Sunday, November 24, 2013

Benford is not kind to strippers

Over at MR, Tyler discusses inflation and strippers:
"Nobody dislikes currency inflation more than strippers." 
But is that claim true?  It depends on the margin.  Let’s say the standard tip is a dollar, and price inflation lowers the real value of that dollar.  A lot of customers won’t substitute into stuffing $1.43 into the stripper’s garments.  They might do two or three singles, but strippers will be shortchanged at various points going up the price pole.  There is something about handing out a single bill that is easier and more transparent, or so it seems.
I was a bit disappointed to see no mention of Benford's law!  I love Benford's law and cannot pass up an opportunity like this...

Benford's law says that if you go to the supermarket (say) and look at the prices, the leading digits will not be distributed uniformly like you might expect; rather, lower digits are much more common, with almost a third of the prices starting with 1!

The underlying reason for this surprising fact is that prices keep pace with inflation and thus exhibit exponential growth.  Think about simply doubling your money every year (a 100% growth rate):

1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 10242048, 4096, 8192, ...

As you can see, over 2/3rds of the numbers begin with a digit less than 5!  As soon as you get to a leading 5 or above, doubling is sure to boost you into the next order of magnitude, leading with a 1 again!

What does this have to do with strippers and indivisible tips? To find out, let's assume that:
  1. The inflation rate is constant at, say,  5% per year.
  2. The "correct" real tip for a stripper's services is $1 in 1980 dollars.
  3. Customers know the correct tip, but insist on paying only in a single bill, limiting them to payments of $1, $5, $10, $20 and so forth.
  4. In any given year, customers compensate by straightforwardly rounding their payment up or down to the bill with value closest to the correct tip for that year.
In 1980, the customer simply tips $1, and everyone is happy.  As inflation kicks in, though, the dollar loses value.  In 1981, a stripper must be paid $1.05 to be equally well off as before.  The customer realizes $1 is underpaying by $0.05, but that's better than paying $5, which overpays by $5 - $1.05 = $3.95.

So the customer underpays.  In 1982, the stripper should be paid $1.10.  Again, $1 underpays, but surely a 10 cent underpayment is better than a $3.90 overpayment with a $5 bill.

We continue in this fashion, year after year.  It is not until 2003 that the customer starts paying with a $5.  In 2003, the correct tip is $3.07, which is closer to $5 than $1.

Now the customer is overpaying.  In 2004, he overpays again.  In 2005, he overpays again.  That's good, since he's been underpaying for the last 22 years.  It will balance out, right?


Sadly, no, it won't balance out.  By 2013, the stripper's correct tip is $5.00, meaning a $5 bill in 2013 is worth the same as a $1 bill in 1980.  (By the way, the true inflation rate in the last 33 years has been much lower than 5%; a 1980 dollar is actually equivalent to about $2.83 today.  But whatever).

The stripper is paid exactly correctly in 1980 and 2013.  But in between, we have 22 years of underpaying versus only 10 years of overpaying. In fact, the sum total of the underpayments in 1980 dollars is $8.84, versus $3.20 in overpayments, for a net loss of $5.64.

What happened?  The customer followed the seemingly innocuous rule of considering the correct payment, and then rounding to the nearest acceptable unit of currency.  It seems like roughly half the time you'd be rounding up and half the time rounding down, balancing out in the long run.  But that misses a fundamental fact about exponential growth, namely that the bigger you are, the faster you grow.

Here is the complete beginning of the sequence of the stripper's "correct" tips:

1.00, 1.05, 1.10, 1.16, 1.21, 1.28, 1.34, 1.4, 1.48, 1.55, 1.63, 1.71, 1.80, 1.98, 2.08, 2.18, 2.29, 2.40, 2.53, 2.65, 2.79, 2.93, 3.07, 3.23, 3.39, 3.56, 3.73, 3.92, 4.11, 4.32, 4.53, 4.76, 5.00, 5.25, 5.52, 5.79, 6.08, 6.39, 6.70, 7.04, 7.39, 7.76, 8.15, 8.55, 8.99, 9.43, 9.91, 10.40, ...

You can observe Benford's law in full effect here. See how many prices begin with 1?

Was there anything special about picking $1 and $5 as our denominations?  Not really.  No matter what, growth accelerates.  That means that you will always traverse the first half of the distance more slowly, which means any policy of rounding to the nearest of two denominations will tend to round down more than up.


Aside: Mind you, I never said how the "correct" tip is determined.  This discussion makes it seem like strippers will systematically be shortchanged, but why should the customers be the ones who determine the "correct" wage, and decide the fair way to round?  Presumably there is some sense in which strippers set their own prices (say, by giving dirty looks to underpaying customers), and thus can correct for Benford's law.  And if strippers are being shortchanged anyway, supply should adjust accordingly.  Also, even if any individual payment is restricted to $1 or $5, there's no reason an individual or group cannot randomize their payments to achieve a correct intermediate payment on average.  But I hope these caveats will not diminish your respect for Benford's law!

Monday, November 11, 2013

Rules, rules, rules

Ryan is currently summarizing Kahneman's Thinking, Fast and Slow. I resist the urge to do a series of summaries of his summaries, but I do still want to encourage this public service, so I will instead offer some comments.

In the second post, we learn that rules can serve not only to make us do things, but also to do them at lower cost, by eliminating the need to make a costly decision.

This is one of the many reasons a well-functioning society or community or company has a system of rules in place, whether they take the form of social norms or laws or something more informal.

Say what you will about the agony of getting yourself out of bed for work in the morning; the fact remains that by having a regular structure imposed on you, it is probably easier to get up in a timely manner.  You don't have to decide whether it's worth it.  You just get up, because you have to.

Maybe that is not the best example, because there is some wiggle room about when exactly you have to get up.  But to the extent that it's a struggle, isn't that exactly the reason?  The existence of wiggle room?  People buy alarm clocks that roll off their nightstands, or even fly away, just to save themselves from dealing with the wiggle room.

There are so many decisions to be made in life.  In order to get a lot done in a limited time, it helps to trivialize as many of those decisions as possible. One way to do that is through rules.

(Of course, in a post like this, there should be at least one sentence acknowledging that rules can go terribly, terribly wrong.)

Friday, October 25, 2013

The walrus, for its part, eats neither eggs nor fish

Today's topic lies at the intersection of two curves.

[It's possible this graph will make sense by the end of this post.]

I know, what a bizarre graph.  What a nutso, bonkers bit of nonsense.  I mean, why on earth is the dependent variable on the x-axis?  Who would do that?

The answer, of course, is every economist.  As we all know, economists have their Supply-and-Demand graph axes all backwards.  Don't buyers and sellers decide how many eggs to buy and sell as a function of price, not the other way around?

I guess what we really want to know is not who so much as why.  Why are we backwards?

A slightly embellished history of our own intellectual backwardness.
My understanding* is that this goes all the way back to our buddy Leon Walras.  He set things up with price as the dependent variable, and everyone after him was just stuck with it.  "I AM THE WALRAS!" he bellowed. "I DO WHAT I WANT!"

What was anybody supposed to say?  No one bellows like a Walras.

Okay then.  Thanks, Uncle Leon.

In his defense, at the time he was not thinking of eggs so much as fish.  Fishermen bring their day's catch to the market, and buyers buy them up.

In this context, it's actually not so crazy to think of price as the dependent variable.  With no way to sell more than the day's haul, and no way to store fish without smelly consequences, the supply was essentially fixed in the short run.

So, quantity supplied was not a function of price.  And on the demand side, if fish were being auctioned off, it really would appear as if buyers generated prices as a function of the quantity they were demanding.  Through this lens, one could be forgiven for thinking: First quantity is set, then price is determined as a function of that quantity. I still don't like it, but it's not crazy.

To his credit, Walras did totally get the idea of the fish market clearing, and that's the most important thing, isn't it?

It is a violent scene, without market clearing:
  • If price is too low, there is a mad scramble at the end, as desperate buyers grab hold of any fish they can find, in a vain attempt to fully satisfy their demand.
  • If price is too high, there are unsold fish, soon to be smelly fish.  Desperate sellers are forced to dispose of their extra fish by hurling them after the retreating buyers.  Will somebody please take our fish?!?  How about a flying fish?
Only in equilibrium can the human being and fish coexist peacefully.

