Month: December 2004

The economics of dueling

Ron Chernow, in his biography of Alexander Hamilton, writes:

Duels were also elaborate forms of conflict resolution, which is why duelists did not automatically try to kill their opponents.  The mere threat of gunplay concentrated the minds of antagonists, forcing them and their seconds into extensive renegotiations that often ended with apologies instead of bullets.

Put that into plain English: We have a Rubinstein bargaining game where players fail to reach an agreement, thereby eating up more and more of the pie.  Each individual plays "chicken" and hopes the other will give in.  But when you approach the precipice…ah…chicken becomes an increasingly dangerous strategy.  The time horizon is truncated, "hold out" behavior becomes riskier, and perhaps the negative wealth effect brings individuals to the bargaining table.  (It is complicated; rising costs may simply make you keener to wait out your opponent.  A mutual increase in risk, however, can boost the likelihood of a bargain.) Then the Coase theorem kicks in and players reach a deal.

Of course to enforce this meeting of the minds, the the probability has to be real that an actual duel will result.

I used to think of duels as an inefficient form of signaling, typically with honor at stake.  In contrast, this hypothesis may suggest that pre-duel risk generation is set privately at too low a level.  The riskier you make things seem with your potential opponent, the more that subsequent would-be duelers will be scared into an agreement. 

The hypothesis also suggests why duels have (mostly) vanished, namely because trading and contract technologies have improved (except in ghettos).  The signaling hypothesis can predict either an increase or decrease in duels, depending on whether the demand for honor or life rises more rapidly with income.

Betting on Canadian CEOs

Online site Betfair this month introduced wagering on the fates of CEOs of nine troubled companies…

CEO wagering is legal in the United Kingdom but is not available because the Brits are bored by the prospects of CEOs getting sacked, says Jordan Ferguson, Betfair’s head of international sales.

Brits use Betfair to wager on everything from snooker to U.S. football, but the only gamblers interested in CEOs are North American, and U.S. laws make Betfair restricted to Canada, Ferguson says.

Betfair does not back wagers but acts as a middleman for customers wishing to take different sides of a bet. Betfair’s revenue comes from keeping 2% to 5% of the winning bet, Ferguson said.

Volume has been light. Less than $100,000 was wagered for or against CEOs in the first two weeks, Ferguson says.

Arthur Millholland, CEO of Calgary-based oil exploration company Oilexco, has been the most likely to lose his job by April 30, 2005, according to Monday’s betting on the Betfair site. Someone who bets $10 that Millholland will still be around next spring would get about $20 if he survives.

Here is the full story.

Democracy’s Soldiers

In a review of Armageddon, a book on WWII by Max Hastings, James Sheehan makes the following bizarre remark.

Hastings recognizes that the generals’ failure to knock Germany out of
the war in late 1944 reflected the kind of armies they led as much as
their own deficiencies as leaders. The British and American armies were
composed of citizen soldiers, who were usually prepared to do their
duty but were also eager to survive.

The corollary being that citizens of non-democracies were not eager to survive and therefore made better warriors.  Uh huh.  I could go on but Brad DeLong has a great smackdown.

Argentina on the move

When the Argentine economy collapsed in December 2001, doomsday predictions abounded. Unless it adopted orthodox economic policies and quickly cut a deal with its foreign creditors, hyperinflation would surely follow, the peso would become worthless, investment and foreign reserves would vanish and any prospect of growth would be strangled.

But three years after Argentina declared a record debt default of more than $100 billion, the largest in history, the apocalypse has not arrived. Instead, the economy has grown by 8 percent for two consecutive years, exports have zoomed, the currency is stable, investors are gradually returning and unemployment has eased from record highs – all without a debt settlement or the standard measures required by the International Monetary Fund for its approval.

The bottom line: Yes, the transition costs of economic shock therapy are much higher than we had thought.  But the Argentine reforms seem to have worked.  Note that their government is now more or less ignoring international capital markets, and it is the market-oriented economists who are skeptical of the current upturn.  Fiscal responsibility, however, is in fashion, and the country is mobilizing its entrepreneurial energies.

Here is the full story.  Here is a good general discussion of capital markets; it debunks the common view that liberalization makes an economy riskier.  And Brad Setser offers further commentary on Argentina.

What I’ve been reading

Garry Kasparov – Garry Kasparov on Fischer, My Great Predecessors, volume 4 – Fascinating, just imagine if Beethoven had written a book on Mozart.  Most of the page is chess games, but the remaining text is alone worth the price.  Kasparov makes a convincing case that Fischer relied heavily on his opponent’s major blunders, and that he would have a hard time beating many of the best post-1972 players.  Can a subsequent champion make such an argument and keep a gracious tone?  That is just part of what makes the book so interesting.  Here is one review, including an interview.

Ron Chernow – Alexander Hamilton – I’ve reached the point where I hate books on the Founding Fathers, and I vowed I would not touch this one.  But I weakened and it won me over.  It stands as one of the best biographies I have read, plus it is full of economic history.

