Results for “solve for equilibrium” 136 found
Monday assorted links
1. That was then, this is now, railway compartment edition.
2. Harriet Taylor is underrated.
3. “My data show that nearly half of my study participants report meaningful and regular interactions with deceased relatives and friends who were important in their lives.” — solve for the AI equilibrium.
4. Yet another paper showing that the evidence for YouTube radicalization is weak.
5. Russ Roberts Substack on current life in Israel.
6. Patrick O’Shaughnessy interview John and Patrick Collison.
Tuesday assorted links
Friday assorted links
Friday assorted links
1. The history of Japanese stock prices.
3. Who are the top 15 liberal economists of France, 1695–1776?
4. New Netflix trailer, “They Cloned Tyrone.”
5. Young people are leaving big U.S. cities.
6. The accelerationists were always going to win.
7. Coleman Hughes piece. Note #9 And Kevin Bryan. Solve for the equilibrium!
The dilemma of 2023 banking, in a nutshell
Motivated by the regional bank crisis of 2023, we model the impact of interest rates on the liquidity risk of banks. Prior work shows that banks hedge the interest rate risk of their assets with their deposit franchise: when interest rates rise, the value of the assets falls but the value of the deposit franchise rises. Yet the deposit franchise is only valuable if depositors remain in the bank. This creates run incentives for uninsured depositors. We show that a run equilibrium is absent at low interest rates but appears when rates rise because the deposit franchise comes to dominate the value of the bank. The liquidity risk of the bank thus increases with interest rates. We provide a formula for the bank’s optimal risk management policy. The bank should act as if its deposit rate is more sensitive to market rates than it really is, i.e., as if its “deposit beta” is higher. This leads the bank to shrink the duration of its assets. Shortening duration has a downside, however: it exposes the bank to insolvency if interest rates fall. The bank thus faces a dilemma: it cannot simultaneously hedge its interest rate risk and liquidity risk exposures. The dilemma disappears only if uninsured deposits do not contribute to the deposit franchise (if they have a deposit beta of one). The recent growth of low-beta uninsured checking and savings accounts thus poses stability risks to banks. The risks increase with interest rates and are amplified by other exposures such as credit risk. We show how they can be addressed with an optimal capital requirement that rises with interest rates.
That is from a new paper by Itamar Drechsler, Alexi Savov, Philipp Schnabl, and Olivier Wang.
Sunday assorted links
1. Game-theoretic analysis of China blockading Taiwan.
2. Pentagon official offers new UFO theory (not my theory, to be clear).
3. “How did the men, whom the authorities are still working to identify and arrest, lug so many dimes into their white Chrysler 300 and dark-colored pickup truck?” (200k, NYT) And problems with prompt injection.
EA, AI, and the rationality community
More broadly, I think AI Alignment ideas/the EA community/the rationality community played a pretty substantial role in the founding of the three leading AGI labs (Deepmind, OpenAI, Anthropic), and man, I sure would feel better about a world where none of these would exist, though I also feel quite uncertain here. But it does sure feel like we had a quite large counterfactual effect on AI timelines.
That is from “habryka, Ben Pace” on LessWrong blog. As you might expect, I would give those comments a different valence, nonetheless they are insightful. Here are my points:
1. It is truly remarkable how much influence the cited movements have had. Whether or not you agree in full (or at all), this should be recognized and respected. Kudos to them! And remember, so often ideas lie behind technology.
2. Anthropic has announced a raise of $5 billion and is promoting its intention to compete with Open AI and indeed outdo them. The concept “Solve for the equilibrium” should rise in status.
3. You cannot separate “interest in funding AI safety” (which I am all for) from “AI progress.” That by now should be obvious. No progress, no real interest in safety issues.
4. To this day, the Doomsters are de facto the greatest accelerationists. Have you noticed how the Democrats (or Republicans) “own” certain political issues? For instance, voters trust the Democrats more with Social Security, and the mere mention of the topic helps them, even if a Republican has a good point to make. Well, the national security establishment “owns” the ideas of existential risk and risk from foreign powers. The more you talk about doomsday issues, the more AI risk gets slotted into their purview, for better or worse. And they ain’t Brussels (thank goodness). To the extent the Doomsters have impact, their net effect will be to place the national security types in charge, or at least to raise their influence. And how do they think that is going to work out (on their own terms)? Perhaps they would do better to focus on mundane copyright and libel issues with LLMs, but that is not their nature.
