Author Archives: Patri Friedman

Modules, signals, and guilt

While a first-order model might see the human brain as a general-purpose computer, coordinated, centralized, acting with a single voice, we now know that this isn’t so.  The brain consists both of hierarchical layers ("a man riding a dog riding a lizard", as John Brunner put it), and of many parallel modules.  To a large extent, our unified view is an after-the-fact interpretation.

One way to deal with this is to think of each of these modules as a different voice, providing input that can be analyzed by the conscious mind as part of making a conscious decision.  For example, Rational Recovery, a method for dealing with drug and alcohol addiction, involves identifying the addictive voice (the one that says "I need a drink"), and then consciously labeling it as "other" (the "beast" in their terminology), rather than "self".  In geek terminology, one might look at this as finding a dysfunctional module and labeling all of its output as questionable, to be subjected to extra critical review in the synthesis phase of decision.

In practice, identifying these voices is difficult, because often modules communicate, not clearly and distinctly, but in broad swaths of emotion that infuse every fiber of one’s being.  As an IPC system, it sucks.  But with practice, we can learn to identify these messages and their sources.

Continue reading "Modules, signals, and guilt" »

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InTrade fee structure discourages selling the tails?

The political betting markets seem more efficient this year, so I’m looking at narrower perceived edges and care more about transaction costs.  It looks to me like the InTrade fee structure really discourages selling longshots, if I’m understanding it right.  There are three main costs:

  • The trading fee is per-lot, and paid by the price taker.  It is slightly lower for extreme prices (3c vs. 5c).
  • The expiry fee is paid by the winner, and is 10c per lot.
  • The opportunity cost of having the money at InTrade to cover your margin is the risk-free rate minus InTrade’s interest rate (3% for accounts over $20K).

Even if we assume always being the price maker, note how the 2nd and 3rd both hurt those who sell longshots much more than those who buy them.  The seller of 1 contract at 5 will (if the price is right) pay the expiry fee 19 times out of 20.  So rather than having a return of $.50 * (19/20) – $9.50 * (1/20) = $0.0, the seller’s return is ($.50 – $0.10) * (19/20) – $9.50 * (1/20) = -$0.095 (or more simply the $0.0 EV of the bet minus (19/20) * $0.10).  Whereas the buyer only pays the expiry fee 1 time in 20, so his return is his $0.0 EV minus (1/20) * ($0.10), or -$0.005.

So starting with an even bet, the in-the-money expiry fee costs the buyer of a longshot 0.5c per lot and the seller 9.5c per lot – quite a difference!  The ratio varies smoothly from splitting the juice for a 50/50 bet to having the seller pay almost all of it for a 99/1 bet, yet I don’t see any underlying mathematical reason why this should be the case.  Which means it will distort prices.

The same is true of point 3.  If the risk-free rate of return is 5%, and traders are earning 3% on their accounts, then any money locked up costs 2%/year.  For a contract with 100% margin requirements, which is currently the case for the markets on the presidential primaries, this means that staying in a contract for 3 months costs roughly 0.5% of interest.  The seller of a contract at 5 must lock up $9.50 / contract, while the buyer only has to lock up $.50.  Which means the seller pays 4.75c in foregone interest while the buyer pays 0.25c.

About the only good thing I can find to say about this fee structure is the consistency – both of these charge buyer and seller at exactly the same rate, namely in proportion to the odds (19:1 for a contract at 5).  Although from the exchange’s point of view, a fixed fee per lot has the benefit of making revenue predictable (as opposed to charging a percentage of winnings), and there are psychological benefits to charging the winner.

Any suggestions for alternate fee structures?

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Good InTrade bets?

I like betting on elections, both because it is fun, and because the chance to profit from them helps distract me from the depressing farce of democracy (a mechanism with some decided disadvantages).  Last election I mostly sold Dem Sweep contracts (Dems win House, Senate, and Presidency), plus the tails of the electoral vote distribution.

