Monthly Archives: May 2014

SMBC comics

Zach Weiner over at SMBC comics often writes economics related comics. Now, I know that most economists don’t really like his comics because he often gets the details wrong and regularly presents economics in a fairly negative light. But I am willing to look past these flaws because the comics are usually still pretty funny.

Take this one for example. [Note: I’m happy to hear ideas on better ways to embed the comics onto this site. I’m new to this stuff, so not really sure the best way to do it.]

I mean, yeah, the elicitation mechanism isn’t incentive compatible and of course the guy actually does want to buy beans at non-equilibrium prices (I’d buy everything at the non-equilibrium price of zero if I could), but it’s funny.

And if you want to know what my board game nights are like…

Update: Only a few days after I put this post up Zach posted this comic up. Horrible misapplication of the EMH. The comic could be partially saved if the text was edited to read “Sorry. But, according to the EMH, if sex with you were a good idea, somebody would be doing it already.”

 

Can we use epsilon equilibrium as a refinement tool?

The short answer is: no.

That is a watered down version of the conclusions in the linked paper by Matthew O. Jackson, Tomas Rodriguez-Barraquer and Xu Tan.

The link is to an ungated version, but the final version of the paper can be found in Games and Economic Behaviour. The title of this post will probably require a bit of background for some readers, so here goes.

For non-economists:

One of the most fun parts of economics is game theory (it is totally as fun as it sounds!). Game theorists use mathematical tools to analyse behaviour and find equilibria in strategic situations. We can somewhat informally think of these equilibria as predictions; in an equilibrium everyone is happy with their actions (given everything else that is happening in the game) so no one wants to change their behaviour.

A key problem that economists have been working on since at least the 1970s is the fact that most games have multiple equilibria. This is a real problem when you are trying to make predictions – which of the equilibria should you choose as your prediction for the game? Despite working on this for 40 years, economists are yet to come up with an answer that can be applied universally to all games. In fact, economists now think that this question is pretty much impossible to answer – if you give me an algorithm for picking an equilibrium to use as your prediction, I will be able to find a game where your prediction is either absurd or not unique.

The other thing we need to know about is epsilon equilibrium. An epsilon equilibrium is a type of equilibrium that comes about when people don’t care about very small changes in their payoffs. Ask yourself: if someone gave you 5 cents would you feel any better off, even a tiny bit, than you were before? What about 1 cent? What about half a cent? What about one hundredth of a cent? If you answered ‘no’ to any of these questions, then you are a candidate for epsilon equilibrium.

Jackson, Rodriguez-Barraquer and Tan ask the question: can we use the ideas behind epsilon equilibrium to help us choose an equilibrium to use as our prediction? And their answer is no, it is completely useless. Not only can it not make a unique prediction it can’t even rule out any equilibrium, ever.

But now comes the really depressing part. Over the years, economists have come up with a lot equilibrium refinements that work in a reasonably broad range of cases. J, R-B and T use their results to show that a whole lot of these refinements (even some pretty popular ones) can only work if we are absolutely sure that we know everyone’s payoffs in the game absolutely exactly.

If we are even a little bit uncertain about the payoffs in the game (i.e. we are not entirely sure that you like outcome A exactly 2.06 times more than outcome B) then we are in a situation where we can use epsilon equilibrium to approximate the game in question. And when we use epsilon equilibrium we can’t rule out any equilibrium, ever. So none of the equilibrium refinements that rely on approximations to the true game can ever work, unless we are absolutely sure that we have the payoffs correct!

In a sense, you can think of this paper as being a big middle finger to the thousands of papers on equilibrium refinements that have been published over the last 40 years. But in a more positive light, we did learn something from Jackson, Rodriguez-Barraquer and Tan: if you think that you might have misspecified the payoffs in your game, it is important to make sure that you use techniques are robust to the potential misspecification. J, R-B and T have shown that a bunch of techniques that we thought were robust are actually not. This is progress.

For economists:

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Desirable politicians

There has been a lot of consternation in Australia following the Coalition Government’s first budget, which was released last week. The Government broke many (perhaps even most?) of its pre election promises, and has been roundly condemned for its duplicitous behaviour.

There has been some commentary  that suggests we should have seen this coming, and should not trust pre-election promises. Such commentary is correct, but does not go far enough in recommending solutions.

There are two main reasons that governments may not honour pre-election commitments: either they were lying, or perhaps circumstances changed so that their commitments were no longer desirable or even feasible. In the case of many broken promises we could argue all day on which was the underlying cause. But why should we bother? We have no mechanisms to enforce compliance with promises, and even if we did there would be many cases where it would cause more harm than good.

The solution lies with voters, rather than with politicians:

Instead of voting for policies, we need to vote for politicians. Circumstances change, and a Government necessarily has better information on a range of topics than the electorate. Electorates should not try to dictate policy via the ballot box – instead they should strive to elect politicians who are thoughtful, intelligent, value and use evidence, and exhibit a strong desire to do what is best for the country.

People disagree on “what is best for the country”, but in most cases we are better off electing a politician who has a goal of maximising social welfare even when we disagree over what the social welfare function looks like. A good example of this is Nick Xenaphon – he appears to genuinely attempt to achieve the best for both South Australia and Australia (although I don’t agree with all of his views and policies, I still view him as a very positive component of Australian politics).

Politicians respond to incentives very well, and voters voting for policies and not politicians have created the current political climate. If we all reserved our votes for intelligent, thoughtful and principled politicians then it wouldn’t be long before political parties start producing intelligent and thoughtful political leaders.