Results for “manipulation”
81 found

High-frequency trading

A few MR readers ask about high-frequency trading.  Senators are calling it unfair because some traders have access to more powerful computers,and better quants, than do others.  The traders with the most powerful aids get there first and make more money.  Here is a typical critique.  Felix Salmon is also skeptical.

I do not worry about high-frequency trading.  Telegraphs and telephones also brought their own, earlier versions of high-frequency trading.  As did stock index futures.  There are second-best arguments relating to hockey helmets and the like but that is the case with most forms of progress and greater economic speed.  You don't have to think that the current profits measure the current social value of high-frequency trading to argue that the overall trend should be allowed.  The correct judgment of efficiency occurs at the system-wide level, not at the level of the individual trading strategy.  The short-run story is that private profits exceed social returns but in the longer run the trading activity and liquidity brings increasing social returns and better communication of information.

I'm not a believer in the strong versions of efficient markets hypotheses, so I do admit that high-frequency trading, like just about every other trading strategy, can bring short-run "whiplash" effects on market prices.  But if you don't like it, you can trade yourself at much lower frequencies, which is probably what you should be doing anyway.  At the same time high-frequency trading smooths out or shortens many other cases of price whiplash.  High-frequency trading brings more liquidity into the market.  Call it "low quality liquidity" if you wish, but it still looks like net liquidity to me. 

The complaint is that this liquidity sometimes vanishes.  Maybe high-frequency trading can scare other traders out of the market;
that charge has been leveled against every method of informed
trading.  In the short run it is sometimes true but markets respond by
upping the general requirements for quality trading and many market
participants rise to meet the new standard or else switch to longer
time horizons.

On the critical side there is lots of talk of "unfairness" and "manipulation," combined with snide references to the financial crisis.  I'd like to see a serious efficiency argument against high-frequency outlined and defended, without the polemics.  That would include a case that regulation will prove workable and catch only the "bad liquidity," while at the same time avoiding capture by envious and inferior competitors. 

If high-frequency trading is used to trick other traders into revealing their demand schedules, and then canceling orders, I can see a case for regulating that particular practice.  On that issue, here is background, from a critic, but note that these charges seem to be unverified.

The philosophical question is why it might possibly be beneficial to have market prices adjust within five seconds rather than within fifteen.  One second rather than five?  0.25 rather than one?  If you had been writing in the year 1800, what comparisons would you have chosen? 

Remember that old comic book where they had Superman race against The Flash?  The Flash won.  Someone had to, just keep that in mind.

How to get people to vote

KAHNEMAN: …there are
those effects that are small at the margin that can change election
results.

You call and ask people ahead of time, "Will you vote?". That’s all.
"Do you intend to vote?". That increases voting participation
substantially, and you can measure it. It’s a completely trivial
manipulation, but saying ‘Yes’ to a stranger, "I will vote" …

MYHRVOLD: But to Elon’s point, suppose you had the choice of calling up
and saying, "Are you going to vote?", so you prime them to vote, versus
exhorting them to vote.

KAHNEMAN: The prime could very well work better than the exhortation
because exhortation is going to induce resistance, whereas the prime‚ the mild embarrassment causes you to make what feels like a
commitment, and the commitment, if it’s sufficiently precise, is going
to have an effect on behavior.

THALER: If you ask them when they’re going to vote, and how they’re going to get there, that increases voting.

KAHNEMAN: And where.         

Here is the whole dialogue, on the importance of the environment and priming effects for human psychology; it is very interesting throughout.  I thank Stephen Morrow for the pointer.

So how do you get some people not to vote?

Borjas on Indoctrination

According to FIRE, The Foundation for Individual Rights in Education:

The University of Delaware subjects students in its residence halls to
a shocking program of ideological reeducation that is referred to in
the university’s own materials as a “treatment” for students’ incorrect
attitudes and beliefs….

The university’s views are forced on students through a
comprehensive manipulation of the residence hall environment, from
mandatory training sessions to “sustainability” door decorations.
Students living in the university’s eight housing complexes are
required to attend training sessions, floor meetings, and one-on-one
meetings with their Resident Assistants (RAs). The RAs who facilitate
these meetings have received their own intensive training from the university, including a “diversity facilitation training” session at which RAs were taught, among other things,
that “[a] racist is one who is both privileged and socialized on the
basis of race by a white supremacist (racist) system. The term applies
to all white people (i.e., people of European descent) living in the
United States, regardless of class, gender, religion, culture or
sexuality.”

George Borjas writes:

Why am I super-sensitive to this? Because as a young boy I myself went through a one-year course in ideological reorientation. I attended an elite elementary Catholic school in Havana. Castro took over, the Catholic school was shut down, and I got transferred to a revolutionary school where the entire day was spent teaching Marxist-Leninist ideology. Luckily, this lasted only a year and I continued my education in Miami (where the entire school day was instead spent talking about the upcoming football game). I am certain that the blind zealotry that I saw in the young teacher’s eyes that year turned me off from that particular way of viewing the world for the rest of my life. One can only hope that many of the students forced to attend the re-education programs at Delaware and other universities react in the same way.

I’d be interested to hear from anyone with first hand experience of the University of Delaware program.

Paul Krugman, pussycat

The Conscience of a Liberal is um…not that polemic.  It’s not that shrill.  There is an argument, to be sure, but the book has much more economic history than I had expected, and much more political history.