Greg Behrendt and Liz Tuccillo – He’s Just Not That Into You – Natasha reads me excerpts from this at night.  Recast in rational choice terms, the main point is that women suffer from weakness of will, and require exhortation to adopt higher standards.  They should split up with more guys, most of whom have no intention of marrying them. 

Is the postulated problem — namely excessively low female standards — well-suited for genetic fitness but not utility maximization?  Or was it well-suited for hunter-gatherer society but no longer today?  How elastic is the supply of quality manhood, in response to higher standards from females?  Must we revise the standard economic account that males will invest too much in signaling quality?

Gregory Conko and Gregory Miller – The Frankenfood Myth: How Protest and Politics Threaten the BioTech Revolution – The title says it all, recommended.  Here is a summary interview.

Temple Grandin and Catherine Johnson – Animals in Translation: Using the Mysteries of Autism to Decode Animal Behavior – Main point: animals are smarter and more sensitive than you think, most of them just happen to be autistic.  After you read the book, this suddenly seems intuitively obvious.  This book I could not put down, and note that one of the authors is herself autistic.

Should you send money to tsunami victims?

Probably yes, but why?  After all, the world has had millions of victims of extreme misery for some time now.

What about opportunity cost?  Why should you aid these people and not others?  I can think of two arguments:

1. Aid is more effective when large numbers of donors coordinate upon addressing a single disaster in a focused manner.

2. Donors are frail in their commitment to altruistic ends.  A dramatic headline induces them to give when they would not otherwise be generous.  So if you find that images of tsunami victims tug at your heartstrings, give now because you will forget about being kind a week or month from now.

These two hypotheses are not fully distinct.  Even if #2 does not describe you, it probably applies to many others.  If your donations help make the tsunami victims a more "focal cause" this will induce more giving from altruistically frail others.

But when are these economies of scale exhausted?  I doubt if the generated aid will come close to saving all the relevant lives.  If these donations do in fact produce increasing returns across a giving network, why are you giving to any other causes?

Is it that donations will stop at the point when saving additional Sri Lankan lives hits a steeply upward-sloping cost curve?  (Unlikely.)  Or are we so altruistically frail that if we displace our other giving, we will have fewer giving motives on net and thus will give less overall?  Can we not sit down and understand our frailty rationally and write one big check, once a year, to the "most efficient cause"?  Possibly not.

Thanks to Jonathan S. for the pointer.  And here is my previous post on whether you should give money to beggars.

Something smells fishy

I share with Tyler a high opinion of Jared Diamond’s work but at least part of his explanation for the collapse of the Norse settlements in Greenland does not pass the smell test.  As relayed by Malcolm Gladwell in his review, the Norse used inappropriate farming techniques which stripped the land bare.  Fair enough, mistakes happen.  But a key part of the morality lesson that Diamond wants to tell is that cultural straitjackets doomed the Norse to failure.  The most important piece of evidence being, in Diamond’s telling, that even as they starved the Norse refused to eat the fish that were there for the taking.

Frankly, I think this part of the story is absurd.  As Diamond notes, the evidence from bones is that at the end the Norse were eating their pets.  A cultural norm against eating fish that is stronger than eating pets?  I don’t think so.  A few martyrs might refrain but thousands of people?  No way.  We know that starving people eat insects, they eat dirt, sometimes they even eat each other.  I reject this one from my armchair.

Addendum: Matt Yglesias gets up from his armchair, at least far enough to reach Google, and casts further doubt on the fish story.

The socialist calculation debate

Here is one of my (very short) essays that nobody ever read; it is now on my home page.  We all know that communism and socialism fail because planners do not have access to market price signals.  They therefore cannot calculate the best means of producing goods and services.  But is the argument so simple?  I start with a few questions:

1. How does rational calculation take place within the firm?  Keep in mind that some corporate giants are larger in economic terms than the smaller socialist economies.

2. If one person owned (privately) all the firms in the economy, would rational calculation be possible?

3. If one dictator controlled all the firms in the economy, would rational calculation be possible?

4. If institutional investors or a diversified citizenry all owned the so-called "market portfolio" in equal proportions, like the Capital Asset Pricing Model suggests, would rational calculation be possible?  [TC: Or is this scenario of "perfect capitalism" not much different from pure communism?]

When is competition "for real," and when is it just play?  If I were dictator but still believed in markets, could I not simulate a sufficiently effective form of competition?  Does the socialist calculation debate simply collapse into the problem of incentives?  No, socialism does not work, but we have not heard the last words on the calculation debate.

Does academia discriminate against right-wingers?

Jonathan Klick — a smart economist, not unsympathetic to markets, writes me the following:

I’ve been thinking a bit about all the stuff regarding the small number of folks on the right in academics in the mainstream press and on blogs, and I think people have missed an important point regarding cross sectional variation — I think the fact that you also see relatively few people on the right in the arts supports the supply side view of the empirical regularity more than the discrimination view.  That is, there’s not really any differential barrier to entry into music, visual arts, writing, etc. for right wingers and yet those fields look at lot like academics in terms of personnel make-up.  To my mind, this supports the view that, by and large, relatively fewer of the right’s brightest want to go into academics than is the case with the left.

