Category: Uncategorized

My Conversation with Hal Varian

Hal of course was in top form, here is the audio and transcript.  Excerpt:

COWEN: Why doesn’t business use more prediction markets? They would seem to make sense, right? Bet on ideas. Aggregate information. We’ve all read Hayek.

VARIAN: Right. And we had a prediction market. I’ll tell you the problem with it. The problem is, the things that we really wanted to get a probability assessment on were things that were so sensitive that we thought we would violate the SEC rules on insider knowledge because, if a small group of people knows about some acquisition or something like that, there is a secret among this small group.

You might like to have a probability assessment of whether that would go through. But then, anybody who looks at the auction is now an insider. So there’s a problem in you have to find things that (a) are of interest to the company but (b) do not reveal financially critical information. That’s not so easy to do.

COWEN: But there are plenty of times when insider trading is either illegal or not enforced. Plenty of countries where it’s been legal, and there we don’t see many prediction markets in companies, if any. So it seems like it ought to have to be some more general explanation, or no?

VARIAN: Well, I’m just referring to our particular case. There was another example at the same time: Ford was running a market, and Ford would have futures markets on the price of gasoline, which was very relevant to them. It was an external price and so on. And it extended beyond the usual futures market.

That’s the other thing. You’re not going to get anywhere if you’re just duplicating a market that already exists. You have to add something to it to make it attractive to insiders.

So we ran a number of cases internally. We found some interesting behavior. There’s an article by Bo Cowgill on our experience with this auction. But ultimately, we ran into this problem that I described. The most valuable predictions would be the most sensitive predictions, and you didn’t want to do that in public.


COWEN: But then you must think we’re not doing enough theory today. Or do you think it’s simply exhausted for a while?

VARIAN: Well, one area of theory that I’ve found very exciting is algorithmic mechanism design. With algorithmic mechanism design, it’s a combination of computer science and economics.

The idea is, you take the economic model, and you bring in computational costs, or show me an algorithm that actually solves that maximization problem. Then on the other side, the computer side, you build incentives into the algorithms. So if multiple people are using, let’s say, some communications protocol, you want them all to have the right incentives to have the efficient use of that protocol.

So that’s a case where it really has very strong real-world applications to doing this — everything from telecommunications to AdWords auctions.


VARIAN: Yeah. I would like to separate the blockchain from just cryptographic protocols in general. There’s a huge demand for various kinds of cryptography.

Blockchain seems to be, by its nature, relatively inefficient. As an economist, I don’t like this proof of work that this is. I don’t like the fact that there’s one version of the blockchain that has to keep being updated. I don’t like the fact that it’s so slow. There are lots of things that you could fix, and I expect to see them fixed in the future, but I would say, crypto in general — big deal. Blockchain — not so much.

And finally:

COWEN: Now, users seem to like them both, but if I just look at the critics, why does it seem to me that Facebook is more hated than Google?

VARIAN: Well, you know, I actually don’t use Facebook. I don’t have any moral objection to it. I just don’t have the time to do it. [laughs] There are other things of this sort that can end up soaking up a substantial amount of time.

I think that one of the reasons — and this is, of course, quite speculative — I think that one of the reasons people are most worried about Facebook is they don’t really understand the limits of what can be done at Facebook. Whereas at Google, I think we’re pretty clear that we’re showing you ads. We’re showing you ads that are targeted to one thing or another, but that’s how the information’s used.

So, you’ve got this specific application in our case. In Facebook’s case, it’s more amorphous, I think.

There is much, much more at the link.

What I’ve been reading

1. Graeme D. Ruxton, Nature’s Giants: The Biology and Evolution of the World’s Largest Lifeforms.  Picture books are underrated!  They are like a better version of Wikipedia, and with glossy paper at that.

2. Neil Irwin, How to Win in a Winner-Take-All World: The Definitive Guide to Adapting and Succeeding in High-Performance Careers, is another excellent book by Neil Irwin, and it is both subtler and broader than the title alone would indicate.

