Results for “manipulation”
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Choosing an Inferior Alternative

It’s well known that people suffer from confirmatory bias, so after they buy a new car they eagerly read the advertisements for that car  – the ads, of course, confirm that their purchase was a good one.

Many people also have a predecisional bias, they interpret new information in a way that is biased towards the leading candidate – a confirmation bias in expectation.  In Choosing an Inferior Alternative (also here) Russo, Carlson and Meloy show that careful manipulation to take advantage of predecisional bias can actually cause people to choose inferior alternatives.

The authors ask people to rate restaurants, nominally named A,B,C etc., on a series of attributes (atmosphere, hours, parking, dishes and so forth) thus creating a ranking.   Two weeks later they ask the same people to rate the same (but renamed) restaurants in a series of pairs.  But this time they put the attribute that most favored the inferior restaurant first – thus the inferior restaurant would win the first comparision and further attributes would suffer from predecisional bias.  They also put the attribute that had the second strongest favorable rating for the inferior restaurant last to take advantage of any recency effect.  The least favored attributes were buried in the middle. 

Compared to a control group, twenty percent more of the treatment group chose an alternative that according to their own preferences was inferior.  In fact, in the treatment group a majority chose the inferior alternative.

The John Edwards health insurance plan

Kevin Drum writes:

John Edwards’ new healthcare proposal is, basically, an individual mandate (everyone is required to get health insurance coverage somehow) combined with community rating (private insurers have to take all comers, regardless of medical condition) and government subsidies (the feds will pay for insurance if you’re too poor to afford it).  Private insurance would be available through a mechanism Edwards calls "Health Markets."

Edwards is honest enough to tell us this will raise our taxes.  Kevin Drum is honest and he tells us that the best hope for this plan is evolution toward a single-payer system.  Here is Matt Yglesias, here is Ezra, here is more

Loyal MR readers will know that I do not favor a single payer system but I can appreciate its logic.  If we are going to regulate insurance companies very heavily, they become a superfluous middleman and a source of manipulation, while yielding few offsetting benefits. 

In the United States doctors (check out those wages) and insurance companies are far more politically powerful than elsewhere.  You might think that makes our health care system worse, if so it will make our health care reforms worse too.  If anything happens, those groups will have a veto, more or less, on the distribution of the resulting rents.

I believe that the best and most intelligent Democratic bloggers are already rooting for an evolutionary path whereby the first-step reforms — whether at the state or federal level — eventually succeed only by making matters intolerable and unprofitable for doctors, insurance companies, and perhaps hospitals as well.  After profits have suffered enough, perhaps everyone will see the light at the end of the tunnel and simply abolish those nasty private health insurance companies.

Given how politics actually works, I do not consider this a promising sign for the future of American health care reform.

Addendum: I did very much enjoy reading the first comment left on this post…

Iranian nukes

If you want to argue for optimism, try the following:

Iranian nukes will create an Israeli-Iranian alignment of political interests.  Iran is more hated by the Arab states than is often let on.  Iranian nukes increase the chance that Arab terrorism will be directed against Teheran rather than Tel Aviv or Manhattan. 

Iran with nukes will carve out a greater sphere of influence, in part at the expense of Israel and America.  But it will seek to stabilize that sphere, and "Israel" and "stability" likely will be seen as complements.  Iran won’t want Iraq under the control of al Qaeda.  Israel and Iran would work together, albeit covertly, to limit further proliferation in the region.

Some of the Arab nations would find themselves forced into a de facto alliance with israel, if only to resist Iranian power.  This is not obviously a bad outcome.

Most politicians — whether religious fanatics or not — are pragmatic.  The status of a nuke could be a substitute for the status earned by Iran from supporting terrorism and bashing Israel.  More importantly, nuclear powers do not generally want to transfer much power to decentralized, hard-to-deter terrorists. 

