It is hard to do business. However, you can make life easier for you when you make fraud part of your business. You probably still cannot be as successful as the CEO of Goldman Sachs, but you can earn more money than a first year employee in Goldman. Sounds sweet? This blog will show you how.
Background
There has never been a more favorable environment for fraud. The legal breakthrough came after the landmark supreme court case of Ben Edelman vs. Ran Duan, which established as the supreme legal principle that in US, businesses operate under the court of public opinion, not rule of law. It is a huge triumph for us potential defrauders. Hurray.
Principles of Successful Fraud
1. Make it small
There is good economics behind it. When you defraud a small amount, you can count on being successful: 1)It is unlikely that your prey will notice it. 2)Even if he notices, he will correctly understand that it is not worth it to fight such a small amount. 3)Even if he is crazy and decides to fight it, the court of public opinion will deem him to be a cheapo and rule in your favor. This is bullet-proof.
2. Combine it with a small business
The key insight is that under the new legal paradigm, we operate with the court of public opinion, which is sympathetic towards small businesses. With a mom-and-pop fraud business, you have higher chance of success.
3. Target High-end consumers
This might sound weird, but it is full of wisdom. When you defraud a high-end customer, who should "have better things to do", it is less likely he would care. Even if he cares, remember, you are more likely to win, because think about it, how awful it sounds: a rich jerk (the court will impose that name for you) fight a small mom-and-pom fraud business for a small amount. Now you recognize that our three principles work all together right?
FAQ
1. Would I make enough money from your scheme?
Absolutely. You need to realize that you make a kill from volume. The most successful fraud is never a grand one, it is "death by a thousand cuts". If you make it big, you will be transported to the normal court. Stay with the court of public opinion, it is your safe-harbour. I would like to perform the following calculation. Each time your defraud 4 dollars. Even in a small town of population around 6000, you can get about 100 people per day (see link). That adds up to 12K a month and 144K a year. Very decent money! That is more than a business school professor makes after spending so many years working harder than a slave as a graduate student, then as assistant professor.
2. How should I respond when my customer fight back?
This should be extremely rare. If one customer fight back, do offer to compensate him the amount over-charged, but nothing more. Be courteous (as this might be used as evidence in court). He will back off. Since this will be rare, it will not affect your profitability. Remember, your target is high-end customers, who are much less likely to fight back. If he demands more, turn it to the court of public opinion, like Boston.com.
3. Can you give some specific examples?
I would love to. Our most successful case involves a restaurant whose online menu shows lower price than actually charged. After customers look at price and put effort into choosing the food, they would find it too costly to leave for another restaurant and remake the food decision. The case protagonist ingeniously posted "all prices subject to changes" and get immune from any legal charges, at least in the court of public opinion. Indeed the case was such a blast, that you can see more and more businesses are adopting similar tactics with huge success. In fact, I would like to point out that there is no reason to limit this to online menu. I advise you do the same with physical menu. After all, changing physical menu is more costly---you need to reprint the menu (so called menu cost). Just do add the line on your physical menu "All prices subject to change".
Conclusion
As I noted, there has never been a better than to build a business around fraud. You can do it and achieve your American Dream! But do remember the clock is tickling, and you should make your fortune before the public opinion swings. May the odds ever be in your favor.
Friday, December 12, 2014
Wednesday, December 10, 2014
Fighting Against Public Opinion
There is a reason we need laws---public opinion is so fickle and we cannot rely on it to make the correct judgement. an important characteristic of law is anonymity, that is regardless of who commits an action against whom, it is the action that determines whether it is legal, not the identity of the parties involved.
I blogged about the incident of Ben Edelman and the Sichuan Restaurant in my previous blog. As I check the matter this morning, it seemed to got worse than ever. Lots of media outlet reported this, and if they share anything in common, it is these media kept stressing the Harvard identity of Ben and family business nature of the restaurant. This is despicable behavior characteristic of "yellow journalism". In the realm of law, it does not matter whether it is a rich guy fraud a poor man, or a poor man fraud a rich person. It is fraud. The identity of the parties involved is irrelevant. Why the heck does those new media stress the identity so much?
the public likes to think of itself as a grand jury. It is laughable that it think it is capable of doing so when it exhibits such lack of understanding of what justice is. In course, a piece of evidence that is not probative (tend to prove the proposition for which it is proffered) is inadmissible, and the rules of evidence permit it to be excluded from a proceeding. In fact, even relevant evidence could be excluded if it causes unfair prejudice, are misleading, etc. If we look at the public court of this incident. It is close to a farce. Irrelevant evidence is being stressed and people get all excited about them. Sounds like a rogue attorney with a bunch of underqualified jury.
I went to Yelp. And as expected, tons of people went to give raving reviews just to support the restaurant. When I checked, there are 20 reviews created just in response to this incident (I know they are in response to this event because they either mentioned "Edelman" or "Harvard", or both, and are created after 12/9/2014). Of course, all but 1 give 5 start review. Unfortunately, even with the flood of biased reviews, the overall rating of the restaurant is still only 3.5. (I took screenshots).
This really made me suspect the intention of the restaurant owner. First, he broke the law. Instead of abiding by the law and compensate for only 12 dollars, he tried to make up excuses to pay less. Second, he tried to and successfully hijacked the public opinion. This is much more unacceptable for me. I saw too many jerks and nations trying to take the moral high ground to cover up their selfish dealings.
Finally, I want to point out, when it comes to fraud, regardless of the amount, it is always a crime. As I pointed out before, small amounts do add up. Online advertising fraud, always involve much smaller amounts (like 20 cents), add up to millions. In fact, that is what Ben Edelman usually go after. I see nothing inappropriate that he gets upset by similar tactics in the offline world.
Long live true justice. Short live public opinion.
I blogged about the incident of Ben Edelman and the Sichuan Restaurant in my previous blog. As I check the matter this morning, it seemed to got worse than ever. Lots of media outlet reported this, and if they share anything in common, it is these media kept stressing the Harvard identity of Ben and family business nature of the restaurant. This is despicable behavior characteristic of "yellow journalism". In the realm of law, it does not matter whether it is a rich guy fraud a poor man, or a poor man fraud a rich person. It is fraud. The identity of the parties involved is irrelevant. Why the heck does those new media stress the identity so much?
the public likes to think of itself as a grand jury. It is laughable that it think it is capable of doing so when it exhibits such lack of understanding of what justice is. In course, a piece of evidence that is not probative (tend to prove the proposition for which it is proffered) is inadmissible, and the rules of evidence permit it to be excluded from a proceeding. In fact, even relevant evidence could be excluded if it causes unfair prejudice, are misleading, etc. If we look at the public court of this incident. It is close to a farce. Irrelevant evidence is being stressed and people get all excited about them. Sounds like a rogue attorney with a bunch of underqualified jury.
I went to Yelp. And as expected, tons of people went to give raving reviews just to support the restaurant. When I checked, there are 20 reviews created just in response to this incident (I know they are in response to this event because they either mentioned "Edelman" or "Harvard", or both, and are created after 12/9/2014). Of course, all but 1 give 5 start review. Unfortunately, even with the flood of biased reviews, the overall rating of the restaurant is still only 3.5. (I took screenshots).
This really made me suspect the intention of the restaurant owner. First, he broke the law. Instead of abiding by the law and compensate for only 12 dollars, he tried to make up excuses to pay less. Second, he tried to and successfully hijacked the public opinion. This is much more unacceptable for me. I saw too many jerks and nations trying to take the moral high ground to cover up their selfish dealings.
Finally, I want to point out, when it comes to fraud, regardless of the amount, it is always a crime. As I pointed out before, small amounts do add up. Online advertising fraud, always involve much smaller amounts (like 20 cents), add up to millions. In fact, that is what Ben Edelman usually go after. I see nothing inappropriate that he gets upset by similar tactics in the offline world.
Long live true justice. Short live public opinion.
Tuesday, December 9, 2014
Time to Let Logic to Replace Empathy and some game theory
As I wrote, the web is pretty excited about the story of a harvard business school professor Ben Edelman got legalistic with a Chinese restaurant that over-charged him $4. I get it. It seems no one can get over with the sympathy they feel for that poor restaurant owner. As I mentioned in my previous blog, empathy, the very attributes we seem to think so highly of, lead to awful judgement errors.
