Showing posts with label emergent order. Show all posts
Showing posts with label emergent order. Show all posts

Thursday, March 31, 2022

The Meaning of Opposite

Opposite is a loaded term. The meaning of it grows more ambiguous as the dimensions of the object to which it refers grow. 

A no-dimensional object (a point) has no opposite aside from absence (not a point). A one-dimensional object (the line A—B) has its pure reversal (B—A) as its opposite. 

Consider a higher order "object" such as driving in America. What is the opposite? It could be said that driving in England is the opposite of driving in America since Americans drive on the right while the English drive on the left. This would be true in the limited sense from the perspective of the perpendicular plane relative to the driver’s general direction, forward, through time—also forward. 

But one could also say that driving sideways is the opposite of driving as we know it. How about rather than driving through scenery that the car passes through that the car stands still and the scenery moves passing by the car was the opposite? Still another could be driving whereby you leave from your destination and arrive at your departure point. There certainly are more.

What is the point of this thought process? It is a hint at how difficult and convoluted and simply fraught any attempt to draw sharp distinctions can be. This is especially true in the realms of human action. Counterfactuals are not only challenging to find. They are nearly impossible to properly define.

Saturday, March 19, 2022

Who You Gonna Call? Trustbusters!

David Henderson has written two very good pieces recently at the Hoover Institution's Defining Ideas. They are a two-part discussion on antitrust: Let Freedom Rein In Big Tech and A Populist Attack on Big Tech. I particularly like his conclusion:
The more regulations there are to enforce a government official’s idea of competition, the more likely it is that those regulations will hamper actual competition. Companies that give their own products and services an advantage in the marketplace are simply harvesting the value of an asset that they took big risks to create. Competition is dynamic, not static. But heavy regulation will make markets more static. Let’s keep competition dynamic by not penalizing successful competitors but by leaving the market open to alternative business models.
Do read the whole thing in both cases. 

He makes many excellent points--ones that I myself had in some notes for a future piece on antitrust. (Of course, he makes them much better and more fully than I could.)

Sometimes one must be patient for competition to work it’s magic. Just because a monopoly, oligopoly, or other sinister market-dominant firm seems entrenched today, does not mean it will always be or that the cost of immediate correction is worth bearing. Forced correction may not even be feasible. 

At any one point in time there are a lot of reasons the world is the way it is. The challenge for the trustbuster is to know with very-high certainty that the current state of the market is suboptimal ("inefficient" is the eye-of-the-beholder term of choice) and that a better world can and should be achieved through government action. 

It is easy to conjure up a hypothetical better world because only in the wild through real-world experience, the so-called market test, do we truly discover all the constraints and tradeoffs. Comparing the unicorn to the horse is always subject to bias--imagined reality almost definitionally engages in willful blindness. But the trustbuster's Dunning-Kruger problem does not end there. The "can be achieved" is naively assumed through hand-waving theory. The "should be achieved" is generally ignored altogether.

In the realm of current worry, Big Tech (dunt, dunt, duh!), see MySpace, Yahoo!, and AOL along with InternetExplorer, Mapquest, Garmin, Blackberry, et al. Then consider Twitter, Facebook, and TikToc, along with Google, Apple, et al.

Also, remember when the government broke up IBM? Yeah, I don’t either. Apologists for activist government regulation will tell you the threat posed by the 13-year case that went nowhere is what reined in the highly-successful company, but this theory only works by willfully ignoring the fabulous work performed by IBM’s various marketplace competitors. Those quick to point out “you didn’t build it” rely on their own wishful agency when the real work is being done by those actually in the field. 

Why in antitrust do we grant so much benefit of the doubt to regulators and so little deference to the world as it is? Are we just that willing and hopeful that a white knight can remake that which we suppose is in error? Is it just because we don't listen to master Yoda?

Wednesday, April 14, 2021

The Local Maximum Problem

Ever since being introduced to this concept, I’ve been intrigued by it and see examples of it more and more throughout life, business, and public policy. This is the problem that occurs when people get stuck in a situation that is the best near-term or near-possible outcome but is not the best possible yet reasonable long-term outcome. 