Iran tends to be ruled by councils rather than lone maniacs, a’la North Korea, a far more worrying example.  Groups are conservative by their nature.  I am aware that the Iranian president sometimes sounds like Hitler, but the talk could be geared to appeal to the Iranian public

Yes I do fear nuclear proliferation — greatly in fact — but Iran getting nukes is neither a) a fact which causes me to up my priors on how bad proliferation will be (which is very bad), nor b) an undeterrable nukeholder.  They are a big fat sitting duck, and their history is to seek regional power against Arabs and into central Asia.

Let me sum up the underlying theoretical reasons for relative optimism: 1) the quest for status is often quite local in nature, 2) Arabs and Iranians often distrust each other, 3) it is not all about us; often the U.S., or Israel for that matter, is a symbolic token in local struggles rather than the real target, 4) politicians tend to be pragmatic, and 5) international political coalitions are often more fluid than the rhetoric of politicians would suggest.

Here is Thomas Schelling on Iranian nukes.

But if you wanted to argue it the other way, I would suggest the following:

1. Iran will face another civil war and the losers might lob a nuke at Israel as a kind of going-away present.

2. Israel feels secure with its current nuclear deterrent only because it knows that no hostile country has a counter deterrent against Tel Aviv.  If Israel felt less free to use its nuclear weapons, it would feel less secure.  It would be subject to repeated regional military taunts, which would eventually lead to war, nuclear or otherwise.  The new book The Bomb in the Basement: How Israel Went Nuclear and What It Means for the World — highly recommended by the way — is excellent on this issue.

3. Western crazies will someday sneak a small nuke into Teheran, leading to Iranian retaliation.

4. Iranian early warning systems may be unreliable, or subject to manipulation, and erroneously report an Israeli first strike.

Open-source peer review

[With] open-source reviewing…the journal posts a submitted paper online and allows not just assigned reviewers but anyone to critique it. After a few weeks, the author revises, the editors accept or reject and the journal posts all, including the editors’ rationale…

Open, collaborative review may seem a scary departure. But scientists might find it salutary. It stands to maintain rigor, turn review processes into productive forums and make publication less a proprietary claim to knowledge than the spark of a fruitful exchange. And if collaborative review can’t prevent fraud, it seems certain to discourage it, since shady scientists would have to tell their stretchers in public. Hwang’s fabrications, as it happens, were first uncovered in Web exchanges among scientists who found his data suspicious. Might that have happened faster if such examination were built into the publishing process? "Never underestimate competitors," Delamothe says, for they are motivated. Science – and science – might have dodged quite a headache by opening Hwang’s work to wider prepublication scrutiny.

Here is a bit more.  What might be some arguments against this practice?

1. It is too easily manipulated by your friends, or perhaps by your enemies.

2. The resulting morass of comments must be interpreted.  We are back to editorial  discretion, but it is better to have some referees rather than none.

3. The purpose of journals is not to always make the right decision, but rather to certify the quality of outstanding work to more general audiences.  By blurring the evaluation process, open source reviewing would make journals as a whole less reliable.

4. Don’t we already have this option?  I could post a paper on this blog, open up the comments, and receive a call from the AER, asking for a submission.  I guess my answering machine isn’t working.

5. The current system allows for editorial manipulation through the choice of referees.  This is good.  An innovator needs only to convince a single editor, not a jackal-like pack of seething commentators [hey guys, that’s you!].

What is the goal of publishing anyway?  To assign "just outcomes"?  To make sure that the one percent of worthwhile papers find a prestigious outlet?  To provide incentives for those papers to be written in the first place?  To increase the prestige of science as a whole?  Since I don’t understand why on-line publishing hasn’t already taken over, this scheme is hard to evaluate.  Comments are open….

What has happened to job growth?

Daniel Gross writes:

Mystified economists have pointed to various possible culprits: outsourcing, competition from China, high health care costs and lower work-force participation, to name a few. But there’s one force that so far has managed to avoid blame for the sluggish pace of job growth: Enron.

