"why have other regarding preferences?"
(a) "to protect the self from possible rent seeking we must understand the actions of the other"
(b) "this is evolutionarily sustainable strategy to preserve the species"
which answer grabs you? Are (a) and (b) independent of each other? What implicit assumptions underlie this question?
I amuse myself here; Your amusement is intended but boundedly so
Sunday, February 6, 2011
Thursday, February 3, 2011
What is an economic model?
In recent years, much has been written about behavioral biases in the actions of people, biases that contradict (apparently) the "rational choice" model in economics.
At first sight, such apparent irrationalities appear as a comforting thought ("surely people are not calculating utility at every instant!"). The more I've thought about it though, the less I am convinced that such irrationalities constitute a contradiction - a more appropriate term would be behavioral biases, as I've used in the first sentence.
To understand this, it is useful to begin here. It becomes apparent from reading that piece that one of the main motivations to introduce a utility function (probably first by Pareto then rigorously defined by Samuelson, if I get the paper) was to avoid such considerations of individual behavior.
A supposed irrational deviation from a supposed rational model can be criticized as follows - "the rational model is saying that people do what pleases them. Proving this mathematically requires some slightly strong axioms. So, one can see whether these axioms hold in the real world. Let's say you find they don't hold. Is it then fair to claim that the results do not follow through?"
Let me take an example. Imagine a lab experiment that demonstrates one group of people are unwilling to give up a coffee cup for a chocolate bar when they are "endowed" with a coffee cup, while the exact opposite holds for another group "endowed" with a chocolate bar. This is the endowment effect, and it is claimed to be irrational. One can argue however, that such endowment effects point to the fact that the basic preference ordering of any person is affected by what you give them. From here, lets say you derive a particular utility function that predicts exactly the supposed irrational behavior. Will you then say the behavior is irrational?
The criticism from the other side will then be - "okay, but you, rational choice theorist, claimed that preference orderings are fixed and unchanging, and now you alter that assumption. It is not surprising that you then get a different prediction." My reply would then be - "Precisely!"
This points to a basic fact about what a theory model in economics is, a fact that is becoming clearer to me over time. Theory in economics is never to be interpreted literally, it is highly metaphorical, yet mathematically exact. It is a way of thinking, a way to organize thoughts. Getting too deeply into how people make decisions - whether in the lab or field - is going to throw up so many different interpretations that it is going to be hard to make sense of them. Instead of claiming the rational choice model is wrong, I am quite sure that if people took the trouble of understanding exactly what extra dimension they are bringing in, a dimension that was not part of the traditional analysis, and how that affects the traditional analysis, we will all be better off.
Let me take another example. Think of the classic prisoner's dilemma problem - 2 person game. Now, we have a Nash equilibrium outcome (in pure strategies) which is inefficient in the sense that each is worse off than they could be, and another outcome which is efficient in the sense that each is as well off as possible. If you interpret this model literally, you will say "if I give people such payoffs I should never see anyone cooperating". Then you test this in a laboratory and find that actually people do cooperate. And you publish in the American Economic Review, claiming that "people don't play Nash thus they cannot be rational as defined".
My reply is twofold - (a) the utility function has been misdefined and (b) you're missing the point. Take (b) first. The point is not that people will play Nash or not, the point is much vaguer perhaps but more true, and it is this - "Adam Smith told us (by the way, the rest of this argument does great disservice to Smith who had a much more humane view of the world) the invisible hand (what a great metaphor!) of self interest makes everyone better off. Well this may not be true. Self interest alone may make everyone worse off." This, I don't think, anyone can have a problem with. After all think about any country, company, individual who "did well" - self interest played a big role perhaps in this, but surely it wasn't the only thing; we typically rely on many others often selfless contribution.
Point (a) is somewhat harder. If people are not playing Nash despite the (monetary) payoff indicating - as described by theory - that they should, the conclusion arguably is that there exist non-monetary payoffs that are driving the decisions being made. Thus the mapping from the utility function imagined by the authors of the published article to the monetary payoffs received isn't clear. Now, you may object - "yes, but you're just evading the issue by bringing up another cause that we cannot know is operating". My answer is - "Precisely". This is what we were trying to avoid when we said you get utility from what you consume, whatever that may be.
