Thinking Like an Economist

DismalScience

I recently read two things related to economics: some economics blogs (particularly Marginal Revolution), and a list of economics jokes.

For someone like myself who doesn’t see everything in economic terms, the world of those who do is very bizarre. For instance, when we think about wealth inequality and how to reduce it, we inevitably come up with familiar concepts like increasing tax rates for the rich, capping their income, regulating investments, and so on. But the first article I stumbled upon, “Two Surefire Solutions to Inequality,” provided two strange solutions: increasing the fertility rate among the rich, and decreasing the fertility rate among the rich.

The tl;dr arguments are as follows: Increasing the fertility rate among the rich means that large wealthy families will be forced to divide their wealth every generation, thus lowering individual wealth slowly over time (of course, assortative mating slows this down).

On the other hand, decreasing the fertility rate among the rich means that the rich class will slowly disappear over time.

This seems really strange. Neither solution obviously solves any problem, and they might make make things worse in the short term. In addition, any government mandate on this would be hard to define and would be met by resentment on both sides in either situation. In other words, these solutions are absurd.

But in another sense, they are not absurd at all. They both make perfect logical sense. Assumptions were made, but not much more so than any other economic model. So why are these solutions so strange? Is it just social norms holding us back? A fear of anything resembling eugenics? A desire to not mess with peoples’ rights?

For a change of pace, here are some funny economics jokes, from the link given at the beginning:

An economist is someone who has had a human being described to him, but has never actually seen one.

When doctors make mistakes, at least they kill their patients. When economists make mistakes, they merely ruin them.

One night a policeman saw a macroeconomist looking for something by a lightpole. He asked him if he had lost something there. The economist said, “I lost my keys over in the alley.” The policeman asked him why he was looking by the lightpole. The economist responded, “It’s a lot easier to look over here.”

Slavery, Sochi, and Steroids: When Does Competition Go Too Far?

winter

In the Olympics (and sporting in general), it is generally considered wrong for an athlete to take performance-enhancing drugs.

Let us take one step back and ask, Why?

Is there any a priori reason that substances like steroids should be banned? Is eating an athletic diet also “cheating”? What about genetic mutations—wouldn’t it unfair if I have a gene that, given all else equal, allows me to run 20% faster than you?

(These are the conversations I have on Friday nights.)

One main point of the Olympics is to test the limits of what humans can do. Someone ran 100 meters in 9.8 seconds? Awesome! Someone ran it in 9.6? Even better! I want to see that! But suppose someone ran 100 meters in 9.4, but was later tested positive for banned substances. Then who is the fastest person in the world at running 100 meters: athlete 9.6 or athlete 9.4?

It depends, of course, on how we frame the question. If we ask, “What is the fastest valid 100 meter dash in Olympic history?,” the answer is 9.6 seconds. But if we ask instead, “What is the fastest time ever for a 100 meter dash?,” the answer becomes 9.4. It would still be true that the fastest time in which a human ran 100 meters is 9.4 seconds.

Suppose, for the sake of argument, that eating an athletic diet makes your time 0.2 seconds faster at the 100-meter dash, and taking illegal substances can also boost the time by 0.2 seconds. Then we might have the following 100-meter times:

Normal Diet Athletic Diet
No Doping 9.8 9.6
Doping 9.6 9.4

In this case, the fastest time is 9.6 because as a society, we agreed on the rules that eating a diet to enhance performance is good, but taking a drug to do so is bad. However, does this mean we are missing out on a possibly faster time, the 9.4?

It is unfair if only one athlete is allowed to use a certain tactic to enhance performance, so let us suppose that we are now looking at the top three finishers, off by 0.1 seconds each. Assume everyone is following the same rules. Here is a the same chart, now showing 1st, 2nd, and 3rd times:

Normal Diet Athletic Diet
No Doping 9.8, 9.9, 10.0 9.6, 9.7, 9.8
Doping 9.6, 9.7, 9.8 9.4, 9.5, 9.6

We can assume that the fastest person is the fastest in all four boxes, the second fastest is second, and so on. Now, we only consider doping to be cheating because it’s agreed upon that it is cheating. Eating an athletic diet, on the other hand, is not considered cheating, so we… don’t consider it to be cheating.

