Month: January 2005

Traditional game theory assumes that individuals choose strategies.  Evolutionary game theory assumes that individuals are strategies.

Our colleague, Dan Houser, has just published an important new paper (co-authored with Robert Kurzban) that supports the assumption of evolutionary game theory. (The paper is also featured in the Economist.)  In a public goods game, Kurzban and Houser are able to identify three systematic strategies; cooperate, free ride and reciprocate (cooperate more when others do so).  The first surprising result of their paper is that these strategies can be tied to specific individuals.  Some individuals cooperate, others free ride and others reciprocate and the strategies that these individuals "choose" are stable.  (This doesn’t mean that individuals play strategies robotically regardless of context a better analogy may be to think of strategies like personalities – even a quiet person can yell sometimes.)

Strategy choice is so stable that Kurzban and Houser can create very cooperative groups simply by weeding out the free riders.  What is even more surprising, however, is that when individuals are randomly assigned to groups each strategy type earns about the same payoff.  Even though the strategies are very different, no strategy dominates the others in a randomly assigned group – this is exactly what one would predict if individuals are strategies in an evolutionary game. 

Kurzban and Houser’s paper raises a number of interesting questions.  First, if they can pick out free riders why can’t the group members do so – in which case the baseline set of strategies won’t be an ESS.  How much does it take to push people away from their natural strategies?  Is the proportion of the population that plays each strategy the same in different cultures?  And what do the proportions (13% co-operators, 20% free-riders and 63% reciprocators) tell us about conditions in the evolutionary era when such strategies first solidified?  I will take these up with Dan.

1. An independent Fed works because the American public fears inflation.  If anything, the data suggest that people are too afraid of inflation.  American voters do not have similar instincts about an independent investing trust.

2. It is harder to maintain political independence when large amounts of money are being allocated or invested.  Note that seigniorage is no longer a significant source of revenue; central bank performance has improved accordingly.

3. If we reform social security, it will lose its status as a "sacred cow."  This is not objectionable per se.  But it will make it harder to treat an independent investment board as a sacred cow.

4. It took long periods of experimentation and meddling to establish the independence of most central banks.  What is the learning process for these investment boards?

5. Most state pension funds (Calpers is one notable exception) are not big enough to influence corporations as the federal government could.  Furthermore state pension funds are much less visible than is social security.  That being said, state pension funds are starting to meddle.

6. What if Brad DeLong is right that the Bush Administration manages to politicize everything?  What if the Democrats learn the same?

A core question is why we don’t run our entire government by independent experts, insulated from political pressure.  The answer, in short, is twofold.  We both require some degree of accountability, plus our government (and yes I include voters under that designation, not just "evil politicians") cannot precommit to leaving things alone.  The Fed works because of a relatively high coincidence of interests in its topic areas, namely monetary policy and bank regulation.

When it comes to the investment board, the greatest danger is simply that voters will get upset if returns are low for a ten or fifteen-year period.  They will demand a change — any change — and I fear how this pressure will work its way through the political process. 

The bottom line: There is nonetheless a good chance that the independent panel idea could work.  Maybe a fifty percent chance.  But still I would not do it, as the downside is higher than the upside.

My general perspective is simple.  Social security will bring some form of big government, whether we like it or not.  Let us do our best to keep private capital markets free to outrace the size of that government.  I am confident that markets are up to the task, and afraid of tinkering with this basic fact about our world.

Other people, it seems:

Are you selfish or generous? Or do you follow the herd, always giving whatever the majority of people deem appropriate?

Society is a mixture of these three types of character, but most of us are the last type, altering our generosity to fit the societal norm, new research has found. It suggests that governments could prompt huge swathes of the population to become more charitable simply by giving more itself or by providing other benevolent role models.

I am a little doubtful about that last sentence (remember crowding out?, and note that the policy implication comes from the journalist, not the researchers!), but here is the story from The Economist.  The quotation is from the 22 January New Scientist.  Here is Dan Houser’s home page.  Here is one paper behind the research.

One bottom line: You are not as benevolent or generous as you think.  The main reason you gave to tsunami victims is because other people did.

Basic microeconomics recommends a simple strategy. Have the number of children that maximizes average utility over your whole lifespan. When you are 30, you might feel like two children is plenty. But once you are 60, you are more likely to prefer ten sons and daughters to keep you company and keep the grandkids coming. A perfectly selfish and perfectly foresighted economic agent would strike a balance between these two states. For example, he might have four kids total – two too many at 30, six too few at 60.

Trust me – you’ll thank me later. Your third child ought to thank me too, but we all know better than to expect gratitude from the young. Now all you have to do is convince your spouse!

Here is the full post.  In case you didn’t already know, Bryan will be guest-blogging over at EconLog for at least a month.

My Arnold Kling-like questions: Is Bryan overestimating the gratitude of grown children?  And given that most people are unwilling to concentrate their bequests on a single child, will you get more attention if you have fewer children?

This one is graphics only, thanks to Jacqueline Passey for the pointer.

1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.

2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.

3. I would think that we have piled on far too much debt, in both the private and public sectors.

4. I would think these trends cannot possibly continue.  Asian central banks may come to their senses.  Furthermore the U.S. would be like an addict who needs an ever-increasing dose of the monetary fix.  This, of course, would eventually prove impossible.

5. I would think that the U.S. economy is due for a dollar plunge, and a massive sectoral shift toward exports.  Furthermore I would think it will not handle such an unexpected shock very well.

6. I would buy puts on T-Bond futures and become rich.

7. I would think that Hayek’s Monetary Nationalism and International Stability, now priced at $70 a copy, is the secret tract for our times.

Of course that is not me.  But at least someone appears to believe in Austrian business cycle theory.  By the way, here is one summary of the theory, although I do not agree with the characterization in all respects.

PartyBuddys, the inspiration of James King and Jason Roefaro, both 30 and both from Union City, N.J., promises to "make normal people feel fabulous for the night," according to its Web site, www.partybuddys.com.

Its night-out package includes a guide (the party buddy) to usher clients "through crowds of jealous bystanders," limousine service, complimentary drinks and V.I.P. treatment at six Manhattan clubs (Cielo, Plaid, Webster Hall, Copacabana, Spirit and China Club).

Fees for the night start at $350 a person; full rock-star treatment is available for $1,200.

Mr. King and Mr. Roefaro, who operate the business out of Mr. Roefaro’s late grandmother’s brick house in Union City, estimate that at least 60 percent of their clients are middle-aged professionals from out of town who have never visited a New York nightclub.

"This service is like paying to drive a race car or be taken up in a fighter plane," Mr. Roefaro said. "They’re not race car drivers or fighter pilots, they’re accountants and lawyers, but for a short time they can imagine they are. For that night, they’re not an accountant; they’re Paris Hilton or P. Diddy."

A personal bodyguard costs $45 an hour.  Here is the full story, and thanks to Daniel Drezner for the pointer.

This time it is Arnold Kling vs. Max Sawicky, read the exchange here.

Addendum: Also read Jane Galt on whether there is a social security crisis.