Monthly Archives: November 2012

Zitzewitz The Wise

Eric Zitzewitz on why the CFTC cracked down on Intrade:

Why prohibit something so harmless? After all, U.S. policy already allows many forms of gambling that have significant social costs and produce no useful information. The real reason may be found in debate surrounding another recent setback for prediction markets, Congress’ last-minute modification of the Dodd-Frank financial reform bill in 2010 to prohibit markets on box-office receipts planned by the Hollywood Stock Exchange (HSX).

The plug was pulled after lobbying by the Motion Picture Association of America, which argued that a prediction market forecasting a poor movie box office could lend an “aura of financial authenticity to gossip.” Translation: Even big-budget failures often have one big weekend before word of mouth kicks in, and information aggregated by prediction markets may deprive them of that.

The bigger threat is to the executives who green-light the flops in the first place. The track record of even the play-money version of HSX is quite good ‑ a real money version would presumably be better. If a prediction market can forecast a poor box office well in advance of production, it raises questions about why an executive cannot. A consultant told me about a software company that ended an internal prediction market that forecast the success of the company’s products. The problem was not that it failed to work ‑ it worked all too well, and that raised awkward questions for the egos involved. (more)

Yes this is a big reason why most firms don’t want prediction markets on internal issues, and why the film industry lobbied to prevent film futures. But I find it harder to see as a big reason the CFTC prevents Intrade, and earlier Nadex, from betting on elections. That seems more simply explained by a general public aversion to what it sees as “gambling.”

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A King is fine, so long as he’s one of us

Living today in longstanding democracies, it can be hard to comprehend why so many people living in the past, or other countries, would permit or even enthusiastically support the unchecked power of their monarchs and dictators. Wasn’t it obvious to them how dangerous and corrupting the accumulation of power by individuals could be?

When someone we don’t like is in power, all of the intellectual arguments for separation of powers jump to mind to justify our fears. But sadly our tribal minds go looking for totally different rationalisations as soon as ‘one of us’ is in charge. This is nicely demonstrated by the acquiescence of US progressives to the further expansion of Presidential powers that supposedly horrified them during the Bush administration:

For the last four years, Barack Obama has not only asserted, but aggressively exercised, the power to target for execution anyone he wants, including US citizens, anywhere in the world. He has vigorously resisted not only legal limits on this assassination power, but even efforts to bring some minimal transparency to the execution orders he issues.

This claimed power has resulted in four straight years of air bombings in multiple Muslim countries in which no war has been declared – using dronescruise missiles and cluster bombs – ending the lives of more than 2,500 people, almost always far away from any actual battlefield. They are typically targeted while riding in cars, at work, at home, and while even rescuing or attending funerals for others whom Obama has targeted. A substantial portion of those whom he has killed – at the very least – have been civilians, including dozens of children.

Worse still, his administration has worked to ensure that this power is subject to the fewest constraints possible

President Obama was recently convinced that some limits and a real legal framework might be needed to govern the exercise of this assassination power. What was it that prompted Obama finally to reach this conclusion? It was the fear that he might lose the election, which meant that a Big, Bad Republican would wield these powers, rather than a benevolent, trustworthy, noble Democrat – i.e., himself.

This is a nice example of human hypocrisy, as if we needed another. So long as a member of the other political tribe was in control, progressives would convince themselves that such a power grab was Wrong On Principle. But now that their man is in control, we can all relax and just trust him to be a Nice Guy:

… the primary reason for this fundamental change in posture [among progressives] is that they genuinely share the self-glorifying worldview driving Obama here. The core premise is that the political world is shaped by a clean battle of Good v. Evil. The side of Good is the Democratic Party; the side of Evil is the GOP. All political truths are ascertainable through this Manichean prism.