Many businesses take it as a strategy to "mistakenly" over-charge customers. Since the amount is small, most people will not complain other than frowning at it. These little sums, when coupled with volume, accumulates to a big number. 4 dollars is no big deal, but do this to 100 customers a day, that will lead to 12K a month. Pretty good money, I would say. In fact, those stupid banks do it all the time. This charge and that charge. When you call their customer service, you wait half an hour on the line, and got told that it is a "mistake" and get refunded. Sure, I can get refunded, but how many of us will get around to do it. I still remember TDbank over-charged me 12 bucks that I meant to call them for. But it has been a year and I have not called them yet. Telecommunication companies like AT&T also employ this ploy.
When it comes to banks, we feel we are justified to be angry. Because banks are jerks. The very same act, when committed by seemingly innocent restaurant owner, we blame Ben. How logical is that? Take this to the next logical step, empathy is the rule upon which we judge. We need no laws.
I am a selfish guy. When this happens, I do the cost benefit analysis, and mostly just get over with it and never pursue it further. In economics, we call it "Rational Inattention". It is the optimal strategy for each one of us. However, when taken collectively, we sow the seeds for businesses to take advantage of us and incentivize them to be dishonest "incrementally". In the end, we all got worse off. This is the well-known "prisoners' dilemma". It is because there are "irrational" agents who are willing to go after such jerks who abuse our rational inattention that puts such behavior in check. In fact, I wish everyone is like Ben, so that I can free-ride on that vigilance---as it becomes unprofitable for businesses to be dishonest. How does that help? When enough people refuse to let it go, business's revenue from such fraud diminishes, and they have less incentive to be dishonest. Furthermore, if each time a customer stands out like Ben, the business incurs a loss, the expected profit for being dishonest will go negative. This is when business no longer wishes to be dishonest. In fact, that is why the law requires the business to suffer a penalty larger than the amount of the overcharge. Gary Becker got this a long time ago---when enforcement is costly, we will make punishment higher.
Friend or Foe, it is a question of logic, not empathy.
Many businesses take it as a strategy to "mistakenly" over-charge customers. Since the amount is small, most people will not complain other than frowning at it. These little sums, when coupled with volume, accumulates to a big number. 4 dollars is no big deal, but do this to 100 customers a day, that will lead to 12K a month. Pretty good money, I would say. In fact, those stupid banks do it all the time. This charge and that charge. When you call their customer service, you wait half an hour on the line, and got told that it is a "mistake" and get refunded. Sure, I can get refunded, but how many of us will get around to do it. I still remember TDbank over-charged me 12 bucks that I meant to call them for. But it has been a year and I have not called them yet. Telecommunication companies like AT&T also employ this ploy.
When it comes to banks, we feel we are justified to be angry. Because banks are jerks. The very same act, when committed by seemingly innocent restaurant owner, we blame Ben. How logical is that? Take this to the next logical step, empathy is the rule upon which we judge. We need no laws.
I am a selfish guy. When this happens, I do the cost benefit analysis, and mostly just get over with it and never pursue it further. In economics, we call it "Rational Inattention". It is the optimal strategy for each one of us. However, when taken collectively, we sow the seeds for businesses to take advantage of us and incentivize them to be dishonest "incrementally". In the end, we all got worse off. This is the well-known "prisoners' dilemma". It is because there are "irrational" agents who are willing to go after such jerks who abuse our rational inattention that puts such behavior in check. In fact, I wish everyone is like Ben, so that I can free-ride on that vigilance---as it becomes unprofitable for businesses to be dishonest. How does that help? When enough people refuse to let it go, business's revenue from such fraud diminishes, and they have less incentive to be dishonest. Furthermore, if each time a customer stands out like Ben, the business incurs a loss, the expected profit for being dishonest will go negative. This is when business no longer wishes to be dishonest. In fact, that is why the law requires the business to suffer a penalty larger than the amount of the overcharge. Gary Becker got this a long time ago---when enforcement is costly, we will make punishment higher.
Friend or Foe, it is a question of logic, not empathy.
Friday, November 21, 2014
Empethetic Sociapath
Check out Financial Times' latest read on Net Neutrality:
Nothing could be farther from the truth.
Those ISP are monopolies in their respective markets. They abuse their monopoly power. The so-called digital divide is merely one symptom of such abuse. A good policy should aim at the root of the problem instead of working at one symptom, which is typical of what politicians do. Abusing its monopoly power, ISP like Comcast has charged unreasonable price for all internet users, and most of us simply surrender and pay the price. For the unlucky ones, they simply chose not to. In an economic sense, those who purchased internet suffered more from having a monopoly than those who simply could not afford internet (Econ 101).
However, empathy drives people to the visible inequality, the digital divide, and completely blind to those who suffer in silence. Empathy, with the help of media, turns the have-nots and haves head on, when they are in fact both suffering from the common enemy---monopolistic ISP. These leads to myopic policy agenda as the one put forth by Mr. Obama. The true evil lies in the damn monopoly, and we need to kill it. Period. Give reasonable price to everyone, not just the poor.
Ominously, Comcast is taking advantage of the public empathy-oriented judgement, and is pre-empting legislative moves:
This seems like a great benevolent move, if our mind revolves around the stupid and narrow goal of closing the digital divide. In fact, this is what economists would call "price-discrimination"---charging everyone his willingness to pay, a typical move by monopolist. If you look at it, Comcast does not lose a dime in this "charity move". In fact, it collects money. The key to realize that internet service has very low marginal cost, almost zero, as long as it is within capacity limit (By the way, ISP like Comcast has deliberately limited its capacity to blackmail Content Providers like Netflix to build its fast lane with ISP) . Thus, offering this plan is like hitting two birds with one stone. First, Comcast sells more products at near zero marginal cost, with relatively low margin; Note that those who can afford internet service still pay the unreasonable price due to the design of this offer. Second, this is a great public relation move, especially for the empathetic crowd. This will probably takes the steam out of further regulatory moves.
Comcast is a complete empathetic socialpath---it understands how the public psychology works, and uses to its advantage, bringing hard to all in the name of charity.
If one has any doubt that the ISPs in US are destructive monopolies, check out the following two graphs---high price, low quality--typical of monopolies. ISPs have wielded their monopolistic power for too long, causing economic loss to all of us.
We are fighting a losing war. The public is diverted by empathy to the stupid digital divide. The regulatory agency is captured---Tom Wheeler, FCC's democratic chairman, lobbied for the cable and wireless industry before entering FCC via this "revolving door". Established Internet companies are more ambivalent. For one thing, lack of net neutrality means they might get blackmailed away some of their profits. On the other hand, that probably means, they could build fast lane to forestall any start-up intent on rising to their position. In this age of technological convergence, such preemption is certainly valuable. One could see that as long as ISP do not get too greedy, big Internet companies will be more than happy to pay a tribute to let ISP to serve as a guard against any innovative "disruptor". In fact, google has been silent about the issue since 2006, and even when it broke its silence, it is more of a lukewarm support for net neutrality. I am not optimistic how long the current conflict between internet companies and ISP will genuinely last. We the paying consumers? Who cares? Those future innovators? LOL
The main idea is that the Internet Service Providers (ISP) abuse their monopolistic power and hence created the digital divide which is described by FT as
While this is an important issue, it is sad, almost disheartening that this becomes the focus. Politicians take this issue as their goal: "Mr Obama has often spoken of his desire to close the gap between the digital haves and have-nots". It seems to them as long as we can close this gap, it is all good.the gulf between those who have access to the internet and those who do not – has become one of the flashpoints in the fierce battle over US broadband policy.
Nothing could be farther from the truth.
Those ISP are monopolies in their respective markets. They abuse their monopoly power. The so-called digital divide is merely one symptom of such abuse. A good policy should aim at the root of the problem instead of working at one symptom, which is typical of what politicians do. Abusing its monopoly power, ISP like Comcast has charged unreasonable price for all internet users, and most of us simply surrender and pay the price. For the unlucky ones, they simply chose not to. In an economic sense, those who purchased internet suffered more from having a monopoly than those who simply could not afford internet (Econ 101).
However, empathy drives people to the visible inequality, the digital divide, and completely blind to those who suffer in silence. Empathy, with the help of media, turns the have-nots and haves head on, when they are in fact both suffering from the common enemy---monopolistic ISP. These leads to myopic policy agenda as the one put forth by Mr. Obama. The true evil lies in the damn monopoly, and we need to kill it. Period. Give reasonable price to everyone, not just the poor.
Ominously, Comcast is taking advantage of the public empathy-oriented judgement, and is pre-empting legislative moves:
Comcast does offer a much cheaper plan – $9.95 a month – for families with children on free or cut-price school meals...