Anyway, however understandable the error may be, it does look like Walras is to blame.  I mean, it's either him or the eggman.  And if you think it's the eggman, you seriously need to brush up on your food science.

Come to think of it, I'm sure we could all use a little more food science in our lives...but if you are not interested, just skip down to the last 3 paragraphs of the post. I'll never know.

On the fascinating differences between eggs and fish. You should think of eggs as basically the most durable natural animal product out there.  What other raw animal stuff do you keep in your fridge for a month?  (No vacuum-sealing, please).  Eggs are uniquely designed to survive outside the body, at room temperature or above, for several weeks.  Furthermore, an egg is basically a self-contained super-bundle of energy, with everything an embryo could possibly need to grow big -- the ultimate balanced meal. Unfortunately, that means that everything wants to eat it.  So the egg has to be really super robust against attack!  The whites are loaded with, oh let me just quote Harold McGee:
Biochemical studies have revealed that the albumen proteins are not mere baby food.  At least four of the proteins block the action of digestive enzymes.  At least three bind tightly to vitamins, which prevents them from being useful to other creatures, and one does the same for iron, an essential mineral for bacteria and animals alike.  One protein inhibits the reproduction of viruses, and another digests the cell walls of bacteria.
Most organisms are not adapted to eating raw eggs. Despite their rich stores of energy, they will actually drain your energy if you eat them raw.  (However, this is not a good weight loss idea.  According to Wikipedia, humans who eat raw eggs regularly will begin to suffer from biotin deficiency, which is a big deal).   
The point is, eggs are designed to last a long time even when everything is trying to eat them.  Thus, they last a long time in your fridge, where almost nothing is trying to eat them.  (Until you eat them).
Now, I know what you're thinking: How on earth did Gaston get so large?

Or maybe you're thinking, wait, what does this have to do with economics?

But what you should be thinking is: Gaston is a cartoon character and I want to learn about fish now! 
Fish! You probably know that fish go bad quickly, compared to beef and pork and chicken and other land animals.  There is a very good reason for this, namely that fish live in the sea, and the sea is cold.

When something dies, it immediately starts to decay, through the combined forces of bacteria and its very own enzymes.  The bacteria and enzymes active in land animals operate efficiently around body temperature, but refrigeration slows their activity to a crawl.  Fish bacteria and enzymes, on the other hand, are designed to operate at low temperatures, because what good is a fish bacterium that can't function at fish temperatures?  The fridge isn't much colder than the sea, so it doesn't slow the decay nearly as much for fish. 
Thus, fish do not last a long time.  Although it is true that warm water fish keep longer than cold water fish.
It's possible this was all a big ruse to talk about food science on an economics blog.  But if there is a point, it's that fish and eggs are at opposite ends of the durability spectrum, as animal food products go.  While the 19th century daily fish market is a pretty good example of fixed quantity from which prices follow, the daily egg market is not.  I would expect the daily supply curve for eggs to slope up, wouldn't you?  After all, if demand is low today, sellers can always just hold onto their eggs until tomorrow.
Thus, we can definitively conclude that it was the Walras, not the eggman, who flipped our graphs.  An eggman would never put quantity on the x-axis!

A cure?  
I think we can also conclude that this insanity needs to stop.  If by "this insanity" you mean this post, don't worry, this is the antepenultimate paragraph.  On the other hand, if you mean the business of putting quantity on the x-axis, then you will be interested in my penultimate paragraph.  (For the record, I agree with both meanings of "this insanity.")

These days, there is really only one person with the power to cure economics of this perpetual backwardness.  I am talking, of course, about Greg Mankiw.  I mean, what if he just did it?  What if economics teachers and students across the nation open up their shiny new 7th Editions in January and all the price-quantity axes are just...flipped?  As far as I know, he could actually do this and nobody would be able to stop him.  That's power, my friends.  And with great power comes great responsibility, or at least a lot of royalty payments.

What say you?  Does the thought of putting price on the x-axis fill you with a visceral terror of the unknown?  Or do you look forward to the day when the penny is abandoned, the metric system reigns supreme, and physicists have only n-1 things to mock economists about?  In any case, imagine how much fun the econ blogosphere would be for the week after the textbook came out!

*I learned about Walras and his fish markets from one of my econ professors in college.  I'm not sure it's true, but I'm sticking with this story until someone tells me otherwise, and probably afterwards as well.

Tuesday, October 1, 2013

Wouldn't it be cool if...

  • You are probably aware that Newton and Leibniz independently discovered calculus at the same time.
  • You may also know that they both have a cookie named after them -- Fig Newtons and Leibniz cookies.  
That's cute.  The co-discoverers of calculus each get a cookie.  But what you probably don't know is that, like calculus, Fig Newtons and Leibniz cookies were also independently invented at the same time.  1891, in fact.  WHAT?!?

Shouldn't someone have told me this?  I literally just uncovered this fact by looking for it.  The topic of Fig Newtons and Leibniz cookies came up, and I thought, "Wouldn't it be cool if they were invented at the same time..." so I looked it up on Wikipedia and HOLY MOLEY! 1891!

This should be taught in every calculus class.  Shouldn't there be a day where the teacher brings in Fig Newtons and Leibniz cookies and blows everyone's mind?

I like to imagine that, after years of fighting over priority, Newton and Leibniz decided to settle their differences with a gentleman's wager concerning whose namesake snack cookie would come first.  Alas, another draw.

Friday, September 27, 2013

The prisoners' other dilemma

A person is made up of multiple selves across time.  In a sense, you can never really punish the agent who committed a crime, because that agent is long gone.

Now, we care about our future selves, so the threat of punishment to our future selves deters us from doing bad acts today.  However, we frown on threats to our family members, even though they would also deter us; is there a qualitative difference?

You could say we are more closely "related" to our future selves than to our family members.  It's wrong to punish your brother for something you did, because he's so obviously not you.

Hypothesis: People who commit serious crimes are systematically less likely to care about their own future selves.  They are not so closely "related" to their future selves, and so do not take the future consequences as deeply into account, which is why they commit crimes.

If so, we penalize specifically the people for whom there is the biggest disconnect between the agent who committed the crime and the agents who must pay the price.

That makes me kind of uncomfortable.  But note that the legal system treats "crimes of passion" as a special case, presumably in recognition that the agent who committed a crime of passion is no longer around.

Drug addiction is especially susceptible to the problem identified here.  Strong addiction induces an obsessive focus on the present, and thus a disconnect between present and future selves.

Maybe it's wrong to punish your brother on your behalf because he clearly had nothing to do with the bank robbery, and didn't even benefit in any way.  By contrast, future versions of yourself may be beneficiaries of the robbery, and indeed might agree that current-you should have committed it.  Perhaps a sense of common agency comes from agreement over what should be done.

But in the case of drug addiction, that link is broken.  In general, drug addicts harm their own future selves by their present indulgence.  Any current smoking makes it both harder to quit and harder for the addict to satisfy the craving in the future.  The worst!

Wednesday, September 25, 2013

A matter of life and death

If you watch Doctor Who, you know that Daleks love to announce their intentions before carrying them out. EXTERMINATE! EXTERMINATE!  This is probably not the best idea, strategically speaking.  It also has welfare consequences, which we're going to talk about today!  On the way, we will discuss animal slaughter, murder, deathbed wishes, criminalizing private acts, and more.

The argument will proceed in the following steps:
  1. What matters is the welfare of agents with preferences.  
  2. Welfare is exclusively a function of an agent's experience, not the underlying state of the world.
  3. Yet we have a strong intuition that we should be allowed to have preferences over states of the world rather than experiences.  
  4. This intuition leads to strange ideas about life, the universe, and everything.
I'm sure the Daleks will fit in there somewhere.  Allons-y!

1. What matters is the welfare of agents with preferences

Well, I dare you to argue otherwise.  

For something to matter, you need an entity it matters to.  If there is no entity with preferences, the state of the world doesn't matter one bit, to anyone or anything.  There is no "better" or "worse," only indifference.  The clock does not care what time it is.

An agent is an entity with preferences.  His preferences generate a sense of "better" and "worse," and the degree to which these preferences are satisfied is captured in his welfare.  