In both cases, I thought (without actually finding data to confirm it) that the parlay was fairly independent, and the prices were way out of line from that.  The tails of the vote distribution were much fatter than you’d expect if the states were independent, and DEM.SWEEP was priced around 4-8 when the independent probability was 1/2% based on the prices for House, Senate, and Presidency.  It worked well for me, but since I was selling longshots, that one data point means very little.

But now it’s time to gamble some more, so I wired $20K to InTrade this morning.  Now I need to find something to bet on.  (Have I mentioned I’m a degenerate gambler? 🙂 ).  My current favorite bets are going long GOP (it’s way too early for the incumbents to be a 2:1 underdog, especially when we don’t even know the candidates!) and shorting Ron Paul (it’s a good bet and a hedge!).  I’d love to hear thoughts from y’all about what bets you like.

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Overcoming bias at work for engineers

While I am only an interested hobbyist when it comes to the theory and practice of overcoming bias, it looks like I will be gifted with the opportunity to explore this interest as a side project in my day job at a large tech company.  Specifically, to help design and deliver one or more classes in what I think of as the self-help side of behavior economics – what are the common human biases, and how can we work around them in our everyday lives?

So I thought I’d take advantage of the collaborative filtering aspect of blogging and ask you for thoughts about the most common biases that affect engineers at work, and pointers to information on the best ways of learning to overcome them.  Preferably at a fine granularity – blog posts rather than full books.  An example of the type of approach I’m looking for is Andy Hunt’s talk (and upcoming book) "Refactoring Your Wetware", which is about how the brain works, how engineers misunderstand it (focusing on the logical serial processing and ignoring the intuitive parallel processing), and how that applies to being a programmer.  Sadly it is not yet available as a book or online video, but I’ve requested a copy of the talk he gave at work so perhaps I can fix that.

I’ll post my own model for what I see as the key realization and skills in another entry, but I’d love to hear your thoughts on the subject.  And if my investigations prove fruitful and I successfully develop some material, in a few months, I may even be able to put up some of the materials.

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Dangers of political betting markets

I’m a big fan of prediction markets, and I think that in most cases, they do good by creating more accurate estimates.  But for the positive outcome of allowing hedges and funding research, I wonder if there is a problem for markets on political races.

For example, wouldn’t large, liquid betting markets allow candidates to fund races more easily?  A candidate who wins can cash in by selling their political influence.  So rather than spending their own money, a moderately wealthy candidate might borrow $10M (using personal collateral, perhaps), and bet $5M against themselves on the markets.  They spend the other $5M on their race.  If they win the election, they lose the bet, and pay back the $10M with funds raised from special interests.  If they lose the election, they’ll win the bet, and pay back the loan with the proceeds.

Things are similar from the standpoint of a campaign contributor, attempting to buy political favors.  Many of them simply donate to both sides.  But another option is to hedge your donation by using some of it to bet against your favored candidate.  That way you guarantee either getting favors or winning some money.  Reducing the risk of investing in candidates should increase the amount spent.

So while being able to hedge risk is normally considered a good thing, in the coercive business of politics, it’s not so clear.  Isn’t it better for political favor to be expensive and risky to purchase?  Are there some markets that are better if inefficient, like the market for political favors?

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Goofy Best Friend

Scott Adams has a suggestion for overcoming bias:

When Dilbert launched in newspapers, the response was underwhelming. In the early years, it wasn’t a workplace strip. It was about Dilbert’s life in general. He just happened to have a job. I was surprised to learn, via my e-mail, that readers loved the relatively rare comics featuring Dilbert in the office. Personally, I didn’t think those were my best work. My ego told me to do it my way. My readers told me I was wrong.