This seems like a great benevolent move, if our mind revolves around the stupid and narrow goal of closing the digital divide. In fact, this is what economists would call "price-discrimination"---charging everyone his willingness to pay, a typical move by monopolist. If you look at it, Comcast does not lose a dime in this "charity move". In fact, it collects money. The key to realize that internet service has very low marginal cost, almost zero, as long as it is within capacity limit (By the way, ISP like Comcast has deliberately limited its capacity to blackmail Content Providers like Netflix to build its fast lane with ISP) . Thus, offering this plan is like hitting two birds with one stone. First, Comcast sells more products at near zero marginal cost, with relatively low margin; Note that those who can afford internet service still pay the unreasonable price due to the design of this offer. Second, this is a great public relation move, especially for the empathetic crowd. This will probably takes the steam out of further regulatory moves.
Comcast is a complete empathetic socialpath---it understands how the public psychology works, and uses to its advantage, bringing hard to all in the name of charity.
If one has any doubt that the ISPs in US are destructive monopolies, check out the following two graphs---high price, low quality--typical of monopolies. ISPs have wielded their monopolistic power for too long, causing economic loss to all of us.
We are fighting a losing war. The public is diverted by empathy to the stupid digital divide. The regulatory agency is captured---Tom Wheeler, FCC's democratic chairman, lobbied for the cable and wireless industry before entering FCC via this "revolving door". Established Internet companies are more ambivalent. For one thing, lack of net neutrality means they might get blackmailed away some of their profits. On the other hand, that probably means, they could build fast lane to forestall any start-up intent on rising to their position. In this age of technological convergence, such preemption is certainly valuable. One could see that as long as ISP do not get too greedy, big Internet companies will be more than happy to pay a tribute to let ISP to serve as a guard against any innovative "disruptor". In fact, google has been silent about the issue since 2006, and even when it broke its silence, it is more of a lukewarm support for net neutrality. I am not optimistic how long the current conflict between internet companies and ISP will genuinely last. We the paying consumers? Who cares? Those future innovators? LOL
Wednesday, November 12, 2014
How Can I give you something for Free?
This sounds like a crazy question, after all, is there anything simpler than giving things away for free? In fact, there is another question hidden behind: Why do I want to give things away for free? Why giving things away for free will determine how one should give away things for free.
Then why would a business want to give away things for free?
The answer is that the future demand for a particular good depends on whether the consumer is using this good in the current period. There are several reasons why current usage will determine future usage. The most common reason is "experience goods" that is, before trying this good, the consumer has no idea how good and how useful this good is. The rational motivates giving away samples for new products.
The second reason is network effect. For example, LinkedIn is only useful if there are many professional on this platform. However, if one charges a price to every professional, many professional will simply refuse to get on the Platform. By offering free basic services to all professionals, LinkedIn is able to increase its base dramatically. 1
The third reason is addiction. I will delay the discussion in the specific example later.
With so many reasons to give things away for free, why would anyone not give things away for free? Duh, because blindly giving things away for free actually decreases consumers' willingness to pay, which is the opposite of our goal. Even a temporary free giving-away might anchor consumers' expectation. This has two consequence. It lead to stronger resistance when the firm transitions to paid services; It incentivize consumers to delay purchase and wait for free offers (eg. sales and discounts). In other words, it could self-canabalizing. I for example, whenever purchasing on Amazon, would look at its price trajectory, and figure out that I can expect that Amazon will discount it to price x with 90% confidence. I will set up an automatic alert when the price on Amazon does fall to or below x.
My favorite example of giving things for free is Dropbox. Let us start with the basic. It is a freemium business, except it is different. Users are given some free space account when they sign up. The amount of free space is fixed, only nominally. The capacity of the first disk drive, the IBM 350 disk storage unit, is only 3.75MB. The typical hard disk we use today, is probably around 1TB.2 This is a a quarter million to one change, and mirrors the inflation of file size we experienced. I still remember those days in middle school when I would use a 3.5-inch floppy disk, which has accomodates about 1.5MB. Today, even if it is still compatible with my computer, I would find a floppy disk completely useless, because the real 1.5MB has been "inflated away". It is fair to say, in real terms, Dropbox is chipping away the size of free space every year. By inflating the free space away, it avoids the thorny problems of generating resistance or at least annoying consumers.
There is also wisdom in continuously and slowly inflating size away. When the size of free space is reduced in one stroke, one will have more incentive to find alternative storage services; however, when the consumer find himself just slightly above the limit every month or so, that incentive is greatly reduced, similar to the "boiling frog" story. In addition, the asynchrony of hitting the limits among users poses a challenge to coordinate migrating to alternative platform.
What really brings my attention to Dropbox is actually an email from them, informing me due to a technical problem that have affected me (I was not even aware of it), they are giving me one year of Dropbox Pro for FREE, that is 1TB for free for one year:
We apologize for any inconvenience this may have caused. To thank you for bearing with us, we're giving you Dropbox Pro for free for one year starting today, October 10, 2014. If you have any questions, please reply to this message or email us at selectivesync@dropbox.com. We’re here to help.
This is excellent, maybe for me, but definitely for them. For one thing, they made it clear this is just a compensation, so it avoids anchoring consumers' expectation in any way---it is just my lucky day. More importantly, it could potentially convert me from a free riders to a paid customer. Here is why. First, the technical problem was Selective Sync. It is reasonable to expect that whoever uses that function derives more value from an average user and probably deal with larger data files. Good targeting. Second, addiction to a service is present here. There is a Chinese saying "It is easy to transition from a poor life to a rich one, but the reverse is much harder". There is some psychological cost to transition from knowing no limits to living under stringent limits. This cost, is often unanticipated by consumers.
Beyond the psychological aspect, there is a more rational or orthodox source of addiction. It might seem weird to talk about addiction to an IT service/product, but it is very relevant in this area. Let me take the least consumer-facing product--VMware's ESX, a hypervisor technology. Swapping out ESX for alternatives are exactly hard, but many companies use the management tool designed for ESX, and they build their operations around that. These are the real switching costs.3 Dropbox is no different. When one is granted free access, the natural response is to use the heck out of it, after all, he reasons:"I probably will never get as lucky". He figures out all the bells and whistles of using Dropbox, what a fun! Dropbox is after all an extremely useful service, and everyone can find so many uses of it. From my perspective, I might want to use it to collaborate with other people on research. Imagine one year later, my pro service is over. I still have a couple of collaboration in progress. No, I cannot leave Dropbox. How could I propose to my collaborator that we find an alternative despite its great performance and just because I am a cheapo? The bottom line is it is very hard to switch collaboration platforms. There is a psychological aspect to it: people tends to overly discount the future cost (of moving their files away and switching to another sync service when their account expire) vis-a-vis the utility they gain from using Dropbox in the current period (a phenomenon known as time inconsistency). In other words, I would think to myself that I will simply move all my files back to hard disk when my pro service expires, but when the time comes, I will instead choose to pay for continued pro service. This problem is exacerbated by the fact that people on average tend to underestimate the cost of making the transition back (planning fallacy).
I had to say, it is a most brilliant move. I am very impressed. The only sad ending to the story is that: knowing my time-inconsistency problem, I am not taking advantage of the free offering. I am only using 0.6% of the 1TB.4
1 In this example, free basic services is a permanent feature for LinkedIn, but one can imagine a platform only provides free service during mobilization stage. For example, google search offered ad-free search in the beginning and then incorporated ads when it became dominant. In some sense, google started to charge us in terms of "attention fee".↩
3 http://en.wikipedia.org/wiki/History_of_hard_disk_drives↩
3 Yoffie, David, Andrei Hagiu and Michael Slind, “VMware, Inc., 2008,” HBS No. 9-709-435 (Boston: Harvard Business School Publishing, 2010), p.15↩
4 If this surprises you, here is a even more surprising story. In sophomore year, I was lucky to get a dingle---a double dorm room occupied only by me. What I did? I limited myself and belongs to only half of the room (using bookcase and bed to block my use of the other half), so that I 1)will not accumulate too many belongs that I have to get ride of later 2)will not get used to having a huge room and face the difficult transition of being confined to a much smaller room the next year.↩
Friday, August 15, 2014
A Funny Encounter, or sad?
So I ran into someone on the street.
He asked me if I am from China. I said yes. Then he said he has a friend who went to China. Without my asking how was it, he said "She told me in China, no one can practice any religion, except for tai chi".
I was stunned for a second. and said "what?, tai chi?"
"Yes" he continued, "she also told me the emperor does not like christianity, or what is that person called again, not emperor, you know china is a communist country, so do you guys call him dictator?"
"President, actually", I replied, at a loss how to explain to him what my perspective is"
"yeah, president", he continued, but probablly not so convinced that we also use such a term. He went on to tell me things that made me wonder if I ever lived in China.