Of course, the agent can care about whatever he wants, including the state of the clock, which is not itself the welfare of an agent.  But if you asked why something matters, it will always be traced back to the fundamental welfare of an agent.

2.  Welfare is exclusively a function of an agent's experience, not the state of the world.

The above implies that agents are the gateways to meaning.  Everything that matters has to go through an agent first.  It has to be experienced by an agent.  

It's important to distinguish between an agent's experience and the underlying state of the world. The state of the world -- the way the world really is -- gets filtered by the senses and turned into an experience.  The mental experience is all the agent directly encounters, and thus the agent's welfare is a direct function of that experience, not the underlying state of the world.

The state of the world is important only insofar as it influences experiences.  If your experience is identical in two states of the world, you must be equally well off.  It could be raining or not, but if you can't tell the difference from inside your windowless office, you are currently just as well off either way.

3. Yet we have a strong intuition that we should be allowed to have preferences over states of the world rather than experiences. 

Suppose someone has taken a compromising photo of you. Do you prefer it to: 
  • circulate without your knowledge, or 
  • not circulate at all?
I know what you want to say, of course.  But supposing that nobody who sees the photo lets on, you can't tell those states of the world apart, so in point of fact you like them equally well.

Mentally, it's hard to disentangle the two, because I'm essentially asking you to choose one, and choosing a state would seem to entail knowing which state is realized.  Also, there is the sidetracking objection that you might find out about (or be otherwise impacted by) the photo at the later date.  To get rid of these, let's consider someone who is (a) not you, and (b) dead.

In particular, Nabokov:
At the time of his death, he was working on a novel titled The Original of Laura. His wife VĂ©ra and son Dmitri were entrusted with Nabokov's literary executorship,and though he asked them to burn the manuscript, they chose not to destroy his final work.
Now put yourself in Dmitri's shoes and consider the decision of whether to publish the work.  Nabokov has expressed a clear preference for the work to be burned.  However, by the time the work is published, he is dead.  He cannot distinguish the two states of the world -- indeed, all his prior life experiences are identical either way -- and so he is made no worse off by the publication.

Let me be clear that just because we won't be alive in the future doesn't mean we can't care about it.  Our past experiences generate beliefs about the likely future states of the world, and we can have preferences over these believed states.  We can even do things today to make certain states more likely than others.  However, our welfare today is a function of these beliefs, not the realized future state.  (Information can't travel back in time!)

Perhaps Nabokov worried this would happen.  This expectation would have hurt his welfare prior to death.  Nabokov could have given his wishes the force of law, in which case he might have been happier, knowing that his wishes would be fulfilled.  Nevertheless, Dmitri did not harm Nabokov one bit by violating his wishes.

(None of this necessarily means it was a good idea to publish, since freely violating deathbed wishes can influence the beliefs of other people about the likelihood that their own future deathbed wishes will be violated.  Similar logic applies to circulating compromising photos, even if it is possible to do so without the subject ever finding out).

4. This intuition leads to strange ideas about life, the universe, and everything.

Well, we are already here.  If you think that welfare is a function of the state of the world, you might think that you are somehow making Nabokov better off by following his deathbed wishes.  But that makes no sense.

Time for a bunch more examples.  

Private acts.  Define a consensual private act as an act unobserved by any agent other than the ones directly involved, who mutually consent.  Societies are always trying to block people from doing "immoral" things, even when all involved parties are consenting, even when no one else knows about it.  This bothers me, because such acts would seem to strictly improve welfare, since each agent in society is either better off or cannot distinguish the states of the world.  However, here are some counterarguments:
  1. Consider the private use of illicit substances in light of my previous post.  In this case, future versions of the drug user may be impacted against their will.  Thus, "consensual private act" has narrower scope than first appeared.
  2. Suppose there is a higher power who is always watching, who disapproves of the act but does not block it.  This too narrows the scope of "consensual private act."  On the other hand, it could be argued that if church and state are to be separate, the state cannot implicitly rely on the existence of an all-knowing entity to motivate any of its laws, which is actually an interesting legal limitation.
  3. Even without a higher power, ordinary members of society may prefer a world in which it is harder to engage in acts of which they disapprove, because this supports beliefs that less "immoral" behavior is happening in the world, which increases their welfare.
Note an interesting implication of (3): In this world, it could be socially optimal to both prohibit a behavior and secretly engage in that behavior!  Compare this to the tragedy of the commons, in which it is socially optimal to prohibit overgrazing but only privately optimal to overgraze.  

(Workbook question: What about the case where agents have limited perception and the commons is very large?  Are carbon emissions effectively a private act, since no individual can make a perceptible difference in the CO2 levels?)

Your stance on government's proper role will determine whether you think any of the above arguments are a legitimate basis for lawmaking. But note that even if (3) is a basis for law, such laws should be handled differently than other laws.  If a prohibition exists, it can be socially optimal for you to break it.  As long as you are not caught, you do no harm.  Furthermore, in a basic crime deterrence model, we would normally say that the punishment should be (net harm to others)*(probability of being caught).  However, in this case, it should just be the net harm to others (conditional on getting caught), since you do no harm when you aren't caught.

So many interesting things to think about!  Let's keep going!

A lamb is born and lives an idyllic, free-range life.  At some point before the age of 12 months, it is gathered up by Friendly Farmer John, who has always been nice to the lamb in the past.  On this occasion, Farmer John puts a captive bolt gun to the unsuspecting lamb's head, and instantaneously ends the lamb's consciousness.

How should we feel about this?  Well, our first instinct is to think of the lamb as an agent who wants to live, who has life stripped away from him, therefore harming him.  But that's not right.  To answer this question, it's better to recognize the lamb as a bunch of agents arrayed through time, like in my last post.

Every instance of the lamb prior to death had an experience that the lamb could not distinguish from a scenario in which he was not about to die.  That means that every instance of the lamb prior to death is just as well off as if the farmer had not killed him.

Meanwhile, there are these hypothetical post-slaughter versions of the lamb, which either exist or not, depending on the farmer's actions.  Let me be clear that the choice is not for them to die or not.  The choice is for them to exist or not.

That means you can't rely the lamb's own preferences to weigh those alternatives, because the lamb's preferences are not consistent across the alternatives.  The lamb isn't either happy to be alive or sad to be dead.  He's happy to be alive or he's dead and does not care.

Of course, you can feel however you want about existing versus nonexisting lambs.  But do you feel differently about a lamb who doesn't exist because he was never born versus a lamb who doesn't exist because he was recently slaughtered?  I don't see the difference.  The "continuity" from current lamb to future lambs feels like an illusion, like we discussed in the last post.

How to feel about agents that do and don't exist?  It's a pure matter of preference.  Personally, I feel no obligation to care about entities that don't exist.  I do care about some of them, of course -- for example, my future selves! But I don't feel bad for lambs that don't exist, and I don't feel differently for lambs that died versus lambs that were never born, because to me those seem like the same thing.  I challenge you to make a compelling case for why these are different.

Now, the slaughtered lamb might have friends and family who miss him.  That is a decent reason to prefer life in this case.

Let's keep climbing the ladder...

Sherlock: People have died.
People think that death hurts them in some way.  And while the prospect of death can certainly affect our welfare, the actual state of being dead doesn't hurt you at all.  You are not an agent who will live a longer or shorter life, with a single utility function that sums your utility over time, producing a larger total if you live longer.  No, you are a series of agents who will exist or not,  at each instant in time, each with their own utility function if they exist, and nothing if they don't.  Death is a dividing line, not a state.

(Of course I'm separating death from the pain often associated with the act of dying). 

Below, I explore a few implications of making the following untraditional assumption which I first introduced when talking about lambs above:

Assumption 1: The life of a "previously alive" agent is not intrinsically different than the life of a nonexistent agent.  Harm is not inflicted on either type of agent by the fact of it not existing.

This is the assumption that's driving everything.  If you have a problem with this post, which is likely, then this is probably what you want to challenge.  Which I welcome!  (Workbook Question: What happens if a previously alive agent persists in the form of a "soul"?  Does it matter if they're en route to Heaven or Hell?).