The result is that, for so many, it is genuinely inconceivable that a leader as noble, kind and wise as Barack Obama would abuse his assassination and detention powers. It isn’t just rank partisan opportunism or privilege that leads them not to object to Obama’s embrace of these radical powers and the dangerous theories that shield those powers from checks or scrutiny. It’s that they sincerely admire him as a leader and a man so much that they believe in their heart (like Obama himself obviously believes) that due process, checks and transparency are not necessary when he wields these powers. Unlike when a GOP villain is empowered, Obama’s Goodness and his wisdom are the only safeguards we need.

Thus, when Obama orders someone killed, no due process is necessary and we don’t need to see any evidence of their guilt; we can (and do) just assume that the targeted person is a Terrorist and deserves death because Obama has decreed this to be so. When Obama orders a person to remain indefinitely in a cage without any charges or any opportunity to contest the validity of the imprisonment, that’s unobjectionable because the person must be a Terrorist or otherwise dangerous – or else Obama wouldn’t order him imprisoned. We don’t need proof, or disclosed evidence, or due process to determine the validity of these accusations; that it is Obama making these decisions is all the assurance we need because we trust him.

As Glenn Greenwald notes, this blind trust in wise and just rulers is the antithesis of how the American system, designed in reaction to a foreign ruler who wasn’t ‘one of us’, was supposed to work: “in questions of power…let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” Unfortunately the constitution isn’t doing much of a job of binding down the President, and the public never managed to bind themselves to the mast to keep caring.

It is especially reckless to allow this precedent to be set for a new technology for surveillance and assassination that will become gradually more accessible to both state and non-state actors. If it had its eyes on the long term, the US would be trying to develop laws and international norms to make sure that this technology is not used in a way that backfires on them in the future. This issue appears not to have been considered much at all.

If you ever find yourself mystified by the tolerance people across history or the world have for giving their rulers great discretion, just because they are charismatic or part of the same cultural group, just look around and you’ll see the same instinct remains all around us today.

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Freakonomics On Consulting

Me in January on Too Much Consulting?:

Last night I discussed the popularity of law, finance, and management consulting with Tyler and many somewhat-libertarian-leaning others. I was surprised that most were skeptical that firms get their money’s worth from consulting, more skeptical than for law or finance. I was also surprised that most focused on explaining why kids from elite schools work at such firms, rather than on why firms pay so much for this consulting.

My explanation:

The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide.

Freakonomics Radio interviewed me about it a bit later, and they’ve just put up a podcast they say was “inspired in part” by my post. In addition to me, they talk to Keith Yost, a former consultant:

Fellow consultants and associates … [said] fifty percent of the job is nodding your head at whatever’s being said, thirty percent of it is just sort of looking good, and the other twenty percent is raising an objection but then if you meet resistance, then dropping it.

and Christopher McKenna, Oxford business historian:

They divide the roles into two parts. The first part is the one that we tend to understand the best and the one that we tend to think of in the most positive terms, and that is that they bring advice to a firm that doesn’t otherwise have it. … The second thing that they provide is legitimacy, and that’s the one that seems a little bit strange. So you’ve made a decision or you think you might know what you’d like to do about entering those markets or making a new product. And instead of just going ahead and doing it, you hire the consultants to confirm what you already thought. And those consultants come in and they say yes you’re right, or even imagine you’re having a political fight within the firm and both sides hire consultants and in effect they both produce reports, and somebody wins that fight with the help of that extra amount of knowledge from outside.

and Nick Bloom, Stanford economist:

So there are really two types of consulting. There’s operational consulting, you know, down on the factory floor, in the shop type improvements. That’s probably ninety-five percent of the industry. Most of it is done by firms you’ve never heard of. And those guys are very much like seasoned, gnarly, ex-manufacturing managers that have spent twenty years working in Ford and are real experts, and are now getting paid as consultants to hand out advice. That stuff typically has pretty big impact because you’re paying someone to give them long-earned advice. And then there’s the very small elite end, strategy consulting, about five percent. And that’s much more helping CEOs make big decisions.