In 2000 and 2001, as the bull market imploded, there was a spike in accounting problems – a mix of outright fraud, earnings manipulation and more benign restatements necessitated by changes in business conditions. Clearly, investors were burned by earnings restatements at Enron and WorldCom, and at hundreds of smaller and less infamous companies. "Nobody had actually explored the real consequences of earnings management, as opposed to the financial ones," says Thomas Philippon, assistant professor of economics at New York University’s Stern School of Business.

In a recent National Bureau of Economic Research working paper, Professor Philippon and a colleague, Simi Kedia, assistant professor of finance and economics at Rutgers, argued that the widespread accounting problems for which Enron was emblematic might have helped suppress employment growth – in the affected companies, and in the industries in which the misreporting was concentrated.

Professors Philippon and Kedia examined the roster of companies that restated earnings from January 1997 to June 2002, as compiled by what is now the Government Accountability Office, and matched it up with available employment data. It was a regrettably large sample: 919 restatements by 845 public companies. About one-tenth of publicly traded companies announced at least one restatement.

Not surprisingly, companies that were misrepresenting their financial results – intentionally or inadvertently – helped juice employment growth in the late 1990’s as they added employees. "During periods of suspicious accounting, firms hire and invest excessively," the professors said. From 1997 to 1999, the restating companies added 500,000 jobs, a 25 percent increase.

When these companies restated their earnings, the growth they had reported often turned out to be an illusion. As a result, the same companies shed labor quickly. At its peak, Enron employed 20,000 people. But in the weeks after its earnings restatement in November 2001, this new-economy profit machine was suddenly revealed to be an old-fashioned money pit. Within months, the company was down to about 500 employees. The authors label Enron a "typical – if somewhat extreme – example" of a company whose employment rose and fell rapidly.

On the whole, Professors Philippon and Kedia conclude, companies that had to restate earnings in 2000 and 2001 axed anywhere from 250,000 to 600,000 jobs in 2001 and 2002. That would account for a significant chunk of the jobs lost during the period.

What’s more, restatements create industrywide uncertainty that can inhibit future hiring. When WorldCom was revealed to have fudged its earnings, it became clear that the business model for telecommunications and data services wasn’t nearly as profitable as WorldCom had made it out to be. "All of the sudden, the entire industry appears to have excess labor," Professor Kedia said. And once many of the assumptions about the industry’s business models turned out to be false, executives and investors were naturally gun-shy about hiring and expanding.

It is too early to evaluate this research, and let us not get carried away by monocausal theories, but today I felt I learned something.  Here is the full story.


At the DNA level, all the major cereals — wheat, rice, maize, millet, barley, and so on — are surprisingly alike.  But despite their genetic similarity, maize looks and acts different from the rest.  It is like the one redheaded early riser in a family of dark-haired night owls.  Left untended, other cereals are capable of propagating themselves.  Because maize kernels are wrapped inside a tough husk, human beings must sow the species — it cannot reproduce on its own…no wild maize ancestor has ever been found, despite decades of search.  Maize’s closest relative is a mountain grass called teosinte that looks nothing like it…And teosinte, unlike wild wheat and rice, is not a practical food source; its "ears" are scarcely an inch long and consist of seven to twelve hard, woody seeds.  An entire ear of teosinte has less nutritional value than a single kernel of modern maize…

…the modern species [of maize] had to have been consciously developed by a small group of breeders who hunted through teosinte strands for plants with desired traits.  Geneticists from Rutgers University…estimated in 1998 that determined, aggressive, plan breeders — which Indians certainly were — might have been able to breed maize in as little as a decade…modern maize was the outcome of a bold act of conscious biological manipulation — "arguably man’s first, and perhaps his greatest, feat of genetic engineering," [Nina Federoff]…"To get corn out of teosinte is so — you couldn’t get a grant to do that now, because it would sound so crazy…Somebody who did that today would get a Nobel Prize!  If their lab didn’t get shut down by Greenpeace, I mean."