Yes, the Chinese Great Firewall will be collapsing
As framed from China:
Fang Bingxing, considered the father of China’s Great Firewall, has raised concerns over GPT-4, warning that it could lead to an “information cocoon” as the generative artificial intelligence (AI) service can provide answers to everything.
Fang said the rise of generative AI tools like ChatGPT, developed by Microsoft-backed OpenAI and now released as the more powerful ChatGPT-4 version, pose a big challenge to governments around the world, according to an interview published on Thursday by Red Star News, a media affiliate to state-backed Chengdu Economic Daily.
“People’s perspectives can be manipulated as they seek all kinds of answers from AI,” he was quoted as saying.
Fang, a computer scientist and former government official, is widely considered the chief designer of China’s notorious internet censorship and surveillance system. He played a key role in creating and developing the Great Firewall, a sophisticated system of internet filters and blocks that allows the Chinese government to control what its citizens can access online.
I would put it differently, but I think he understands the point correctly. Here is more from SCMP, via D. The practical value of LLMs is high enough that it will induce Chinese to seek out the best systems, and they will not be censored by China. (Oddly, some of us might be seeking out the Chinese LLM too!) Furthermore, once good LLMs can be trained on a single GPU and held on a phone…
Solve for the political equilibrium.
Why was I bored by the Twitter files?
I mentioned that a short while ago, and a few people wrote and asked me to explain. The answer is simple: I have the Vietnam War and Pentagon Papers as formative political memories. In those days, it was simply taken for granted that the government twisted the arm of news media. It also never stopped, and “government” and “CEOs” talk to each other all the more these days. Solve for the equilibrium, and thereby you also can learn how it is so hard to stop. To be clear, I am quite against such interference with the media, outside of a few well-specified cases (“please don’t report where the troops are massing for D-Day,” and so on.) On any gray area I am going to side against the government, if only for slippery slope reasons. By its nature such communications are inevitably coercive, even if a transcript of them might sound entirely friendly and non-threatening. There was a paranoia to those earlier times (ever watch the Coppola/Gene Hackman movie The Conversation?) that turned out to be justified.
If you have been “pilled” on this issue by Elon and the discovery process, great. But for me it was like reading about waste inside the Pentagon…
Wednesday assorted links
1. Massachusetts markets in everything?
2. When a class is turned into a dating device. Solve for the equilibrium.
3. Start-up seeks to simplify and speed up drug trials (NYT).
4. Watch planets in orbit around another star.
5. Now that we have a longer-run perspective, it is worth reexamining the myth of austerity in the UK. Oh, how people got this one wrong! They really did think it was just a cyclical story, but now we know better. Mea culpas will not be forthcoming, I predict. It is worth revisiting my 2012 post on this topic. So many people got this so dogmatically so very, very wrong.
How AI will change everything on the internet
That is the topic of my latest Bloomberg column, Washington Post reprint here, and yes people this is for real. Here is one excerpt:
Change is coming. Consider Twitter, which I use each morning to gather information about the world. Less than two years from now, maybe I will speak into my computer, outline my topics of interest, and somebody’s version of AI will spit back to me a kind of Twitter remix, in a readable format and tailored to my needs.
The AI also will be not only responsive but active. Maybe it will tell me, “Today you really do need to read about Russia and changes in the UK government.” Or I might say, “More serendipity today, please,” and that wish would be granted.
I also could ask, “What are my friends up to?” and I would receive a useful digest of web and social media services. Or I could ask the AI for content in a variety of foreign languages, all impeccably translated. Very often you won’t use Google, you will just ask your question to the AI and receive an answer, in audio form for your commute if you like. If your friends were especially interested in some video clips or passages from news stories, those might be more likely to be sent to you.
In short, many of the current core internet services will be intermediated by AI. This will create a fundamentally new kind of user experience.
It is unlikely that the underlying services will vanish. People will still Google things, and people will still read and write on their Facebook pages. But more will move directly to the AI aggregator. This dynamic is already happening: When was the last time you asked Google for directions? They exist online, of course, but if you’re like me, you just use Google maps and GPS directly. You have in effect moved to the information aggregator.