I agree, but with one caveat.  Many academic entrants are initially undecided in their political outlook, but social pressures sway them to the left.  That being said, so many academic leftists have held their views from an early age.  Academic life and discourse have, if anything, moderated their stances toward the center. 

Both academic life and left-wing attitudes are correlated with the same basic status markers.  Whether or not Democrats and academics are in fact more tolerant of others, at the very least they pretend to be.  They also are, or at least pretend to be, more thoughtful, nuanced, intellectual, and internationalist [TC: This doesn’t stop them from being wrong about many things.]  Most importantly, they take pride in identifying with these values.  This will put most academics into the Democratic camp.  Those that cannot become Democrats — such as myself — will often be libertarian or "independent" rather than registered or self-identifying Republicans.  The Republican "pride markers" are, for many academic tastes, too nationalistic, religious, and involve too much "tough talk."

So the market-oriented or "right-wing" anthropologists will, ex post, experience negative bias in academia.  Minority points of view are not always treated fairly.  But that bias is not the initial reason why they are so outnumbered in the first place.

In praise of impersonal medicine

Many people complain that medicine is too impersonal.  I think it is not impersonal enough.  I have nothing against my physician (a local magazine says he is one of the best in the area) but I would prefer to be diagnosed by a computer.  A typical physician spends most of the day playing twenty questions.
Where does it hurt?  Do you have a cough?  How high is the patient’s
blood pressure?  But an expert system can play twenty questions better than most people.  An expert system can use the best knowledge in the field, it can stay current with the journals, and it never forgets.

Consider how many people die because physicians forget the basics. Gina Kolata reports on a Medicare program to rate hospitals on the quality of care provided in the treatment of  heart attacks, heart failure and pneumonia – these three areas chosen because there are standard, clinically proven, treatments that everyone agrees are highly beneficial.

At Duke University’s hospital, for example, when patients arrived
short of breath, feverish and suffering from pneumonia, their doctors
monitored their blood oxygen levels and put them on ventilators, if
necessary, to help them breathe.

But they forgot something:
patients who were elderly or had a chronic illness like emphysema or
heart disease should have been given a pneumonia vaccine to protect
them against future bouts with bacterial pneumonia, a major killer.
None were.

All bacterial pneumonia patients should also get antibiotics within four hours of admission. But at Duke, fewer than half did.

doctors learned about their lapses when the hospital sent its data to
Medicare. And they were aghast. They had neglected – in most cases
simply forgotten – the very simple treatments that can make the biggest
difference in how patients feel or how long they live.

…[Similarly, the] hospitals were asked how often their heart attack
patients got aspirin when they arrived (that alone can cut the death
rate by 23 percent). When they were discharged, did they also get a
statin to lower cholesterol levels? Nearly all should, with the
exception of patients who have had a bad reaction to a statin and those
rare patients with very low cholesterol levels. Did they get a beta

Once hospitals learned their score, it was up to them what to do.
Over the next year, ones that improved in these measures saw their
patient mortality from all causes fall by 40 percent. Those whose
compliance scores did not change had no change in their mortality rate,
and those whose performance fell had increases in their mortality rates.

"Those are the most remarkable data I have ever seen," said Dr. Eric
Peterson, the Duke researcher who directed the study and has reported
on it at medical meetings.

Unfortunately, we (doctors and patients) have a model in our head of the nearly omniscient doctor carefully attending to the needs of every patient on an individualized basis – medicine as craft.  Instead what we need is medicine by the numbers.  But doctors don’t like being told what to do.

"We tried to come up with a standardized order set," with all the
measures that Medicare was asking about, Dr. Gross said. "But the
doctors didn’t want to use the sheet," insisting they would just
remember those items. Then they forgot.

The solution, Dr. Gross said, was to assign specially trained nurses
to see what care was provided and remind doctors when important steps
were omitted. The result was immediate improvement, Dr. Gross said,
even in items not on Medicare’s list.

The nurses, in effect, are being trained to follow standardized procedures, just as does an expert system.

Thanks to the John Palmer, The Econoclast, for the link.

Jared Diamond on Ecocide

Jared Diamond’s new book Collapse: How Societies Choose or Fail to Succeed is due out December 29th.  His main argument is that many past civilizations have declined due to ecological catastrophes, and that we underestimate similar risks today.  Here is an exclusive article by Diamond, which summarizes much of the book. 

His older Guns, Germs, and Steel is a modern classic on the rise of the West; I am also much enamored of his The Third Chimpanzee.  You’ll hear more on his latest once I get my hands on it, any Diamond book is an event.

Addendum: Blogger David Friedman points my attention to this Malcolm Gladwell review.  Read Matt Yglesias on the book as well.