That is from 1491: New Revelations of the Americas Before Columbus, by Charles C. Mann.  I loved this book, which also tells you why Norte Chico, at its peak, may have been as advanced as the Sumerians.  The book covers much of the New World, and the evidence in this area is in general muddy.  So the text is virtually certain to contain mistakes.  But the judgments are generally well-reasoned, the author is remarkably well-read, and the area I know best — the Nahua culture of early Mexico — is presented in a sober and balanced manner.

Will China revalue the yuan?

The US Treasury, in its twice-yearly report to Congress on exchange rates and trade, stopped short on Tuesday of accusing China of currency manipulation but made clear it expected revaluation within six months.

That is the FT, read more here.  What does the betting market say (scroll down all the way)?  With a deadline of December 2005, the chance of revaluation is running in the 58 to 76 percent range.  Thanks to Chris Masse for the pointer.

Brad Setser offers an excellent analysis of whether revaluation would be good.

The good ol’ days

I was pleased to see Auletta describe the 1971 McDonald’s jingle, "You deserve a break today," as a "classic of manipulation," because I was the person who sang the jingle.  Auletta rightly chalks up that ad’s success to Keith Reinhard’s copywriting talent, but credit should also go to the late composer Sidney E. Woloshin, who helped to make its music so memorable.  Woloshin was one of the many gifted composers who made jingles a part of our lives.  I had a thirty-year career singing amazing little songs like that one, and I think that advertising lost something when the industry started to deemphasize creative and original music in favor of pre-recorded pop songs [TC: que lastima, how artificial!] that bear no relation to the product.

That is a letter from Arlene Martell, to The New Yorker, issue of 9 May 2005.

Prediction Markets Have Arrived!

Donald Luskin writes:

There is now no question whatsoever that the Bush re-election futures contract at is being manipulated. Yesterday the price of the futures were sold down from about 55 (indicating the market’s estimate of a 55% probability of Bush’s re-election) to 10 (indicating a 10% probability) with a single 10,000-lot order entered by a single trader. An order that size represents twice the normal volume of an entire typical day’s trading. Within moments after the order was completed, the price recovered back to the low-mid-50’s.

According to sources at Tradesports, yesterday’s order was entered by the same individual who has heavily sold the Bush futures three times over the past month. The first instance was on September 14, when this trader sold the futures down from the mid-60’s to 49.6. The second instance was in the middle of the second presidential debate on October 8, when the futures were sold down from the high 50’s to 51.5. The third instance was right after the third presidential debate on October13. As the debate began the futures were priced at 57, and by the end of the debate they had risen to 60. Then a few moments later they were beaten down to 54 in a matter of minutes.

Luskin hints that George Soros might be at work. Wouldn’t that be cool! What I see as most interesting is a) an order twice the normal volume of an entire day’s trading had virtually no influence on the market price and b) prediction markets are now so widely followed that someone finds it worthwhile to try to manipulate them.

Should Luskin be worried that his candidate is being sold down? Not at all. A surprising result in these markets is that manipulators subsidize information traders. Think about it this way, by definition manipulators aren’t trying to predict the true outcome so they are likely to take losses and the more they try to manipulate the bigger the losses. Now if the manipulators are taking losses who is making money? The information traders! Manipulators, therefore, encourage and support the information traders. Manipulation isn’t impossible but it’s surprising how little information other trader’s need to not only avoid the manipulation but to profit from it.

Our colleague, Robin Hanson, has written a paper explaining the theory (warning, not for the mathematically faint hearted) and an experimental paper showing that the theory works in practice.

Thanks to Newmark’s Door for the link.

Government Sues to Raise Drug Prices

The headline in the NYTimes read “Schering Case Demonstrates Manipulation of Drug Prices.” The article continued:

A $345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.

Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.

Now you probably think this article is about how drug firms acted collusively in order to raise prices, right? Nope, read carefully and you will see that intense competition from Allegra caused Schering to reduce the price of Claritin. Great! Not according to the Feds. The price reductions violated Medicare’s Most Favored Customer clause which requires pharmaceutical manufacturers to give Medicare the lowest price they offer any other customer.

