Monthly Archives: May 2015

Elite Evaluator Rents

The elite evaluator story discussed in my last post is this: evaluators vary in the perceived average quality of the applicants they endorse. So applicants seek the highest ranked evaluator willing to endorse them. To keep their reputation, evaluators can’t consistently lie about the quality of those they evaluate. But evaluators can charge a price for their evaluations, and higher ranked evaluators can charge more. So evaluators who, for whatever reason, end up with a better pool of applicants can sustain that advantage and extract continued rents from it.

This is a concrete plausible story to explain the continued advantage of top schools, journals, and venture capitalists. On reflection, it is also a nice concrete story to help explain who resists prediction markets and why.

For example, within each organization, some “elites” are more respected and sought after as endorsers of organization projects. The better projects look first to get endorsement of elites, allowing those elites to sustain a consistently higher quality of projects that they endorse. And to extract higher rents from those who apply to them. If such an organization were instead to use prediction markets to rate projects, elite evaluators would lose such rents. So such elites naturally oppose prediction markets.

For a more concrete example, consider that in 2010 the movie industry successfully lobbied the US congress to outlaw the Hollywood Stock Exchange, a real money market just then approved by the CFTC for predicting movie success, and about to go live. Hollywood is dominated by a few big studios. People with movie ideas go to these studios first with proposals, to gain a big studio endorsement, to be seen as higher quality. So top studios can skim the best ideas, and leave the rest to marginal studios. If people were instead to look to prediction markets to estimate movie quality, the value of a big studio endorsement would fall, as would the rents that big studios can extract for their endorsements. So studios have a reason to oppose prediction markets.

While I find this story as stated pretty persuasive, most economists won’t take it seriously until there is a precise formal model to illustrate it. So without further ado, let me present such a model. Math follows. Continue reading "Elite Evaluator Rents" »

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What Does Harvard Do Right?

Is Harvard the top rated college because it is the most clever in deciding who to admit? Not obviously. Instead, in the short run Harvard can gain plenty from a positive feedback loop: the best people apply and prefer to go there, which adds a glow to those who graduate from there, which makes the best want to apply, and so on.

While this seems an obvious and simple story, I must admit I haven’t been thinking enough in such terms, probably in part because I haven’t seen formal economic models that capture this story well. I thank venture capital (VC) titan Marc Andreessen for clarifying. Here is part of a 14 May twitter chat between him (MA) and myself (RH):

RH: VC is dominated by a few firms. What is the scale economy? Few geniuses? Info of seeing most pitches? Ability to create new fashions? Other?

MA: Core dynamic: A few firms have positive selection on their side; the other firms have adverse selection working against them.

The battle among VC firms is less “who is smarter?” than “who do the best founders approach first?”.

RH: OK, but why approach the top few first? What is more attractive about being funded by them vs others?

MA: Founders care about the VC brand halo because potential employees, potential customers, and other potential investors care.

RH: Is it just that top VC get first pick, so they are better picks, so their picks get halo by being in that pool, rinse & repeat?

MA: Yes, that’s the core positive feedback loop. How it starts is less meaningful than how it perpetuates.

Core dynamic: A few firms have positive selection on their side; the other firms have adverse selection working against them.

The battle among VC firms is less “who is smarter?” than “who do the best founders approach first?”.

The main historical driver of positive selection is prior success: a halo branding effect that new startups seek.

In essence, a new startup uses its VC’s brand as a credibility bridge until the startup establishes its own brand.

RH: Sure, but the question is why some VC brands shine brighter. Their money isn’t any more green.

MA: They have an aura of success as a consequence of having previously funded successful startups.

Arguably these dynamics are changing in real time in some interesting ways:

RH: Is there a prediction on if VC industry will become more or less concentrated as result of these changes?

MA: My belief is that VC is restructuring the same way retail stores, law firms, accounting firms, and investment banking did:

This seems to be the hallmark of a professionalizing industry being run properly. You either go big or you go specialist.