Bloom did a randomized trial in India of the first type of consulting, and found that it gave great value. But on the other type, which is what I think Yost, McKenna, I, and my dinner companions were discussing, the only positive evidence the show offers is cohost Steve Levitt saying that as a consultant he sure felt he added value:

My own experience has been that even though I know nothing about an industry, if you give me a week, and you get a bunch of really smart people to explain the industry to me, and to tell me what they do, a lot of times what I’ve learned in economics, what I’ve learned in other places can actually be really helpful in changing the way that they see the world.

And how can you argue with data like that?

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Marginal Charity

People often ask: where can I get the best bang for my buck in charity? The above diagram shows where.

We make many choices, both as individuals and as organizations; we choose prices, qualities, locations, etc. We often make such choices to maximize some sort of private gain, shown in red. Such private choices also usually have effects on the gain of the rest of the world, shown in black. In general the social gain curve peaks at a different point than the private gain curve, because there are usually many market failures associated with our choices. (As the absolute curve heights are irrelevant, I’ve arbitrarily let them intersect where private gain peaks.)

At the choice that maximizes private value, a small change in the direction of raising social gain, as shown by the yellow arrow, comes at only a tiny loss in private gain. In fact, in the limit of going to the exact private gain maximizing choice, the ratio of the rates of change of social gain and private loss approaches infinity!

The lesson: if you aren’t already doing it, by far the most cost-effective way to help the world is to shade your selfish choices just a little in the direction of making the world a better place. If you have market power when you sell a product, lower your price just a tad. If you have market power when you sell your labor, lower your wage a bit. Instead of choosing the profit-maximizing quality for your product or labor, increase that quality a little. If twenty floors would be the most profitable height for your apartment complex, add one more floor. And so on. (And maybe learn some econ, so you can better see which direction is good.)

Yes, you usually aren’t sure what is your best selfish choice; your choice might already be accidentally helping the world at a bigger personal cost than you intended. But you might also be accidentally hurting both you and the world. If you are now doing your best guess way to help yourself, shift just a bit toward helping the world; on average that will cost you very little and give the world a lot.

Yes it is harder to pay others to take this approach. If you tried to pay an apartment builder to add one floor beyond the twenty they’d otherwise build, they’ll probably quickly learn to lie and say that nineteen floors is what maximizes their profits. So this approach tends to be limited to choices where you are the insider who knows the internal best estimates, or where you trust an insider not to lie to you. Still, most of us make selfish choices all the time, so we should all have lots of opportunities to apply this method.

If this is such an easy way to help the world, why haven’t you heard about it before? Why isn’t this a standard part of everyone’s education? I’d guess it is because it is hard to show that you are helping the world via this method. And people care a lot more about seeming to help, than about actually helping. Also, even if this could be made visible, we are usually much more eager to show we’ve paid a high cost than to show we’ve achieved a big social gain; it is the cost that makes for a credible costly signal of our virtue. Finally, this can’t be the basis of an inspiring hero story; it is something that many folks can each do a little, not something that one person can do a lot.

(I doubt I’m original here; this point seems pretty obvious given basic optimization theory. But I didn’t see anywhere else I could link to that makes this point.)

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Invent yourself and think through your impact – graduation ceremony speech

I was lucky enough to be chosen to be the student speaker for my graduation ceremony. Unsurprisingly, I decided to talk about some key ideas emerging from the effective altruist movement, in which I have recently started working.

It was a challenging event to write for, because I am too cynical to be sentimental or outright wrong, but nor did I think it would be productive to spurn the social norms surrounding this kind of tradition altogether. I’ll let you judge whether I did a good job of riding the line.

The speech is below the fold. The personal content comes first; if you would like to skip that, click here.

Chancellor, Vice-Chancellor, ladies and gentlemen. Good afternoon, and thank you for the opportunity to speak with you today.