Most Favored Customer/Nation clauses are routinely analyzed in game theory texts as ways for firms to tacitly collude to raise prices. The idea is simple – it’s easier to commit not to compete if lowering price for one customer means lowering prices for all customers. Indeed, this is precisely why the antitrust authorities often sue to prevent firms from using MFC clauses. The evidence supports the theory, after the MFC clause was introduced pharmaceutical prices rose.

The US Attorney may think that “we’re fighting to keep the costs of health care down for everyone,” but in truth by reducing competitive pressures to lower prices they are helping the pharmaceutical firms to maintain a cartel.

Addendum: Put it this way, now that the government has successfully sued the firms for reducing prices do you think a) the firms will now cut the price to Medicare to match the rebates or b) stop giving rebates?

Terror Betting Markets and the 9/11 Commission

Remember “terrorism betting markets”? The program was killed one day after it made headlines – so much for democratic inertia! Opponents plausibly argued that these markets made terrorism pay. According to a press release by Senators Wyden and Dorgan:

Terrorists themselves could drive up the market for an event they are planning and profit from an attack, or even make false bets to mislead intelligence authorities.

Of course, you hardly need terrorism betting markets to make money from terrorism; all you need to do is short the stocks of firms that will be adversely affected (say… airlines?). So if betting on terrorism scares you, you should still be scared! But before you start losing sleep, check out the findings of the 9/11 Commission. They find no evidence of 9/11-related stock market manipulation. Here are the two key passages:

There also have been claims that al Qaeda financed itself through
manipulation of the stock market based on its advance knowledge of the 9/11
attacks. Exhaustive investigations by the Securities and Exchange Commission,
FBI, and other agencies have uncovered no evidence that anyone with advance
knowledge of the attacks profited through securities transactions. (pp.171-2)

Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual
pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact
occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options–
investments that pay off only when a stock drops in price–surged in the parent companies of United Airlines on
September 6 and American Airlines on September 10–highly suspicious trading on its face. Yet, further investigation
has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no
conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy
that also included buying 115,000 shares of American on September 10… The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous
resources to investigating this issue, including securing the cooperation of many foreign governments. These
investigators have found that the apparently suspicious consistently proved innocuous. (p.499)

It is worth pointing out that even if the 9/11 Commission had found evidence of a terror/stock market connection, there would still be almost no case against the original plan for terrorism betting markets. The maximum bet was under $100. I like the economic theory of suicide as much as the next economist, but I still can’t imagine any would-be terrorist changing his mind over a Benjamin.

Thanks to my colleague and terrorism betting market lightning rod Robin Hanson for the 9/11 pointer. See also Alex’s short piece In Defense of Prediction Markets, kindly made available by Mahalanobis.

Ralph Nader and the regulation of neuroscience

Ralph Nader’s Commercial Alert group seeks to restrict or prohibit commercial research into neuroscience. You might recall that researchers at Emory are hard at work on this problem:

Neuromarketing research uses a magnetic resonance imaging machine, or MRI, to determine which parts of the brain react to different types of advertising in an effort to help marketers develop more effective marketing techniques for selling their products or services.

The critics charge that the research is directed at finding a “buy button” in the mind. Critics also raise the specter of mind control and the loss of individual autonomy. Commercial Alert makes the following threat:

“It is wrong to use medical research for marketing instead of healing,” Ruskin said. “If Emory University doesn’t stop this immediately, we will do everything in our power to shut down Emory’s federal funding.”

My take: The neuroscience techniques remain unproven, but in the meantime corporations are subsidizing an important science. Many of our most significant scientific discoveries have been by accident, when people were looking for some other result altogether. The support for research may well have a real long-run payoff.

Furthermore the worries are overblown. Let’s say we found such a buy button and that corporations could use that knowledge in their ads. Would it really shift the marketing balance of power in favor of sellers? Over time I would expect buyers to compensate, as the knowledge would not stay secret for very long. We could imagine lists of products that were sold by manipulative techniques, and customers would know to stay away from such products. A technological arms race would be set off. We could imagine private entrepreneurs selling “counter-persuasion” techniques to customers, perhaps in the form of drugs, warning buzzers, or counter-subliminal images flashed into your eyeglasses (the latter product is already under development!). Or how about programming the microchip credit card embedded in your arm to discourage or prevent such manipulation-induced purchases? Or how about if consumers use neuroscience to learn how to be truly happy staying at home and cultivating their gardens?