Of course, if neuroeconomics develops enough, we can actually understand (maybe) the mapping from utility to monetary as well as non-monetary payoffs. That may lay all this debate to rest.
But the broader point will remain - a theory in economics is not something where it is straightforward to take predictions to data. How a theory will operate in any circumstance must be understood not by the blackboard model offered by the theorist, but by understanding the broad meaning behind the mathematics, and interpreting that to analyze any situation. This isn't easy, and I believe requires just as much work as coming with the theory in the first place.
In fact, if you think about it, the idea that "people ought to work together to understand how a new observation can fit received theory, does it really contradict the theory or is the theory not supposed to apply there, etc" is just another way of stating that if we work together, we will be better off. Which is the lesson of the prisoner's dilemma.
At first sight, such apparent irrationalities appear as a comforting thought ("surely people are not calculating utility at every instant!"). The more I've thought about it though, the less I am convinced that such irrationalities constitute a contradiction - a more appropriate term would be behavioral biases, as I've used in the first sentence.
To understand this, it is useful to begin here. It becomes apparent from reading that piece that one of the main motivations to introduce a utility function (probably first by Pareto then rigorously defined by Samuelson, if I get the paper) was to avoid such considerations of individual behavior.
A supposed irrational deviation from a supposed rational model can be criticized as follows - "the rational model is saying that people do what pleases them. Proving this mathematically requires some slightly strong axioms. So, one can see whether these axioms hold in the real world. Let's say you find they don't hold. Is it then fair to claim that the results do not follow through?"
Let me take an example. Imagine a lab experiment that demonstrates one group of people are unwilling to give up a coffee cup for a chocolate bar when they are "endowed" with a coffee cup, while the exact opposite holds for another group "endowed" with a chocolate bar. This is the endowment effect, and it is claimed to be irrational. One can argue however, that such endowment effects point to the fact that the basic preference ordering of any person is affected by what you give them. From here, lets say you derive a particular utility function that predicts exactly the supposed irrational behavior. Will you then say the behavior is irrational?
The criticism from the other side will then be - "okay, but you, rational choice theorist, claimed that preference orderings are fixed and unchanging, and now you alter that assumption. It is not surprising that you then get a different prediction." My reply would then be - "Precisely!"
This points to a basic fact about what a theory model in economics is, a fact that is becoming clearer to me over time. Theory in economics is never to be interpreted literally, it is highly metaphorical, yet mathematically exact. It is a way of thinking, a way to organize thoughts. Getting too deeply into how people make decisions - whether in the lab or field - is going to throw up so many different interpretations that it is going to be hard to make sense of them. Instead of claiming the rational choice model is wrong, I am quite sure that if people took the trouble of understanding exactly what extra dimension they are bringing in, a dimension that was not part of the traditional analysis, and how that affects the traditional analysis, we will all be better off.
Let me take another example. Think of the classic prisoner's dilemma problem - 2 person game. Now, we have a Nash equilibrium outcome (in pure strategies) which is inefficient in the sense that each is worse off than they could be, and another outcome which is efficient in the sense that each is as well off as possible. If you interpret this model literally, you will say "if I give people such payoffs I should never see anyone cooperating". Then you test this in a laboratory and find that actually people do cooperate. And you publish in the American Economic Review, claiming that "people don't play Nash thus they cannot be rational as defined".
My reply is twofold - (a) the utility function has been misdefined and (b) you're missing the point. Take (b) first. The point is not that people will play Nash or not, the point is much vaguer perhaps but more true, and it is this - "Adam Smith told us (by the way, the rest of this argument does great disservice to Smith who had a much more humane view of the world) the invisible hand (what a great metaphor!) of self interest makes everyone better off. Well this may not be true. Self interest alone may make everyone worse off." This, I don't think, anyone can have a problem with. After all think about any country, company, individual who "did well" - self interest played a big role perhaps in this, but surely it wasn't the only thing; we typically rely on many others often selfless contribution.
