# Monthly Archives: November 2012

## Could risk aversion be from friend thresholds?

If you are going for a job that almost nobody is going to get, it’s worth trying to be unusual. Better that one in a hundred employers loves you and the rest hate you than all of them think you’re mediocre.

On the other hand, if you are going for a job that almost everybody who applies is going to get, best to be as close to normal as possible.

In general, if you expect to fall on the bad side of some important threshold, it’s good to increase your variance and maybe make it over. If you expect to fall on the good side, it’s good to decrease your variance and stay there. This is assuming you can change your variance without changing your mean too much.

This suggests people should be risk seeking sometimes, and risk averse other times, depending on where the closest or most important thresholds are for them.

Prospect theory and its collected evidence says that people are generally risk averse for gains, and risk seeking for losses. That is, if you offer them fifty dollars for sure or half a chance of a hundred, they’ll take the sure fifty. If you offer them minus fifty dollars for sure, or half a chance of minus one hundred, they’ll take the gamble. The proposed value function looks something like this:

The zero point is a ‘reference point’, usually thought to be something like expectations or the status quo. This means people feel differently about gaining fifty dollars vs. a fifty percent of one hundred, and being given one hundred then later offered minus fifty or a fifty percent chance of minus one hundred, even though these things are equivalent in payoffs.

Risk aversion in gains and risk seeking in losses is what you would expect if people were usually sitting right near an important threshold, regardless of how much they had gained or lost in the past. What important threshold might people always be sitting on top of, regardless of their movement?

One that occurs to me is their friends’ and acquaintances’ willingness to associate with them. Which I will explain in a minute.

Robin has suggested that people should have high variance when they are getting to know someone, to make it over the friend threshold. Then they should tone it down if they make it over, so they don’t fall back under again.

This was in terms of how much information a person should reveal. But suppose people take into account how successful your life is in deciding whether they want to associate with you. For a given friend’s admiration, you don’t have that much to gain by getting a promotion say, because you are already good enough to be their friend. You have more to lose by being downgraded in your career, because there is some chance they will lose interest in associating with you.

Depending on how good the friend is, the threshold will be some distance below you. But never above you, because I specified friends, not potential friends. This is relevant, because it is predominantly friends, not potential friends, who learn about details of your life. Because of this selection effect, most of the small chances you take run the risk of sending bad news to existing friends more than sending good news to potential friends.

If you think something is going to turn out well, you should be risk averse because there isn’t much to gain sending better news to existing friends, but there is a lot to lose from maybe sending bad news. If you think something is going to go a tiny bit badly, you still want to be risk averse, as long as you are a bit above the thresholds of all your acquaintances. But if you think it’s going to go more badly, a small chance of it not going badly at all might be more valuable than avoiding it going more badly.

This is less clear when things go badly, because the thresholds for each of your friends can be spread out in the space below you, so there might be quite a distance where losing twice as much loses you twice as many friends. But it is less clear that people are generally risk seeking in losses. They do buy insurance for instance. It’s also plausible that most of the thresholds are not far below you, if people try to associate with the best people who will have them.

Another feature of the prospect theory value function is that the loss region is steeper than the gain region. That also fits with the present theory, where mostly you just have things to lose.

In sum, people’s broad patterns of risk aversion according to prospect theory seem explicable in terms of  thresholds of association with a selection effect.

Can you think of a good way to test that?

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## Why Not Pre-Books?

I’m planning to write a book, a book I want to both be engaging to a wide audience, and to adequately defend some complex non-obvious intellectual claims. It feels quite daunting to write with both of these goals in mind at once. So I’m thinking of achieving these two goals in two steps. First I’d write a pre-book, which states my main claims and arguments directly and clearly, using expert language, for an expert audience. I’d then circulate that pre-book privately among experts and useful thinkers of various sorts, seeking criticism of my arguments. Then using their feedback, I’d revise my claims and arguments, and write an engaging accessible book that can be circulated widely.

