Category Archives: economics

The Road Less Traveled

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I’ve read that given two stores people will tend to visit the one that is toward the city center in preference to the one that’s in the other direction.  It’s as if you had to climb uphill to move away from the city center.  Customers tend to flow, like water toward the commercial centers.

These effects get filled under the term Hoteling in some of the economics’s literature.  In it’s most naive form Hoteling is kind of stupid; it merely points out that buyers include the total cost of a transaction when making a purchase.  The vegetables maybe spectacular at Russo’s or dirt cheap at Haymarket; both a half hour round trip from my house; but the Foodmaster  at the bottom of my street is a damn sight more convenient.  Which goes to explain why there are a few dozen Foodmaster’s around town; like a hotel chain Mr. Foodmaster knows that part of what he’s selling is being close at hand.

My reading on hyperbolic discounting suggests that hoteling effects are much stronger than mere arithmetic would suggest.  I suspect that people have extremely skewed models about this stuff.  The hills are much steeper than it’s possible to imagine.  That most people shop closer to home and stick to the main roads far more than would be in their best interest.

I’ve always been a road less traveled kind of guy.  As a child, before first grade, I can recall lying in bed tracing out the roads of my town; wondering what was down particular turns my parents had never taken.  As an adult I have a self amused tendency to take turns out of raw curiosity and a strong preference for taking the roads the super highways replaced.  I know that the interesting authentic vendors tend to be hidden, around the corner, up the stairs, where their unique qualities sustain them; rather than their proximity to traffic.

Hoteling effects, of course, take place in your mind too.  When something new needs an explanation you fall naturally into the existing explanations.  When you must decide what to do your thoughts flow into existing channels.  It would be, it is, exhausting not to.

In this country, where we have traditionally had tremendous amounts of empty real estate, we have undergone waves of upheaval that have transformed the shape of the traffic flows.  We have successively overlaid networks of rivers, turnpikes, canals, railroads, and superhighways.  For better or worse, each time these have created new commercial centers while displacing older ones.

In each round some people got really rich.  Not by buying the land cheap and selling it high, but by shaping the traffic flows until they came to the land they owned.    Some railroad barons are and were more conscious of this process than others.  For example the folks building Facebook are clearly working hard to see that social traffic flows over their turnpikes.

As a guy who like to take the road less traveled I’m pleased to see that Google Maps has added little handles to their suggested routes that enable me to dynamically drag them.  Now I can insist that, yes I do want to drive thru downtown on this trip; and yes I do want to make detour that goes along the beach road, and yes I do want to cross the river on that exceptionally narrow bridge.  But I wonder, why did they decide that such a feature would actually be interesting to most people?  Most people aren’t like me.  I suspect I’m way out on the long tail of map users; but then I suspect the folks working on Google maps are too.

Progressive taxation is the enemy of the Professoriate

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This is rolling on the floor funny:

” … Theorists love the model of job market signaling . In this model agents perform a costly effort which produces nothing useful. The only point is that it is less costly to the able. Thus an equilibrium exists in which the able signal their ability by performing the costly effort (the example is obtaining a BA). Employers require the lowest level of signaling such that it is not optimal for the less able to produce the signal of high ability. The able can save on pointless effort by paying the less able to be honest. This is a collective action problem. They can implement this strategy by taxing each other to pay a subsidy to those who admit they have low ability and, therefore have low incomes. Obviously the policy helps the less able (they get something for nothing). Therefore, in a model of job market signalling a progressive tax and transfer program can be Pareto improving …”

So true!

Friction

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Today I noticed this ad offering to reimburse you for getting a passport.  $157 per adult.  I felt some sympathy for the advertiser, an island in the Caribbean.  A place people go for the weekend; well they used to.  The island tourism folks woke up recently to discover that numbers where down and they have discovered that the newly increased tedium of getting a passport has caused huge numbers of idle travelers to decided to, well, just go someplace else.

When my 1st son got his learner’s permit it took us three trips to the registry before we managed to accumulate enough documentation to convince them to let him have the learner’s permit.  My 2nd son submitted his first pay check’s stub rather than the check and the bank called to correct the error.  A bit got set on his account that didn’t get cleared.  So the ATM ate his bank card.  It took months to get a replacement card since his school was yet to issue the ID card they required.  All N of my financial institutions have recently insisted that I add four security questions, including one involving a photograph; which is a pain since I share access to these accounts with my spouse so all 30 odd questions and their answers all have to be in some shared location.  We recently got new passports, a project that was at least a dozen times more expensive and tedious than doing my taxes.

I once had a web product that failed big-time.  A major contributor to that failure was tedium of getting new users through the sign-up process.  At each screen they had to step  through we lost of 10 to 20% of our customers.  Reducing the friction of that process was key to our survival.  We failed. It is a thousand times easier to get a cell phone or a credit card than it is to get a passport or a learner’s permit.  That wasn’t the case two decades ago.