Don't get me wrong. I like this fellow. He is a superb man from other parts of our conversation, not on china.
But it strikes me as horrifying that in US, some people still cling to such an outdated view of China. That impression is probably true 40 years ago when China was in the cultural revolution.
What can I say? When we move to a place that is foreign, and when we have language barriers, and when we move there with prejudices, our perception of that place will be quite wrong. Maybe we enclose ourselves too much to protect ourselves and we never even ventured to see the true place.
We trust anecdotes too much. It is more personal than hard facts. After all, a trusted friend told me so. Just as we need to take a grain of a salt with what eye witness say in court due to many cognitive bias, personal perceptions could easily go way off when the subject is complicated and hard to comprehend.
Maybe I should not think of this too much. This is after all, an encounter, and will be an anecdote, isn't it?
He asked me if I am from China. I said yes. Then he said he has a friend who went to China. Without my asking how was it, he said "She told me in China, no one can practice any religion, except for tai chi".
I was stunned for a second. and said "what?, tai chi?"
"Yes" he continued, "she also told me the emperor does not like christianity, or what is that person called again, not emperor, you know china is a communist country, so do you guys call him dictator?"
"President, actually", I replied, at a loss how to explain to him what my perspective is"
"yeah, president", he continued, but probablly not so convinced that we also use such a term. He went on to tell me things that made me wonder if I ever lived in China.
Don't get me wrong. I like this fellow. He is a superb man from other parts of our conversation, not on china.
But it strikes me as horrifying that in US, some people still cling to such an outdated view of China. That impression is probably true 40 years ago when China was in the cultural revolution.
What can I say? When we move to a place that is foreign, and when we have language barriers, and when we move there with prejudices, our perception of that place will be quite wrong. Maybe we enclose ourselves too much to protect ourselves and we never even ventured to see the true place.
We trust anecdotes too much. It is more personal than hard facts. After all, a trusted friend told me so. Just as we need to take a grain of a salt with what eye witness say in court due to many cognitive bias, personal perceptions could easily go way off when the subject is complicated and hard to comprehend.
Maybe I should not think of this too much. This is after all, an encounter, and will be an anecdote, isn't it?
Life, not for sale, but for purchase
One thing that makes people uncomfortable about universal health insurance is so called death panel, where health care has to be rationed among people.
It is sad, but it is not outrageous.
Some people argued that you cannot put a price on life.
Well, not for sale, but for purchase.
What do I mean? There is a maximum price one is willing to pay for his life! This is quite obvious, since people are putting a price on their life all the time. When opting out of insurance, when not seeing the doctor when not feeling well, or when choosing to take indirect flight to save money. At least, they are putting a price on a partial life---in a probablistic sense.
So how much are you selling your life? You may ask?
There isn't a price! Hence my title, life, not for sale but for purchase.
This seems most bizzare and irrational. Not really, when it is for sale, I possess my life, and at this point I value it infinitely. When it is for purchase, I do not possess my life, and there is only finite amount I am willing to pay for it. The fundamental effect is income effect, as economists call it.
If you really insist, then let me explain it in a trivial example. Suppose life gives you certain utility $U_0$, and money gives you some utility $U(c)$ where c is money. Of course it is concave. Suppose you total utility is the sum of these two. The optimization problem is
\[
U(c)+U_0\; or \; U(c+p)
\]
for selling life, and
\[
U(c-p)+U_0\;or \; U(c)
\]
for buying life.
One can easily show that as long as $U(\cdot)$ is bounded above, given a high initial c, there is no price for life for sale. In that situation, there will always be a price for buying life.
So which concept is more relevant? In the medical context, buying life is more more relevant.
It is sad, but it is not outrageous.
Some people argued that you cannot put a price on life.
Well, not for sale, but for purchase.
What do I mean? There is a maximum price one is willing to pay for his life! This is quite obvious, since people are putting a price on their life all the time. When opting out of insurance, when not seeing the doctor when not feeling well, or when choosing to take indirect flight to save money. At least, they are putting a price on a partial life---in a probablistic sense.
So how much are you selling your life? You may ask?
There isn't a price! Hence my title, life, not for sale but for purchase.
This seems most bizzare and irrational. Not really, when it is for sale, I possess my life, and at this point I value it infinitely. When it is for purchase, I do not possess my life, and there is only finite amount I am willing to pay for it. The fundamental effect is income effect, as economists call it.
If you really insist, then let me explain it in a trivial example. Suppose life gives you certain utility $U_0$, and money gives you some utility $U(c)$ where c is money. Of course it is concave. Suppose you total utility is the sum of these two. The optimization problem is
\[
U(c)+U_0\; or \; U(c+p)
\]
for selling life, and
\[
U(c-p)+U_0\;or \; U(c)
\]
for buying life.
One can easily show that as long as $U(\cdot)$ is bounded above, given a high initial c, there is no price for life for sale. In that situation, there will always be a price for buying life.
So which concept is more relevant? In the medical context, buying life is more more relevant.
time inconsistency and the evolution of policies
Just something random came to my mind.
Imagine there is a National Park that is open to public. Every year some visitors ran into accidents. The public begins to demand a rescue team to help out. Sure, no problem. The government set up a rescue team. To cover the cost, every one must pay an insurance fee before entering the National Park.
"That is not fair!" some protested, "We don't need that stupid rescue team! We are never like those stupid duechbags, we stay in line and we know our stuff!" Yeah yeah, why should those cautious hikers subsidize those reckless fools?
No problem, the coverage is voluntary. But one must make up his mind before entering the National Park. Either covered or not. One cannot get himself into deep sh*t and sign up for the insurance.
All is well for a while. Then some day, one guy got into big problem. Fell from a cliff and broke his leg. What is worse, he chose NOT to have the insurance. The rescue team did not help, and he died. The public was furious. How could this government agency stand by to watch a life disappear when it could deliver the help! When a life is at risk, the stupid government agency is still thinking about the stupid money! We need CHANGE!
Sure, you want change, and you are granted a change in a democratic government (though it is never guaranteed if it is for better or for worse). So the director of the rescue team was sacked and publicly humiliated. The new director was careful, and when this happened again, he sent his man.
Soon enough, fewer people want to pay the insurance fee. After all, they will still send out the men if I need help, won't they? As fewer people pay for it, to keep a balanced budget, the rescue team increased the price. Sure enough, even fewer people pay for it. After a couple of rounds, no one is paying for it. The rescue team is bankrupt.
So it is dissolved. The public was not happy, and sure enough the government bail it out. We gonna fund you.
And they live happily ever after. Except, many people never realize that now everyone is paying for the rescue team, whether you are a hiker or not. How so? It sounds condescending for me to even point out that the government money has to come somewhere. Yeah, the tax payers. No government generate its own money (though at least in China, many fail to understand this subtle point despite their high international rankings in math). Probably less well-off people in general do not go to that National Park that often. It is usually a vacation place for the more well-to-do. So we now have a more regressive tax.
Imagine there is a National Park that is open to public. Every year some visitors ran into accidents. The public begins to demand a rescue team to help out. Sure, no problem. The government set up a rescue team. To cover the cost, every one must pay an insurance fee before entering the National Park.
"That is not fair!" some protested, "We don't need that stupid rescue team! We are never like those stupid duechbags, we stay in line and we know our stuff!" Yeah yeah, why should those cautious hikers subsidize those reckless fools?
No problem, the coverage is voluntary. But one must make up his mind before entering the National Park. Either covered or not. One cannot get himself into deep sh*t and sign up for the insurance.
All is well for a while. Then some day, one guy got into big problem. Fell from a cliff and broke his leg. What is worse, he chose NOT to have the insurance. The rescue team did not help, and he died. The public was furious. How could this government agency stand by to watch a life disappear when it could deliver the help! When a life is at risk, the stupid government agency is still thinking about the stupid money! We need CHANGE!
Sure, you want change, and you are granted a change in a democratic government (though it is never guaranteed if it is for better or for worse). So the director of the rescue team was sacked and publicly humiliated. The new director was careful, and when this happened again, he sent his man.
Soon enough, fewer people want to pay the insurance fee. After all, they will still send out the men if I need help, won't they? As fewer people pay for it, to keep a balanced budget, the rescue team increased the price. Sure enough, even fewer people pay for it. After a couple of rounds, no one is paying for it. The rescue team is bankrupt.
So it is dissolved. The public was not happy, and sure enough the government bail it out. We gonna fund you.