But for now, take this assumption as given, and continue to charitably maintain whatever other assumptions I've implied up to now.  Some observations:
  • In some ways, livestock have it lucky.  It is easy to systematically delude them.  You can slaughter every last lamb before their first birthday and they will never catch on.  It's hard to do that to humans, outside of sci-fi.  That said, many of the worlds explored in sci-fi cannot be distinguished from the one in which we live.  The plug on the Matrix could be pulled any time, and the simulators of this world need not feel any guilt at all, even if they have the utmost respect for our sentience.  But it is dangerous to talk about such matters since we don't know who may be listening.
  • There are, obviously, lots of good reasons for murder to be outlawed.  I am not advocating the killing of humans.  However, murder is bad in a bizarre, backwards way: the harm from the (painless) death of an agent comes from its effect on other agents!  This is so counterintuitive, but so is the tragedy of the commons: everyone is hurt by overgrazing, but no individual is hurt by their own overgrazing.  In the same way, when the murder rate rises we are all hurt, even though no murdered agent is hurt by his own murder.  I know, it's still counterintuitive.  Feel free to argue...
    • Oh, and if you are going to kill someone, for God's sake don't tell them they are about to be exterminated.  Daleks have so many opportunities to kill people unexpectedly and instantaneously, but they blow it every time.  (I told you we'd get to Daleks!)
  • I said the slaughtered lamb might have friends and family who are sad when it dies.  That's even more true of people, generally.  But one interesting philosophical case is that of an abortion in which the mother and father are the only ones who know about the baby, and do not want it.  Here, the abortion does not negatively alter the observed experience of any agent who exists.  The fetus is like the lamb; the parents prefer it; everyone else who might not prefer it doesn't know.  However, note that if you believe that a higher power exists and that he has a strong preference for the baby to live, then that's a third agent right there who will know and be sad when his preferences are violated.

Whether you agree with any of this or not, I hope you have found it thought-provoking.  I leave you with two final thoughts:  

1) For an individual, the worst part about dying is not death, it's the act of dying, all the pain and suffering and fear of death that precedes being dead.  That could be a good reason to sign a Do Not Resuscitate order.  Because once you've lost consciousness, you've already gone through all that suffering, and maybe you don't want to do it again.  (It depends on other factors, too, like how much your death will upset your loved ones).

2) Death is scariest when it is imminent.  People may prefer to live in a world where they are taken by surprise, even if it means living slightly shorter lives.  Suppose instantaneous death arrives each day with a fixed probability p, constant over time, for your whole life.  Under what circumstances would that be preferable?  Or what if we could be systematically deluded into thinking we would live for 100 years, only to be euthanized at 75?  Would people choose such a world over the one we're living in?

Tuesday, September 10, 2013

Donut Time, All the Time!

You know when you read something and you're like, "I sort of already knew that, but it was nice to hear it laid out properly"?

That's the first half of this post.

You know when you eat a donut and you are like, "Yum, but...I really wish I had given that to Xan since he loves donuts so much more than me..."

Well, that should happen -- I do really love donuts -- but it doesn't.  And I don't blame you, since not once in my life have I even saved a donut for my own future self.

The second half of this post is about why evolution just couldn't accomplish the seemingly simple task of getting me to save donuts for my future self.  It has to be evolutionarily optimal at least sometimes, right?


Am I an agent?  
Before I answer that question, I want to impress on you what it truly means to be an agent.

Economists typically use the word agent to refer to a single person with a single set of preferences.
An agent decides how to act, taking his preferences into account, and then actually acts upon that decision.

Contrast this with a collective, a group of agents each with their own preferences.  Whereas an agent has coherent preferences that tell it unambiguously how to behave, a collective is an amalgam of preferences that may not agree with each other. And whereas an agent decides how to act and then pulls the trigger, it is ultimately the agents in the collective who act on its behalf.

There are many instances where a collective can be thought of as having agency.  Whether the collective is a family or nation or firm or sports team, we may not lose much by modeling it as a single entity, depending on the problem.

But it can also be deeply misleading to imagine that a collective has proper agency when it doesn't.  In fact, this is one of the most pervasive logic failures in circulation today. Consider this representative quote:
"We run the risk of going extinct, and the irony is, we did it to ourselves. The ‘smarty pants’ brain that created advanced weapons, complex global routinely bossed around by the brain that shoots from the hip.... 
No one in their right mind would deliberately create the means of their own extinction, but that’s what we seem to be doing. The only conclusion is that we’re not in our right minds..." 
-K.C. Cole
No, that is not the only conclusion.  Of course people do stupid things, but that's a bit of a red herring here.  When people talk about all the ways in which we are destroying ourselves -- and how stupid to destroy oneself! -- they almost always mean that agents are destroying the collective.   Since the agents are in the collective, these sound like the same thing; however, the deep insight of the tragedy of the commons is that everyone can be doing individually smart things and still end up with a collectively stupid result.

More generally, there is almost always a tension between the preferences of different agents.  In the absence of well-designed laws or norms or enforceable contracts or markets to discipline their interactions, the large-scale effects of these interactions can diverge significantly from what they would collectively choose, if only it were possible to choose collectively.  We cannot hope to understand their joint behavior if we always think of the collective as an agent with the power to dictate its own behavior. Because it's not.

So am I an agent?
In a word, no.  I exist, and exist, and decide, and decide.  But the cold, hard truth is that I am better thought of as a collective of agents that exist at different moments of time.  Do we have a lot in common?  Sure.  But we aren't the same agent.  For one, we have different preferences over which of us gets to eat the donut (I can tell you that each of me wants the donut for himself!).  For another, when all is said and done, each of me must decide for himself what to do.  Today-me cannot flex a muscle to lift the arm of tomorrow-me.

Of course, today-me has influence over the state of the world tomorrow, and as such can manipulate the incentives of tomorrow-me.  Perhaps today-me can make it optimal for tomorrow-me to lift his arm, perhaps even employing a commitment device if one is available.  However, that does not make us the same agent, any more than you become the same person as me when I hold a gun to your head and order you around.  In any case, commitment devices are often either unavailable or prohibitively costly, so the fact remains that versions of me are not always going to agree on how to behave.

To facilitate breaking yourself free from any illusion that you are a single agent over time, let me stress how unnatural the idea of single agency is from a physical standpoint.  Your mind itself is under constant reconstruction at the atomic level.  Your brain isn't even composed of any of the same atoms it was originally made of.  The strong feeling that you are a single person is a product of inherited memories and characteristics passed along by the physical laws that govern your transition from one instant to the next.

[Just to say it: You might believe in some sort of incorporeal soul that binds all the versions of you together into one coherent entity.  Fine by me, but that is immaterial (ha!) for the present discussion.  What really matters right now is that different versions of yourself have different preferences, all else equal.]


The thing is, there are strong evolutionary reasons for agency.  The evolutionary optimum is a single consumption path and, while it may technically be an array of agents who need to act at different points in time, it would be most adaptive if they all cooperated along the same optimal consumption path.

But since this so often fails to happen, we are left to wonder why.  I have seen a few evolutionary models that generate dynamic inconsistency (procrastination, preference reversals, etc) as a second-best outcome, but never convincingly.  Dynamic inconsistency is pervasive, so a truly satisfactory explanation needs to rely on first-order issues.

My feeling is that agency -- which entails dynamic consistency -- is just plain hard to accomplish.  Because the truth of the universe is that we aren't agents.  The null hypothesis in economics is that we are agents, so evolutionary models are forced to come up with reasons why evolution would "prefer" us to act inconsistently.  But can't it just be legitimately hard to make a collection of people arrayed through time agree on everything?

A donut model.  (No relation to a circle model). 
Say you live for 10 periods, but that "you" are really a collection of 10 agents, one per period.  In the first period, you are endowed with a donut which you can save or consume at any time.  And suppose that for whatever reason, it is evolutionarily optimal to eat the donut in period 7.  But because of limited hardware/software, evolution cannot fit a 10-period utility function into your brain.  It can only fit a single, simple, one-period utility function into the brain of each of the ten agents.  The same utility function has to go into every agent, and each agent can only make the simplest of differentiations: "himself" versus "other agents."