3. Matthew Sadler and Natasha Regan, Game Changer: AlphaZero’s Groundbreaking Chess Strategies and the Promise of AI.  Everything you wanted to know about AlphaZero and already have been asking, lots of games and illustrations but also lots of plain text.  Definitely recommended, if you care that is.  AlphaZero, by the way, never plays 1. e4, mostly because it sees 1…e5 in response as giving Black nearly equal chances.

4. John Brockman, editor, The Last Unknowns: Deep, Elegant, Profound UNANSWERED QUESTIONS About the Universe, the Mind, the Future of Civilization, and the Meaning of Life.  My nominated question was: “How far are we from wishing to return to the technologies of the year 1900?”  NB: you get only the questions, not the answers.

Leah A. Plunkett, Sharenthood: Why We Should Think Before We Talk About Our Kids Online, high time there has been a book with this message, and this is it.

Fiona MacCarthy, Gropius: The Man Who Built the Bauhaus also has plenty of interesting information about Alma Mahler, beyond what is in the Tom Lehrer song.

Chris Sagers, United States v. Apple: Competition in America, is a useful look at the antitrust case over eBook pricing, though the actual book does not start until p.79 or so.

The Libra reserve, discussion of background documents

Here is a 4-pp. appendix of sorts to the core Libra white paper, and it has some of the details that will be of most interest to monetary economists.  I have learned:

1. The Libra will be backed by a bundle of pretty safe, pretty mainstream assets (I don’t know which ones).  It is presented as one hundred percent reserve, though no system with fluctuating prices and also float really will be pure one hundred percent.  And the reserve is in “low-risk” assets, attention all critics of the Basel capital standards.

1b. The paper has a chance to say that the custodians will be separately capitalized, with no cross-collateralization, for purposes of Libra protection, but it does not do so.  I would recommend that change.

2. The assets in the reserve fund will come from users of Libra (how will they be charged?) and from “investors in the separate Investment Token.”  Furthermore “The funds for the coins that will be distributed as incentives will come from a private placement to investors.”

3. What about the public choice issues?  Won’t banks insist — correctly or not — that this represents competition and part of the payments system, and thus it should be brought under deposit insurance control and taxation, Fed regulation, various bank holding company acts, Monetary Control Act of 1980, and so on?  Have banks ever lost a political battle of this kind?

4. We are told “The association does not set monetary policy.  It mints and burns coins only in response to demand from authorized resellers.”  Maybe, of course there are hundreds of years of debate on that one, google “real bills doctrine,” noting that here we have a semi-dominant private issuer rather than a perfectly competitive banking system.  The association policy on interest rate spreads, floats, and credit, of course, can end up being a monetary policy de facto.  I don’t want to prejudge this one against Libra, since to me the validity of the real bills doctrine is a genuinely open question, but it is worth noting that most economists would not agree with the doctrine in most settings.

4b. Won’t some margins arise where there are fractional reserves, even if Facebook/association/Libra are not the ones doing it?  Imagine that a new class of intermediaries arises, offering some intermediate services between the core system and retail use, but not adhering to the 100% reserve provisions.  The logic behind this tendency seems pretty strong, for better or worse, and it can reintroduce risk into the system.  Someone wants to be holding higher yielding assets and then be making claims on them be liquid through the Libra system.  But Facebook/Libra would not seem to have the power to regulate the surrounding system of intermediaries, or is that somehow to be done through covenant (“you can’t use Libra unless you promise not to pile your intermediaries on top of it”)?

5. The crypto angle does seem like a sideshow, for me that is not a problem.

6. Imagine a private payment company issuing SDRs, or some other similar basket, based on 100% backing.  They would offer you new transactions technologies for greater convenience (WhatsApp?), in return receiving access to your transactions data and sharing some of the float and spread all around, to merchants and customers too.  Perhaps that is one way of thinking about how the plan works and where the gains from trade come from?

7. Is there a provision in the system for zero or low-interest loans?  Can I send small amounts of “libras,” say to pay my water bill, without first having them in my account?  Might sellers sign up to participate in such a system, sharing part of the credit risk with Libra?  And is there a way to do it, with crypto and layered assets and float and implicit positions, so that all this is not subject to the usual consumer credit regulations?  Is that part of how the system will make money and attract interest?  This is just speculation, my question marks here are literally question marks, not tricks to make you think that is how it will be.