And they live happily ever after. Except, many people never realize that now everyone is paying for the rescue team, whether you are a hiker or not. How so? It sounds condescending for me to even point out that the government money has to come somewhere. Yeah, the tax payers. No government generate its own money (though at least in China, many fail to understand this subtle point despite their high international rankings in math). Probably less well-off people in general do not go to that National Park that often. It is usually a vacation place for the more well-to-do. So we now have a more regressive tax.
Thursday, July 24, 2014
Avoiding Fundamentals
I somehow feel in this age, we seem to avoid talking about fundamentals. When it comes to financial crisis, we talk about multiple equilibria and failure of coordination; when it comes to beauty, we point to artificial social construct; when it comes to poverty or poor performance, we emphasize discrimination and stereotypes.
I will not argue that all those other factors do not matter---most likely they do. But it does seem to me we go to great length to deny the role of fundamentals.
Part of the things is when we say the fundamental is problematic, we cannot avoid assigning blame or responsibility. Doesn't it feel great that our financial system is perfectly regulated, it is just an unfortunate mis-cordination that caused a big problem, that there is no intrinsic beautiful or ugly, it is just some stupid tastes imposed on us by the society, that we are all perfectly smart and diligent, but it is the society that is preventing us from achieving great things?
I personally consider science as a pure curiosity endeavor---one that involves asking and answering questions that interests us. Those answers should be prevented from having anything to do with our policy or judgement. The current frenzy to apply and extrapolate "scientific findings" probably lead to numerous restrictions imposed on our scientific endeavors.
Fundamental is never the full picture, but it is very often in the picture. Perhaps it is better if science remains a personal inquiry, rather than a public display.
I will not argue that all those other factors do not matter---most likely they do. But it does seem to me we go to great length to deny the role of fundamentals.
Part of the things is when we say the fundamental is problematic, we cannot avoid assigning blame or responsibility. Doesn't it feel great that our financial system is perfectly regulated, it is just an unfortunate mis-cordination that caused a big problem, that there is no intrinsic beautiful or ugly, it is just some stupid tastes imposed on us by the society, that we are all perfectly smart and diligent, but it is the society that is preventing us from achieving great things?
I personally consider science as a pure curiosity endeavor---one that involves asking and answering questions that interests us. Those answers should be prevented from having anything to do with our policy or judgement. The current frenzy to apply and extrapolate "scientific findings" probably lead to numerous restrictions imposed on our scientific endeavors.
Fundamental is never the full picture, but it is very often in the picture. Perhaps it is better if science remains a personal inquiry, rather than a public display.
Sunday, June 22, 2014
International Trade---An Idiot's perspective
Some liberals adhere to Krugman as their intellectual backbone---after all, they feel their points are backed up by a Nobel-winning economist. However, it is recently reviewed that some of them completely ignore Krugman's insight that won him the Nobel Prize--why people trade. Krugman gave a clear answer to the benefit of intra-industry trade---it gives people more variety to enjoy.
Well, you know you can count on New York Times for idiotic protectionist argument. Man, it never disappoints me.
http://www.nytimes.com/2014/06/22/opinion/sunday/why-are-we-importing-our-own-fish.html?hp&rref=opinion&_r=0#permid=12084248
I once thought there is no point teaching intro Econ---these things are obvious, one does not need to learn it from a book. Now I still believe there is no point teaching intro Econ---it is beyond most people.
Thursday, June 19, 2014
That is Crazy Excitement
In a previous post, People Are Over-Excited, I remarked that people are too excited about internet companies, and there is a bubble in this industry. I was talking about WhatsApp. Now I now discuss something else.
Imagine sending the following text message to your friend:
Yo
Yes, just these two letters.
Yo, now what? Guess how much funding this app got? 1.2 million USD.http://techcrunch.com/2014/06/18/yo-yo/
Some people are still skeptical of the existence of bubbles. They argued that apps like WhatsApp and Yo has built a huge customer base and that is important---A canonical app company's business model relied on harnessing network effects by operating at a sustained net loss and to build market share (or mind share). These companies offered their services or end product for free with the expectation that they could build enough brand awareness to charge profitable rates for their services later. The motto "get big fast" reflected this strategy.
Btw, I did not wrote the previous explanation. I copy pasted from Wikipedia's page on dot.com bubble. I only changed the dot.com to app. That reflects my attitude.
I am now very confident that there is a bubble. The problem is when it will burst and what will that bring about. The questions I am curious about is what is the differential effect on sound companies like Amazon and google versus those jokes. How will it impact the kind of innovation company takes? Obviously, innovation like Yo will stop, but will big companies be hurt to such an extent that they will need to suspend current promising research that might not promise immediate payoff. The impact on labor market is equally interesting. When companies shrink, where will excess programmers go? Will they shift to finance, especially into high frequency trading?
Imagine sending the following text message to your friend:
Yo
Yes, just these two letters.
Yo, now what? Guess how much funding this app got? 1.2 million USD.http://techcrunch.com/2014/06/18/yo-yo/
Some people are still skeptical of the existence of bubbles. They argued that apps like WhatsApp and Yo has built a huge customer base and that is important---A canonical app company's business model relied on harnessing network effects by operating at a sustained net loss and to build market share (or mind share). These companies offered their services or end product for free with the expectation that they could build enough brand awareness to charge profitable rates for their services later. The motto "get big fast" reflected this strategy.
Btw, I did not wrote the previous explanation. I copy pasted from Wikipedia's page on dot.com bubble. I only changed the dot.com to app. That reflects my attitude.
I am now very confident that there is a bubble. The problem is when it will burst and what will that bring about. The questions I am curious about is what is the differential effect on sound companies like Amazon and google versus those jokes. How will it impact the kind of innovation company takes? Obviously, innovation like Yo will stop, but will big companies be hurt to such an extent that they will need to suspend current promising research that might not promise immediate payoff. The impact on labor market is equally interesting. When companies shrink, where will excess programmers go? Will they shift to finance, especially into high frequency trading?
Monday, May 19, 2014
The Best Commencement Speech
I must quote this wonderful wonderful commencement speech. It points to the cancer that is spreading in American campus, especially elite schools. My experience with such tyrannical and yet superficial "humanitarianist" is frustrating at best. I am so glad that at least among graduate students, intellectual life is much better. Disagreement is very pleasant experience here.
Members of the Class of 2014, I salute you. My warmest wishes on the occasion of your graduation from this fine institution.
And, before I go any further, I would like to express my personal thanks to all of you for not rescinding my invitation. I know that matters were dicey for a while, given that I have held and defended actual positions on politically contested issues. Now and then I’ve strayed from the party line. And if the demonstrators would quiet down for a moment, I’d like to offer an abject apology for any way in which I have offended against the increasingly narrow and often obscure values of the academy.
In my day, the college campus was a place that celebrated the diversity of ideas. Pure argument was our guide. Staking out an unpopular position was admired -- and the admiration, in turn, provided excellent training in the virtues of tolerance on the one hand and, on the other, integrity.
Your generation, I am pleased to say, seems to be doing away with all that. There’s no need for the ritual give and take of serious argument when, in your early 20s, you already know the answers to all questions. How marvelous it must be to realize at so tender an age that you will never, ever change your mind, because you will never, ever encounter disagreement! How I wish I’d had your confidence and fortitude. I could have spared myself many hours of patient reflection and intellectual struggle over the great issues of the day.
Ladies and gentlemen, you are graduating into a world of enormous complexity and conflict. There are corners of the globe where violence and war and abject oppression still dominate. Capitalism is concentrating wealth in fewer hands but, in the developing world, lifting tens of millions out of poverty. Traditional societies are caught in an increasingly desperate struggle between the perils of fundamentalism on the one side and the perils of modernism on the other.
Given your generation’s penchant for shutting down speakers with whom you disagree, I am assuming that you have no intention of playing any serious adult role in mediating those conflicts. And that’s fine. We should leave the task of mediation to those unsophisticated enough to be sensitive to the concerns of both sides.
Besides, you will face more important problems. Once you depart the campus, the world will make unjust demands on you. You will have to work for a living. You will have to put up with people whose views you despise. Fortunately, as long as you don’t waste precious time reflecting in a serious way on the issues of the day -- or, worse, contemplating the possibility that you might be mistaken on a question or two -- you should have plenty of hours for Twitter and Google Hangout and the nonstop party that every truly just society was meant to be.
Indeed, a lack of reflection can be of enormous assistance to an act of protest. Consider the contretemps at Smith College over the invitation extended to Christine Lagarde, the head of the International Money Fund, who has decided not to attend. Were one to think seriously about the implications of the anti-IMF argument -- and, please, ladies and gentlemen, do nothing of the kind! -- one would also presumably have to bar from the stage Lagarde’s fellow conspirators, particularly leaders of the IMF’s biggest financial supporter, the United States of America. (The Tea Party, happily, opposes the IMF. Perhaps one of its leaders might be invited next year.)