The analogy is to imagine four people playing a game that has them blindfolded and linked arm-in-arm in a square configuration. Each member of this team is responsible for one of the cardinal directions (north, south, east, and west). Their goal is to locate the highest point possible. They experiment by taking steps to see if a step in that direction is up or down. If the step is down, they don’t take it. If the step is up, they take it. They keep walking until none of the four can make a step that is in the upward direction. This point is the conclusion of their game by reaching the local maximum. However it is most likely not the highest point on the surface where they’re walking. They just can’t reach (or detect) a higher point by virtue of their own rules. 

I believe governments are particularly susceptible to this problem. The rewards for experimentation that drive one out of a local maximum are very dispersed or completely irrelevant to those bearing the costs of experimentation. This is more than just people not wanting their cheese moved or having their apple cart disrupted. This is the very legitimate concern that an ambitious idea is going to have significant negative outcomes or the potential rewards will not accrue to those bearing the risk. It is an acute combination of asymmetric risk-reward and principal-agent problems.

The many, many public and private failures in the COVID pandemic are vivid examples. Perhaps the most costly in the United States were the CDC and FDA's insistence on using their own developed testing (staying with the controllable and familiar) and as important if not more so the refusal to allow challenge trials to speed the vaccine development process. Sadly this list goes on and on from "pausing" the Johnson & Johnson vaccine to not approving AstraZeneca's. 

The position those in power have taken are understandable but completely inexcusable. And we have ourselves to blame as these mistakes are just the latest examples of how the FDA works against medical advancement and is a deep net cost to society. 

To be sure individuals, firms, and other organizations are also susceptible to the LMP. Notice, though, the degree to which these entities are somewhat or greatly better structured and incentivized to resist and correct it.  

As a general rule, the more insulated and protected an entity is from competition, the more vulnerable they are to a local maximum. Hence, traditional banks are more vulnerable than are start-up fintech firms. 

To whom a firm or organization is held responsive has strong implications for its fragility to local maximums. As a firm is more responsive to those who reap rewards proportional to risk taken, it will better prevent the LMP. Hence, non-profits (highly responsive to donors rather than customers) are more at risk than are profit-seeking firms (highly responsive to owners and customers). 

Within a firm the dominant force becomes existing and entrenched stakeholders who are in comfortable, conventional positions. Hence, no one in marketing will ever suggest the firm experiment by not running ads

The degree to which a person faces public scrutiny or cannot capitalize on public adoration, the more they will rest once finding the local maximum. Hence, a public figure with a lot to lose/little to gain will tend to play it safe. 

Risk bearing requires compensation in the form of return, and this risk-return should be commensurate, symmetrical, and willfully accepted. Those are tough hurdles to achieve. All the more so when we are relying on force rather than persuasion. 

P.S. I believe Arnold Kling deserves credit for introducing me to this concept.

Saturday, March 27, 2021

A Paradox of Choice

When well-meaning fools lament the plethora of choices we have in a free market society, they make a crucial mistake. They ignore the necessary condition for which those choices emerge and simply assume a result. 

I can imagine a very well constructed study done that proves, truly proves in a way that most all could agree, that ~99% of why a consumer chooses A versus B comes down to irrational affiliations or random luck. For example the determination of what car one chooses to buy between a Honda Accord and a very similar Toyota Camry would be shown to be nothing more than stuff like a person's prior cars happened to be Hondas or their parents bought Hondas or they buy the car they last saw an ad for or their favorite color is red and the car the dealer first showed them was red, etc.

The incorrect conclusion a well-meaning fool might jump to is that we have unnecessary redundancy in our free market economy. We should stop wasting resources on the competition because the differences between these artificial choices are illusory. Just build the Acamry and be done with it!

The fact that there are minor, subtle, and hidden differences between all such choices are lost on those drawing such conclusions. But more importantly they are making a dangerous mistake to neglect how we got to the magnificent state of the world where we have such amazing choices that a purchase decision settled by a coin flip likely leaves the consumer equally well off. 

There are no instructions from the universe for how to build the optimal mass-consumer sedan. We need a process to discover this and continually rediscover and improve upon the outcome. We need the right incentives to reward incremental success, punish incremental failure, and fully stop efforts going down a bad path. The capitalist free market is this process. It is the sine qua non for progress--as broadly defined as one can imagine it.

PS. Or maybe this is optimal?