What the hell do readers know? After all, they aren’t syndicated cartoonists, and I was, albeit in only a few dozen newspapers. But this time, fortunately, I ignored my ego, changed the focus of the strip to workplace humor, and it took off. …

I’ve come to call this ego-driven behavior the “loser decision.” I don’t mean it as an insult.  It’s an objective fact that life often presents us with choices where the comfortable decision leads nowhere and one that threatens your ego has all the potential in the world.

You need a healthy ego to endure the abuse that comes with any sort of success. The trick is to think of your ego as your goofy best friend who lends moral support but doesn’t know shit.

I don’t think it’s quite fair to be so down on comfortable decisions – discomfort is, after all, a cost.  But it is an upfront cost, and given our irrationally high discount rates, we are likely to understate the net present value of the decision.  Also, my experience is that people tend to consistently overestimate the amount of discomfort involved in doing something new, and once they start, it usually isn’t that bad.  (Which I have trouble seeing an evolutionary explanation for – any ideas?)

So I mostly agree with Adams, but my solution is a bit different:

Continue reading "Goofy Best Friend" »

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Uncovering Rational Irrationalities

Bryan Caplan posits that people treat irrationality as a consumption good, in that they choose to buy it when its cheap.  Irrationality is cheap when holding wrong opinions is unlikely to have negative impact on our lives, such as when we are opining about things we have no control over (eg politics).  Since opinions on these things can make us feel good, there is value to buying them, and so bias is rife.

A few years back, I noticed a striking example of this in my own thought processes.  I have long been a libertarian, and I realized an alternative way to look at why governments perform poorly, which gave a strange new idea about how they could be made to do a better one.  Coming up with this solution made me suddenly see all the problems with conventional libertarianism – the views which I had but recently held.  And not just small problems – I went from thinking that if only enough people could be converted, or a state taken over, a stable libertarian government could be created, to thinking that it would never happen, and if it did would quickly devolve back into big government.

Despite my purported values of objectivity, my subconscious had sneakily purchased some irrationality.  The irrationality was cheap, as erroneous political beliefs have little impact on my life, and it was valuable, as it gave me hope that the society I find most appealing might someday exist.  It was only when that value disappeared, because I saw an alternate way for the society to come about, that I was able to rationally examine the belief.

This suggests some techniques for reducing bias.  If it is important to you that something be true, imagine an alternative which gets you the same positive feeling, and see if the first thing is still believable.  Or imagine yourself in a position where your opinions on grand social issues actually matter.  One of the great things about betting markets is that make many types of opinions matter, thus forcing people to more carefully consider them.  If the blowhard at the bar really thinks Iraq is such a mess, ask him to place a bet.  If he won’t, everyone (including, most importantly, himself) knows that he doesn’t really believe it.  If he does bet, he’ll quickly learn whether he is overconfident about his judgment.

On the other hand, perhaps it is best for our mental health that not all of these attics be subjected to the light of critical examination.  There is some value to illusions – particularly those our subconscious sees as cheap at the price.

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A Tough Balancing Act

My interest in bias is indirect: what I really want is the truth, and bias gets in the way.  One subtle effect of bias is its effect on movements (political or otherwise).  Once a movement forms to the degree where it is an identifiable entity, it seems to almost inevitably become an echo chamber.  Even its original inspiration is true, it will be amplified into falsehood.

For example, as is natural in someone interested in bias, for awhile I self-labeled as a skeptic.  I even subscribed to The Skeptical Inquirer – but I did not renew.  The magazine seemed to spend most of its time on the easy cases, like UFOs and psychics, rather than the interesting ones on the fractal boundary between truth and falsehood, where diligent examination is necessary (but not always sufficient) to determine the truth.  If you’ve read anything about bias, this tendency to repeatedly confirm known truths should be a red flag.  A true skeptic should be honing his faculties on the hard cases which expand our knowledge, not the easy ones which play to the crowd.

For example, Michael Shermer recently linked approvingly to this post by David Cowan "debunking" Airborne, a multivitamin product sold to help prevent and fight colds.  The argument is:

Continue reading "A Tough Balancing Act" »

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