This raises the question, is there any point to these artificial rules? A competition is concerned with relative times and not absolute times (even then, the absolute times are only interesting because we compare them to the absolute times in years past, hence making them again relative times). Under the restrictions of diet or doping, the relative times are all the same. So are the rules simply arbitrary? Should we allow doping because it will reveal the full potential of human beings?

My intuition is no, and there are arguments for and against. One of the immediate objections is that doping is unnatural. But so is eating a diet specifically designed to optimize your athletic performance. So that argument doesn’t quite hold.

One of the more legitimate points is human health. We know that performance-enhancing drugs come with a range of side effects. Let’s say that a regular user of PED’s has their lifespan cut by 1 year. In addition, if PED’s are legalized, then everyone will start using them, because there would be no way to seriously compete without them (like it is futile to compete while on a diet of donuts and soda today). So is it worth shaving 1 year off of every athlete’s life to improve the absolute numbers, which don’t matter, by 0.2 seconds? Obviously not. (Is it obvious?)

However, what about a situation where the “absolute numbers” do matter? Let’s say that an asteroid is headed towards Earth, and all the scientists and engineers with the relevant technical skills are working on how to deflect it. However, they are still working 8 hours a day. Should we be able to force them to go to 10 hours, or 12 hours, or even 16 hours? (Of course, given the gravity of the situation, no pun intended, these people are probably voluntarily willing to work harder anyways, but suppose they are not.) In this scenario, there might be 100 teams with 100 different solutions to deflect the asteroid. The best solution has a 47% chance of success. But if everyone were instead working 16 hours a day, the best solution might have a 70% chance of success. Do we force longer hours?

What about a doctor who is trying to cure cancer? Should this doctor be allowed to use performance-enhancing drugs so that he might have a slightly better shot at the big issue?

And what about capitalism? The free market provides the ultimate competition: your 100-meter speed is now your wealth and status. How far will you go to improve it? Should the government restrict your ability to create wealth?

The title of this post starts with “Slavery,” so what has that got to do with anything? Well, under an “anything goes” structure, allowing slavery might be the only way a country can support a certain level of economic production, perhaps in order to defend itself. This does not have to be an economic slavery—it could be political slavery, or totalitarian rule. Imagine we detect an alien fleet that is just blowing up planets of the solar system and is headed to Earth. Is martial law justified?

And here’s a more realistic issue: Should a country be allowed to do whatever it wants in order to develop? In response to climate change and environmental damage, the developed countries of the world are starting to decrease their pollution levels, particularly of greenhouse gases, by using more renewable energy and being more environmentally aware. Should a developing country be exempt from the rules and be allowed to power itself solely using cheap but environmentally harmful fossil fuels, because it can’t afford renewable energy?

If everybody is sitting in a crowded theater, and you have a really lousy view, should you be allowed to stand up (and take away the view from the person seated behind you)? See this post for similar issues.

In the end, the absolute numbers don’t matter most of the time—it’s the relative that matters.

Credit to Jesse Orshan for this discussion.

Standing Up in a Crowded Theater, Studying for Tests, and Other Game-Theoretic Dilemmas

Everyone is sitting down in a crowded theater, comfortably seated and with a good view. All is well until one person decides his view is not good enough, so he stands up to get a clearer view. This ruins other peoples’ views, so they stand up as well. A while later, everyone is standing up but has the same view as before, resulting in each being in a position strictly worse than when everyone was sitting.

This particular example is typically avoided since the social norm in a theater is to sit. In fact, in numerous examples of this game, there are either direct (laws) or indirect (social norms) methods of control to prevent such disasters from happening. Here are two for illustration:

  • Crime. If one person stole a little, this person would be in a better position and society would not be harmed by much. However, if everyone did this, society would collapse. The criminalization of theft prevents this problem (for the most part). This concept applies to many types of crimes.
  • Environmentalism. If one person polluted more, there would be virtually no change to the environment. However, if everyone did so, the environment would feel the full effects. (This still isn’t quite resolved, but in most developed countries it is well on its way.)

From a game-theoretic perspective, however, each individual taking the selfish path is making a rational decision. The problem is that the system may not discourage the selfish activity sufficiently.

Someone who doesn’t recycle may (justifiably) argue that they do in fact care about the environment, but that the impact of their not recycling is negligible to the environment. While this is true, if everyone thought like this, then we would all be standing up in the theater. The main point of this post to go over some less commonly cited situations.