Wednesday, February 10, 2021

The Trouble with Art Museums

A few years ago I had the pleasure of visiting the Barnes Foundation art museum in Philadelphia. It is extraordinary, and I highly recommend it. The history of this art collection and why it is where it is today is very interesting. And that's where the trouble begins.

Supposedly, the art collection is worth $25 billion! Wow, that's a big number. If your first thought upon hearing that is, "how would we know?", you are thinking like an economist.

If the museum burned to the ground losing all the art inside, would the loss to society actually be $25 billion? How would we know? Without robust and recent market transactions, we wouldn't. Yet that is just the beginning of the problem. 

The reason the art is in its current location is because in the 1990s the foundation was in financial trouble. One solution was to take some of the art on a world tour and then move the collection, the Barnes, to Philly. Maybe I'm just na├»ve or cynical, but things worth $25 billion aren't that hard to cash flow normally. 

The foundation raised about $150 million dollars to relocate a few miles into Philly from Merion Station, PA building a new facility and presumably using the remainder as an on-going endowment for maintenance. While there are many minor points to reconcile in all the legal and financial battle involving the move, there is a bigger point I'd like to make. Admission to the museum is at most $25. What's more, capacity is very limited--it is a relatively small space with limited hours of operation. At $25 billion in value why isn't there a line out the door and/or a very high-priced secondary market for tickets? Seems like a steal. Well, it is part of the art market; therefore, it probably is . . . just not in the way my questions would indicate. 

The art world is not designed--no system this involved ever is. It is the result of an emergent evolution. The spontaneous order that created it and drives it is not entirely or even largely benign. It is the result of a series of intentional manipulations and unintentional consequences from private, selfish, and in some cases socially-negative ulterior motives. Art museums aren't about public access to refined artistic culture. 

Allow me to begin the disillusionment with an excellent EconTalk, Michael O'Hare on Art Museums. The most forbidden thing an art museum can do is sell any of its collection. Even if it means some art will never be seen, it is somehow better that it stay in cold storage than be sullied by commercial activity. For the short version on why, see this episode of Adam Ruins Everything. For the longer version, see this article from Quartz

Value is like water--it seeks its own level. Interferences with this natural process can be expensive and often are resource destructive. One version of this is politically powerful people, who are otherwise unwilling to put their money where their advocacy mouth is, working to stop market transactions. Consider also cases like when the city of Detroit's bankruptcy reorganization had creditors pursuing the collection at the Detroit Institute of Art

This is the kind of example where preventing "priceless" collections from being sold or commercialized might mean very hard choices for governments facing enormous pension liabilities. If those assets are off limits, there are two big problems. The first is how the liability problem gets solved once a great option (selling off valuable assets) is removed. The second is how well can that same entity be a good steward for the art. They have already gotten themselves into financial difficulty, and now they are additionally constrained by having to at least store the art. 

I enjoy art museums generally and some in particular. The idea of art museums is something I support in theory, but in practice it has become rather fraught with very undesirable aspects. The pretentiousness is not just a bug. It is a feature of a bigger bug. Art museums are about exclusion despite the conventional marketing otherwise. Perhaps they are simply fancy, tax-favored institutions for hoarders? Malcolm Gladwell's Revisionist History makes the case in two episodes

Speaking of taxes, that is yet another troubling aspect of the art market with museums playing a key role. I'll explore that in the next post

Thursday, February 2, 2017

Choosing Your Neighbors

If I had my druthers, I would choose retired couples who are infatuated with my children. The advantages are numerous including:

  • They'd be quiet.
  • They'd keep an eye out.
  • They'd keep their yard tidy.
  • They'd dote on my children.
  • They'd think I invented technology.
  • They'd be dependable and predictable.

One might think I'd say sorority girls who enjoy their pool parties. Problems range from making me feel old and unattractive to finding me attractive and tempting me to throw away a lifetime for 30 minutes of bliss (or performance anxiety).

The reality is you can't choose your neighbors. And you probably wouldn't want to. Turns out those older retired couples have some bad qualities too. They are pretty good at minding your business. They are always up for conversation--ALWAYS. If they spot you in the yard, you are automatically in for a round of "Let's Talk About My Latest Doctor Visit". They know the neighborhood covenants extremely well including all the ones you are currently breaking, and they know that those covenants are not suggestions--they are serious dogma to be followed with strict religiosity. They like things as they are and better yet as they were and best yet as never changing.