I’ve already blogged on The Great Compression; Krugman’s more detailed account in the book does emphasize the role of war, wage and price controls, and very high rates of taxation.  Normative questions aside, Krugman’s positive analysis isn’t as far from mine as I had been expecting from his blog post.

Some claims in the book are simply wrong: "…if there’s a single reason blue-collar workers did so much better in the fifties than they had in the twenties, it was the rise of unions."  (p.49)  Of course it was instead greater capital investment per head and better technology; if Krugman means relative status he needs to say so.  This conflation of relative and absolute magnitudes is a running problem throughout the first part of the book.

Most of all, today’s world — or even an extrapolated version thereof — isn’t nearly as like the Gilded Age as Krugman suggests.  Absolute standards of living really do matter, and most Americans today live very fine lives, or if they don’t the economy is not at fault.

Krugman writes of "the vast right-wing conspiracy" repeatedly, and in these moments he verges on the shrill.  But Bush receives virtually no attention; perhaps Krugman is simply sick of writing about the guy

Conservatism rose in the 1980s in large part because the mid to late 1970s were such an economic mess and because American had lost so much relative status internationally.  Krugman won’t face up to that; instead he blames the Republican manipulation of "the race card," even though at the time racial tensions arguably were lower than ever before.  Of course in a relatively close election any single factor can be called decisive but I found this discussion well below the standards of the political science literature, even the popular political science literature.

Krugman calls for single-payer health insurance, tax hikes, and raising the minimum wage.  He doesn’t come off as all that radical.

His theory of government failure is that wealthy right-wingers hijack the state to redistribute wealth to themselves, and that’s all we hear on what’s wrong with government.  That’s the part of the book I find hardest to swallow, but if you’re asking "should I read this?" the answer is yes.

My prediction: For lack of red meat, this book won’t sell nearly as well as Naomi Klein’s latest.  At my Borders, circa 4 p.m., they hadn’t even unpacked it.  "Yeah, we have that in the back somewhere, I haven’t seen it yet." was what the guy said.

My question:  Is Paul Krugman willing to come out and simply pronounce: "Margaret Thatcher turned the UK around and for the better"?  If so, how does this square with his broader narrative?  And if not, why not?

Addendum: Here is Ed Glaeser’s review.

Justin Wolfers wants to know

And can you think of a better reason than that?

There is currently some very unusual activity going on in the election markets at
InTrade: Over the past two weeks, there appears to have been a concerted effort
to bid up the price of the contract tied to Hillary winning the Presidency, and
on the back of essentially no news, the price climbed from about 25, up to 40,
and now is at about 35.  My usual coauthor, Eric Zitzewitz, suggested that
this looks a lot like manipulation, and the best evidence of this (apart from
the absence of any news) is that over the same period, the odds on Hillary
winning the Democratic nomination are essentially unchanged at 50.  It
just can’t make any sense to buy PRES.CLINTON at 40, when
2008DEM.NOM.CLINTON is at 50. 

All told though, this manipulator has been
surprisingly successful.  And this is where our experiment comes in.
I wonder whether the manipulator will be just as successful when a broader
audience becomes aware of this possibility?  We tried a first experiment a
week ago – Eric mentioned this anomaly while at a prediction markets
conference in Palm Desert (Robin was with
us).  In turn, this led to a bit of pressure on the price, but the
manipulator held firm.  We were wondering whether a simple post on
Marginal Revolution (tipped off by a loyal reader) pointing to this mis-pricing
might lead to further price pressure?  As such, if you were to blog on the
mis-pricing, that would serve a second purpose, of giving us truly experimental
variation in public attention.  And all of this holds the promise of
learning a bit more about manipulation in prediction markets.

OK people, trade away!

Addendum: Here is Eric Zitzewitz, over at Chris Masse, on same.  And Koleman Strumpf says no manipulation.

Are irrational voters stubborn voters?

Bryan Caplan writes:

Venezuelan policy was bad in the past for the same reason it’s really bad now: In Venezuela, bad policy is good politics because it’s popular.

We all know that Bryan blames bad policy on irrational voters,  I sometimes worry he is too quickly identifying irrationality with stubbornness.  An irrational voter might be very easy manipulated by a politician, just as many Venezuelan voters have had their incipient populism mobilized by the rhetoric of Chavez.  Were so many Cubans communist before Castro?  Of course to the extent irrationality and its content are endogenous, we must move away from a simple "blame the voters" story.

In the past Bryan has blogged that many voters are too stupid or too irrational to respond even to propaganda.  But political rhetoric sometimes works on some of the people and perhaps that is enough.  (Technical point: I doubt if the Caplan-postulated irrationality is evenly distributed along a Downsian spectrum in such a way to support quasi-dictatorial rule by the median voter.)  Irrationality is likely to make the political spectrum sufficiently complex and multi-dimensional as to have some easily manipulated levers.  In that case electoral competition is not aiming at a simple mid-point of dominant public opinion.  Social choice theory then tells us that even a small amount of preference manipulation or agenda-setting can have a huge effect on final outcomes.

Under one plausible view (not Bryan’s as far as I know), politicians have good fundraising and coalition-organizing reasons to persuade voters to accept an essentially one-dimensional political scale.  Mankind’s biological tendencies toward prejudicial alliances, combined with the forces of spontaneous order, support the same.  Political irrationality results, much as Caplan suggests, but the apparently-in-charge voters are as much a shadow play as a unique cause or fulcrum. 

Tristan Tzara!

Addendum: Here is the critical Christopher Hayes review of Bryan’s book.

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.

1491

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.