RH: I guess the key idea is that there are big scale economies with doing standard tasks, but big diseconomies for specialized tasks.

MA: Yes, but with the subtlety that the well-run scale players are also excellent at many of the specialized tasks.

RH: Many, but not most, or the specialized shops couldn’t exist long.

MA: This is exactly what happened in the talent agency business in the 1980s and 1990s. The big agencies got great at many things.

The specialized shops have to stay small and stay laser-focused on particular areas of specialized advanced competency.

But of course similarly, a scaled franchise firm that gets sloppy runs the same risk, can degrade itself into the middle tier.

RH: Summary: long trend is to scale given tasks, but also task specialization. Overall scale rises, but falls locally when specialize.

MA: Right, exactly. And this explains the size distribution — the scaled players have to be big; the boutiques have to stay small.

You see this in investment banking. You either work with Goldman Sachs or you work with a small boutique specialist bank.

RH: This makes sense, but I’m not sure we have any formal models that predict this correlation nicely.

This same sort of story also seems to work in the short run to explain why some journals have higher prestige. It is not so much that top journal editors are more clever, or use a smarter system to review submissions. It is just that the best papers are submitted there first, which makes the average quality of their publications higher, and so on.

In the long run, we see changes in the prestige rankings of these colleges, journals, investment banks, and venture capital funds. The key question is: what determines those long run changes? Do competitors with slightly better ways to evaluate or help submissions slowly win out over others? Or do other factors dominate?

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Take Origins Seriously

We have a strong tendency to believe what we were taught to believe. This is a serious problem when we were taught different things. How can we rationally have much confidence in the beliefs we were taught, if we know that others were taught to believe other things? In order to overcome this bias, we either need to find a way to later question our initial teachings so well that we eliminate this correlation between our beliefs and our early teachings, or we need to find strong arguments for why one should expect more accurate beliefs to come from the source of our personal teaching, arguments that should persuade people regardless of their teaching. These are both hard standards to meet.

We also have strong tendencies to acquire tastes. Many of the things we like we didn’t like initially, but came to like after a time. In foods, kids don’t initially like spice or bitterness, or meat, especially raw. Kids don’t initially like jogging or structured exercise, or cold showers, or fist fights, but many claim later to love such things. People find they love the kinds of music they grew up with more than other kinds. People who grow up with arranged marriages generally like them, while those who don’t are horrified. Many kids find the very idea of sex repellent, but later come to love it. Particular sex practices seem repellent or not depending on how one is exposed to them.

Now some change in tastes over time could be due to new expressions of hormones at different ages, and some can be the honest discovery of a long-term compatibility between one’s genetic nature and particular practices. But honestly, these just aren’t very plausible explanations for most of our acquired tastes. Instead, it seems that we are designed to acquire tastes according to which things seem high status, make us look good, are endorsed by our community, etc.

Now one doesn’t need to doubt culturally-acquired tastes in the same way one should doubt culturally-acquired beliefs. Once you’d gone through the early acquiring process your tastes may really be genuine, in the sense of really making you happy when satisfied. But you do have to wonder if you could come to acquire new tastes. And even if you are too old for that, you have to wonder what kind of tastes new kids could acquire. There seem to be huge gains from choosing the kinds of tastes to have new kids acquire. If they’d be just as happy with such tastes later, why not get kids to acquire tastes for hard work, for well paid work, or for products that are easier to make. For example, why not encourage a taste for common products, instead of for massive product variety?

The points I’m making are old, and often go under the label “cultural relativity.” This is sometimes summarized as saying that nothing is true or good, except relative to a culture. Which is of course just wrong. But that doesn’t mean there aren’t huge important issues here. The strong ability of cultures to influence our beliefs and tastes does force us to question our beliefs and tastes. But on the flip side, this strong effect offers the promise of big gains in both belief accuracy and happiness efficiency, if only we can think through this culture stuff well.

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Why Happiness?

