Fischer Black’s classic 1986 essay “Noise”
Here is the pdf link, every now and then I feel I should put up an “oldie but goodie.” This is one of the essays that has influenced my thought the most, noting that Fischer had his own language and could be quite opaque. Here is the abstract of his 17 pp. essay:
The effects of noise on the world, and on our views of the world, are profound. Noise in the sense of a large number of small events is often a causal factor much more powerful than a small number of large events can be. Noise makes trading in financial markets possible, and thus allows us to observe prices for financial assets. Noise causes markets to be somewhat inefficient, but often prevents us from taking advantage of inefficiencies. Noise in the form of uncertainty about future tastes and technology by sector causes business cycles, and makes them highly resistant to improvement through government intervention. Noise in the form of expectations that need not follow rational rules causes inflation to be what it is, at least in the absence of a gold standard or fixed exchange rates. Noise in the form of uncertainty about what relative prices would be with other exchange rates makes us think incorrectly that changes in exchange rates or inflation rates cause changes in trade or investment flows or economic activity. Most generally, noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark.
Both of Black’s books are worth studying, as well as the Perry Mehrling biography of Black.
Would North Korea consider a first strike?
Vipin Narang says yes:
The strategy turns on Kim’s main calculation that the United States will say it’s not worth losing a major American city to get rid of him.
Of course he could not knock out a major American or allied target, but he could use them somewhere. And the use would boost his, uh…credibility. In fact Charles Murray is worried.
I think of the model this way. If Kim is irrational, we have obvious reason to worry, and of course a first strike could not be ruled out. Remember Pearl Harbor? (Or is that “Remember Pearl Harbor!”)
Alternatively, say all involved parties are fully rational in the selfish sense. Fully rational agents make purely forward-looking calculations. So if Kim used a nuke to kill a sparrow in North Korea, we would not attack because fear of losing an American city would far outweigh desire to retaliate for the loss of the sparrow.
How about one sparrow in the DMZ? In Japan? In the Arctic? In a Malaysian airport? Or maybe one sparrow, three sled dogs, and thirty Inuit?
At what point do we give it a go, and risk a poorly aimed North Korean ICBM being shot off into the sky?
What if Kim uses “only” a biological or chemical weapon, designed for minimum but noticeable impact, on a nearby country? You should think of Kim’s strategy space as a continuous variable, with some noise added of course.
Is the space of “boosts his credibility and domestic stature, but without too much upping the risk of massive American retaliation” really the empty set?
Maybe. Maybe not. I give it about one percent, which in expected value terms is still a real worry.
Tesla’s Damaged Goods Problem
TechCrunch: Tesla has pushed an over-the-air update to some of its vehicles in Florida that lets those cars go just a liiiittle bit farther, thus helping their owners get that much farther away from the devastation of Hurricane Irma.
Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?
The answer to the second question is price discrimination! Tesla knows that some of its customers are willing to pay more for a Tesla than others. But Tesla can’t just ask its customers their willingness to pay and price accordingly. High willing-to-pay customers would simply lie to get a lower price. Thus, Tesla must find some characteristic of buyers that is correlated with high willingness-to-pay and charge more to customers with that characteristic. Airlines, for example, price more for the same seat if you book at the last minute on the theory that last minute buyers are probably business-people with high willingness-to-pay as opposed to vacationers who have more options and a lower willingness-to-pay. Tesla uses a slightly different strategy; it offers two versions of the same good, the low and high mileage versions, and it prices the high-mileage version considerably higher on the theory that buyers willing to pay for more mileage are also more likely to be high willingness-to-pay buyers in general. Thus, the high-mileage group pay a higher price-to-cost margin than the low-mileage group. A familiar example is software companies that offer a discounted or “student” version of the product with fewer features. Since the software firm’s costs are mostly sunk R&D costs, the firm can make money selling a low-price version so long as doing so doesn’t cannibalize its high willingness-to-pay customers–and the firm can avoid cannibalization by carefully choosing to disable the features most valuable to high willingness-to-pay customers.
The classic paper in this literature is Damaged Goods by Deneckere and McAfee who write:
Manufacturers may intentionally damage a portion of their goods in order to
price discriminate. Many instances of this phenomenon are observed. It may
result in a Pareto improvement.
Note the last sentence–damaging goods can be beneficial to everyone! Consider: Without selling to the high willingness-to-pay customers at the high price the good might not be produced at all because the profit from customers who are only willing to buy at a discount aren’t enough to support the R&D. Thus, the high willingness-to-pay customers aren’t worse off from the existence of a discounted version and the low willingness to pay customers and the firm are clearly better off.
