When negotiating over the price of a nice chair at a garage sale, it can be useful to demonstrate there is only twenty dollars in your wallet. When determining whether your friend will make you a separate meal or you will eat something less preferable, it can be useful to have a longterm commitment to vegetarianism. In all sorts of situations where a valuable trade is to be made, but the distribution of the net benefits between the traders is yet to be determined, it can be good to have your hands tied.
The thing that interests me about the 85:15 figure is how close it is to the 80:20 split generally found as the least fair split commonly accepted in the Ultimatum Game (Henrich et al 2004).
The situations are very similar. In effect, your "whichever party gets to determine whether a transaction takes place" is equivalent to the UG's "whichever party is making the ultimatum".
I think that the fact of surplus-splitting becomes more salient the more deminsions the parties can use to split the surplus. The examples in the article mainly deal with a single dimension of price. Try examining the processes of a modern purchasing department and you will see innumerable instances of strategies around gaining more of the surplus in a negotiated setting. Examples:1. Providing the preferred form of agreement in a request for proposals.2. Requiring bidders to justify any deviations from the preferred form.3. Stating weights between various factors when those factors are clearly incommensurate (meaning that bidders must try to win in each factor being examined).4. During negotiations, having a multi-step process for any negotiated terms, where the pruchasing department must -- with great reluctance -- go back to the legal department for approval.And so on.
The market value on Craigslist is already splitting surplus between the renter and the owner.
Again, you simply cannot ignore opportunity costs. The price on Craig's list incorporates the renter's opportunity costs. But, Daniel Reeves has stipulated that Bob would "otherwise would leave [the spare bedroom] empty." Thus, Bob does not incur the opportunity costs of the typical Craig's List renter (who is, after all, advertising publicly).
At least to a first approximation, Daniel Reeves economic reasoning is sound; yours, Eliezer Yudkowsky, just misses his point.
I had to puzzle out that the author, Katja Grace, apparently thinks the inconvenience of traveling to someone else's house to eat weighs more heavily than the inconvenience of providing food, cleaning public areas, or doing the dishes.
This article would be improved if that were made explicit..
The first consideration that comes to my mind here is low transaction cost, which favors price tags over negotiations. I think cultures that encourage explicit negotiation over smaller-scale transactions destroy some value in doing so, though I realize that this is a difficult equilibrium to shift when what is a "smaller-scale" amount to me is in fact a big deal to locals.
I have a hypothesis which says that whichever party gets to determine whether a transaction takes place - which is usually but not always the party with the market advantage, i.e. the seller if demand is high or the buyer if supply is high - takes 85% of the surplus and the other party gets 15%... This implies that in most modern markets where you're the buyer, you'll usually end up capturing a lot more of the consumer surplus than the people selling to you - which again sounds right to me! I'd pay seven times as much for food if food was scarce, or seven times as much for a laptop if that was the only way to get a working laptop.
Just seven times as much for food? Make your food supply sufficiently tenuous, and I bet you could be coaxed to pay much more than seven times as much! You might well sacrifice your entire fortune for a morsel. So, does the difference between what you'd willingly pay when you're starving and what you pay now measure your surplus from the transaction?
Of course not. What you're ignoring is your opportunity costs, just as Katja ignored her friend's opportunity costs when Katja nudged her to have lunch exclusively at Katja's dwelling. In your case, you ignore that to pay seven times as much for food could mean (if not for you, then for a more typical consumer) that you must forgo the laptop. The opportunity cost cuts deeply into your surplus.
The result is that you vastly overestimate the surplus.
Given that market advantages vary widely, if this really exists as a close-to-universal trend, it may be an artefact instead of how close two goods have to be before we stop judging them in different markets and instead assess them as substitutes for each other.
This means manipulating salient ways to split benefits could be pretty profitable.
Not necessarily--only if there's no equilibrium price because of market imperfections. If there is an equilibrium price, then when you prime the decision making so that your friend is nudged to have lunch at your house, your friend may choose instead to have lunch with katla, who isn't given to dirty tricks.