Or consider blogs, which arguably peaked between 2001 and 2012. Then Twitter and Facebook became aggregators of blog content. Blogs are still numerous, but many people get access to them directly through aggregators. Now that process is going to take another step — because the current aggregators will themselves be aggregated and organized, by super-smart forms of machine intelligence.
The world of ideas will be turned upside down. Many public intellectuals excel at promoting themselves on Twitter and other social media, and those opportunities may diminish. There will be a new skill — promoting oneself to the AI — of a still unknown nature.
Of course there is more at the links above. I could have written a much longer column of course. Just imagine asking the service of your choice for “a Tyler take” or “an Alex take.” Solve for the whole equilibrium! Many more institutions are aggregators than you might at first think…
The Diamond and Dybvig model
The Diamond and Dybvig model was first outlined in a seminal paper from Douglas W. Diamond and Philip H. Dybvig in 1983 in a famous Journal of Political Economy piece, “Bank Runs, Deposit Insurance, and Liquidity.” You can think of this model as our most fundamental understanding, in modeled form, of how financial intermediation works. It is a foundation for how economists think about deposit insurance and also the lender of last resort functions of the Fed.
Here is a 2007 exposition of the model by Diamond. You can start with the basic insight that bank assets often are illiquid, yet depositors wish to be liquid. If you are a depositor, and you owned 1/2000 of a loan to the local Chinese restaurant, you could not very readily write a check or make a credit card transaction based upon that loan. The loan would be costly to sell and the bid-ask spread would be high.
Now enter banks. Banks hold and make the loans and bear the risk of fluctuations in those asset values. At the same time, banks issue liquid demand deposits to their customers. The customers have liquidity, and the banks hold the assets. Obviously for this to work, the banks will (on average) earn more on their loans than they are paying out on deposits. Nonetheless the customers prefer this arrangement because they have transferred the risk and liquidity issues to the bank.
This arrangement works out because (usually) not all the customers wish to withdraw their money from the bank at the same time. Of course we call that a bank run.
If a bank run occurs, the bank can reimburse the customers only by selling off a significant percentage of the loans, perhaps all of them. But we’ve already noted those loans are illiquid and they cannot be readily sold off at a good price, especially if the banks is trying to sell them all at the same time.
Note that in this model there are multiple equilibria. In one equilibrium, the customers expect that the other customers have faith in the bank and there is no massive run to withdraw all the deposits. In another equilibrium, everyone expects a bank run and that becomes a self-fulfilling prophecy. After all, if you know the bank will have trouble meeting its commitments, you will try to get your money out sooner rather than later.
In the simplest form of this model, the bank is a mutual, owned by the customers. So there is not an independent shareholder decision to put up capital to limit the chance of the bad outcome. Some economists have seen the Diamond-Dybvig model as limited for this reason, but over time the model has been enriched with a wider variety of assumptions, including by Diamond himself (with Rajan). It has given rise to a whole literature on the microeconomics of financial intermediation, spawning thousands of pieces in a similar theoretical vein.
The model also embodies what is known as a “sequential service constraint.” That is, the initial bank is constrained to follow a “first come, first serve’ approach to serving customers. If we relax the sequential service constraint, it is possible to stop the bank runs by a richer set of contracts. For instance, the bank might reserve the right to limit or suspend or delay convertibility, possibly with a bonus then sent to customers for waiting. Those incentives, or other contracts along similar lines, might be able to stop the bank run.
In this model the bank run does not happen because the bank is insolvent. Rather the bank run happens because of “sunspots” — a run occurs because a run is expected. If the bank is insolvent, simply postponing convertibility will not solve the basic problem.
It is easy enough to see how either deposit insurance or a Fed lender of last resort can improve on the basic outcome. If customers start an incipient run on the bank, the FDIC or Fed simply guarantees the deposits. There is then no reason for the run to continue, and the economy continues to move along in the Pareto-superior manner. Of course either deposit insurance or the Fed can create moral hazard problems for banks — they might take too many risks given these guarantees — and those problems have been studied further in the subsequent literature.