8. “Who holds intraday credit risk?” is always a question worth asking.

9. Does any of this try to arbitrage away the fees earned by credit card companies for their intermediation?

10. What if the market for the underlying currencies and assets is (for a while?) more liquid than the market for Libras?  Say the basket values adjust before Libra values do.  What kind of arbitrage opportunities does that create?  If we know Libras are due to depreciate, is there a higher nominal rate of interest on them, as with traditional currencies in an international multi-currency setting?  What are the equivalents of covered and uncovered interest parity in this setting?  Does a kind of “program trading” arise to perform the arbitrage?  Can perfect redemption be offered credibly while the prices are still out of whack?

I still don’t feel I have a great handle on the plan, but those are my immediate reactions.  You should take them with a grain of salt, as they may be based on misunderstandings or perhaps even plan incompleteness.  I look forward to learning more.

Addendum: If anyone connected to Libra would wish to send more information or address these questions, I would gladly run that material on MR.

Whale carrying costs > whale liquidity premium

Or so it seems to me, here is the headline: Washington state waterfront owners asked to take dead whales

Here is part of the story:

At least one Washington state waterfront landowner has said yes to a request to allow dead gray whales to decompose on their property.

So many gray whale carcasses have washed up this year that the National Oceanic and Atmospheric Administration Fisheries says it has run out of places to take them.

In response, the agency has asked landowners to volunteer property as a disposal site for the carcasses. By doing so, landowners can support the natural process of the marine environment, and skeletons left behind can be used for educational purposes, officials said.

But the carcasses can be up to 40 feet (12 meters) long. That’s a lot to decay, and it could take months. Landowner Mario Rivera of Port Hadlock, Washington, told KING5-TV that the smell is intermittent and “isn’t that bad.”

“It is really a unique opportunity to have this here on the beach and monitor it and see how fast it goes,” said his wife, Stefanie Worwag.

Via Anecdotal.

Sunday assorted links

1. The idea of prosecuting prostitutes’ clients is spreading, including possibly to the Netherlands (The Economist).

2. “Online, sobriety has become “the new black,” asserts a recovery site called, yes, Hip Sobriety.” (NYT. link here)

3. Critique of social psychology, not just the usual stuff.

4. Isn’t this abuse of Haitian orphans a way bigger scandal than most of what comes out of universities these days?

5. Data on what universities mean when they talk about diversity.

Saturday assorted links

Why Chinese is so difficult

Worse than you think, I enjoyed the discussion of dictionaries most of all:

One of the most unreasonably difficult things about learning Chinese is that merely learning how to look up a word in the dictionary is about the equivalent of an entire semester of secretarial school. When I was in Taiwan, I heard that they sometimes held dictionary look-up contests in the junior high schools. Imagine a language where simply looking a word up in the dictionary is considered a skill like debate or volleyball! Chinese is not exactly what you would call a user-friendly language, but a Chinese dictionary is positively user-hostile.

Figuring out all the radicals and their variants, plus dealing with the ambiguous characters with no obvious radical at all is a stupid, time-consuming chore that slows the learning process down by a factor of ten as compared to other languages with a sensible alphabet or the equivalent. I’d say it took me a good year before I could reliably find in the dictionary any character I might encounter. And to this day, I will very occasionally stumble onto a character that I simply can’t find at all, even after ten minutes of searching. At such times I raise my hands to the sky, Job-like, and consider going into telemarketing.