Unfortunately, I fear that Tesla may have made a marketing faux-pas. When it turns off the extra mileage boost are Tesla customers going to say “thanks for temporarily making my car better!” Or are they going to complain, “why are you making MY car worse than it has to be?”
Hat tip: Monique van Hoek.
Florida price gouging by the airlines?
Maybe, but consider this:
Airfare data by Hopper shows that the price hikes that took place this past week are similar to those from two weeks ago, suggesting that the price changes are typical for a week of departure flights.
Here is the full NYT story.
Sunday assorted links
MIT to offer Degree in Computer Science + Economics
Designing electronic marketplaces will be the focus of a new degree to be offered jointly by MIT’s economics and computer science departments.
“This area is super-hot commercially,” says David Autor, the Ford Professor of Economics and associate head of the Department of Economics. “Hiring economists has become really prominent at tech companies because they’re filling market-design positions.”
Because these companies need analysts who can decide which objectives to maximize, what information and choices to offer, what rules to set, and so on, “companies are really looking for this skill set,” he says.
UBER, Airbnb and Amazon are familiar marketplaces that need computer scientist cum economist designers and online worlds like EveOnline join multiple marketplaces into entire economies.
I’d also note that an increasing number of marketplaces will need to be designed not for people but for non-human traders–this will create entirely new challenges.
Luxury canine markets in everything
How is making clothing for animals different than for humans?
“There is a whole different physiology when you’re designing for a pet. The animal has to be able to go to the bathroom without removing the clothing. The design must be comfortable, because you don’t want the dog chewing at it or taking it off on the runway.”
What’s the price range of your designs?
“Anywhere from $300 to $15,000. The most expensive item I did was a pageant dress for a Maltese for the New York Pet Fashion Show. It had a crown, a faux fur wrap covered in Swarovski crystals, and the gown was convertible — the skirt part came apart and the dog was still wearing the harness.”
How do you choose the dog models?
“I have a who’s who of the famous dogs of Instagram (including Norbert and Henry from Bideawee, a New York pet welfare organization). I use my clients’ dogs, and I always do a rags-to-riches story and feature a rescue animal that can be adopted.”
What’s it like being a dog clothing designer in New York?
“There was time when people would look at it weird, in the beginning when I was doing it. Now you can’t go anywhere where the dog is not wearing something. I mean, my dogs even wear shades.”
Is the Great Chocolate Stagnation over?
I say no, but some disagree:
There hasn’t been an innovation in the world of chocolate since the white variant was introduced in 1930, which is fine because — in the immortal words of Cogsworth in “Beauty and the Beast” — if ain’t baroque, don’t fix it.
But still, we’d never turn away a new kind of creamy, chocolate-y thing to munch on while we binge-watch Netflix.
And thanks to some Swiss chocolate scientists over at Barry Callebaut — the world’s leading manufacturer of the good stuff, producing 1.8 million tons of cocoa every year and with a revenue of almost $10 billion — that’s exactly what we’re getting. A brand new chocolate flavor called Ruby, developed from the Ruby Cocoa bean, colored a pleasingly millennial pink hue and that tastes like sweet, sweet berries despite having no added color or flavoring.
“Ruby chocolate is the fourth type of chocolate [after milk, white and dark] and is an intense sensorial delight,” a spokesperson for Barry Callebaut said after launching the chocolate to a panel of experts in China.
Here is the (noisy) link, via the excellent Samir Varma.
China Philippines fact of the day
Gulangyu — known as Kulangsu in the local Fujian dialect — is a typical example of this [growing tourism] trend, which has been repeated from Tibet to the Great Wall.
The 2 sq km island just off the thriving port city of Xiamen gets more than 10m visitors a year, almost double the number that visited the entire Philippine archipelago last year. On peak days in the past, more than 100,000 visitors clogged the winding, vehicle-free streets of the island, whose resident population is just 20,000. But the government capped the numbers at 35,000 per day this year as part of the Unesco bid.
That is from Ben Bland at the FT.
Saturday assorted links
1. Is the middle class abandoning football?
2. It’s not quite The Drone Wars, but New York to See Release of GMO Murder-Moths.
3. MIE: Stock spirit Financial Economist John Maynard Keynes 3D crystal company Desk art statue.
Should Harvard admit more legacy students?