There are no perfect neighbors. This documentary proves it.

Planning out and carefully choosing those around us would create a stale, uninspiring bubble world with high susceptibility to overrate the qualities we think we want and underrate those we think we want to avoid. Those biases would yield continuously disappointing results.

To a large degree you do get to pick your neighbors and they get to pick you. Our lives are characterized greatly by self selection. Fortunately it isn't the sole determining factor, though. New ideas, new opportunities, new methods: these things come from chance encounters and unplanned coordination and interaction.

Look at immigration as this microcosm writ large, and think about it from a purely selfish perspective. Every immigrant we discourage, turn away, or ban is another worker, another set of new ideas, another opportunity to discover something didn't know existed but now eagerly want.

Saturday, April 26, 2014

What Basketball Strategy Can Tell Us About the Growth of Government

I believe there is a fundamental flaw in the U.S. Constitution and federal government structure. As foresightful as the founders were, they failed to appreciate the tenacity and momentum of government's reach for power. Allow me to illustrate with an analogy:

Some time ago basketball coaches realized there was a strategy they could employ to give them a systematic edge over opponents. What they realized was that while physical contact to gain an advantage over the opponent is generally prohibited in basketball, not all fouls as such were called. What's more, the referees exhibited reluctance to call fouls beyond a certain threshold. So a game with 100 fouls in it would only result in perhaps 40 fouls being called (40%) whereas a game with 50 fouls in it might result in as many as 30 fouls being called (60%). Therefore, a team that was naturally more aggressive would have an advantage as aggression escalated--sure they'd be called for fouls more often, but they would also get away with more fouls and they would create a more disruptive environment more suited to their style of play. To take the strategy further these aggressive teams would be built to accommodate the more aggressive style having athletes with more strength than finesse. As a result the officiating landscape of college basketball shifted to the favor of the aggressive teams. Because this was an emergent and unforeseen development, it can be said the rulemakers in basketball failed to appreciate the risk of this.

Similarly, the founders failed to appreciate how more and more government would overrun the checks and balances system created to prevent undesired government growth. Ultimately it is the role of the Supreme Court to prevent government behavior that is prohibited by the spirit or letter of the Constitution. And generally the hallmark cases brought to and decisions made by the court have been to limit government encroachment of freedom. But as the landscape of legislative spending and action and executive regulatory zeal has developed in favor of more not less, liberty has given ground. To wit, when we are debating if Obamacare imposes a fee or a tax, we have already lost.

The implications of this are sobering. We cannot depend on the Supreme Court to undo that which we as a society have evolved to allow--that is, a belief that government rightly and pragmatically provides solutions. Reversing the tide of government growth requires both changing our understanding of the role of government as well as recognizing that stronger impediments to government growth are needed.

Cross posted at

PS. This topic dovetails with the highly recommended recent Econtalk with Steven Teles discussing the "Kludgeocracy".

Thursday, February 27, 2014

Everybody Talks

Listening to a recent Freakonomics Radio episode about gossip got me thinking about journalism and the perhaps unintended role it plays or has played in regulating society some. In the episode we first hear about research by Thomas Corley summarized in his book "Rich Habits" that showed the behavior differences between rich people and poor people. One of the differences he found was that the rich gossip significantly less than the poor. However, the rest of the episode tends to dispute that finding.

What stood out to me was how necessary the role of gossip seems to be for many aspects of society (e.g., norm setting and regulation) and how differently we approach and are affected by gossip. It doesn't seem at all unlikely to me that the wealthy would have different gossip habits and methods than the poor. The rich have different tools--namely, they have journalism. Or at least they had it until those crazy kids started TweetBooking everything.

Here is a theory that probably isn't original to me. I am not completely sold on it myself; it's just a hunch that I think at least partially explains what we've seen.

The rich and powerful have traditionally exerted a lot of control and influence over news media. This part is not in dispute. The creation and growth of news media served two primary purposes: 1) it had an informative value (stock reports, political actions, etc.) and 2) it had an entertainment value (local celebrity news, sports, etc.). But the problem is aside from the cut and dried factual reporting like the price of wheat or the winner of the mayor's race, most news reports have some damaging aspect to them that someone would like to keep quiet. These could range political corruption to a juicy, high-profile divorce to, well, the price of wheat for the guy who is trying to buy at a market discount. When we get down to it, the fact that we have journalism and that the rich and powerful put up with it seems a bit of a puzzle.