The Republicans have done a lot of work over the last decade to make it harder to vote; creating additional friction in the process of getting to the polling booth.  The increased barriers for getting a drivers license, passport, etc. are all part of that.  This make sense because now, unlike 30 years ago, there is now a significant difference in the wealth of Democratic v.s. Republican voters.

Public health experts have done a lot of work over the decades to create barrier between the public and dangerous items and to lower barriers to access to constructive ones.  So we make it harder to get liquor, and easier to get condoms.  Traffic calming techniques are another example of engineering that makes makes a system run more slowly.

I find these attempts to shift the temperature of entire systems fascinating.  This is at the heart of what your doing when you write standards, but it’s entirely scale free.  Ideas like this are behind the intuition of some managers who insist on getting everybody in the team working in the same room with no walls between them.

In the sphere of internet identity it is particularly puzzling how two counter vialing forces are at work.  One trying to raise the friction and one trying to lower it.  Privacy and security advocates are attempting to lower the temp. and increase the friction.  Thus you get the mess around the passport, real-id, and the banks.  Wearing that hat it seems perfectly reasonable that one should present photo id when you vote, or have your biometrics captured if you cross a boarder.  On the other hand there are those who seek in the solution to the internet identity problem a way to raise the temperature and lower the friction.  That more rather than less transactions would take place.  That more blog postings garner good coments, that more wiki pages will be touched up, that more account relationships will emerge rather than less.

Of course the experts in the internet identity space are trying to strike a balance.  It’s clearly one of those high-risk high-benefit cases that people have trouble holding in their head.

Pennywise

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Mike Neuenschwander’s Law of Relational Risk

“Contribution to the relationship that is not met proportionally by the other participants is a loss to the contributor.”

is perfectly fine but that it suffers from Asperger’s Syndrome. Relationships are not like accounting. Since there is no reserve currency for relationships it is impossible to balance the books. Since there is no accounting cycle when the books are required to be brought upto date any attempt to balance the books will fail. Their is no consensus about discount rates, they are unregulated. For example if something bad happens to me in a relationship I can, of my own free will, depreciate that into oblivion via forgiveness or I can compound the issue demanding increasing compensation.

Bearing that in mind the rest of his post is all good and useful fun. Mapping economic ideas into the rest of the social sphere is more than fun, it is deeply silly.

Big purses v.s. unbanked

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Possibly last posting about the World Household Wealth Distirbution study.

First off I’m bemused by two articles in the New York Times.  One about giant purses:

“…clients old and new staggering under the weight of huge purses and griping about neck pain. “It’s an epidemic,” Ms. Ehrlich said. “We’re busier than ever before right now and big bags are the reason.”

A common side effect is that one shoulder becomes slightly higher than the other, she said. “A lot of women talk on their cellphones while they’re carrying these bags, which only intensifies the problem, because in addition to balancing too much weight on one side, they’re lifting the shoulder at the same time.”

Ms. Ehrlich recommends weekly massages for the pain. Gentle stretching and warm baths with Epsom salts can help bag abusers, too, she said. But she would never tell a client to ditch her Mulberry Elgin tote.

“It’s like telling a woman, ‘You cannot wear Manolo Blahniks,’ ” she said. “It’s just not realistic.”…”

One about giant planes.

“… private jet much like Air Force One, which is a 747. Each plane carries a list price of about $275 million. Boeing will not identify the customers, … personal use.”

Finally there is a note in the report that points out that zero is, of course, not the bottom of the household wealth distribution.  Debt allows household’s wealth to be negative.  Because most of the worlds poor are “unbanked” you need to go into the developed world to find the absolutely poorest households.  How’s that for a triggering a worry-some eye brow raising moment?  Since, the currently popular fad in this problem space is micro-finance.

Control of Appetite

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i’m enjoying reading “Breakdown of Will” by Ainslie. One name his work goes by is pico-economics. If that name is not intended to be sarcastic then it’s at least ironic given that Economics is currently king of the social sciences and Ainslie’s model underminds the king’s legitamacy. The market stalls of pico economics are set out inside your head. The market participants negotate for your attention, slices of your time. I recorded a bit of audio from the market floor in an old blog posting.

Re-negotiate your cable contract once a year. Oh, and your long distance service. Rebalance your investments annually. Keep an eye on your mortgage rate and refinance at appropriate times, but not too often. Consider having a health savings account. Clip coupons. Keep track of those rebates. Join frequent flyer programs as appropriate. Be sure you have a will. Check that your love ones know your end of life desires. Eat more vegetables. Take regular breaks to avoid typing injuries. Get plenty of sleep.

Here, let me quote a fragment from the book:

I have described a model of learned interests that compete freely on the basis of timeframes over which of their rewards will be prefered. … a person is a population of these roommates each clamoring for control of the room … to continue to exist each interest must be the highest bidder at some time or it will be extinquished …

But pico-economics is not like classical economics. Not at all! The math that governs in the attention marketplace of your head is taken straight out of bizzaro world. It might as well be non-linear. We don’t respect the future; even if you think you do. You don’t.