Ha, yes, sorry, I was making a woefully unstated assumption: Bob and Alice are close buddies or family or something so Bob considers it no skin off his nose to have Alice take the spare bedroom. I.e., Bob's BATNA isn't renting it on craigslist to a stranger, but rather for it to sit empty.
We actually think that way in our family. :)
PS: I notice that I did technically state the assumption ("which he otherwise would leave empty"). But your confusion was quite justified!
I have a hypothesis which says that whichever party gets to determine whether a transaction takes place - which is usually but not always the party with the market advantage, i.e. the seller if demand is high or the buyer if supply is high - takes 85% of the surplus and the other party gets 15%. For example, 15% is about the royalty that most IP producers get in markets where the IP distributor is making this grave, gatekeepery decision, but in markets where you can take your pick of gatekeepers and they're all eager to have you, the amount they charge you is closer to what an agent charges an author, again around 15%.
This implies that in most modern markets where you're the buyer, you'll usually end up capturing a lot more of the consumer surplus than the people selling to you - which again sounds right to me! I'd pay seven times as much for food if food was scarce, or seven times as much for a laptop if that was the only way to get a working laptop.
Who-wa? The market value on Craigslist is already splitting surplus between the renter and the owner. Otherwise the renter wouldn't rent! Charging half of that price - if the original price was half of surplus, which it's not, because it will actually be the supply-demand market-clearing price - would give the owner 1/4 of the surplus.
It seems to me that I have seen situations like your busking example in which different participants had incurred costs, and there was some manipulation of which costs were reimbursable before the even split of the remainder, in which the more experienced busker is more likely to be reimbursed. It's worth noting that we sometimes have tacit fairness norms that conflict with our explicit fairness norms.
When possible I try to arrange explicitly for the Exquisitely Fair Outcome, where the surplus is split equally. Like if Alice wants to rent Bob's spare bedroom, which he otherwise would leave empty, then you could argue that half of fair market value (what the room would go for on craigslist) is the fairest price. Alice and Bob each get an equal amount of money/savings from the arrangement.
Another way to put it: What is each person's BATNA? Pick the midpoint.
The thing that interests me about the 85:15 figure is how close it is to the 80:20 split generally found as the least fair split commonly accepted in the Ultimatum Game (Henrich et al 2004).
The situations are very similar. In effect, your "whichever party gets to determine whether a transaction takes place" is equivalent to the UG's "whichever party is making the ultimatum".
I think that the fact of surplus-splitting becomes more salient the more deminsions the parties can use to split the surplus. The examples in the article mainly deal with a single dimension of price. Try examining the processes of a modern purchasing department and you will see innumerable instances of strategies around gaining more of the surplus in a negotiated setting. Examples:1. Providing the preferred form of agreement in a request for proposals.2. Requiring bidders to justify any deviations from the preferred form.3. Stating weights between various factors when those factors are clearly incommensurate (meaning that bidders must try to win in each factor being examined).4. During negotiations, having a multi-step process for any negotiated terms, where the pruchasing department must -- with great reluctance -- go back to the legal department for approval.And so on.
Max
The market value on Craigslist is already splitting surplus between the renter and the owner.
Again, you simply cannot ignore opportunity costs. The price on Craig's list incorporates the renter's opportunity costs. But, Daniel Reeves has stipulated that Bob would "otherwise would leave [the spare bedroom] empty." Thus, Bob does not incur the opportunity costs of the typical Craig's List renter (who is, after all, advertising publicly).
At least to a first approximation, Daniel Reeves economic reasoning is sound; yours, Eliezer Yudkowsky, just misses his point.
I had to puzzle out that the author, Katja Grace, apparently thinks the inconvenience of traveling to someone else's house to eat weighs more heavily than the inconvenience of providing food, cleaning public areas, or doing the dishes.
This article would be improved if that were made explicit..