Point (a) is somewhat harder. If people are not playing Nash despite the (monetary) payoff indicating - as described by theory - that they should, the conclusion arguably is that there exist non-monetary payoffs that are driving the decisions being made. Thus the mapping from the utility function imagined by the authors of the published article to the monetary payoffs received isn't clear. Now, you may object - "yes, but you're just evading the issue by bringing up another cause that we cannot know is operating". My answer is - "Precisely". This is what we were trying to avoid when we said you get utility from what you consume, whatever that may be.
Of course, if neuroeconomics develops enough, we can actually understand (maybe) the mapping from utility to monetary as well as non-monetary payoffs. That may lay all this debate to rest.
But the broader point will remain - a theory in economics is not something where it is straightforward to take predictions to data. How a theory will operate in any circumstance must be understood not by the blackboard model offered by the theorist, but by understanding the broad meaning behind the mathematics, and interpreting that to analyze any situation. This isn't easy, and I believe requires just as much work as coming with the theory in the first place.
In fact, if you think about it, the idea that "people ought to work together to understand how a new observation can fit received theory, does it really contradict the theory or is the theory not supposed to apply there, etc" is just another way of stating that if we work together, we will be better off. Which is the lesson of the prisoner's dilemma.
Sunday, January 23, 2011
why are dhabas clustered together?
so I watch this show, "Highway on my Plate" starring a Rocky and Mayur two non-skinny men, one from the south one from the north, one vegetarian the other non-vegetarian, as they travel all over India eating at local places.
It's getting to an interesting point now, because they've done so much traveling, that they begin to see some patterns emerge from their experiences. In other words, they've generated enough of a sample to see a trend. This is basically an empirical observation therefore: they say that no matter where they go, the appearance of a single dhaba by itself is never observed. Instead, there are long stretches of emptiness, followed by a sudden clustering of dhabas, followed by emptiness, and so on.
Why does this happen? For one reason, this is essentially the Hotelling model operating. In the simplest version of the Hotelling model, imagine two people competing for the custom of a local town. Call these two people restaurant owners. (Incidentally, Hotelling is the name of the guy who came up with this.) Where should they locate their restaurant? To simplify the problem to its essentials, imagine that the possible locations can be only on a single street, in fact, imagine the whole town to be arranged on a single street. So it's now just a matter of choosing where to locate on a single line.
Using assumptions on the cost functions of operating a restaurant (linear), and on the distribution of town residents on the street (uniform), it is easy to derive that the optimum location given that each hotel owners location impacts the number of consumers the other gets is the center of town. The basic intuition can be seen by seeing why any other location will not be optimal: assume one guy (A) gets to the center of town, now where should the other (B) locate? If B goes to the left of center, he will get the custom of all those to the left of his location, A will get all those to the right of his location (which is the center); but B and A will have to compete for those customers that locate between the their individual points.
Why will A get all those to the right of center? with a uniform distribution, the costs of finding a restaurant for any consumer will increase with the distance travelled, thus the result that A gets all those to the right of center, while B gets all those to the left of where B locates.
This competition between B and A can be alleviated if B shifts a little to the right. Now, B gets more consumers, while A gets the same number as before, although he probably loses a bit from before because some consumers he had now go to B. If A moves leftward he will gain a bit. B will respond by moving to the right. Eventually they will settle into the same place. However, and this is important, now either A or B can gain more by moving to the center. Thus the only place from where deviations are non-profitable for both A and B is the exact center.
Therefore, dhabas tend to cluster, and what's more, they should cluster somewhere in the middle of the cities. The episode on Ranchi I was watching appears to confirm the second result, but of course that is just one observation.
However there is also probably another reason, in that reciprocity - you benefit from having another dhaba nearby, in case one of your cooks doesn't show up, then you can borrow one from a nearby dhaba, with the understanding that in the future you will lend one of yours - can be another reason to locate nearby. Or they can take advantage of co-location and share electrical generators. This is more subtle reasoning, because it is a dynamic argument as opposed to the Hotelling model above which is static.