So what explains journalism as we know it--journalism that reports the good, the bad, and the ugly for the most part about both the rich and the poor? I think game theory offers a solution. The idea is that journalism is a necessary evil. Basically the job description was artificially created because the role was needed more than it was wanted. This puts it at odds with the idea that journalists are noble superheroes with special investigative and truth-finding powers striving to do good--journalists aren't that special, just don't tell them that. Rather it is as if the rich sat down and played a quick game of MAD where they realized they needed a controlled outlet to realize the informative value and entertainment value of journalism but not have chaotic reporting where the message cannot be controlled. What's more journalism offers what I would call auditor-caused moral hazard--if the auditor doesn't catch it or correct it, then it must be okay. That is a useful if unintentional purpose.

Of course there was not some secret meeting on Jekyll Island where journalism was launched, and the early twentieth century's muckraking shows how different the market for journalism can play out than what the rich and powerful might otherwise like. However, it was some of the rich and powerful on the production side of muckraking. So, no; journalism was not centrally planned or created in the last 200 years. It is a very long-run emergent order. Yet being emergent does not preclude it from my game theory theory or isolate it from powerful guiding influences. I think that my theory well explains how it was nurtured and shaped. Or perhaps captured is the better term. When journalism emerges as powerful enough to threaten the elite, the elite appropriate it for themselves.

With some ebb and flow between a more pure journalism and a more controlled journalism, this all is going along nicely until the Internet comes along. Then chaos. The Internet causes major disruptions to this order by commoditizing the tools of journalism with blogging, smartphones, et al. flattening the business model. The elite did not have this in mind. If the journalists are "us", and all of us at that, then we, elites and all, have to be more honest. We can't control the message or information--at least that control is very greatly weakened. Journalism before served a purpose to tell a story, a version of the truth, to the masses as a few saw fit. Now journalism is telling many stories, many versions of the truth including many with higher truth value than before, to varying numbers of consumers as many see fit. And it is deeper than that. The story isn't so one directional. It is more and more a conversation.

The quickest way to wreck a game theory optimal solution is to change a premise. The Internet is just such a change to the game theoretic outcome that journalism had been for so long.

Wednesday, July 17, 2013

And how many words have I got to say?

Every day tens of millions of people now have an astonishing and remarkable ability to make use of the answer to that question in the subject line. We now have tools and venues that give our thoughts, ideas, and opinions voice in ways that were physical if not theoretical impossibilities for the past 99% of human history. Here are some thoughts on how the Internet and the devices that connect to it give us "voice":

  • There seems to be some emerging norms regarding which way certain social networks are to be used. But there is a lot of variation with significant dispersion. Serious versus light-hearted is one dimension. Professional versus personal is another.
    • Facebook seems naturally more personal in nature since one speaks only to one's "friends" or a subset of friends in nearly all cases. So it always surprises me how some use it for more serious topics or for advancement of political or ideological positions. For me it just seems more social in nature; so I find it hard to take too seriously given the alternatives.
    • Twitter on the other hand is a voice to the world (potentially) with no audience filter per se except the bounds which one's own reach has set. Seems like we'd be as nervous tweeting as we would be speaking at the Oscars, but reasonably we are not. Since we don't expect people from outside our intended audience to hear our tweets, we don't have the apprehension. 
    • Google+ seems to be still seeking its definition in this dimension. I see it more naturally as a place of both personal and professional self promotion as well as recommendation. In that sense I think it competes eventually with LinkedIn, and the case for Google+ will be very strong with the more natural crossover to mini-blogging.
    • Isn't it always interesting if not awkward when someone seems to use one of the above out of tune with the "local", that is group-specific, norm?
  • We are now audiences of individuals. Our group action is both more powerful than in the past but less prone to peer pressure. Many would disagree with this point, but it seems strong to me. Failure to conform in the audiences of the past (theaters, church pews, dinner parties, et al.) met strong and effective opposition. Switch cost in terms of behavior is now much lower. At the same time the ability of even a small group to mount counter voice is quite high--the thrust of this post is about this very point. 
  • The noise versus signal aspect is interesting. Bloggers tend to face a more pure market test. These other social networks have audience stickiness that insulates the speaker. Are you really going to defriend Grandma because she keeps posting Great Depression-era recipes? Noise versus signal is context dependent. It is subjective to the individual audience member. While every social network has some logic helping to mute noise and boost signal, all are highly imperfect. The next great advancement in social networking may be a mastery of this domain. 
  • Here is a great example of how the Internet is revolutionary greatness offering to give us all a voice never before so vocal and therefore offering us all experiences never before so dreamed: What Ali Wore.
We live in amazing times. 