While this strategy seems to make sense, I rarely hear of anyone doing it. Why? Some possible explanations:

1. Lots of writers do this; they just don’t let it be known, as that makes them seem unconfident.
2. Most writers think they know what experts will think about each opinion they will express, and see little value in getting expert feedback on the package of opinions they will express.
3. A pre-book nearly doubles a writer’s effort, and few writers of accessible books are willing to do this just to get a more intellectually defensible argument.
4. Far fewer experts are willing to comment on a private pre-book than are willing to publicly criticize a published book. The main way to get feedback is to publish things.
5. The readers of the pre-book will be offended that their feedback don’t much change the writer’s opinions.
6. If the pre-book is circulated too widely, that will cut too far into the book sales.
7. Critics with access to the pre-book might embarrass the author by pointing the many changes of opinion in the book.
8. Good writers don’t find it very hard to simultaneously write both defensibly and accessibly.
9. Writers choose a book concept based on what they think will sell. Getting expert feedback on a pre-book might change author opinions too much, making it harder to sincerely write the initial book concept.
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## Brands Show Identity

Marketers have long noticed puzzlingly high levels of brand loyalty:

Consumers appear to have high willingness to pay for particular brands, even when the alternatives are objectively similar. The majority of consumers typically buy a single brand of beer, cola, or margarine, even though relative prices vary signiﬁcantly over time, and consumers often cannot distinguish their preferred brand in blind “taste tests”. Consumers pay large premia to buy homogeneous goods like books and CDs from branded online retailers, even when they are using a “shopbot” that eliminates search costs. A large fraction of consumers buy branded medications, even though chemically equivalent generic substitutes are available at the same stores for much lower prices.

Brand loyalty is big barrier to innovation, and an important reason why inefficient firms manage to survive so long.

Brand preferences create large entry barriers and durable advantages for incumbent firms, and can explain persistence of early-mover advantage over long periods

In the latest American Economic Review Bronnenberg, Dube, & Gentzkow offer new clues:

Variation in where consumers have lived in the past allows us to isolate the causal effect of past experiences on current purchases, holding constant contemporaneous supply-side factors such as availability, prices, and advertising. … 60 percent of the gap in purchases between the origin and destination state closes immediately when a consumer moves. … The remaining 40 percent gap between recent migrants and lifetime residents closes steadily, but slowly. It takes more than 20 years for half of the gap to close, and even 50 years after moving the gap remains statistically signiﬁcant. … The relative importance of brand capital is higher in [product] categories with high levels of advertising and high levels of social visibility. (more)

This ad effect is puzzling because:

Large literatures have measured the effects of advertising, but these studies often ﬁnd no effects [of ads on sales], and the effects they do measure are estimated to dissipate over a horizon ranging from a few weeks to at most ﬁve or six months.

Let me suggest that an important use of brands is to create and signal identities. We create a coherent understandable idea of the kind of person we are, integrated with the kind of products we use, and we prefer not to change that concept, so that others can continue to rely on their expectations about us. We are willing to pay higher prices, and neglect info about quality, in order to keep a persistent style and appearance. So brands are naturally more important for products we use that others see more, and where ads have made connections to identity more salient.

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## Was Intrade being manipulated over the last month?

Intrade’s betting odds on the 2012 presidential election have differed significantly from those available elsewhere. For the 48 hours preceding the election, the difference in the implied probability of Obama winning on Intrade relative to other betting agencies like Betfair, was 8 to 15 percentage points. This persisted until a large share of Ohio votes had been counted and Colorado and New Mexico were starting to count, at which point the difference quickly evaporated. Over the previous 3 weeks or so, the difference had moved in the range of 5 to 10 percentage points.  The same distortion was observed in favour of McCain during the election in 2008, though to a lesser extent.

This provided an opportunity to make substantial money by betting on Obama on Intrade and Romney elsewhere – a so called dutch book, or ‘arbitrage‘. I joined some colleagues at 80,000 Hours doing this yesterday to earn money for our favourite cost effective charities. We each walked away with about \$500 after all of the associated fees. Eyeballing it, a dutch book is profitable, ignoring the cost to your time, if the probability gap is larger than 3 percentage points; below that, the fees involved will eat up your winnings.

Why was this possible? I don’t have a good answer, but I can suggest one possibility. Some noteworthy aspects of the situation are:

• Americans can’t deposit money into Intrade using credit and debit cards – they have to use bank transfers.
• Bank transfers take at least two days to arrive and cost over \$20.
• Everyone else can choose between cards and bank transfers.
• Cards are instantaneous and free (if denominated in US dollars anyway) but have a \$2,000 deposit limit in the first month, and \$5,000 thereafter.
• It takes at least a day, probably two, to open a new Intrade account and have it approved.
• There are other significant barriers to entry – knowing about the issue, learning about the fees, opening an account with another betting agency and finally having the time and confidence to correctly place the hedge.
• Intrade seems very widely covered by the US media.