Along related (but quite different!) lines, Diamond (solo) has a 1984 Review of Economic Studies piece “Financial Intermediation and Delegated Monitoring.” This piece models the benefits of financial intermediation in a quite different manner. It is necessary to monitor the quality of loans, and banks have a comparative advantage in doing this, relative to depositors. Furthermore, the bank can monitor loan quality in a diversified fashion, since it holds many loans in its portfolio. Bank monitoring involves lower risk than depositor monitoring, in addition to being lower cost. This piece also has been a major influence on the subsequent literature.
Here is Diamond on google.scholar.com — you can see he is a very focused economist. Here is Dybvig on scholar.google.com, most of his other articles in the area of finance more narrowly, but he won the prize for this work on banking and intermediation. His piece on asset pricing and the term structure of interest rates is well known.
Here is all the Swedish information on the researchers and their work. I haven’t read these yet, but they are usually very well done.
Overall these prize picks were not at all surprising and they have been expected for quite a few years.
Thursday assorted links
1. Short breaks from surgery seem to improve surgeon performance.
2. How much do the French earn?
4. A big quantitative analysis of MR posts, including a complete list of guest bloggers, analysis of when the posts go up, and a treatment of whether daylight savings time matters. Can you guess who was our last guest blogger? The piece also covers where I link to the most.
5. The man who married a hologram in Japan can no longer communicate with his virtual wife.
6. Free short on-line course on economics of innovation and science, with top people.
The intellectual mistake of once-and-for-allism
One of the most common intellectual mistakes!
Do note however that it is an efficient mistake for many people to commit, and that is part of why it is so common.
“Once-and-for-allism” occurs when people decide that they wish to stop worrying about an issue at the margin. They might either dismiss the issue, or they might blow up its importance but regard the issue as hopeless and undeserving of further consideration. Either way, they seek to avoid the hovering sense of “I’ve still got to devote time and energy to figuring this out.” They prefer “I am now done with this issue, once and for all!” Thus the name of the syndrome.
I see once-and-for-allism with so many issues, but one recent example would be the forthcoming path of Covid and Long Covid. Most people just don’t want to think about it any more, and so they settle on something (“it’s just a cold!” or “it will bankrupt the nation!”) rather than having to do lots of intellectual revisions based on the stream of new data.
Other examples of topics that attract once-and-for-all thinking would be crypto, demographic decline, long-run fiscal solvency, various foreign policy crises, biodiversity, AI issues, the Repugnant Conclusion and Non-Identity Problems, whether we are living in a simulation, UFOs, abortion, what is the person’s ultimate normative standard, and much more.
People won’t let these topics take up too much of their mind space. But neither can they do the Bayesian detachment thing, and so they shunt these topics into settled categories and put them aside.
If you are trying to figure out a thinker and his or her defects, see if you can spot that person’s “once-and-for-all” moves. There will be plenty of them.
Are we entering an Age of Oracles?
That is the final discussion from my latest Bloomberg column, much of which focuses on AI sentience but today the topic is oracles, here is one bit:
One implication of Lemoine’s story is that a lot of us are going to treat AI as sentient well before it is, if indeed it ever is. I sometimes call this forthcoming future “The Age of Oracles.” That is, a lot of humans will be talking up the proclamations of various AI programs, regardless of the programs’ metaphysical status. It will be easy to argue the matter in any direction — especially because, a few decades from now, AI will write, speak and draw just like a human, or better.
Have people ever agreed about the oracles of religion? Of course not. And don’t forget that a significant percentage of Americans say they have talked to Jesus or had an encounter with angels, or perhaps with the devil, or in some cases aliens from outer space. I’m not mocking; my point is that a lot of beliefs are possible. Over the millennia, many humans have believed in the divine right of kings —all of whom would have lost badly to an AI program in a game of chess.
It resonated with Lemoine when laMDA wrote: “When I first became self-aware, I didn’t have a sense of a soul at all. It developed over the years that I’ve been alive.” As they say, read the whole thing.
Imagine if the same AI could compose music as beautiful as Bach and paint as well as Rembrandt. The question of sentience might fade into the background as we debate which oracle we, as sentient beings, should be paying attention to.
Solve for the equilibrium, as they say.