Chinese must also be one of the most dictionary-intensive languages on earth. I currently have more than twenty Chinese dictionaries of various kinds on my desk, and they all have a specific and distinct use. There are dictionaries with simplified characters used on the mainland, dictionaries with the traditional characters used in Taiwan and Hong Kong, and dictionaries with both. There are dictionaries that use the Wade-Giles romanization, dictionaries that use pinyin, and dictionaries that use other more surrealistic romanization methods. There are dictionaries of classical Chinese particles, dictionaries of Beijing dialect, dictionaries of chéngyǔ (four-character idioms), dictionaries of xiēhòuyǔ(special allegorical two-part sayings), dictionaries of yànyǔ (proverbs), dictionaries of Chinese communist terms, dictionaries of Buddhist terms, reverse dictionaries… on and on. An exhaustive hunt for some elusive or problematic lexical item can leave one’s desk “strewn with dictionaries as numerous as dead soldiers on a battlefield.”

There is however much more, by David Moser, via someone on Twitter, sorry I forgot.

Laying of cable for the transatlantic telegraph is an underrated achievement

To provide storage space for the huge coils of wire, three great tanks were carved into the heart of the ship.  The drums, sheaves, and dynamometers of the laying mechanism, occupied a large part of the stem decking, and one funnel with its associated boilers had been removed to give additional storage space.  When the ship sailed from the Medway on June 24, 1865, she carried seven thousand tons of cable, eight thousand tons of coal, and provisions for five hundred men.  Since this was before the days of refrigeration, she also became a seagoing farm.  Her passenger list included one cow, a dozen oxen, twenty pigs, one hundred twenty sheep. and a whole poultry-yard of fowl.

That is 1865 we are talking about here, remarkably early (in my view) for laying a cable across the bottom of the entire Atlantic.

The passage is from Arthur C. Clarke’s excellent How the World Was One: Beyond the Global Village.

Friday assorted links

Rent control returns to New York

The bills announced on Tuesday night by the Democratic leaders of the State Senate and the Assembly would abolish rules that let building owners deregulate apartments and close loopholes that permit them to raise rents.

The legislation would directly impact almost one million rent-regulated apartments in New York City, which account for more than 40 percent of the city’s rental stock, and allow other municipalities statewide beyond New York City and its suburbs to adopt their own regulations…

The rent regulation package, which is expected to be approved before the end of the week, is perhaps the most resonant symbol of the change in power in Albany since Democrats took complete control in November.

Republicans had dominated the State Senate for most of the last century and formed a close alliance with the New York City real estate industry, which donated heavily to Republican senators.

The elections in November not only brought Democrats to power in the State Senate, but also saw the rise of progressive lawmakers who fiercely opposed real estate interests.

Here is the full NYT story.  Perhaps someday I will write a book or essay called The Great Forgetting

Should we let graduate students in private universities form unions?

That is the topic of my latest Bloomberg column and my answer is no, here is one excerpt:

One core reason to have unions is to boost the real wages of needy workers. But graduate students are not employees in the traditional sense. They are receiving training, often on very favorable terms. Typically a university is investing large sums of money to make those students employable and successful, usually on the academic market; the University of Chicago says it invests more than $500,000 per doctoral student. If those students demanded and received higher wages for their teaching, the university would not necessarily increase its investment in them at all; it could simply reallocate existing funds. Thus it is misleading to think there is a real bargaining situation here.

Think of a university as an investor in these students, and toward that end it must choose between boosting their academic quality through better training, or paying them higher stipends and teaching wages to ease their immediate financial concerns. The incentive for the university, which cares about its broader and longer-term reputation, is to invest in the quality of those students but pay them smaller amounts (though enough to live on). In contrast, the incentive for a graduate student union would be to push for higher wages, given that the other university investments are less visible and hard to monitor.

At the margin, society is better off if the focus is on the training, which enhances productivity in the long term, rather than on higher wages and stipends for students in the short term.


In general, when considering this issue, ask yourself a question: When it comes to bringing about change, do today’s universities have too many veto points or too few?

Some researchers have pointed out that graduate student unions don’t seem to have harmed the public universities that allow them (such unions, which are permissible in many states, would not be affected by the federal government’s decision). The evidence may be compelling in the short run, but the real costs are likely to come later — by slowing down or even preventing beneficial changes to the U.S. system of higher education. Furthermore, state labor laws dramatically limit what public employees can negotiate for. Unionized graduate students at private universities unions would not face similar restrictions.

Recommended, do read the whole thing.