Then there are your fellows at Rutgers University, who rose up to force the estimable Condoleezza Rice, former secretary of state and national security adviser, to withdraw. The protest was worded with unusual care, citing the war in Iraq and the “torture” practiced by the Central Intelligence Agency. Cleverly omitted was the drone war. This elision allows the protesters to wish away the massive drone war that President Barack Obama's administration has conducted now for more than five years, with significant loss of innocent life. As for the Iraq war, well, among its early and enthusiastic supporters was -- to take a name at random -- then-Senator Hillary Clinton. But don’t worry. Consistency in protest requires careful and reflective thought, and that is exactly what we should be avoiding here.
The literary critic George Steiner, in a wonderful little book titled "Nostalgia for the Absolute,” long ago predicted this moment. We have an attraction, he contended, to higher truths that can sweep away complexity and nuance. We like systems that can explain everything. Intellectuals in the West are nostalgic for the tight grip religion once held on the Western imagination. They are attracted to modes of thought that are as comprehensive and authoritarian as the medieval church. You and your fellow students -- and your professors as well; one mustn’t forget their role -- are therefore to be congratulated for your involvement in the excellent work of bringing back the Middle Ages.
Now, before I close, I would like to address those members of the Class of 2014 who might think that it’s wrong to ban speakers whose views you reject. Your reactionary belief in tolerance and open-mindedness is truly distressing. I beg you to remember that every controversial question has only one answer. You have absolutely nothing to learn from people whose opinions you dislike.
And now, graduates, before things go too far -- before you run the risk of being thought to be on the road to becoming responsible adults -- please, rise to your feet, and, speaking with one voice, shout me down!
Thank you.
Members of the Class of 2014, I salute you. My warmest wishes on the occasion of your graduation from this fine institution.
And, before I go any further, I would like to express my personal thanks to all of you for not rescinding my invitation. I know that matters were dicey for a while, given that I have held and defended actual positions on politically contested issues. Now and then I’ve strayed from the party line. And if the demonstrators would quiet down for a moment, I’d like to offer an abject apology for any way in which I have offended against the increasingly narrow and often obscure values of the academy.
In my day, the college campus was a place that celebrated the diversity of ideas. Pure argument was our guide. Staking out an unpopular position was admired -- and the admiration, in turn, provided excellent training in the virtues of tolerance on the one hand and, on the other, integrity.
Your generation, I am pleased to say, seems to be doing away with all that. There’s no need for the ritual give and take of serious argument when, in your early 20s, you already know the answers to all questions. How marvelous it must be to realize at so tender an age that you will never, ever change your mind, because you will never, ever encounter disagreement! How I wish I’d had your confidence and fortitude. I could have spared myself many hours of patient reflection and intellectual struggle over the great issues of the day.
Ladies and gentlemen, you are graduating into a world of enormous complexity and conflict. There are corners of the globe where violence and war and abject oppression still dominate. Capitalism is concentrating wealth in fewer hands but, in the developing world, lifting tens of millions out of poverty. Traditional societies are caught in an increasingly desperate struggle between the perils of fundamentalism on the one side and the perils of modernism on the other.
Given your generation’s penchant for shutting down speakers with whom you disagree, I am assuming that you have no intention of playing any serious adult role in mediating those conflicts. And that’s fine. We should leave the task of mediation to those unsophisticated enough to be sensitive to the concerns of both sides.
Besides, you will face more important problems. Once you depart the campus, the world will make unjust demands on you. You will have to work for a living. You will have to put up with people whose views you despise. Fortunately, as long as you don’t waste precious time reflecting in a serious way on the issues of the day -- or, worse, contemplating the possibility that you might be mistaken on a question or two -- you should have plenty of hours for Twitter and Google Hangout and the nonstop party that every truly just society was meant to be.
Indeed, a lack of reflection can be of enormous assistance to an act of protest. Consider the contretemps at Smith College over the invitation extended to Christine Lagarde, the head of the International Money Fund, who has decided not to attend. Were one to think seriously about the implications of the anti-IMF argument -- and, please, ladies and gentlemen, do nothing of the kind! -- one would also presumably have to bar from the stage Lagarde’s fellow conspirators, particularly leaders of the IMF’s biggest financial supporter, the United States of America. (The Tea Party, happily, opposes the IMF. Perhaps one of its leaders might be invited next year.)
Then there are your fellows at Rutgers University, who rose up to force the estimable Condoleezza Rice, former secretary of state and national security adviser, to withdraw. The protest was worded with unusual care, citing the war in Iraq and the “torture” practiced by the Central Intelligence Agency. Cleverly omitted was the drone war. This elision allows the protesters to wish away the massive drone war that President Barack Obama's administration has conducted now for more than five years, with significant loss of innocent life. As for the Iraq war, well, among its early and enthusiastic supporters was -- to take a name at random -- then-Senator Hillary Clinton. But don’t worry. Consistency in protest requires careful and reflective thought, and that is exactly what we should be avoiding here.
The literary critic George Steiner, in a wonderful little book titled "Nostalgia for the Absolute,” long ago predicted this moment. We have an attraction, he contended, to higher truths that can sweep away complexity and nuance. We like systems that can explain everything. Intellectuals in the West are nostalgic for the tight grip religion once held on the Western imagination. They are attracted to modes of thought that are as comprehensive and authoritarian as the medieval church. You and your fellow students -- and your professors as well; one mustn’t forget their role -- are therefore to be congratulated for your involvement in the excellent work of bringing back the Middle Ages.
Now, before I close, I would like to address those members of the Class of 2014 who might think that it’s wrong to ban speakers whose views you reject. Your reactionary belief in tolerance and open-mindedness is truly distressing. I beg you to remember that every controversial question has only one answer. You have absolutely nothing to learn from people whose opinions you dislike.
And now, graduates, before things go too far -- before you run the risk of being thought to be on the road to becoming responsible adults -- please, rise to your feet, and, speaking with one voice, shout me down!
Thank you.
Monday, April 28, 2014
An interesting read from Noahpinion: What I learned in econ grad school
I found the following blog entry to be very interesting. In some sense, it touched on my dissatisfaction with macro, and why I quit it.
Noahpinion: What I learned in econ grad school: I always find it interesting that criticisms of economics education focus more on the gra...
Noahpinion: What I learned in econ grad school: I always find it interesting that criticisms of economics education focus more on the gra...
Tuesday, April 15, 2014
Names, names...
I remember one argument my friends and I got into. Qiao and I believed in the non-neutrality of names. Naming a concept frames peoples' thoughts, and it is the gateway to introduce bias. We both felt the name of "China Proper" to denote "Inner China" is inappropriate since it seem to imply the frontier region during Qing dynasty is not properly China's land. Another friend of us disagree.
Why I suddenly think of this? I recently realized that what we economists call "price discrimination" is elegantly called "price customization" for marketing people. The very act of charging different prices to extract more surplus is depicted as a special service---customization by the marketing people. I found that to be really amusing. We actively use language to frame, mislead, and remove stigma.
I am aware of some research in political science and economics trying to study the neutrality of of media (Jesse Shapiro from Chicago Booth had a paper on newspaper ideological leaning, Ali from Stanford GSB had one one cable media, Feng from HBS looked at bias in wikipedia). Most of the work I have seen involves searching for "key words". This has lots of problems. The baseline might employ keywords very differently from media (for example, congressman with known political leaning might have different frequencies of keywords as a result of differential participation in certain topics, while media might use the same keywords to ridicule opponents). Empirically, the estimates have been noisy. Maybe one could get more mileage by looking at the different naming of the same concept.
As for me, this is a very effective screening tool for me. I like to read news, but not biased news. For example, I can pick up an article from NYT, if I found manipulation via naming, I can quickly threw it to trash can, ignoring the prose carefully crafted to convey a sense of balance and neutrality.
Smart as you are, you must be aware that I chose to name NYT in the previous example to "manipulate" you into associating NYT with that tactics. Absolutely, an eye for an eye.
Why I suddenly think of this? I recently realized that what we economists call "price discrimination" is elegantly called "price customization" for marketing people. The very act of charging different prices to extract more surplus is depicted as a special service---customization by the marketing people. I found that to be really amusing. We actively use language to frame, mislead, and remove stigma.