This utility function can tell an agent to save the donut or eat it himself.  It cannot tell him to save the donut for agent 7, as he doesn't properly know who agent 7 is.

Constrained in this way, if each agent prefers to save the donut, it will never get eaten.  It's better for each agent to prefer to eat the donut! Then it gets eaten in period 1, which is better than not eating it at all, but far from the unconstrained evolutionary optimum.

Complexity is Simplicity for Complicated People.  
I think this minimalist model captures something really true.  At its heart, dynamic inconsistency arises because it's simpler than dynamic consistency, and complexity is evolutionarily expensive. That's it.  That's the real reason.

That sounds so weird to economists, because if you are really a single agent over time, as we tend to assume, then of course it's more complicated to make your preferences vary over time.  But if you are actually a bunch of different agents, then it's more complicated to make your preferences agree!

In this model everyone has the "same" preferences; that's the sense in which dynamic inconsistency is simpler.  But they aren't really the same, are they?  In fact, they all have the same utility function with respect to a different reference point: everyone has a different definition of "me"!

As well they should. If a frisbee is hurtling toward your head, you should react the same way that I would react if a frisbee were hurtling toward my head.  That's what a one-size-fits-all program looks like, given that we all see out of our own eyes.

Different versions of ourselves are qualitatively the same story.  People ask, "Why dynamic inconsistency?"  But to the contrary, isn't it amazing that evolution was able to endow us with as much glorious consistency as it did?

Thursday, August 15, 2013


I consider myself a fairly adventurous eater, at least for an American.

There are still foods that gross me out at least a little.  But I don't think there's any food that grosses me out more than the thought of food I have just been chewing up for the last few seconds.  If I saw that on a plate, it would probably go straight in the trash.

Which, if you think about it, is kind of odd.  Because we are eating that, all the time, by definition. But on the other hand, it makes a lot of sense.  Because if you ever do see that on a plate, it's probably not a good idea to eat it.

I think this is a pretty interesting and unique example of something.  But I'm not going to spend any more time thinking about it right now because (a) it's an EconOMNOMNOM, and (b) gross.

Tuesday, August 13, 2013

No Divorce

Ryan points me to a post by Alex Tabarrok on no-divorce laws:
It’s easy to see why a divorce law might arise that allows men relatively easy divorce, as in the Old Testament which lets men divorce almost at will (as written, interpretations differ) but gives women no right to divorce at all. It is also easy to see why a society might adopt mutual consent under which both parties must agree in order to get a divorce or no-fault unilateral rules in which either party can get a divorce without the consent of the other. What is difficult to understand, however, is why a society would adopt divorce laws that make it difficult to get a divorce even when both parties want a divorce.
I think he knew I would have some fun with it.

Warm up (the boring answer...sigh): Maybe if people believe that God wants them to enforce his will of no-divorce, it's not that surprising when it gets written into law?

There's a long tradition in society of prohibiting "sinful" behavior for its own sake, even if the parties involved do not impose (non-psychic) externalities on others.  For example, charging interest, privately believing in the wrong god, gay anything...

In fairness, psychic externalities do matter for social welfare. But that's not today's topic.

Okay, now let's actually have some fun with this. There are some fine reasons for no-divorce laws.  Let's build them up and tear them down!

I: Incomplete information!
The willingness to enter into a no-divorce marriage reveals information about your long-term commitment to each other.

There are good apples and bad apples.  Good apples will stick around to help you raise the kids, but bad apples won't.  Suppose you only want to build a family with a good apple, but you can't tell them apart.  The trouble is that a bad apple may say he's the kind of person who wants to raise kids, but it's cheap talk.  If only there was some way of distinguishing the good apples...

Enter no-divorce marriage.  Only a good apple is willing to be with you permanently, and thus you are able to separate out the good apples by requiring them to enter into a no-divorce marriage.

The interesting thing is that, in this world, the no-divorce law isn't keeping anyone from getting divorced!  Everyone who is married wants to stay married anyway!  But it helps to reveal important information that otherwise would not be available.

The Problem: In reality, people don't know everything about their own future preferences and characteristics up front.  Only over time do they learn what will be best for themselves and for each other in the future.  In light of this, sufficiently costly divorce is probably a better option.  This would enable up-front screening while still allowing people to exit the marriage should they turn out to be a poor fit, 10 or 20 or 30 years down the line.

II: Insurance!
On that note, no-divorce marriage can be thought of as a form of insurance.  You don't know the future. You don't know if you're going to be sick down the line, but you sure would like a guarantee that someone will be there to take care of you when the going gets rough.  So you find a friend and promise to support each other through the hard times.  But maybe once you get sick, they don't feel like following through with their promise.  So, you chain yourselves together with an unbreakable vow.  No-divorce marriage as a way of committing to each other no matter what!

The Problem: Wouldn't mutual-consent divorce be even better for this purpose? It guarantees each party at least the marriage payoff, with the option to exit if each can be made better off by doing so.  On the other hand, unilateral divorce does not look so good from this perspective.  Even though the parties will bargain to an efficient outcome (assuming transferrable utility), unilateral divorce does not give either side property rights over the marriage itself, so one party can get left in the lurch.

(Note that unilateral divorce instead gives each person property rights over their outside option, instead.  Someone else can extol the virtues of this arrangement!).

III: Dynamic inconsistency!
In a many-selves model with dynamic inconsistency, no-divorce marriage can serve as a commitment device which protects the "individual" from acting on short-term impulses that are not good for the "individual's" long-term wellbeing.

I am being very loose here, but it's an agreeable enough sentiment.  Don't get too comfortable though, because I am now going to violate the hell out of it.

The Problem: The thing is that by the very same token, no-divorce marriage is a prison for all future selves whose preferences do not happen to agree with the guy who got married way back when.  As soon as dynamic inconsistency is in play, there is no such thing as the "true" self against whom all actions are properly judged.  When multiple sets of preferences are on the table, who's to say which is "right"?

Actually, I could muster up a satisfactory answer to that question, maybe even one that strikes a chord with your intuitive sense of having a "true" underlying version of yourself, but that is not my goal today.  Instead, let us recognize the underlying truth that:

  • You are a collection of multiple selves arrayed out through time.
  • These selves don't all agree with each other.
  • Earlier versions of yourself have power over later versions of yourself, which matters because they don't all agree on what's best.
The natural next question is, to what extent should you be allowed to exercise that power?  A contract that you enter into today will become binding to a future person who had no say in the signing of that contract!

Most forms of indentured servitude are illegal in America.  It is illegal for a willing donor to contract to provide a kidney at a future date.  There are contracts we are not allowed to write, and one very good reason is that "we" may not truly be the parties responsible for fulfilling the terms.

No-divorce marriage is one heck of a long-term contract, with huge potential to violate the preferences of future selves.  That makes me really uneasy.  It is primarily for this reason that I think no-divorce marriage should not be mandatory, and perhaps not even an option at all.

But that's me, what about you?

We are unavoidably bound in many ways to the choices we once made --- that is the true tyranny of the young --- but our society moves increasingly to restrain this tyranny.  

Now go away and think about potato chips, tattoos, life in prison, social security, universal healthcare, your childhood...

Saturday, July 27, 2013

EconOMNOMNOM: voting?

Welcome to EconOMNOMNOM (Econ Food for Thought!).  This is a place for silly ideas that I do feel like thinking about but don't feel like writing about. Just some stuff to munch on.

Today's EconOMNOMNOM:  What would happen if in presidential elections, not showing up meant you automatically voted for whatever party you were registered with?

Look, I'm not even going to spend time figuring out how to phrase that elegantly.  The whole point is for me not to have to do any real work here.  (Of course I welcome your comments and/or blog posts in response!)

It would also be great if I could make some money off of all this non-work.  Therefore I will be monetizing my EconOMNOMNOM posts with ads for delicious edibles so you can satisfy the OMNOMNOM cravings they invariably trigger.  This issue of EconOMNOMNOM is brought to you by Tony's Country Style Ham and Cheese Biscuitwiches.  This mouth-watering product really sells itself:
"Silver Lake and Michael Dell are asking that along with the increased offer, a special committee conducting Dell's sale agree to revise the merger agreement so absentee votes at the shareholder meeting aren't counted against the takeover consortium. It is reported that about 20% of Dell's shareholders were absent the July 18 vote, creating a roadblock for the private equity buyers."
...Not surprisingly, turnout really matters in elections where you vote "no" if you don't show up.