A single person with a huge amount in their account from a wire transfer could manipulate the market by selling Obama’s shares down, or buying Romney’s up. This appeared to be happening in the 67-72% likelihood range in which Obama was stuck for a long period of time, while other larger agencies were placing him around 82%. Several people on Intrade’s forum spotted what they thought were abnormally large bids for Romney’s stock.

Once someone started doing this, it would take at least two days, probably three, for a wealthy or ambitious person to respond by wiring in enough money to bet against them. They would have to hope that the manipulation persisted long enough for them to profit from it. Until then, people outside the USA would be limited to putting at most \$2000 or \$5000 into their accounts, which is barely worth the effort for someone with the required skill. Someone could plan to do this over the last few days of the election without generating much resistance.

The volume yesterday on Obama’s Intrade shares was about 600,000. If all of those trades involved one person, who was losing 10 percentage points on each share, they would have blown \$600,000 to keep Obama’s odds down. The volume over the previous three weeks is hard to read from Intrade’s graphs, but looks to be about the same again. So a single cunning person willing to lose \$1 million could have singlehandedly driven the price difference, if they wanted to influence perceptions of the race and encourage voter turnout. Out of the \$6 billion spent on the election so far, that’s not a big investment. Intrade will face the risk of this until they make it easier for wolves to fund their accounts and go out hunting sheep.

Weaknesses of this theory are:

• Why didn’t manipulation over the previous three weeks prompt someone to move a large sum onto Intrade in anticipation?
• Why haven’t wealthy Obama supporters attempted the same trick?

Nonetheless, I think this is more likely than a broad pool of Intrade participants being enthusiastic about Romney against all the evidence, and unaware that they could get better odds elsewhere.

If I were a Democrat supporter with a lot of money, I would plan to profit from similar situations in the future while simultaneously improving Intrade’s performance.

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## Is Paper Low Status?

“Virginia has a lot of electronic voting and in general has an election system where it’s very hard to get recounts,” says Dill. “So I might worry about Virginia, depending on how close it is.” … It’s a lot easier to modify electronic records than to modify paper records which is why banking and a lot of other critical activities like that still rely on paper when there’s an ultimate disaster and electronic records are lost or corrupted. (more)

When I voted this morning in Virginia I noticed a line of 6-8 people waiting to use the electronic voting machines, but one could vote immediately on paper. Yet paper voting is less corruptible. I asked Alex Tabarrok and he said he puzzled over the same thing when he voted: why is paper voting so unpopular?

A fb comment noted that it is mostly old folks voting on paper. And that was true at my place as well. Which leads me to suggest that this is a status effect – people stand in line to vote less securely in order to signal that they aren’t old folks scared by or incompetent at electronics. Yes, it seems surprising that people are willing to spend an extra few minutes just to look hip to strangers. But what other explanation is there?

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## Wanted: Elite Crowds

This weekend I was in a AAAI (Association for the Advancement of Artificial Intelligence) Fall Symposium on Machine Aggregation of Human Judgment. It was my job to give a short summary about our symposium to the eight co-located symposia. Here is what I said.

In most of AI, data is input, and judgements are output. But here humans turn data into judgements, and then machines and institutions combine those judgements. This work is often inspired by a “wisdom of crowds” idea that we often rely too much on arrogant over-rated experts instead of the under-rated insight of everyone else. Boo elites; rah ordinary folks!

Many of the symposium folks are part of the IARPA ACE project, which is structured as a competition between four teams, each of which must collect several hundred participants to answer the same real-time intelligence questions, with roughly a hundred active questions at any one time. Each team uses a different approach. The two most common ways are to ask many people for estimates, and then average them somehow, or to have people trade in speculative betting markets. ACE is now in its second of four years. So, what have we learned?

First, we’ve learned that it helps to transform probability estimates into log-odds before averaging them. Weights can then correct well for predictable over- or under-confidence. We’ve also learned better ways to elicit estimates. For example, instead of asking for a 90% confidence interval on a number, it is better to ask for an interval, and then for a probability. It works even better to ask about an interval someone else picked. Also, instead of asking people directly for their confidence, it is better to ask them how much their opinion would change if they knew what others know.

Our DAGGRE team is trying to improve accuracy by breaking down questions into a set of related correlated questions. ACE has also learned how to make people better at estimating, both by training them in basic probability theory, and by having them work together in teams.