Continue reading "Invent yourself and think through your impact – graduation ceremony speech" »

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Can a tiny bit of noise destroy communication?

If everyone knows a tenth of the population dishonestly claims to observe alien spaceships, this can make it very hard for the honest alien-spaceship-observer to communicate fact that she has actually seen an alien spaceship.

In general, if the true state of the world is seen as not much more likely than you sending the corresponding false message somehow, it’s hard to communicate the true state.

You might think there needs to be quite a bit of noise relative to true claims, or for acting on true claims to be relatively unimportant, for the signal to get drowned out. Yet it seems to me that a relatively small amount of noise could overwhelm communication, via feedback.

Suppose you have a network of people communicating one-on-one with one another. There are two possible mutually exclusive states of the world – A and B – which individuals occasionally get some info about directly. They can tell each other about info they got directly, and also about info they heard from others. Suppose that everyone likes for they and others to believe the truth, but they also like to say that A is true (or to suggest that it is more likely). However making pro-A claims is a bit costly for some reason, so it’s not worthwhile if A is false. Then everyone is honest, and can trust what one another says.

Now suppose that the costs people experience from making claims about A vary among the population. In the lowest reaches of the distribution, it’s worth lying about A. So there is a small amount of noise from people falsely claiming A. Also suppose that nobody knows anyone else’s costs specifically, just the distribution that costs are drawn from.

Now when someone gives you a pro-A message, there’s a small chance that it’s false. This slightly reduces the benefits to you of passing on such pro-A messages, since the value from bringing others closer to the truth is diminished. Yet you still bear the same cost. If the costs of sending pro-A messages were near the threshold of being too high for you, you will now stop sending pro-A messages.

From the perspective of other people, this decreases the probability that a given message of A is truthful, because some of the honest A messages have been removed. This makes passing on messages of A even less valuable, so more people further down the spectrum of costs find it not worthwhile. And so on.

At the same time as the value of passing on A-claims declines due to their likely falsehood, it also declines due to others anticipating their falsehood and thus not listening to them. So even if you directly observe evidence of A in nature, the value of passing on such claims declines (though it is still higher than for passing on an indirect claim).

I haven’t properly modeled this, but I guess for lots of distributions of costs this soon reaches an equilibrium where everyone who still claims A honestly finds it worthwhile. But it seems that for some, eventually nobody ever claims A honestly (though sometimes they would have said A either way, and in fact A happened to be true).

In this model the source of noise was liars at the bottom of the distribution of costs. These should also change during the above process. As the value of passing on A-claims declines, the cost threshold below which it is worth lying about such claims lowers. This would offset the new liars at the top of the spectrum, so lead to equilibrium faster. If the threshold becomes lower than the entire population, lying ceases. If others knew that this had happened, they could trust A-claims again. This wouldn’t help them with dishonest B-claims, which could potentially be rife, depending on the model. However they should soon lose interest in sending false B-claims, so this would be fixed in time. However by that time it will be worth lying about A again. This is less complicated if the initial noise is exogenous.

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Grace-Hanson Podcast

Katja and I recorded a new podcast, this time on Relations (wmvmp3)

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On Friend Jealousy

We humans have many kinds of relationships with each other. We can be lovers, parents, children, teachers, students, priests, parishioners, customers, suppliers, drivers, passengers, writers, readers, etc.

Jealousy can make sense in most of these relations. Jealousy is a fear that potential associates will choose instead to associate with someone else. I can be jealous that my kids will like their mom better than me, that my students may prefer other teachers to me, or that blog readers may prefer to read other blogs.

Role specialization is a robust way to limit jealousy. If dads have different parental roles than moms, then my kids could like me best as a dad, and their mom best as a mom, and I less have to fear that they will substitute her for me. If I teach a particular course well, then my students can like me for being good at my course, and others for teaching their courses well, and I need less fear that few students will want me to teach them.