(It's good it sells itself because I certainly am not going to do any additional work, if you didn't get that already.  By the way, Tony, I learned why you find ham so mouth-watering: the ham you know and love is actually a ham-and-water-product!)

Sunday, July 21, 2013

Monterey Bay, and Penguin Cyclone!

Ryan visits the Monterey Bay aquarium of awesomeness!  When I was at Monterey Bay in 2004, they were the only aquarium to have (temporarily) a great white shark.  I also remember the jellyfish and Ryan's sardine cyclone.  Also they have penguins!

The Monterey Bay aquarium is probably the best aquarium I've been to.  The only reason for the "probably" is that I have also been to this aquarium in New Zealand.  (Yes, that is a conveyor belt that takes you through the shark tank.)

Anyway, speaking of herding and penguins, consider these emperor penguins, which huddle for a very different reason than the sardines, namely that it's cold in Antarctica:

Coordination Success!
What interests me is how the penguins coordinate their efforts.  The issue is that penguins on the outside of the huddle are exposed to the cold, so the penguins need some way of taking turns.  Importantly, the equilibrium must be robust to self-interested penguins who just want to stay in the center all the time.

According to the narrator at the 24 second mark, "Speeding up the action reveals an unparalleled display of sharing, as each penguin works its way toward the warmer center."

But that's not what's happening at all, is it?  Look at the 33-second mark.  Penguins aren't working their way into the center so much as the center is working its way to the penguins.  Here's how it happens:

  • A dissatisfied penguin on the outside can't hope to work its way into the center -- the huddle is very dense to conserve heat.
  • However, a penguin on the outside can easily move to another point on the outside.
  • In isolation that accomplishes nothing, but if all the dissatisfied penguins move to the same place on the outside, that becomes the new inside.

This is an equilibrium, and one that requires no cooperation, no "unparalleled display of sharing."  If penguins on the left edge of the huddle are constantly moving to the right edge, it is optimal for any individual penguin on the left edge to move to the right, because other penguins will soon surround him.  In this manner, the center of the huddle slowly shifts to the right, and every penguin gets its time in the center.

This is such a neat solution to the problem.  Penguins never have to fight for a good spot, which would waste precious energy in zero sum conflict, which is just plain infeasible given that the penguins have to play this game in the bitter cold for two whole months with No Food.  And the solution requires no benevolent penguin ever saying, "Hey, I've had my turn, why don't you take my spot now."  Which is good, because evolution has a hard time producing such creatures.

As a bonus, notice the penguin cyclone at the 18-second mark.  That's how you absorb a bunch of additional penguins into your group while staying in the center yourself!

Coordination failure?
Herding is always partly about copying your neighbors.  But in the penguin herd, copying your neighbors serves a particularly vital role, because coordination is necessary for this reshuffling to work.

Yet at first glance, there's a lot of disorder in the video above, with multiple groups of penguins sometimes moving about in seemingly random ways.  Does that disconfirm my model?  Not really.  I would say it's just plain hard for the whole group of penguins to perfectly coordinate their behaviors.  If you look closely, you will at least see that nearby penguins are generally doing the same thing as each other.  Penguins on the move are copying each other, walking around to attach themselves to the same side of the huddle.  The fact that they're copying each other ensures it is locally optimal to do so.

Coordination success!

Well, there is one thing that can help the penguins coordinate perfectly...a cold winter wind!

When a strong wind is whipping at the penguins, naturally the ones on the exposed side move to the sheltered side.  Perfect coordination when it matters most!

Added: Cold wind sucks, but it is theoretically possible for the penguins to be better off when the wind is blowing, if its value as a coordination device exceeds the damage done by the coldness of the wind.

Free bio research idea: It should be easy to confirm if penguins use the wind as a coordination device.  Just monitor their behavior, and plot some measure of coordination against wind speed.  Is there an optimal nonzero windspeed that gives them most of the benefits of coordination without too much cost?

Wednesday, June 5, 2013

Chicago Litterbugs Take Note!

From the Tribune:
Adults who toss litter out the window of vehicles in Chicago would face fines of $1,500 and the impoundment of their cars, SUVs or trucks under a proposal being introduced at today’s City Council meeting. 
“I’ve been behind one too many cars where they are throwing trash — chicken bones, paper, McDonald’s bags, you name it,” said Ald. Howard Brookins, 21st, the sponsor of the measure. 
“It is a big deal in our community, with respect to people who throw trash and debris and litter on the street,” added Brookins, whose ward is on the South Side. “We have put out garbage cans, to no avail. We need to do something to get their attention, and if we take their cars, we think that will get their attention.”

Whoa. That's a hefty fine!

Here's a reminder from economonomics 101:
When the goal is to incentivize socially optimal behavior, there is such a thing as an optimal fine.  How much should we charge for parking in front of a fire hydrant? Not $0, but also not $1,000,000.  Sometimes it's socially optimal to park there!  (Say you need to pick up your kid to take him to the hospital and there's nowhere else to park while you run inside, etc, etc...).  The great thing about a well-chosen fine as opposed to, say, a strip of spikes in front of the hydrant, is that it incentivizes people to park there only when it is socially optimal to do so. 
What's the ideal fine?  To simplify a bit, the fine you expect to pay (i.e. what you pay in expectation each time you park in front of a hydrant) should equal the harm to the rest of society imposed when you block a hydrant.  This ensures you will properly internalize the externality you impose upon others. 
Now to my main point.  We like to assume, as economists, that incentivizing good behavior is as simple as setting the right fines, in the sense described above.  But there's a problem with this, which is that people don't know most of the fines.  We walk around with nothing more than a vague idea of how much we will be charged for our various transgressions.

So if you want to curtail littering, maybe the naively-calculated optimal fine will have little effect, because nobody hears about the new law.  (And, since the chance of being caught is low, learning by firsthand experience will also be slow).  In this case, maybe the true socially optimal fine is so ridiculously high that it ends up on the front page of the Tribune.  Throw in a crazy measure about the car being impounded and people are sure to notice!

That said, drawing attention to a new law does crowd out attention people could have devoted to another law or issue.  That said, most of the stuff in the daily paper has little importance to society.  And certainly it is in Alderman Brookins' interest to direct our attention towards his proposed law.

One prediction is that laws with some "novel" component to them will have a bigger impact on behavior.  It's also possible that novel proposed laws that aren't passed will have bigger impacts than boring laws that are passed.  Another prediction is that changes in laws will be more radical, when the laws concern lower-probability events.

Friday, May 31, 2013

Influence, Chapter 6

Chapter 6: Authority

Ah, the power of authority.

A shocking experiment!
This chapter begins (of course) with an account of Milgram's famous electric shock experiment, in which one subject (the "teacher") was instructed to deliver increasingly high voltages of electric shock to another subject (the "learner") for each wrong answer the learner gave.  As the shocks reached intolerable levels and the learner cried out in increasing agony, the scientist pressed the teacher to continue administering the shocks ("The experiment requires that you continue.").

In fact, the learner was a confederate, just pretending to be shocked.  The real experiment was about the willingness of a subject to do what an authority figure (the scientist) told him to do.
The result was that "teachers" became increasingly uncomfortable, but instead of refusing to continue, 65% of them continued to the end.

Ah, the power of --- editorializing?

Sigh.  I am tired of the standard interpretations of this experiment. Cialdini draws the usual, strongly negative conclusion that people are wrong to be such slaves to the authority of the scientists. Rise up, timid sheeples!  Don't just blindly follow orders!  You can think for yourselves!

But in a sense, this experiment couldn't be suggesting something more opposite.  Because actually it wasn't a bad idea to trust these scientists!  They weren't monsters after all, shockingly (!), even though they really, really seemed to be.

Authorities are authorities for a reason
Why do we listen to scientists? Maybe because we have accumulated a large body of evidence saying they are trustworthy.  Did you ever hear of a Yale psychologist actually torturing people?  Our prior is based on the fact that they don't really do horrific experiments.  This is an appropriately strong prior that perhaps shouldn't be overridden by apparent evidence to the contrary from inside a psych experiment.