I just watched Exit through the Gift Shop, a documentary on street art that asks similar questions to those asked by the people who liked Iron Maiden and Motorhead and Metallica, were convinced this music would be big, however it was the glam rock bands that got big, which became a bit of a problem. Because it appears to prove that most people seem to prefer the inferior product, or are unable to tell the rip-offs from the originals.
It's getting to an interesting point now, because they've done so much traveling, that they begin to see some patterns emerge from their experiences. In other words, they've generated enough of a sample to see a trend. This is basically an empirical observation therefore: they say that no matter where they go, the appearance of a single dhaba by itself is never observed. Instead, there are long stretches of emptiness, followed by a sudden clustering of dhabas, followed by emptiness, and so on.
Why does this happen? For one reason, this is essentially the Hotelling model operating. In the simplest version of the Hotelling model, imagine two people competing for the custom of a local town. Call these two people restaurant owners. (Incidentally, Hotelling is the name of the guy who came up with this.) Where should they locate their restaurant? To simplify the problem to its essentials, imagine that the possible locations can be only on a single street, in fact, imagine the whole town to be arranged on a single street. So it's now just a matter of choosing where to locate on a single line.
Using assumptions on the cost functions of operating a restaurant (linear), and on the distribution of town residents on the street (uniform), it is easy to derive that the optimum location given that each hotel owners location impacts the number of consumers the other gets is the center of town. The basic intuition can be seen by seeing why any other location will not be optimal: assume one guy (A) gets to the center of town, now where should the other (B) locate? If B goes to the left of center, he will get the custom of all those to the left of his location, A will get all those to the right of his location (which is the center); but B and A will have to compete for those customers that locate between the their individual points.
Why will A get all those to the right of center? with a uniform distribution, the costs of finding a restaurant for any consumer will increase with the distance travelled, thus the result that A gets all those to the right of center, while B gets all those to the left of where B locates.
This competition between B and A can be alleviated if B shifts a little to the right. Now, B gets more consumers, while A gets the same number as before, although he probably loses a bit from before because some consumers he had now go to B. If A moves leftward he will gain a bit. B will respond by moving to the right. Eventually they will settle into the same place. However, and this is important, now either A or B can gain more by moving to the center. Thus the only place from where deviations are non-profitable for both A and B is the exact center.
Therefore, dhabas tend to cluster, and what's more, they should cluster somewhere in the middle of the cities. The episode on Ranchi I was watching appears to confirm the second result, but of course that is just one observation.
However there is also probably another reason, in that reciprocity - you benefit from having another dhaba nearby, in case one of your cooks doesn't show up, then you can borrow one from a nearby dhaba, with the understanding that in the future you will lend one of yours - can be another reason to locate nearby. Or they can take advantage of co-location and share electrical generators. This is more subtle reasoning, because it is a dynamic argument as opposed to the Hotelling model above which is static.
I just watched Exit through the Gift Shop, a documentary on street art that asks similar questions to those asked by the people who liked Iron Maiden and Motorhead and Metallica, were convinced this music would be big, however it was the glam rock bands that got big, which became a bit of a problem. Because it appears to prove that most people seem to prefer the inferior product, or are unable to tell the rip-offs from the originals.
Monday, January 17, 2011
nerd
"i'm getting sick of this drinking tea everyday, I want something new to drink. Day after day, din par din, chai pe chai, milord!..."
"you could try coffee, you know"
"but it's going to be instant, no?"
"yes, you should try this spoon, take two spoons of coffee and one of sugar, but only with this spoon with this particular combination...there's some non-linearities inherent in this particular production process"
"okay"
"you could try coffee, you know"
"but it's going to be instant, no?"
"yes, you should try this spoon, take two spoons of coffee and one of sugar, but only with this spoon with this particular combination...there's some non-linearities inherent in this particular production process"
"okay"
Saturday, January 15, 2011
contention
"you know, I'm glad you stuck with this...I can see you enjoy this..."
"yeah, we were pretty skeptical in the beginning, but you've convinced us. It's good you were persistent..."
(n-2) obstacles cleared. good relations established. good topic chosen - both important and interesting. most important: the topic is mine, thus independence also (endogenously) arises.
so far, therefore, so good. now to make the good better!