I am aware of some research in political science and economics trying to study the neutrality of of media (Jesse Shapiro from Chicago Booth had a paper on newspaper ideological leaning, Ali from Stanford GSB had one one cable media, Feng from HBS looked at bias in wikipedia). Most of the work I have seen involves searching for "key words". This has lots of problems. The baseline might employ keywords very differently from media (for example, congressman with known political leaning might have different frequencies of keywords as a result of differential participation in certain topics, while media might use the same keywords to ridicule opponents). Empirically, the estimates have been noisy. Maybe one could get more mileage by looking at the different naming of the same concept.
As for me, this is a very effective screening tool for me. I like to read news, but not biased news. For example, I can pick up an article from NYT, if I found manipulation via naming, I can quickly threw it to trash can, ignoring the prose carefully crafted to convey a sense of balance and neutrality.
Smart as you are, you must be aware that I chose to name NYT in the previous example to "manipulate" you into associating NYT with that tactics. Absolutely, an eye for an eye.
Tuesday, March 4, 2014
What is Barbaric?
Let me start with a quite unrelated note. There is a custom of foot binding in Chinese culture. In short, the culture is about applying painfully tight binding to the feet of young girls to prevent further growth. In fact, the previous statement understates the pain associated with it. The following are two pictures. The first is a picture of a bound foot and the second is a Schema of an x-ray comparison between an unbound and bound foot.
It is a part of Chinese culture, but that does not prevent me from labeling this particular element as barbaric and backward. Despite several champaigns against it led by Woman's Christian Temperance Movement and other feminists, it did not end until Mao came to power:
When the Communists took power in 1949, they were able to enforce a strict prohibition on foot-binding, including in isolated areas deep in the countryside where the Nationalist prohibition had been ignored. The ban remains in effect today.There are two takeaways. 1)The fact that certain custom/practice/etc is part of culture does not mean we cannot pass value judgement one it. Sometimes, it is outright barbaric. 2) To end certain barbaric behavior, reason might not be as helpful as a strict crack down.
Now let us imagine a church. The church pours resources from everyone and spend them on a very few selected people. Those people get educated at the expense of others being deprived of education. And the culture of that society is that the uneducated mass placing much faith on the few elites. That does not sound that inviting. Does it? Let me go to what I intend to discuss in the beginning. To know more about Tibet, I consulted a close friend on what it is like in Tibet, and here is his/her response:
I have seen pious Tibetans, their religious devotion is incredible, but they are not perfectly kind, compassionate, and peaceful people (in fact ... someone's recent argument that Tibetan Buddhism is a culture infused with both extreme violence and extreme compassion). some are aggressive, and many are incredibly erotic and sexual. one can even argue that the complete devotion and trust of guru required in tibetan buddhism can be used to cultivate terrorism. but rather than concluding that religious devotion is the problem, I'd rather see the problem as the extreme lack of and inequality in education (religious and secular, in general). the way tibetans train lamas are perhaps elite intellectual education at its finest, and they do produce most incredible human beings, but that's the resources of the entire society poured into a few individuals. the vast majority is so un-educated that it is difficult to think about rationality. an uneducated population entrenched in a single belief system, that's like material waiting to be mobilized for collective aggression and chaos.As an economist, I see gigantic problems right here. Educating the rest of the population gonna be hard, because the lamas understand that once the people get educated and enlightened, they will not be as susceptible and worship lamas as much they did. The lamas stood to lose, just as the church in the past viewed science and enlightenment as its enemy. What the church did, is to turn the people against scientists and leaders of enlightenment. I suspect that is what happened in Tibet.
I called this practice "backward at best, barbaric at worst", but my friend protested against my use of the language. I stood by what I wrote however. Yes, every culture has good sides and bad sides, but certain elements are still barbaric.
As my friend later noted, most of the lamas are good-natured. Sure, just as I believe that most people in the church are wonderful people throughout history, but that does not mean, we should give them unlimited power. For power abuse, it is not the majority that matters, it is the very few evil outliers that matters.
What should we do? There are only two ways. 1) leave it as it is 2) eliminate that element. The latter definitely is going to be painful. So I am not sure if we should go with the latter. But what I do wish to say here is that there is no middleground. It is not possible to campaign and advocate, hopefully people will ditch their old ways, as illustrated in the footbinding history. It is like a tumor that just does not heal by itself. Of course it is debatable if we need to remove the tumor or the pain of removing the tumor does not justify the removal, but I think it is overly romantic to wish for a middle ground.
Friday, February 21, 2014
How Seriously should We Take Economic Policy Analysis 1?
The short answer is: not much. We can take the qualitative analysis quite seriously, but in many areas, the quantitative results are far from as trust-worthy as most would like you to believe.
There are many reasons, and I have intended to blog about this for a long time, but I will only discuss one issue briefly.
In economic analysis, we do something called welfare analysis---that is we find the utility function for individuals, and then we find their utility under different policies.
The problem lies in finding the utility function. We know there is no way utility function is parametrically identified, thus, we need to assume a functional form for the utility and for that functional form, we fit the data. Almost surely (that is with probability 1), we will be using the wrong functional form and the utility function we claim to identify is a very crude approximation within that functional form. As it turns out the welfare calculation could be very sensitive to that. There is one paper that finds that the welfare improvements is infinity!! The authors admirably kept the results and explained that it is due to their functional form assumption and continued with other functional forms. I could imagine in other studies authors would just delete crazy results from the paper and pretend nothing happened.
The problem continues. For welfare calculation, we want an "experience utility", that is how people actually feel. However, we can only back out what I call "decision utility", that is agents behave as if they are maximizing their "decision utility". Unless we assume that agents do maximize their experience utility, there is no reason to believe that these two would coincide. In fact, the study of behavioral economics point to many problems. Any inconsistency problems or cognitive bias would break the link, and they exist.
Let me give another example. We all know about business cycle--that is the boom and bust, recessions. We kind of feel there is a big cost to it, and it would be quite desirable if we can eliminate it. In fact, it is so desirable that we will be willing to pay an insurance fee to eliminate it or protect ourselves completely from it. But if we apply a standard welfare calculation, an upper estimate of the welfare cost of business cycle is 1/5 of 1 percent. An individual with average consumption of \$50,000 would be willing to pay \$100 to eliminate fluctuations. This is still a very small amount compared to the implications of long run growth on income. Most economists feel this is weird, but that is what is spit out. I think this does point to the limitation of our standard welfare analysis. Perhaps, some habbit formation adjustments would give more plausible answers.
Thus, the utility function we get needs to be taken with a grain of salt and so does the policy recommendation.
What does this imply?
It does NOT imply we should stop doing welfare analysis in economics. We need to and we need to expand the scope. But we need to be careful in interpreting our results and realize the error margin is larger than it looks. I always think of the wisdom of Ariel Pakes:"A decision needs to be made in real time. This is not perfect, but this is the best we can do." On the other hand, I would not shoot for any drastic policy changes that promises a slight/moderate welfare improvements on paper.
There are many reasons, and I have intended to blog about this for a long time, but I will only discuss one issue briefly.
In economic analysis, we do something called welfare analysis---that is we find the utility function for individuals, and then we find their utility under different policies.
The problem lies in finding the utility function. We know there is no way utility function is parametrically identified, thus, we need to assume a functional form for the utility and for that functional form, we fit the data. Almost surely (that is with probability 1), we will be using the wrong functional form and the utility function we claim to identify is a very crude approximation within that functional form. As it turns out the welfare calculation could be very sensitive to that. There is one paper that finds that the welfare improvements is infinity!! The authors admirably kept the results and explained that it is due to their functional form assumption and continued with other functional forms. I could imagine in other studies authors would just delete crazy results from the paper and pretend nothing happened.
The problem continues. For welfare calculation, we want an "experience utility", that is how people actually feel. However, we can only back out what I call "decision utility", that is agents behave as if they are maximizing their "decision utility". Unless we assume that agents do maximize their experience utility, there is no reason to believe that these two would coincide. In fact, the study of behavioral economics point to many problems. Any inconsistency problems or cognitive bias would break the link, and they exist.
Let me give another example. We all know about business cycle--that is the boom and bust, recessions. We kind of feel there is a big cost to it, and it would be quite desirable if we can eliminate it. In fact, it is so desirable that we will be willing to pay an insurance fee to eliminate it or protect ourselves completely from it. But if we apply a standard welfare calculation, an upper estimate of the welfare cost of business cycle is 1/5 of 1 percent. An individual with average consumption of \$50,000 would be willing to pay \$100 to eliminate fluctuations. This is still a very small amount compared to the implications of long run growth on income. Most economists feel this is weird, but that is what is spit out. I think this does point to the limitation of our standard welfare analysis. Perhaps, some habbit formation adjustments would give more plausible answers.
Thus, the utility function we get needs to be taken with a grain of salt and so does the policy recommendation.