(And gosh, a psych experiment! Are things ever as they seem in a psych experiment?  Not that the subjects knew this, though.)

Why follow orders?
Maybe you think they know what's best for you. Maybe they can hurt you if you don't do what they say.  Maybe by following orders, you are absolved from some portion of responsibility for your actions.  Maybe everyone else is following orders and going with the flow might be a good idea.  These are all fine reasons.

The question is not whether we tend to follow the orders of authority figures. (We do).  The question is whether our priors are well-calibrated on which authority figures to follow what kinds of orders from.  Scientists, governments, bosses, our we give them the proper weight on average?  It's not enough to look at a few decisions ex post and declare people stupid for following orders.  (And it's definitely not enough to look at an experiment in which people weren't stupid to follow orders and declare them stupid for following orders.)

What? A Doctor?
Of course, when a trait is correlated with (justified) authority, it can potentially be mimicked by non-authority figures hoping to ride the wave.  Anyone can dress like a police officer or call themselves a doctor to gain an air of authority!

But while this might look like authority having "undue influence" to the naive social scientist, it's a bit of a masquerade.  The real man behind the curtain is Dr. Incomplete Info, also known as Doctor What the Heck's Going On? or simply Doctor What for short.  You can trust Doctor What -- after all, he's a doctor! -- to mess things up sneakily.  His specialty is sneakily taunting his victims with all the great outcomes they could achieve If Only.  Like any successful man behind the curtain, Doctor What is seldom blamed directly for his deeds.

I'm a stellar candidate for this job.  If I'm the best person for the job I should get the job. Why can't I even get an interview?  If Only I could convince my prospective employer. (Life is so unfair).
Look at these stupid buffalo being herded off a cliff.  If Only they realized the dangers of herding behavior.
Look at this dupe trusting a salesman pretending to be a doctor. If Only he realized that the appearance of authority can be deceiving.

When you know the truth, you feel strongly that the world ought to align with what you know, and any misalignment is stupid or unfair.  Because the truth is true. The truth is right.  But behavior isn't a function of the truth, it's a function of the information people happen to have.  How could you expect people to act on information they don't have?  Perhaps they couldn't possibly know the truth at the time of their decision, or perhaps it is simply too costly for them to gather the information.

Coexisting peacefully
Because economists are interested in optimal decision-making, and because decision-making depends on the available information, we are hyper-aware of information and the role it plays.  Economics has uncovered many ways to facilitate information flow, but in the process, we have also been forced to recognize that information is often too costly to be worth collecting.  This can include the cost of walking downstairs to figure out if the mailman has come yet; the cost of getting your trading partner to reveal how much he really wants the microwave you're trying to sell him; the cost of sorting through all possible job applicants to find the true best fit for the job...

In an imperfect world, such impossibility results bring peace of mind.  They tell us that even if we do the very best we can, we have to live with imperfection, so we may as well accept it as a fact of life.  Faced with a suboptimal outcome, people's first instinct is to complain, to search for a culprit, someone to blame.  But things can suck without anyone to blame.

Well, in this instance you can blame Doctor What.  But even better would just be to accept the reality of the situation.

Economists have coexisted peacefully throughout time with the Doctor in all his various incarnations.  They see through his curtain, which is to say they know when he's up to no good...but there are no answers there, only unanswered questions...

The bottom line
Cialdini says we should be wary of fakers and mistrustful of authority.  And while it's true that paying extra attention may help us to distinguish some fakers, that's no magic bullet.  Effort is costly, and for any level of effort we put in, there will still be some fakers who manage to make themselves indistinguishable from genuine authorities.  It is equally intelligent to trust every person who appears to be an equally convincing doctor, regardless of the actual truth.

Monday, May 13, 2013

The Value of College

Tony has a nice post about the value of college:

A huge part of the value of college its option value: i.e., finding out (a) is a diploma is worth it for me? (b) what kind of diploma is worth it for me?   Even if the answer is that the student should drop out and do something else, going to college is valuable because it helps the student figure this out.
Do high dropout rates imply that college is a bad investment?  No!  You can't determine whether college is worth enrolling in by looking at dropout rates.  To the contrary, 46% dropout rates are good evidence that people are learning a lot about the suitability of college for them.  If they knew up front that they were going to drop out, they might not bother attending in the first place.

College is a great facilitator of information flow.  It is a chance to efficiently learn about a great many things.  You learn about subject material, yes, but also about your own affinity and aptitude for various subjects. You learn a lot about yourself, and about other people, too.  It's relatively easy to find friends (and more) in college.

Making the best use of college is a tricky business.  For one, it's too easy to take college for granted.  College campuses dramatically lower the cost of interacting with a variety of subjects and people.  In fact, because they are part of a trend of decreasing costs in life up to that point, it's natural to think the trend will continue for years to come.  And then you might not focus enough on making low-cost investments in your future, instead of living it up in college.

The college atmosphere can trick you into thinking it's a good idea to major in something that won't help you after graduation.  There are few expectations imposed upon college students, which is how they come to have so much time for exploring.  In such a low-cost environment, nearly anything has a positive return.  The real world, by contrast, expects people to do stuff that generates value for other members of society.

Friday, May 3, 2013

Influence, Chapter 5

Chapter 5: Liking.

You will not be surprised to hear that liking people increases our willingness to comply with their wishes.  But the strength of the effect is perhaps surprising.  And the ways likeability can be manufactured, say by a salesperson or other compliance professional, are worth a chapter for sure.

Physical Attractiveness
Yep.  Good-looking, well-groomed people are strongly favorably treated in politics, in job interviews, in the courtroom, and just about everywhere else.

I'll see you in court! 
In a Pennsylvania study, researchers rated the physical attractiveness of seventy-four separate male defendants at the start of their criminal trials...The attractive defendants were twice as likely to avoid jail as the unattractive ones.  In another study...a defendant who was better-looking than his victim was assessed an average amount of $5,623 [in damages]; but when the victim was the more attractive of the two, the average compensation was $10,051.
Maybe attractiveness is correlated with other underlying traits that partially explain this, I dunno. But strong attractiveness effects are also easy to identify in experiments.

Improper schooling!
Research on elementary-school children shows that adults view aggressive acts as less naughty when performed by an attractive child and that teachers presume good-looking children to be more intelligent...
Whoa! Well, there's probably something going on here too.  Although...I mean nobody likes to talk about it, but...shouldn't more attractive people actually tend to be smarter? Beauty and intelligence are both positive attributes.  In the marriage market, beautiful people should tend to match with people who are higher in both attributes.  Their children should be more beautiful and more intelligent than average.

I also wonder whose job it was to rate elementary school kids on "attractiveness." (Grad students! Grad students!)

Vote for the ugly ones!
Unsurprisingly, attractive politicians do better in the polls.  As an aside, a consequence of selection for physical attractiveness in politics is that uglier politicians should on average be better along other dimensions that are valued in politics (speaking ability, bargaining power, sanity...).  This follows from a point Jeff Ely has made a few times (see for instance  (To check your understanding: why do I expect more attractive politicians to be worse in other ways, while I expect more attractive people to be more intelligent?)

In fairness, likeability is genuinely important for a politician's effectiveness; however, if we tend to overweigh attractiveness, you should respond by downgrading attractive politicians.  The next time you're on the fence in the voting booth, maybe you should pick the uglier one!


We like people who dress like us, talk like us, have similar background and interests.

This one was an eye-opener for me.  Yes, car salesmen are trained to mirror posture, mood, verbal style.  But apparently they are also trained to manufacture a persona that coincides with whatever they can learn about their potential customer.

This includes looking for evidence about a buyer from the car that he drives into the lot.  If there is camping gear in the back (or the car betrays other signs of an outdoorsy lifestyle), the salesman can mention that he loves to get away from the city whenever possible.  If the license plate is out of state, he might ask where the person is from and report that he (or his wife) was born there.  If there are political bumper stickers or a Jesus fish or...well, you get the idea.  A car can say a lot about a person before the salesman has even made first contact.

Up until now, I wouldn't say that I have trusted salespeople, exactly.  But their trustworthiness just got seriously downgraded, which is saying something.