Wednesday, June 5, 2013

The tip of the iceberg

Should tipping be banned? That is the topic of a recent Freakonomics podcast. Listen to the whole thing.

Tipping expert Michael Lynn says if he had his druthers he would outlaw tipping. I found the reasoning for this conclusion lacking. Most of his research is based on survey data, which by its nature comes with a full shaker of salt. Of course many of the results of the survey research agrees with conventional wisdom priors, and this is a rare instance when I tend to agree with conventional wisdom. Hard to say that the surveys tell us much when they simply tell us what we already believed.

Confirmation bias is seductive. For example, we are told that physically attractive females earn better tips especially from men. What isn't so clear is if assuming they could earn more, the female servers actually deliver superior service to that target audience. Or perhaps they are take the game theory to the next level. Since the men are a sure thing, the female servers focus their attention on other patrons. The men appreciate them just the same while the other patrons get superior service. In this case tips rise from all patrons when compared to the alternative--non-attractive servers for the men and standard or inferior service for other patrons.

The major case Lynn finds against tipping is that it is de facto racially, et al. discriminatory assuming the survey results match reality. Here is where the reasoning is poor. Association with an outcome potentially undesirable, such as black waiters making less tips than white waiters when other factors besides race are supposedly held constant, is then construed as being the undesirable behavior per se. It is as if tipping were the cause of the discrimination rather than simply a correlated symptom of the problem. This is the logic of the disparate impact doctrine. Unfortunately, eliminating tipping even if it is truly used in a discriminatory manner including simply having a discriminatory result doesn't eliminate racial discrimination or disparate impact.

A bigot can exert harm in ways that may be more harmful if the tool of tipping is removed. This is true if the discrimination is done consciously (disparate treatment) or unconsciously (disparate impact). Without the ability to choose a restaurant blind to the color of the staff knowing the bigot can always tip less if the server is of an "undesirable" race (from the perspective of the bigot), the bigot may be lead to only consider restaurants that have low to no proportion of "undesirable" races employed within. In this thinking tipping is a more subtle tool for exerting bigoted behavior. Take away the tool, and the bigot is left with only more blunt means of acting out the bigotry.

Throughout the podcast there seemed to be an air of confusion about what the purpose of tipping is and a dismissiveness in the sense that a practice while long standing and ubiquitous was nevertheless illogical.

The purpose of tipping is to properly align incentives and minimize principal agent problems. It is not a gift. It is not a requirement. A tip should be understood as part of the compensation withheld until service is rendered to be delivered directly from the patron with potential variability depending on quality. It is an emergent solution to a knowledge and cooperation problem.

Some more thoughts:

  • Those eligible for tips should be those with an ability to perform above or below the standard. 
  • "They work for tips" is not adequate reasoning for how much one should tip. That is simply the definition of the service arrangement. 
  • Inflation does not imply that the rate used for a standard tip should change, say from 15% as the old norm to 18% as the new norm. That is really bad math.
  • For tipping to be effective, one must be willing to differentiate. At the least that means tipping a minimum amount (perhaps 10%) subject to upward revision if service is excellent. More desirably it means a willingness to tip zero for horrible service or negative (complaining to the manager) and a willingness to tip very well for excellent service.
  • Tipping based on a percentage of the cost of goods is generally fine, but there is a floor and ceiling on this causing the rate to become an S curve rather than a straight line. If I order a Coke at the bar while my friends drink beer, I don't simply tip 15% on the $2.00 soft drink. Likewise, an expensive dinner for my wife and I where the before-tip bill is $300 might only rate a $50 tip even if service is excellent.