That is the question behind my latest Bloomberg column, and basically the answer is yes. Schools could scale up, using legacy admissions as a further source of finance. But why don’t they?:
So why don’t top schools do more to expand their reach? No one doubts that they could find many more qualified students to admit. But there are two problems, both of which we should be willing to live with. First, expanding the size of top schools would lower faculty standards on the research side. That said, teaching quality is unlikely to suffer, as Harvard doesn’t select for the very best teachers. In any case, Harvard’s best researchers could continue their highly productive efforts without missing a beat. Second, administrators would face headaches and potential reputational liabilities from the new initiatives. But that is true in any kind of startup endeavor, and it isn’t a reason to remain stuck in the past.
The actual constraint on how big top schools could grow is how many eligible donors they can find and cultivate, if only through admitting their children. One question is how many such donors there are period, but in an age of high income inequality it seems America’s top schools have hardly tapped out this pool. Legacies make up a sixth of undergraduates at the University of Pennsylvania. A more unfortunate reality is that some donors might limit their support if say Princeton offered them and their children a less tony and exclusive experience. If that attitude can be overcome, America’s top schools could grow a great deal larger and more diverse.
Do read the whole thing.
*Incontinence of the Void*
That is the new, forthcoming Žižek book, here is one brief excerpt:
Peter Sloterdijk endorses Badiou’s thesis, from his Le siecle, that the defining feature of the twentieth century was “the passion for the real,” the gravitational pull toward the real basis of our lives (economic base, libido, will, etc.). What we witness is the reversal of the traditional relation between public theology and occult materialism preached in elite circles — today, materialism is public while gnostic theology grows in the underground…Passion for the Real is not just a realist-cynical stance of reducing ideological chimeras to their “actual base” (“it’s all really about the economy, power, sex”), it is also sustained by a messianic logic of extermination: the cobweb of (religious, moral, etc.) illusions has to be ruthlessly erased, and it has to be done now. The twentieth century was a time of extremis, of passage a’ l’acte, not of hope for some future. Sloterdijk, of course, for this very reason sees the twentieth century as the age of extremism and ethical catastrophes, from Nazism to Stalinism.
I have several other of his books in my pile to read; this latest one focuses much of its energy on Lacan and also the Slovenian theorist Alenka Zupančič. It turns out Žižek also is a big fan of Liu Cixin and The Three-Body Problem.
Silphium
Long ago, in the ancient city of Cyrene, there was a herb called silphium. It didn’t look like much – with stout roots, stumpy leaves and bunches of small yellow flowers – but it oozed with an odiferous sap that was so delicious and useful, the plant was eventually worth its weight in gold.
That’s the opening to an excellent story about silphium, a herb widely-used and loved by the Romans but that hasn’t been seen for nearly two thousand years. Part of the problem was biological, the plant grew only in a tiny region of modern day Libya:
Its entire range consisted of a narrow strip of land about 125 miles (201km) by 35 miles (40km).
Try as they might, neither the Greeks or the Romans could work out how to farm it in captivity. Instead silphium was collected from the wild, and though there were strict rules about how much could be harvested, there was a thriving black market.
Even today there are plants, like huckleberry which resist all efforts to farm them. (Ala Jared Diamond’s Guns, Germs and Steel). Part of the problem was also economic–a tragedy of the commons–as prices shot up and property rights weren’t strong enough to prevent over-farming.
And might silphium still be found somewhere in remote regions of Libya? Read the whole thing.
Friday assorted links
1. Five Karl Polanyi lectures from 1940.
2. The plans to guarantee everyone a job.
4. The evolution of women’s stock photos (NYT).
5. Catalonia’s insurrection day (a quick read will offer numerous reasons to be skeptical of this initiative).
6. Why Germany did so well from the China shock.
7. Will North Korea end up as China’s thorn? (NYT) Is there a scenario where North Korea rationally uses nuclear weapons first?
How much does Fox News matter?
…we first propose a new instrument for exposure to media bias to complement estimates based on news channel availability: the channel positions of news channels in cable television lineups. The channel position is the ordinal position of news channels in the cable lineup. The assertion is thus that the Fox News Channel will be watched more when it is channel position 25 instead of channel position 65. We demonstrate that a one-standard-deviation decrease in Fox News’s channel position is associated with an increase of approximately 2.5 minutes per week in time spent watching Fox News. We estimate that watching the Fox News Channel for this additional 2.5 minutes per week increases the vote share of the Republican presidential candidate by 0.3 percentage points among voters induced into watching by variation in channel position. The corresponding effect of watching MSNBC for 2.5 additional minutes per week is an imprecise zero.
That is by Gregory J. Martin and Ali Yurukoglu, just published in the most recent AER. Here are ungated copies.