Studying for Tests

I would argue that studying for a test falls into the category of standing up in a theater. From both high school and college, I have observed or have heard of people studying hours upon hours for tests and often barely remembering any of the material after a semester. A test should measure how well you understand something, not how well you can memorize and cram facts into your brain for the next day.

People who know me from high school and college know I don’t study much (if at all, depending on the class) for tests. Perhaps some see this as a sign of not caring, but I would argue that I care about the knowledge just as much, if not more, than people who study far greater hours. In the cases where I do study, I go for the “why” rather than the “what,” and I study to load the concepts into long-term memory, rather than the details into short-term memory. If you do need the details at a later time, cram it in then when it is relevant and when you have the big-picture understanding.

Let’s pretend that studying for tests were not allowed. Then what would a test measure? Would it measure how much attention someone paid in lecture? How well they comprehended the main points? What part of the homework they didn’t copy from someone else?

In fact, everyone’s grades would still be similar. In classes where grades are curved, if everyone does “worse” on a test the same way, then the grades will be unaffected (though there may be some shifting around). The tests would just become more genuine.

So it may seem like I have something against studying for tests. But what part specifically of studying for tests do I have an issue with? Well, as mentioned before, I think if everyone studied for tests, it makes the test scores more a measure of who studied the most and who could cram in material the most efficiently, instead of who actually understood the content. But even if this problem were somehow irrelevant—letsay an irrefutable study comes out tomorrow saying that cramming ability is just as relevant for the real world as understanding—I would still have an issue with studying, namely the time spent. Suppose someone is taking 4 classes and studies 4 hours for each midterm and 8 hours for each final. That’s 48 hours spent studying in a semester. Multiply that by 8 semesters to get 16 days spent on studying. These 16 days are the difference between sitting down and standing up.

Preparing for Colleges/Job Interviews

Sure, the informative power of some of the tests I’ve mentioned above may be arguably above zero. For example, maybe it’s feasible that a dedicated premed student university should cram before a bio test because the details do matter, though the question remains of whether such a student will remember anything years later. But there’s still one very important test taken all around the country that really has no arguable intellectual merit: the SAT.

This test is probably the biggest insult to intelligence when taken seriously. I try my hardest to resist cringing whenever I hear smart people talking about their SAT scores. From the CollegeBoard site:

The SAT and SAT Subject Tests are a suite of tools designed to assess your academic readiness for college. These exams provide a path to opportunities, financial support and scholarships, in a way that’s fair to all students. The SAT and SAT Subject Tests keep pace with what colleges are looking for today, measuring the skills required for success in the 21st century.

Yes, I’m sure it’s very “fair to all students.”

sat-scores-by-wealthAnd I’m sure that by “keep[ing] pace with what colleges are looking for today, measuring the skills required for success in the 21st century,” what CollegeBoard means is that the skills required for success in today’s world are… wealth, certain racial backgrounds, and access to prep courses.

Anyways, I guess my point is that if nobody studied for the SAT, nobody took prep courses, and no one cared so much, then:

  • Students wouldn’t be wasting their time studying for it.
  • Many families would save time and money on SAT prep by not having to do it.
  • As a result, less privileged students would stand a better chance, and thus the test would be more fair.

Of course, while this may sound good, it is easier said than done. To not study would be shooting yourself in the foot, or in this case, to sit down in the theater in which everyone is standing. It would be like one country’s reducing its greenhouse emissions while other countries are not decreasing theirs.

(Personally, I refused to study for the SAT, though at the time I had to give off the impression that I was studying for it to appease my Asian parents. If you really want the story, it’s in the latter part of this post.)

I would go further to say that preparing for job interviews in some ways fits this type of game. On this subject, however, I have very little experience as my only important interviews were of the type where it would be very difficult to prepare for, i.e., math puzzles. Answering such questions did not hinge on knowing certain advanced equations, but instead on using simple tools that almost everyone knows, in unusual ways.

In addition, I understand that an interview not only judges the answers to the questions, but also the interviewee’s character. If it is evident that someone prepared a lot for an interview, that fact in itself would be considered in the interviewer’s assessment. However, I think that in a world in which no one prepared for interviews, both sides would benefit as the interviewee would save time and stress while the interviewer gets a more genuine view of the interviewee, not a carefully constructed outer shell.

