The Utility of Revenge

Over at one of my favourite blogs, there's a post about one of my favourite phenomena.

The Ultimatum Game

The setup is simple: a host introduces you to a stranger. Both of you get shown a ten-dollar bill. The ten-dollar bill, the host explains, gets divided between you and the stranger however you, player one, chooses. (It could be a 50/50 split; it could be a 90/10.) There's a catch, though: the stranger, player two, can reject your proposal, leaving both you and him empty handed.

In a world where rational self-interest–the prevailing model of microeconomic decisionmaking–reduces to sheer profitmaking, there wouldn't be a reason to offer him a more equitable split than $9.99/$0.01. Player two seeks to maximise profit, so he shouldn't turn you down–deciding to "reject" would cost him a penny. And you, player one, should take advantage of that insight, offering only as much as makes his rejection unprofitable.

Read more »

Musings about Asymmetry

Hat tip to Freakonomics, who gives us an article worth reading today. If you're feeling lazy, I'll summarize:

1) Sam needed an apartment in Queens.
2) He came across one and it seemed like a good deal.
3) He signed the lease.
4) He soon discovered why it was a good deal—the basement flooded every time it rained.
5) He lost out: none of his storage space was useful.
6) Worse still, he lost everything he stored down there.

The author describes the situation as textbook information asymmetry. I don't disagree. And information asymmetries can be really really pernicious. One simple example:

Read more »

If the Yuan's So Cheap...

...why don't we just buy some? I'm tired of all this whining about currency manipulation. Yes, the Chinese yuan is undervalued. Yes, the Chinese manufacturers get a big leg-up: they're able to practically give away goods to anyone not paying in it. And yes, that places the rest of us at a disadvantage. But think of it this way:

Say you're vacationing in China. Somehow, you managed to smuggle $10,000 through customs. Wheee! Everything's cheap for you, right? That means if you exchanged your $10,000 for, say, ¥80,000 (a totally hypothetical exchange rate), you'd be getting a raw deal. You'd be able to buy far less. But if you planned on leaving tomorrow, then you'd be scoring huge. Why? Well, everyone believes the yuan's dirt cheap; it should be worth more in dollars. (And I tend to agree.) But it can't stay cheap forever. So if you take some home and wait long enough, you'll score big. Just bide your time until it is worth more dollars.

Conventional wisdom says otherwise. Conventional wisdom says we'll never see a stronger yuan because we never have. Conventional wisdom says we've never seen a freely-traded yuan, and so we never will. But I disagree. After long enough, we'll hit a tipping point. It's a rising power we're talking about here, but it's one that ultimately will rise. And when that happens, the yuan is going to follow. Right now, China's a paradise for producers, but only by being a consumer's hell. The people of China aren't paying for groceries in euros or dollars; they're paying for them in yuan. And so whenever they make a purchase, they take a hit. Granted, we haven't seen much resistance yet—but that doesn't mean we won't. The more the Chinese earn, the more they'll notice the difference. And the more they'll demand a change.

The Economics of Parking...

...was apparently the only thing economists talked about a month ago. Blunt Object has a run down. Not to suggest it's an unimportant debate or anything—but far less interesting than what started it.

Basically, Tyler Cowen made an obvious point about parking prices. More specifically, the ones set by government fiat: they're almost always too low and they almost invariably cause shortage. In the process, the driving public gets a fat, juicy transfer payment from the carless because they're the only ones not totally screwed by the deadweight loss. And then Arnold Kling shat a brick, arguing that shortage somehow isn't shortage in the magic land of parking; it's actually sort of hard to understand, though, because his writing's not its clearest when it's bullshit.

But really, if you're arguing parking spaces should be 100% occupied 100% of the time, you're arguing demand should outstrip supply. The minute any of those spots opens up, you're needing a driver quick to pounce. But that driver had to have been waiting there a while! You're not getting rapid 1-to-1 turnover of every single fucking spot without some sort of backlog. And how the hell do you describe that except as unsupplied demand?!

On Government as Monopoly

Perhaps Max Weber's most enduring contribution to economics was his definition of the state. It's become so widely referenced these days that it's becoming a cliché: governments divide territories and exert coercive monopolies within their sector. Hell, even anarchists and non-anarchists can agree on that much. The main difference between the former and the latter is that the former believe this monopoly is normatively bad; the latter consider it mainly descriptive.

I say "mainly" because, being a non-anarchist myself, I still feel Weber's monopoly has a certain normative component. We love to hate monopolies because they generally screw consumers. But some monopolies, like those given patent owners, are considered so consumer-benevolent that they're justified. The pivot point is behaviour, I think. Let me elaborate.

Monopolies aren't deterred by competition, so they never fully internalise surplus. They would if their market were open to more sellers, because then they'd forfeit control over supply. That they don't causes a disequilibrium between natural demand and price: demand is artificially inflated due to the supply shortage induced by the seller. So, the seller pays nothing for being inefficient. As the sole source, his surplus goes unchecked. In fact, he profits from inefficiency.

Read more »

Can You Ever Lower Interest Rates Past Zero? (Redux)

Greg Mankiw at the New York Times gives us another option for reducing interest rates past zero. As I explained before, low interest rates incentivise borrowing; subzero ones would leverage that. We'd be doing it to correct a market distortion, which as I noted here is primarily demand inelasticity to price. Money shouldn't act like that. And when it does, our attempts at aggressive AD are effete. But how do we stimulate demand when consumers aren't keyed into price?! All money buys you is price. It's not like we want it to come with 24-hour customer service and a free latte.

We need this demand. We need it badly, because assuming debt comes with the motivation to seek out returns. If borrowing takes off, so does the drive to grow, expand, hire, and innovate. But we can't force people into borrowing; all we can do is reassure them they won't go bankrupt. That's basically what low interest does: it tells the debtor he's not going to end up underwater.

Read more »

I, Toby Flenderson (And Not Bernie Madoff!)

Without going into laborious detail, I work in human resources, which means I disseminate truly devastating information on a semi-regular basis. And as such, I've had ample opportunity to learn how to do it–at least, learn well enough to save my windows from bricks. One of the things I've picked up is the awesome power of Fridays. Seriously: people take character-assasinating threats to their livelihood much better on a Friday.

But I'm neither the first nor last person to figure this out. Governments do it to cover their hides; companies do it to sway their shareholders–why, it's become a downright fixture in our lives. Who hasn't observed the uncanny esteem Fridays curry with earnings reports? With press secretaries? It's a form of opacity, really. But, the nice thing is no one notices. No one's going to defer his or her well-laid plans. No one's going to derail his campout. It's brilliant because it's opaque–but opaquely so.

And who would ever want to be transparently non-transparent? Decide to equivocate, you fool no one. Decide to deceive, you might get caught. And yet, you see these tactics everywhere. (Bernie Madoff, anyone?) But why would they get employed? Why not use Fridays instead? Let's consider the options:

Read more »