You can’t be happier than the person you’re with. I’ve tried. It doesn’t go over well. Scott Adams

Why did evolution makes us (sometimes) happy? One standard story, and in fact the only story I’ve found so far in a quick search, is that happiness is just our mind’s way of telling us what we want. We consciously want to be happy, and so to direct our behavior our subconscious tells us that we are happy doing what it wants us to do.

But this can’t be the whole story. Not only are we well aware of wanting as a different feeling from happiness, we know of many systematic differences between our wants and our happiness. For example, even though we expect these choices to make us less happy, we expect we’ll pick money over sleep, shorter commutes, leisure time, friends, family, and legacy. We’ll pick school over a social life, and a career-helping internship over interesting one. And we’ll pick attending a favorite musician’s concert over a friend’s birthday party or reporting a crime. (Source) Two other fascinating cases:

To reconcile the intuition that Americans today are better off than in the past with the finding that average SWB [= subjective well-being] has remained flat in the U.S. over the past decades, we ask respondents to rank being born in 1950 versus being born in 1990 in both choice and SWB questions. Although our respondents overwhelmingly favor being born in 1990 in both questions, more choose 1990 despite believing that they would be happier in 1950 than the reverse. …

To reconcile the intuition that expanding political and economic freedoms for women have made women better off with the finding that average SWB among women has declined in the U.S. since the 1970s, both absolutely and relative to men, we ask respondents to rank living in a world with or without these expanded freedoms for women. Again, significantly more respondents choose a world with these expanded freedoms for women in spite of believing that a world without them would make them happier than the reverse. (more)

These all seem to me reasonably consistent with our thinking we’ll be happier doing what others approve, and what connects us to them. Our visible happiness functions in part to convince our associates that that we care about their approval and contact. This fits with smiles, taken as an indicator of happiness, also being seen as signs of submissiveness – athletes and runway models rarely smile in photos. (More on smiles)

This seems similar to a plausible theory of pain, that pain is in part a call for help from associates:

Certain types of [human] pain are not associated with any physiological damage, and studies that show the presence of others can affect reported sensations of pain. Labour pain is another good example. Across all human cultures, there are nearly always helpers, from relatives to medical professionals, who attend births. … By contrast, among our primate relatives, solitary birth is the norm. Human childbirth appears to be uniquely painful among members of the animal kingdom. … I suggest that protracted labour pains make us show distress and recruit help from others well in advance of the birth – a strategy that offers a survival advantage. (more)

Added 6:30p: Calls for people to be happy, and to teach them what leads to happiness, can be seen as calls from associates to attach yourself more strongly to them and conform more strongly to their norms and pressures.

Added 12May: Bryan Caplan correctly points out that in the last two cases above, of being born earlier and women’s rights, it is choices that are in the direction of doing what others approve and connecting to them. Happiness goes against those things there. Bryan also suggests that we tend to choose money and status over happiness because of social pressure to work hard and succeed. In this view athletes and runway models don’t smile as a signal of having sacrificed happiness for status. This all makes sense; it seems I was just confused.

But Bryan’s account raises the question of why happiness doesn’t encode our value for status and social approval, as it encodes so many other values. Bryan suggests that this is because “foragers tend to act on impulses that farmers strive to suppress.” Somehow the transition to farming changed the values we use to chose actions in a way that wasn’t reflected in the processes by which our minds compute happiness. But surely foragers had to deal with social pressures and status; those issues arose long before farmers. So there seems to be more to this story that we don’t yet understand.

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What Is Signaling?

Noah Smith complains about people like me:

There’s a fad in the economics world that annoys me. The fad is to describe every human action as “signaling.” This has to stop, people. … It’s become fashionable in the economics world to label any and every human social interaction as a form of signaling. The most enthusiastic promoter of this way of thinking is GMU economist Robin Hanson. Fashion isn’t self-expression — it’s signaling. Leisure isn’t about fun — it’s about signaling. And so on.