At the heart of this bizzaro math is deeply hardwired preference for immediate gratification over longer term goals. This evil math is time scale free so we will scratch an itch in preference to eating some ice cream, and eat ice cream that’s at hand in preference to a fine meal with friends in half hour, and that we will go off to long lunch rather than finish that deliverable the team needs to make progress next month, etc. etc.

The preference for short term ones v.s. long term is so pervasive that we tend to gloss over how odd it is. Would you like to stop what your doing and have some ice cream? How do you decide that turning your attention to the fun of a bowl of ice cream is worth it? The utilitarian answer is that you weigh the alternative and if it’s better than what your doing then you switch. What’s curious about living in the bizzaro world of pico-economics is that this calculation is radically different depending on how close at hand that ice cream is. Going out to get it? Going into the kitchen? Plucking it off the desert cart? Dipping your spoon the bowl? Each step closer and in the competition for your attention the ice cream becomes vastly more likely to seize control of your scarce attention. So much so that it makes no economic sense at all.

From animal experiments they know exactly how out of wack your internal calculator is. If the pleasure of ice cream is 2, 20, or 200 seconds away for the spoon, the desert cart, and the kitchen respectively then you will treat see the fun of ice cream as 66 units, 8, or 1 unit respectively. If we replaced ice cream with a financial reward this implies that people have to struggle to avoid accepting a dime in two seconds v.s. $6.60 in few minutes later. Rationally this makes no sense; since I could make a mint moving ice cream closer to my customers.

That our attention is so badly behaved creates a problem what we struggle with continually. For example we all know not to buy the ice cream and bring it home; i.e. to avoid the temptation. Ainslie reports a delightful experiment involving pigions. Pigeons have the same bizzaro internal marketplace. So if you put them in a cage and give them some buttons to peck you can show that they will peck a button that gives smaller rewards sooner over a button that delivers significantly larger rewards later. Amazingly this setup annoys the pigion. He knows that he is making bad choices. Apparently there is a rational market regulating pigion in there scolding the his irrational free market animal pigion. How do we know? Well they can augement the experiment to add a third button pecking that will disabled the short term reward button. The pigeon will use that third button to lock in his commitment to the longer term reward.

Avoiding temptation and using external devices to make binding commitments are both means to force your internal bizzaro attention economy to behave better. We don’t trust ourselves anymore than we trust other parties. We engage in lots of these strategic games in an attempt to keep the bizzaro internal economy from doing more harm. Most of these work by reducing our options. We lock in our savings in long term investments, we don’t buy the ice cream, and the pigeon pecks that third button.

A Gang of One

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Here’s a fun variant of the repeated prisoner’s dilemma game.

Picture a lecture audience. I announce that I’ll go along every row, starting at the front, and give each member a chance to say “cooperate” or “defect.” Each time someone says “cooperate” I’ll award ten cents to her and to everyone else in the audience. Each time someone says “defect” I’ll award a dollar only to her. And I ask that they play this game solely to maximize their individual total income, without worrying about friendship, politeness, the common good, etc. I say that I will stop at an unpredictable point after at least twenty players have played, at which time each member can collect her earnings.

You gotta love the instruction not to be “worrying about friendship, politeness, the common good, etc.” The game creates a group out of the audience with all the group dynamics in play particularly because there is no privacy. In the original prisoner’s dilemma that players are part of a gang, here we make the audience into a gang; while instructing them not to act like one.

That framing is from an interesting synopsis of a set of some ideas that apparently were first formalized by George Ainslie, e.g. that we all prefer short term pleasures and we tend to severely discount long term benefits as we make our choices in life. Given the choice between a chocolate bar right now and a chocolate cake tomorrow we tend to take the chocolate bar. This behavioral default is apparently well documented in man and other animals.

Formally we ought to discount future rewards by some reasonably uniform rate. So if we are offered a $100 tomorrow and $10 in an hour we ought to just compute the option value of each discounting by some interest rate based on the risk we percieve the future payoff to have. This kind of discounting is expediential; and it isn’t biased about things that are closer vs. farther away. It will cough up the same answer for 5 today vs. 10 tomorrow no matter what units (days, weeks, years) you use when you ask.

We animals don’t do that. Another way of saying that we like short-term benefits is that we discount things in small time units very sharply. A cookie in 30 seconds vs. a nice lunch in an hour? The cookie wins. It’s not rational but it’s how we are wired.

This leads to all kinds of common but irrational behaviors. Breaking the diet, staying up to late, having a few too many beers, failing to hold our tongue, etc. etc.

But most interestingly it puts us into a game just like the one above with ourselves. We are the audience. At each step in the game we have a choice to defect and take the dollar; but if we can manage not to defect then we can capture the long-term gains. We are caught in a gang of one our loyalty to our future selves continually tested against a hardwired setting that tempts us into short term defections.

Housing Prices – Part III

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Here’s a chart of housing prices from the NY Times. I’m not entirely sure why it’s so extreme compared to the charts I put up in a previous posting. I suspect part of it is not using a log scale, part is having a much longer time horizon, part is that it’s showing a different index, and finally I suspect that it’s selective about what cities are included; but I still don’t really get it.