The first consideration that comes to my mind here is low transaction cost, which favors price tags over negotiations. I think cultures that encourage explicit negotiation over smaller-scale transactions destroy some value in doing so, though I realize that this is a difficult equilibrium to shift when what is a "smaller-scale" amount to me is in fact a big deal to locals.
I have a hypothesis which says that whichever party gets to determine whether a transaction takes place - which is usually but not always the party with the market advantage, i.e. the seller if demand is high or the buyer if supply is high - takes 85% of the surplus and the other party gets 15%... This implies that in most modern markets where you're the buyer, you'll usually end up capturing a lot more of the consumer surplus than the people selling to you - which again sounds right to me! I'd pay seven times as much for food if food was scarce, or seven times as much for a laptop if that was the only way to get a working laptop.
Just seven times as much for food? Make your food supply sufficiently tenuous, and I bet you could be coaxed to pay much more than seven times as much! You might well sacrifice your entire fortune for a morsel. So, does the difference between what you'd willingly pay when you're starving and what you pay now measure your surplus from the transaction?
Of course not. What you're ignoring is your opportunity costs, just as Katja ignored her friend's opportunity costs when Katja nudged her to have lunch exclusively at Katja's dwelling. In your case, you ignore that to pay seven times as much for food could mean (if not for you, then for a more typical consumer) that you must forgo the laptop. The opportunity cost cuts deeply into your surplus.
The result is that you vastly overestimate the surplus.
Given that market advantages vary widely, if this really exists as a close-to-universal trend, it may be an artefact instead of how close two goods have to be before we stop judging them in different markets and instead assess them as substitutes for each other.
This means manipulating salient ways to split benefits could be pretty profitable.
Not necessarily--only if there's no equilibrium price because of market imperfections. If there is an equilibrium price, then when you prime the decision making so that your friend is nudged to have lunch at your house, your friend may choose instead to have lunch with katla, who isn't given to dirty tricks.
Ha, yes, sorry, I was making a woefully unstated assumption: Bob and Alice are close buddies or family or something so Bob considers it no skin off his nose to have Alice take the spare bedroom. I.e., Bob's BATNA isn't renting it on craigslist to a stranger, but rather for it to sit empty.
We actually think that way in our family. :)
PS: I notice that I did technically state the assumption ("which he otherwise would leave empty"). But your confusion was quite justified!
I have a hypothesis which says that whichever party gets to determine whether a transaction takes place - which is usually but not always the party with the market advantage, i.e. the seller if demand is high or the buyer if supply is high - takes 85% of the surplus and the other party gets 15%. For example, 15% is about the royalty that most IP producers get in markets where the IP distributor is making this grave, gatekeepery decision, but in markets where you can take your pick of gatekeepers and they're all eager to have you, the amount they charge you is closer to what an agent charges an author, again around 15%.
This implies that in most modern markets where you're the buyer, you'll usually end up capturing a lot more of the consumer surplus than the people selling to you - which again sounds right to me! I'd pay seven times as much for food if food was scarce, or seven times as much for a laptop if that was the only way to get a working laptop.
Who-wa? The market value on Craigslist is already splitting surplus between the renter and the owner. Otherwise the renter wouldn't rent! Charging half of that price - if the original price was half of surplus, which it's not, because it will actually be the supply-demand market-clearing price - would give the owner 1/4 of the surplus.
It seems to me that I have seen situations like your busking example in which different participants had incurred costs, and there was some manipulation of which costs were reimbursable before the even split of the remainder, in which the more experienced busker is more likely to be reimbursed. It's worth noting that we sometimes have tacit fairness norms that conflict with our explicit fairness norms.
When possible I try to arrange explicitly for the Exquisitely Fair Outcome, where the surplus is split equally. Like if Alice wants to rent Bob's spare bedroom, which he otherwise would leave empty, then you could argue that half of fair market value (what the room would go for on craigslist) is the fairest price. Alice and Bob each get an equal amount of money/savings from the arrangement.
Another way to put it: What is each person's BATNA? Pick the midpoint.