And for a preemptive defense, to the claim that studying or preparing is simply a result of competition, I have nothing against capitalism or competition. If anything, freeing up students’ time from studying for tests would make them be able to compete in other areas, and be able to take additional classes or learn new skills (I picked up programming while pretending to study for the SAT). I see the time wasted as an inefficiency. The point of not studying is to have more time, and hence be more productive.

Sitting down in a standing theater is a difficult decision. But if everyone sat down, we might all live in a better place.

Is the Virtual World Really An Escape from Reality? (Part 2)

On September 17th, Blizzard announced that they would be removing the auction houses in Diablo 3. For gamers, this may seem like a very strange move. It is very rare that a company will remove a significant feature of a game, especially when there is no stated replacement plan.

Real World Finances

But from a sociological perspective, this is a very interesting move that signifies a reaction to the merging of the virtual and real worlds. It seems like the warnings from Jesse Schell in 2010 are manifesting. Last year, Diablo 3 launched with two widespread auction houses, allowing players to trade their virtual items. The gold auction house used in-game currency, while the real money auction house used… real money. Real US dollars. And other worldwide currencies.

The Diablo 3 Real Money Auction House. The $250 max buyout is the limit.
The Diablo 3 Real Money Auction House. The $250 max buyout is the limit.

As I said in part 1, the virtual world, used to be an escape from reality:

One of the strongest effects of these games was to cause players to disregard socioeconomic stratification that existed in the real world. In the virtual worlds of RPG’s, everyone starts equal and has the same opportunities.

From an extensive CNN report on gaming:

A professor: “…people do not feel they have the freedom and kind of  their own power to change their own social roles and their own identities. But in cyberspace, people do not remember… your wealth.”

However, Facebook (among others, though Facebook arguably had the largest effect) changed this with microtransactions that allowed players with more wealth in real life, or more willingness to use the wealth, to translate it to in-game wealth. Schell’s talk has a lot more on how Facebook changed gaming.

But despite the influence of Facebook, many gamers stayed on non-FB games. It took Diablo 3 to have a large enough impact on affecting socioeconomics within a game. To some degree, those who were wealthier in real life were wealthier in the game. And to some degree, it was impossible to progress forward unless one was already wealthy.

In one sense, Blizzard’s removal of the auction houses signifies a break from the trend of the ever increasingly tangled web of real and imaginary.

An Efficiency Problem

Of course, we cannot discount Blizzard’s stated reasons for removing the auction houses:

When we initially designed and implemented the auction houses, the driving goal was to provide a convenient and secure system for trades. But as we’ve mentioned on different occasions, it became increasingly clear that despite the benefits of the AH system and the fact that many players around the world use it, it ultimately undermines Diablo’s core game play: kill monsters to get cool loot.

Indeed, the problem was that there was too much trading and the system became too efficient. I actually wrote a lengthy post about this on the Diablo 3 forums last year, called “Why the Auction House is the Main Problem,” which was also mathematically oriented. This article was highly rated and was spread around the interwebs.

Basically, the problem was that the increased market efficiency from the auction houses allowed the average player to obtain much better items than they otherwise would, thereby short-circuiting the actual game.

Although it seems fairly obvious now as to what happened, the sentiment at the time was that the real money auction house was causing the main problems, but that the gold auction house was fine. Before my thread, I don’t recall anyone making a coherent argument against the efficiency of the gold auction house.

The Future of Gaming

Thus it is not all that surprising that Blizzard is removing both auction houses. And even considering Blizzard’s official reason, it is interesting that the economic system in the game has so many analogs in real life.

A vision of the future virtual world, from part 1:

It will not be a place where we can set aside our real world and escape our problems for a few hours. It will not be a place where we have fun or meet people we would never see otherwise and talk about the little things in life without worrying about our financial position.

Instead, it will be an extension of the real world and everything in it. Those who are wealthier in the real world will have more options in the virtual world, and those who are poorer will remain poor. Ultimately, if virtual reality does not return to its roots as an escape from reality, people will end up escaping the virtual world as well.

So given the recent news, perhaps we are not quite as firmly on that road as we were last year—a wrench has been thrown in the works. But in the end, the real and virtual worlds are still on a collision course. We should definitely be prepared.