SMBC comics

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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?

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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

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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.

Deception in experimental economics

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Bart Wilson has a recent working paper on deception in experimental economics. Like pretty much everything that I have read from Wilson, it’s primary purpose is to make the reader think. It is also completely non-technical, so I will not split this post into technical and non-technical sections.

Economists, unlike psychologists, do not deceive subjects in experiments. As Wilson outlines, the reason for this is  to make sure that, in future experiments, subjects will not be second guessing what might happen. If subjects were to be second guessing the experimenter, then they may not be responding to the monetary incentives that the experiment is designed to provide.

Wilson goes on to provide a series of examples, from the experimental literature, where the experimenters have gone close to deceiving the subjects (if you are at all interested in experimental design, it is worth reading Wilson’s paper. It is short.). In each case, Wilson finds that the experimenters did not engage in deception. In each case, I agree with Wilson’s judgement. Finally Wilson proposes the following test for deception “Did the experimenters mislead the participants by false appearance of action?” The implication that Wilson makes is that omission is not deception. It is hard to disagree.

Unfortunately, however, this is where Wilson stops.  Deception ,in and of itself, is not what we care about. What we care about is the preservation of the subject pool for future use. Asking “is X deception” is not enough. What we should be asking is “if subjects became aware of X either during or after this experiment, will it affect their behaviour in the next experiment?” Omission may very well fail this later test and should, therefore, be used with caution.

 

 

 

 

 

Awareness of Unawareness

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Awareness of unawareness is the title of a new paper by Karni and Viero (that ‘o’ should actually be one of these, but I can’t get it work on here). As mentioned in my previous post, I shall start by describing the paper for a non-economist audience, before giving a more technical discussion at the end.

For non-economists:

This paper addresses the question: How should we model decision making when there are aspects of our environment about which we are unaware? This is a very delicate question to pose. If we are unaware of something, then how can it affect our decision making process? Yet if we include it in our decision model, then we are no longer unaware.

Karni and Viero take an approach where they split the world into two different groups of states (edit – in decision theory, a state of the world is a complete description of your decision making environment. If we don’t know something about the environment, this is equivalent to not knowing which is the true state of the world). In the first group are the states of the world that we are fully aware of and can explain perfectly. In the second group are the states that we cannot fully conceive of yet. In the future we might learn more about the world, and some of the states move from the second group to the first.

To facilitate the modelling process, the states in the second group can be treated together as a lump of things that we don’t really know about yet. Although we don’t know anything about these states, we might still be able to form an estimate about how likely it is that they are important. Similarly, we might have a sense about whether these unknown outcomes are likely to be good or bad – we might be either fearful or optimistic about the unknown.

The Karni and Viero framework gives us a formal system within which we can quantify and describe these ideas of increasing or decreasing ignorance, and fear or optimism about the unknown. This might not sound like much but it is important get the foundations in place before we can start answering bigger, real world, questions about how ignorance and unawareness affect decisions.

There are other models that model the same sort of things as Karni and Viero; each of these frameworks have their own technical strengths and weaknesses. This a good thing – modelling unawareness is a tricky thing to do, and it would be amazing if the first attempt turned out to be the best one. At this point the literature is very young, and remains to be seen which approach will be the most useful for answering more applied questions.

For economists:

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Blog outline

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As mentioned on the about page, I plan to use this blog to write about research on a semi-regular basis. I will (mostly) focus on working papers because they are normally not paywalled, there is a long publication lag in economics that makes working papers more relevant than published papers and the ‘new economics papers’ mailing lists provide a steady stream of new ready material.

My plan is to do two related write-ups for each paper. The first will be aimed at non-economists. I will try to explain why the paper is interesting and what the paper does in a non-technical fashion. Then, in the second part, I will provide additional details, clarifications and technicalities that might be relevant to practitioners.

The first actual post should be up shortly after this one.