Here is some good advice:
Because a veneer of similarity can be so easily would be wise these days to be careful around salespeople who just seem to be just like you.
Or more generally, in light of all the discussion in this chapter, be wary of salespeople who you just seem to like for some reason.  In fact, I will coin my own pithy moral:
Be wary of the salesman you seem to (be)  like.


According to Cialdini, we are "phenomenal suckers for flattery," even when we know the flatterer has something to gain by flattery, even when the flattery is completely inaccurate(!)

Praise makes us feel liked.  And we reciprocate with a powerful urge to like the praise-giver back.

This is a great time to mention that at Economonomics, we genuinely love our small but thoughtful and intelligent readership!  And remember, comments are both the best complements and the best compliments to a post you have enjoyed!

(Every comment is a complement and a compliment, whether it contains compliments or not.  In fact if you did leave a few words of praise, that would be a complementary complimentary compliment.)

Contact and Cooperation

Being in cooperation with someone, even being forced to cooperate, strongly influences us to like that person.  They become allies.  We begin to trust them, and to internalize their goals and desires in our own utility functions.

I infer from the tone that Good Cop/Bad Cop was unfamiliar to readers in 1984 (when Influence was originally published).  These days, it's such a staple of crime drama that even the interrogated characters know about it.  In any case, the point is that after the Bad Cop rips into the subject, the Good Cop comes in and adopts the air of a trustworthy ally who thinks his colleague is taking things too far.

Similarly, a salesman will pretend to "battle with his boss."  The salesman seems to be on your side, trying to get you a good deal.  It's an incredibly effective tactic.

Conditioning and Association

Advertisements are full of beautiful people.  This is partly to get our attention, but partly also to make us like the product by association.  Mere association with something positive increases our opinion of the product, even when the associated feature has nothing to do with the product itself.

This isn't hard to believe or understand.  As a general heuristic, positive things tend to be associated with each other.

Heads we win, tails they lose!
Apparently we also take measures to associate ourselves with positive things while avoiding the negatives.  Cialdini did a neat experiment in which he asked students at Arizona State to describe the outcome of football games.  When the team lost, fans tended to say things like, "They lost the game."  But when the team won, it became, "We won!"  This is perhaps best exemplified by this gem of a response from one student:
They threw away our chance for a national championship!
Oh, sports fans.  Cialdini also describes an interesting extension where students took a general knowledge test before being asked to describe the game.  The test was rigged so that some succeeded and others failed badly.  The people whose pride had just taken a blow were much more likely to associate themselves with a victorious team, or distance themselves from a losing team.  In other words, association with success is used as a substitute for success.


Time to disassociate! (Or, How to Lose Credibility and Alienate Readers)
So far, I think we've been having a pretty good time with this chapter.  But the author is about to go horribly, horribly astray.

I'm flipping through the chapters as I write these reviews.  And this is the unfortunate part of the review where I just flipped to a page covered in angry margin notes.
In the aftermath of the [1980 Olympics victory of the US hockey team] over the Soviet team, scalpers were getting a hundred dollars a pair for ticket stubs...Although the desire to bask in reflected glory exists to a degree in all of us, there seems to be something special about people who would wait in the snow to spend fifty dollars apiece for the shreds of tickets to a game they had not attended, presumably to "prove" to friends back home that they had been present at the big victory...
Lying to friends...really?  And he goes on...
Unless I miss my guess, they are not merely great sports aficionados; they are individuals with a hidden personality flaw---a poor self-concept.  Deep inside is a sense of low personal worth that directs them to seek prestige not from the generation or promotion of their own attainments, but from...associations with others of attainment. 
Oh lord. This is what happens when you take a psych theory too far.  There can be a very large difference between an effect discovered in the lab, and the net effect of all the forces that characterize real world behavior.

People collect stuff.  
Which level would you like me to defend this on?  How about this: it's fun to collect stuff.  No?  Okay then, how about this: There is a thriving resale market for sports memorabilia. You don't even have to enjoy it!  According to Antiques Roadshow, those $50 dollar Miracle on Ice ticket stubs are worth over $500 today.   Furthermore, an unused ticket is worth over $2,500 today.

Yes, the unused ticket is worth more. Even though, unfortunately for Cialdini's theory, it cannot be used to prove to your friend that you were at the game.  Quite to the contrary, I suppose an unused ticket would prove that you wasted a ticket instead of sending your friend to the Miracle on Ice.  (And yes, you would be seen as a total jerk, because sports fans are not known for their keen ability to distinguish between ex ante and ex post reasoning).

Now one might ask, where does this value come from then?  Even if it's smart to buy a $50 stub for resale purposes alone, doesn't someone have to value it for its own sake?  Isn't it possible that the $500 resale price is largely underpinned by the motives Cialdini describes?

The bizarre truth is, it is perfectly possible for ticket stubs to be valuable even if no one actually values the stubs for their own sake!  What? Intrinsically worthless pieces of paper going for $500?


How about I'll agree not to put a whole annoying page of dots, and you can pretend you didn't already see the punchline in your peripheral vision?


Technically this bill is worth considerably more than $500 nowadays, but you get the idea.
Yep.  That's basically what money is.  It has value today because people expect it to still have value tomorrow.

My point is not to argue that Miracle on Ice ticket stubs don't have intrinsic value to people; to the contrary, I'm sure they do.  But good luck figuring out which part of the $500 is "intrinsic" value, and which part is value based on the fact that people expect them to have value tomorrow.  Which implies, especially: good luck arguing that a particularly high price for ticket stubs is evidence of deep emotional insecurity.

Even if he's right (he's still wrong)
I'm actually not done demolishing Cialdini's argument.  For the final pass, let's suppose Cialdini is completely correct that sports fans and memorabilia collectors really are largely driven by a desire to associate with the triumphs of others. A hidden personality flaw, he says!  Low personal worth, he says!

Holy absolute versus marginal fail, Batman!
Just because you really enjoy a good steak doesn't mean you are really unhappy without steak.  If we collect a bunch of steak lovers do we expect them to be secretly unhappy whenever they aren't eating steak?  No.  Similarly, you can have a great life and still really enjoy the vicarious successes of other people's lives.

Slightly more technical: In a lab, you can vary people's baseline utility while effectively holding constant the expected marginal value (conditional on baseline utility) of associating with success in sports.  But in the real world, people select into sports according to marginal values, not baseline utilities. Sports fans are people who get particularly high marginal value from associating with sports.  This doesn't imply they have low baseline utilities, even though in the lab the people with the highest marginal values were the people with the lowest baseline utilities.

Are you not entertained?
Now, let me shift gears a bit and make a broader point about entertainment.  I'm not much of a sports fan but I would bet the real, dominant reason for sports fanaticism has got to be less about associating with success of others, and more about mentally experiencing the drama and success oneself.  There's a fine line between these, but sports are best understood as an immersive experience analogous to a good book or movie.  Good drama immerses you and invests you in the outcome.

The real appeal of sports, or for that matter most entertainment, is that the drama in sports and movies and books is so much more dramatic than your own drama.  Have you ever gone up against a league of the world's best athletes and vanquished them in a glorious display of skill and strength and other traits that you value?  Have you ever launched an against-all-odds rebellion against the evil Empire and blown up the Death Star using mystical Force powers?

Stories are made less compelling by the fact that they aren't "real," but more compelling by the fact that awesomer things happen in them than in reality.  

Sports are so popular because they are social, immersive, and considerably more "real" than most other forms of mass entertainment.  Movies and novels are successful because the author is totally unconstrained by reality and thus free to choose the optimally dramatic sequence of events.  Video games are successful because they pull you into the action and give you an actual role in victory.  (And the future will be full of progressively more immersive entertainment experiences).

Summing it up
The point of all this is, I think the immersive entertainment effect has got to be orders of magnitude stronger than the associative effect.  You have to add them together to ascertain a sports fan's motives, and when you do, the associative effect gets swamped.  Yes, we especially like to associate ourselves with teams when they are successful. But somehow the Cubs still have fans.

If you've made it this far, I salute you.  Or rather, I salute you, dear reader who has made it this far.  I hope you have been entertained.  Incredibly, that only covers the first half of my angry margin notes on page 203...but we can talk about stage mothers and rock-music groupies another time.