But the biggest thing we’ve learned is that people are unequal – the best way to get good crowd wisdom is to have a good crowd. Contributions that most improve accuracy are more extreme, more recent, by those who contribute more often, and come with more confidence. In our DAGGRE system, most value comes from a few dozen of our thousands of participants. True, these elites might not be the same folks you’d have picked via resumes, and tracking success may give better incentives. But still, what we’ve most learned about the wisdom of crowds is that it is best to have an elite “crowd.”

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## Nuclear winter and human extinction: Q&A with Luke Oman

In Reasons and Persons, philosopher Derek Parfit wrote:

I believe that if we destroy mankind, as we now can, this outcome will be much worse than most people think. Compare three outcomes:

1. Peace

2. A nuclear war that kills 99% of the world’s existing population.

3. A nuclear war that kills 100%

2 would be worse than 1, and 3 would be worse than 2. Which is the greater of these two differences? Most people believe that the greater difference is between 1 and 2. I believe that the difference between 2 and 3 is very much greater… If we do not destroy mankind, these thousand years may be only a tiny fraction of the whole of civilized human history.

The ethical questions raised by the example have been much discussed, but almost nothing has been written on the empirical question: given nuclear war, how likely is scenario 3?

The most obvious path from nuclear war to human extinction is nuclear winter: past posts on Overcoming Bias have bemoaned neglect of nuclear winter, and high-lighted recent research. Particularly important is a 2007 paper by Alan Robock, Luke Oman, and Georgiy Stenchikov:  “Nuclear winter revisited with a modern climate model and current nuclear arsenals: Still catastrophic consequences.” Their model shows severe falls in temperature and insolation that would devastate agriculture and humanity’s food supply, with the potential for billions of deaths from famine in addition to the direct damage.

So I asked Luke Oman for his estimate of the risk that nuclear winter would cause human extinction, in addition to its other terrible effects. He gave the following estimate:

The probability I would estimate for the global human population of zero resulting from the 150 Tg of black carbon scenario in our 2007 paper would be in the range of 1 in 10,000 to 1 in 100,000.

I tried to base this estimate on the closest rapid climate change impact analog that I know of, the Toba supervolcanic eruption approximately 70,000 years ago.  There is some suggestion that around the time of Toba there was a population bottleneck in which the global population was severely reduced.  Climate anomalies could be similar in magnitude and duration.  Biggest population impacts would likely be Northern Hemisphere interior continental regions with relatively smaller impacts possible over Southern Hemisphere island nations like New Zealand.

Luke also graciously gave a short Q & A to clarify his reasoning:

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## Why underestimate acceptable partners?

The romantic view of romance in Western culture says a very small fraction of people would make a great partner for you, customarily one.

Some clues suggest that in fact quite a large fraction of people would make a suitable spouse for a given person. Arranged marriages apparently go pretty well rather than terribly. Relationships are often formed between the only available people in a small group, forced together. ‘If I didn’t have you‘ by Tim Minchin is funny. It could be that relationships chosen in constrained circumstances are a lot worse than others, though I haven’t heard that. But they are at least common enough that people find them worthwhile. And the fraction of very good mates must be at least a lot greater than suggested by the romantic view, as evidenced by people ever finding them.

So it seems we overstate the rarity of good matches. Why would we do that? One motive would be to look like you have high standards, which suggests that you are good enough yourself to support such standards.

But does this really make sense? In practice, most of the ways a person could be especially unusual such that it is hard for them to find a suitable mate are not in the direction of greatness. Most of them are just in various arbitrary directions of weirdness.

If I merely sought mates with higher mate value than me, they wouldn’t be that hard to find. They are mostly hard to find because I just don’t really get on well with people unless they are on some kind of audacious quest to save the world, in the top percentile of ‘overthinking things’ and being explicit, don’t much mind an above average degree of neuroticism on my part, and so on.

The romantic view is much closer to the truth for weird people than normal people. So while endorsing the romantic view should make you look more elite, by this argument it should much more make you look weird. In most cases – especially during romance – people go to a lot of trouble to not look weird. So it seems this is probably not how it is interpreted.

Most of anyone’s difficulty in finding mates should be due to them being weird, not awesome. So why does considering a very small fraction of people suitable make you seem good rather than weird?

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## Does complexity bias biotechnology towards doing damage?

A few months ago I attended the Singularity Summit in Australia. One of the presenters was Randal Koene (videos here), who spoke about technological progress towards whole brain emulation, and some of the impacts this advance would have.