Sellers seem to have the biggest advantage when manipulation techniques are less than transparent. So neuroscience research into buyer behavior may be a classic prisoner’s dilemma problem. Various sellers may pursue such knowledge, hoping to get a leg up on the competition. The long-run result may be an evaporation of business advantage and an empowering of consumers.

Thanks to Kevin McCabe for the pointer on this issue, check out his neuroeconomics blog.

The economics of cheese

Free trade is not only good for prosperity, it is also good for fine food shopping. Here are some pithy comments on a recent book on the history of Camembert cheese:

Fifty years ago, or even twenty-five, it was very hard, if not impossible, to get cru Camembert – or gold seal balsamic vinegar, or single-estate Tuscan extra virgin olive oil, or jambon de Bayonne, or Ortiz salt-packed Spanish anchovies, or Niçoise olives – if you didn’t live in a world metropolis or in the regions near where they were produced. Now they are all widely available. Thanks to the Internet, Fedex, the food-writers (and their globalised publishing firms), the once-local has become global.

Nor is it just the distant local that has a place in the markets; preferences for the local local are now better catered for than at any time in the recent past: farmers’ markets flourish as never before in both Britain and America; the role of the “forager” – searching out the quality produce of local farmers for top restaurants – has become institutionalised; the formerly resistant Californian wine industry is rediscovering the power of place as against the manipulations of the scientific winemaker; the cheese plates at better American eateries feature increasingly convincing Sonoma County goat cheeses and one of the finest semi-soft goat cheeses in the world, the Cypress Grove Humboldt Fog; the Slow Food movement gathers strength throughout the world and reinforces the revival of the local and the seasonal.

Here is the full book review, from The London Review of Books, the piece is interesting throughout. Here is an earlier post on the corporate origins of Maytag cheese in the United States. Here is a post on using radar to improve the quality of wine.

The bottom line: When I first started going to Europe, in the early 1980s, I was amazed at the quality of the foodstuffs, but America is catching up rapidly. The next steps: lower price supports for dairy products, lower duties on foreign cheese, and free importation of non-pasteurized cheeses, the opposite of what Hillary Clinton wants.

Terrorism futures are back

Yes, those terrorism futures, here is a story from The old group, Net Exchange, is behind the current revival, but this time without a Pentagon connection.

The idea is being marketed as a research tool:

In response to the highly charged criticisms that ended the Pentagon’s association with the project, Polk [a Net Exchange spokesman] noted the market is designed mainly as a research tool, not unlike the Iowa Electronics Markets, which have done a pretty good job of predicting the outcomes of presidential elections.

“It is potentially an interesting alternative to Gallup polls or to specialists reporting from the region,” Polk said. “It’s a way of going directly to individuals in the region or outside who have knowledge or interest in the political and economic events in the area.”

Polk said Net Exchange would initially limit the amount of money traders could invest in the market, so that people won’t be profiting from violence or upheaval in the region.

What’s more, the futures contracts would be based on general questions, such as the likelihood that the King of Jordan will be overthrown at some point during the second quarter of 2004, for example, rather than on specific acts or events, which could lend themselves to manipulation by terrorists.

My prediction: These markets require legal tolerance, given that they otherwise violate anti-gambling rules or fall under regulatory jurisdiction. I’ll bet that this revival is shut down pretty quickly.

My view: Most of the movements in asset prices are noise, rather than based on fundamentals. The main problem with the idea is that the price movements, even if “unbiased” in the mathematical sense, feed us a steady stream of misinformation about world affairs. I also could imagine public panic resulting, or bad events being accelerated into greater likelihood, imagine how Jordanese politics is altered if the betting market says the King of Jordan is a goner.