The problem is, this notion of “signaling” isn’t really what Spence had in mind. Spence’s signaling model was about proving yourself by doing something difficult — something so difficult that someone who didn’t have what it takes wouldn’t even bother. But most of what Hanson is talking about is just communication, not Spence-style signaling. Even if hipsters wax their moustaches in order to prove their hip-ness, that doesn’t mean there are a whole bunch of wannabe hipsters out there who just didn’t have what it takes to wax their moustaches. Communication, like signaling, is costly. But it’s not a matter of jumping through hoops to prove yourself. (morefollowup)

Let’s distinguish three different kinds of messages I might send with my waxed moustache:

1) “I have thick shiney hair.” This message is verifiable. Soon enough, others can just directly check if it is true. So I don’t need to pay costs to send this message, though I may pay costs to create the nice hair.

2) “Hipster is one of my interest areas.” If you and I are going to talk anyway, but must pick a conversation topic, we may share a sufficient common interest in finding talk topics of mutual interest. In such a context, it can be enough for me to just tell you about my interests. You can just accept my claims for the purpose of picking a talk topic. Technically, this is a “cheap talk” message.

3) “I am especially devoted to the hipster ethos” or “I especially embody hipster ideals.” That is, I am especially willing to identify myself as a hipster, and my personal features are an especially high quality match to ideal hipster features, including having a creative and contrarian yet attractive and coherent personal style that fits with current hipster fashions. These messages are hard to verify, and the interests of observers and I conflict. While observers want to accurately rank me relative to others, I may want them to estimate me as having maximal devotion and quality. Since verification and cheap talk won’t work here, I have to show, not just say, my messages.

To show my hipster devotion, I can choose an appearance that is sufficiently off-putting to ordinary people at work, home, church, etc.. By paying the cost of putting off possible associates, I show my devotion to hipsterism. To show my hipster features, I can pay to track hipster fashions and to continually search in the space of possible styles for a combination that simultaneously reflects current fashions while being creative, coherent, and showing off my best personal features. Not being a hipster, I don’t know how exactly that works for them. But I do know, for example, that since lipstick and tight clothes make some bodies look better while making other bodies look worse, they are costly signals of the quality of lips and body shape. There must be similar factors for showing off hipster qualities.

More generally I call a message “signaling” if it has these features:

  1. It is not sent mainly via the literal meanings of words said.
  2. It is not easily or soon verifiable.
  3. It is mainly about the senders’ personal features, perhaps via association with groups.
  4. It is about sender “quality” dimensions where more is better, so senders want others to believe quality is as high as possible, while others want to assess more accurately. Such qualities are not just unitary, but can include degrees of loyalty to particular allies.

Cheap talk cannot send a message like this; one cannot just say such a thing, one must show it. And since it cannot be verified, one must show it indirectly, via how such features make one more willing or able to do something. And since willingness and ability track costs, these are “costly” signals.

When weighted by how much the messages matter to us, and by how much effort we put into adjusting them, I’d say that most of our communication is “signaling” of this sort. Most of the private value, if not most of the bits.

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Ranking The Sacred

Consider four possible acts:

  1. Eating Twinkies
  2. Watching Gilligan’s Island
  3. Fighting cancer
  4. Working for racial justice

Now consider pairwise comparisons of value between these acts. You might say which you prefer, or which matters more, or is more important or admirable.

It seems to me that we don’t mind ranking #1 vs #2. We might think the exercise silly, but we’d still be comfortable expressing an opinion. It also seems to me that we don’t mind puffing up our chest and intoning very seriously that either of #3,4 are more noble and admirable than either of #1,2, and looking sadly down on those who might say otherwise. But if asked to rank #3 vs #4, we are much less comfortable. In this case we could be seen as saying something against an act many find important and admirable. That isn’t the sort of thing we like to be quoted on. We don’t like to speak against the sacred.

Because of this, we end up sharing less info about relative rankings among the acts we most admire. Which, alas, are the acts most valuable to rank. We learn what others think of the relative ranking of silly tv shows and minor foods, but not about our most important choices. Silly humans.

I’m fond of this classic question pair: “What is the most important research question in your discipline?” followed by “Why aren’t you working on it?”

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