Many enthusiasts – including Robin Hanson on this blog – hope to use mind uploading to extend their own lives. Mind uploading is an alternative to more standard ‘biological’ methods for preventing ageing proposed by others such as Aubrey de Gray of the Methuselah Foundation. Randal believes that proponents of using medicine to extend lives underestimate the difficulty of what they are attempting to do. The reason is that evolution has led to a large number of complex and interconnected molecular pathways which cause our bodies to age and decay. Stopping one pathway won’t extend your life by much, because another will simply cause your death soon after. Controlling contagious diseases extended our lives, but not for very long, because we ran up against cancer and heart disease. Unless some ‘master ageing switch’ turns up, suspending ageing will require discovering, unpacking and intervening in dozens of things that the body does. Throwing out the body, and taking the brain onto a computer, though extremely difficult, might still be the easier option.

This got me thinking about whether biotechnology can be expected to help or hurt us overall. My impression is that the practical impact of biotechnology on our lives has been much less than most enthusiasts expected. I was drawn into a genetics major at university out of enthusiasm for ideas like ‘golden rice’ and ‘designer babies’, but progress towards actually implementing these technologies is remarkably slow. Pulling apart the many kludges evolution has thrown into existing organisms is difficult. Manipulating them to reliably get the change you want, without screwing up something else you need, even more so.

Unfortunately, while making organisms work better is enormously challenging, damaging them is pretty easy. For a human to work, a lot needs to go right. For a human to fail, not much needs to go wrong. As a rule, fiddling with a complex system is a lot more likely to ruin it than improve it. As a result, a simple organism like the influenza virus can totally screw us up, even though killing its host offers it no particular evolutionary advantage:

Few pathogens known to man are as dangerous as the H5N1 avian influenza virus. Of the 600 reported cases of people infected, almost 60 per cent have died. The virus is considered so dangerous in the UK and Canada that research can only be performed in the highest biosafety level laboratory, a so-called BSL-4 lab. If the virus were to become readily transmissible from one person to another (it is readily transmissible between birds but not humans) it could cause a catastrophic global pandemic that would substantially reduce the world’s population.

The 1918 Spanish flu pandemic was caused by a virus that killed less than 2 per cent of its victims, yet went on to kill 50m worldwide. A highly pathogenic H5N1 virus that was as easily transmitted between humans could kill hundreds of millions more.

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## Young Idealist Reply

I wrote:

Humans … slowly gain competence over a lifetime, usually reaching peak productivity in our forties and fifties. … When people get idealistic, they tend to forget this. … They want to know how to most help the world in the next few years, not over their lifetime. … Young folks … should expect to prepare and learn while young, and then have their biggest influence in their peak years.

Alex Waller disagrees:

When I’m 50 I don’t really want the world to be the way it is now. I don’t want to bide my time and merely learn and network idly for another decade or two while someone else is responsible for enacting positive change in the world.

News flash: you are just one of seven billion, so you aren’t going to personally make much difference. The world will have nearly as many problems worth solving then as now, with or without your help.

Let’s say I was the CEO of a small corporation that developed medical devices. … A sustainable revenue stream requires projects with a variety of timelines. Similarly, I shouldn’t only invest my company’s resources in a project with a huge payout that will take 15 years.

The world already has a big portfolio of idealistic projects. If you want your life to be one of those projects, you should accept that it has a natural timescale. There’s a best time to invest, and a best time to reap returns.

Hanson elicits skepticism in the idea that social changes enacted now will positively impact the future, without justification.

I’m not skeptical of future impacts, just of their typically growing in impact faster than financial investments.

However, I’d counter-argue that his position is just as weak: name someone who is making better-than-inflation on their investments in the last 11 years?

The last few years have been quite unusual in finance. Feasible long term financial rates of return are higher than economic growth rates.

If I am to put off charity for 20 years to compound interest, why not put it off 40 years to compound even more? Why not put it off for 100 years?

Why not indeed? If you think that your personal monitoring adds much value, you might want to spend before you die, so you can personally monitor your charities. Else you might instruct your charity fund to grow until it seems that worthy causes are about to run out, or that investments no longer grow.

Hanson totally misguides when he suggests that Young Idealism is sexually motivated.

I said “signal one’s attractiveness to potential associates.” I didn’t mention sex.

Then what explains extra altruism in the old?

I said “people tend more to form associations when young.” This implies only that old folks have a weaker need to signal, not that they have no need to signal.

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