We use role specialization a lot, to great benefit, in our business and work lives. And traditional societies greatly specialized their personal and family relations. Genders, ages, and classes all had distinct roles to play. Wives and mistresses were even clearly distinguished. Since we have today weakened such role specialization, we now have more scope for jealousy in our personal and family relations.

One interesting exception is friendship. While friends sometimes specialize into more particular friendship roles, like “golf buddy”, and we are sometimes jealous of others supplanting our friend roles, such as “best friend”, both of these tendencies are noticeably weaker relative to non-friend relations. So much so that when people try to talk you out of being jealous in some other area, they usually point to friendships, as in, “You can have lots of friends without jealousy; why not do that with lovers too?”

Why treat friendships so differently? My guess is that friends, more than other relations, function in large part to cement our position in larger social coalitions. As a social species, we play a lot of coalition politics, and in coalition politics one needs many allies who themselves have many other allies. For this function jealousy makes a lot less sense. If my friends have more other friends, that makes them better not worse friends for me, if their function is to cement my position in a larger social alliance.

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Dec 7 DC Em Econ Talk

At 8:15p Dec. 7, I’ll give an em econ talk in DC, to the Philosophical Society of Washington, at the Powell Auditorium adjacent to the Cosmos Club, 2170 Florida Avenue NW (Entrance through club gate). It is open to the public, free, informal dress, requires no reservation, and is followed by a social hour. Title & abstract:

Whole Brain Emulation: Envisioning Economies And Societies of Emulated Minds

The three most disruptive transitions in history were the introduction of humans, farming, and industry. If another transition lies ahead, a good guess for its source is artificial intelligence in the form of whole brain emulations, or “ems,” sometime in roughly a century. I apply standard social science to this unusual situation, to outline a relatively-likely reference scenario set modestly far into a post-em-transition world. I consider families, reproduction, life plans, daily activities, inequality, class, work training, property rights, firm management, industrial organization, urban agglomeration, security, politics, and governance.

Added Dec 8: My talk was “among the best attended talks of the year.” Here are slides, audio, video (to appear here).

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Working Class Futures

Two years ago I posted on an article saying most psych data comes from a weird source, US college students:

Americans are, on average, the most individualistic people in the world. … American parents, for example, were the only ones in a survey of 100 societies who created a separate room for their baby to sleep. … Compared with other Western industrialized societies, Americans were found to be the most patriotic, litigious, philanthropic, and populist. They were also among the most optimistic, and the least class-conscious.

The article authors expect US college attitudes to spread to be the usual ones worldwide, because they are just better:

Our evolved tendencies to imitate successful and prestigious individuals will favor the spread of child-rearing traits that speed up and enhance the development of those particular cognitive and social skills that eventually translate into social and economic success.

Unsurprisingly, US non-college-grads are culturally more like the rest of the world. They more value conforming to norms and to others, and less value choice, control, and being different. (Many quotes below.)

Many futurists seem to also expect US college values to dominate the future. They imagine wealthy future folk as super-individualists — gaining even more “transhumanist” options to expand or change themselves, diverging according to differing personal inclinations, and often violating familiar norms in the process. My guess, however, is that increasing individualism results from a mix of increasing per-person wealth giving more personal options and less need for strong social ties, and the world copying the random weirdness of the most successful nation.

Thus when US success is eclipsed by other nations, and when per-person wealth again declines, both of which seem very likely in the long run, I expect more-farmer-like future folk to be much less individualistic than today’s US college grads. If as a US person you have trouble imagining them as like foreigners, since you don’t know foreigners well, then imagine them with traditional US working class values. Don’t so much imagine the low religion, marriage, and work effort typical of today’s US working class; instead imagine their grandparents.

Yes future folk may change in many ways compared to humans today, but less because of differing personal inclinations, and more to increase productivity and to be compatible and cooperative with associates.

Those promised quotes on US working class culture: Continue reading "Working Class Futures" »

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