older brother.

Cap tap: Ron Siegel.