"yeah, we were pretty skeptical in the beginning, but you've convinced us. It's good you were persistent..."
(n-2) obstacles cleared. good relations established. good topic chosen - both important and interesting. most important: the topic is mine, thus independence also (endogenously) arises.
so far, therefore, so good. now to make the good better!
fuel price hikes
apparently the price of petroleum (gasoline in american) has been "deregulated" in India, with the obvious impact being the price rising because the subsidy provided is gone.
I found this reaction to be somewhat hilarous (found on NDTV's live TV): "you know, the common man has been really hurt by this...I have a Santro and an Accent and now I have to think whether I want to drive my Accent..."
I might wager that this is perhaps (partly) the point of making consumers face the "right", or at least, a "less wrong" price?
Oh, you thought I'd go after the fact that this supposed common man has two cars in a country where the number of malnourished children out number those in sub-saharan Africa, didn't you?
Deregulating the price of fuel is a brave step, but I'm not entirely sure a wise one. Of course, the people making this decision would (should?) have thought about this before. The "right" price arrived at by a calculation that does not allow for some weighting of those worse off isn't right, after all. "Free" markets, that elusive concept, are not going to put weights on anyone.
I found this reaction to be somewhat hilarous (found on NDTV's live TV): "you know, the common man has been really hurt by this...I have a Santro and an Accent and now I have to think whether I want to drive my Accent..."
I might wager that this is perhaps (partly) the point of making consumers face the "right", or at least, a "less wrong" price?
Oh, you thought I'd go after the fact that this supposed common man has two cars in a country where the number of malnourished children out number those in sub-saharan Africa, didn't you?
Deregulating the price of fuel is a brave step, but I'm not entirely sure a wise one. Of course, the people making this decision would (should?) have thought about this before. The "right" price arrived at by a calculation that does not allow for some weighting of those worse off isn't right, after all. "Free" markets, that elusive concept, are not going to put weights on anyone.
Monday, December 20, 2010
Political incorrectness is so appealing
"Going for broke, rock till you choke
It don't matter if you drink or smoke
Speak through the beat, get up on your feet
Sweating like a hound dog, white as a sheet
Don't you be scared, don't you be scared
Everybody terrified, I don't seem fair
What are you waiting for
What do you think you were created for
Out of your seat, blind in the heat
Do the nasty boogie mama, stomp your feet"
Hilarious video; the lyrics ("do the nasty boogie") and the video together so well. Of course, one must not make light of what was a terrible time for mankind. But, I mean, "born to raise hell, we know how to do it and we do it real well"?
I'm pretty sure Lemmy did not intend to parody the Nazis when he wrote this song, but it works, and what is better is that it works unintentionally. In fact, to make things merrier, Lemmy's well known for collecting Nazi memorabilia because "the bad guys have the best costumes". So the circumstantial-ness of the whole thing is quite...elegant.
...bringing up an important question: do people largely like to be lead? and do some tiny fraction of them like to lead? because if you put the two together, you get an equilibrium. Can't be a stable one though. Well unless you're the Congress Party and you happen to exist in India.
It don't matter if you drink or smoke
Speak through the beat, get up on your feet
Sweating like a hound dog, white as a sheet
Don't you be scared, don't you be scared
Everybody terrified, I don't seem fair
What are you waiting for
What do you think you were created for
Out of your seat, blind in the heat
Do the nasty boogie mama, stomp your feet"
Hilarious video; the lyrics ("do the nasty boogie") and the video together so well. Of course, one must not make light of what was a terrible time for mankind. But, I mean, "born to raise hell, we know how to do it and we do it real well"?
I'm pretty sure Lemmy did not intend to parody the Nazis when he wrote this song, but it works, and what is better is that it works unintentionally. In fact, to make things merrier, Lemmy's well known for collecting Nazi memorabilia because "the bad guys have the best costumes". So the circumstantial-ness of the whole thing is quite...elegant.
...bringing up an important question: do people largely like to be lead? and do some tiny fraction of them like to lead? because if you put the two together, you get an equilibrium. Can't be a stable one though. Well unless you're the Congress Party and you happen to exist in India.
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