What does this imply?
It does NOT imply we should stop doing welfare analysis in economics. We need to and we need to expand the scope. But we need to be careful in interpreting our results and realize the error margin is larger than it looks. I always think of the wisdom of Ariel Pakes:"A decision needs to be made in real time. This is not perfect, but this is the best we can do." On the other hand, I would not shoot for any drastic policy changes that promises a slight/moderate welfare improvements on paper.
People are Over-excited
This is my reaction to facebook buying WhatsApp. It is a stretch for me to believe that it is rational.
First, I would like to put 19b in perspective. It is a large number and we have very bad intuition for it. Some benchmark helps. See this excellent comparison.
I am kind of old school and I always use a cash flow model as a benchmark (Though I think it gives very very crude estimates, since the result is purely assumption-driven, but it does give good sense of what assumptions are needed to justify a result. Also, it gives an anchor).
So We need to consider two scenerios: 1)what will be the annual income of facebook if it buys whatsApp $Y_t$ 2)what will be the income of facebook if it buys whatsApp $Y_t'$ Then we need to consider the differential of $\Delta Y_t=Y'_t-Y_t$. As a very crude benchmark calculation, let us hold $Y_t$ and $Y'_t$ fixed and thus $\Delta Y_t=\Delta Y$. When we apply the annuity principle to find what is the value of the discounted present value of all those differential income $\Delta Y$.
\[
NPV=\Delta Y/r
\]
where $r$ is the interest rate.
If we consider an interest rate of 5 percent (risk -adjusted), then it means that the annual income differential needed to justify this purchase is 1 billion usd. That seems awefully large, as the net income of facebook in 2013 is only 1.5 billion.
When it come to tech stuff, we often believe the old rules do not apply. It is the ideas! This time is different! I regard this as nothing but bullshit. The earliest innovation that drives much excitement is the South Sea Bubble in Britain, and the Mississippi bubble in France. They were wonderful financial innovation that really could be very beneficial. The railroad bubbles seem to be got forgotten as well. We are not talking about worthless craps--like many in the tech bubbles. We are talking about things of value, and people just get over-excited. Nothing more, nothing less.
Financial Times has a pretty interesting analysis.
If I have to speculate, the tech industry contains lots of hype. There was a time it created lots of value, and truly made things better. Skype was a wonderful start. But later things just get boring. It is just some marginal incremental improvements whose value seldome justifies the extra cost. (like iphone's first appearance was great and a couple of improvements were good, but the later innovations have run out of steam). I think the demand is now sustained more by commercial manipulation that exaggerates the differences, and prey on people's catching up with the latest mentality. This is not sustainable. There is much to catch up, and smartphones will not always be on the list.
First, I would like to put 19b in perspective. It is a large number and we have very bad intuition for it. Some benchmark helps. See this excellent comparison.
I am kind of old school and I always use a cash flow model as a benchmark (Though I think it gives very very crude estimates, since the result is purely assumption-driven, but it does give good sense of what assumptions are needed to justify a result. Also, it gives an anchor).
So We need to consider two scenerios: 1)what will be the annual income of facebook if it buys whatsApp $Y_t$ 2)what will be the income of facebook if it buys whatsApp $Y_t'$ Then we need to consider the differential of $\Delta Y_t=Y'_t-Y_t$. As a very crude benchmark calculation, let us hold $Y_t$ and $Y'_t$ fixed and thus $\Delta Y_t=\Delta Y$. When we apply the annuity principle to find what is the value of the discounted present value of all those differential income $\Delta Y$.
\[
NPV=\Delta Y/r
\]
where $r$ is the interest rate.
If we consider an interest rate of 5 percent (risk -adjusted), then it means that the annual income differential needed to justify this purchase is 1 billion usd. That seems awefully large, as the net income of facebook in 2013 is only 1.5 billion.
When it come to tech stuff, we often believe the old rules do not apply. It is the ideas! This time is different! I regard this as nothing but bullshit. The earliest innovation that drives much excitement is the South Sea Bubble in Britain, and the Mississippi bubble in France. They were wonderful financial innovation that really could be very beneficial. The railroad bubbles seem to be got forgotten as well. We are not talking about worthless craps--like many in the tech bubbles. We are talking about things of value, and people just get over-excited. Nothing more, nothing less.
Financial Times has a pretty interesting analysis.
If I have to speculate, the tech industry contains lots of hype. There was a time it created lots of value, and truly made things better. Skype was a wonderful start. But later things just get boring. It is just some marginal incremental improvements whose value seldome justifies the extra cost. (like iphone's first appearance was great and a couple of improvements were good, but the later innovations have run out of steam). I think the demand is now sustained more by commercial manipulation that exaggerates the differences, and prey on people's catching up with the latest mentality. This is not sustainable. There is much to catch up, and smartphones will not always be on the list.
Sunday, February 16, 2014
Greatest unfairness in China?
This blog is about the registry system in China. It is one of the most controversial issues in China, often making headline, and debates often getting too heated for rationality to remain.
I am talking about eligibility for social benefits here. If you look around the world, there is huge discrepency in social welfare. Some countries are doing great--Denmark is an example, but no one in his right mind would suggest that Denmark should extend its benefits to people from all over the world. In fact, Denmark would not allow people from all over the world to migrate there freely. Many people migrate to work in other countries, and it is very common to find themselves excluded from the social benefits in the other country (they pay the taxes, by the way), in addition to lots of obstacles in finding a job. I do not wish to dwell on this too much, but it suffices to say that countries do set up walls for social benefits.
www.bit.ly/aV32Mn
As you can see, the country China is like a miniature world (excluding the poorest niche). If it is reasonable for different countries to set up walls of their social benefits, then the same goes for a country like China. In fact, this graph underestimate the amount of heterogeneity, because the biggest difference lies in countryside vs. cities, and thus by mixing them together, some heterogeneity is lost.
In reality, the effects on welfare of unskilled labor will be cushioned by public education, health care, and other benefits provided by the local government. We consider two alternatives--1)extend those benefits to the migrant worker. 2)deny those migrant workers the benefits. If we extend the benefit, since the number of recipients increased the quality will decrease. Thus from the perspective of unskilled labor in the city, it is a double hit--their wage goes down and the public service becomes crappy. From the perspective of migrant worker, they have chosen to come to the city---via revealed preference, must have improved their life from that in their hometown. (On a side note, four years ago, I did use a Computable General Equilibrium model calibrated to model this, and it does suggest that unskilled labor in city will lose, and migrant worker will gain a little from such a flow) Empirically, the unskilled labor is much more dependent on social programs as the rich can afford private schools and now increasingly private health care. Thus, unskilled worker is the only loser in this game, and if we take the status quo as a reference point, there is a reason for denying social welfare to newcomers. What is important here is to realize that we are faced with the tradeoff between unskilled labor native to the city and the migrant worker, it is not the trade-off between rich and poor.
The reason why migrant worker will only gain a little in the model when we improve the access to social benefits is due to its general equilibrium nature. As I commented in the previous blog, we need to think general equilibrium when we consider a policy. Now consider the following shock: we give migrant workers more benefits. What will happen? In the short run, migrating to the cities to work becomes more attractive, and thus, more people will flow into the city, bidding down the price, and adding to the burden of social programs--ultimately these two forces will make working in the city less attractive to induce more flows. These two forces work on the unskilled worker in the city as well, and there is no initial positive shock to counter it--in fact, they only have an initial negative shock. I suspect, this general equilibrium consequences are never in people's mind when they discuss this issue.
Background
In China, people gets assigned to a registry (a city or a town), which determine what benefits they are eligible to. For example, your registry in Shanghai will entitle you to the public education system in Shanghai. If your registry happen to be not in Shanghai, but you happen to work in Shanghai, will unless you find some way to change it or work out some other way, it is going to be a lot of trouble for you. Your choice will be limited, you might need to pay for some of the choices others can enjoy for free, and there might be a longer line for some services. The gist of the problem as many see it is that there is underprovision of public service to migrant worker. They ask, why is there a differential treatment to people? Why are people not born equal?"Walls" of Social benefits
The short answer is, people are never born equal.I am talking about eligibility for social benefits here. If you look around the world, there is huge discrepency in social welfare. Some countries are doing great--Denmark is an example, but no one in his right mind would suggest that Denmark should extend its benefits to people from all over the world. In fact, Denmark would not allow people from all over the world to migrate there freely. Many people migrate to work in other countries, and it is very common to find themselves excluded from the social benefits in the other country (they pay the taxes, by the way), in addition to lots of obstacles in finding a job. I do not wish to dwell on this too much, but it suffices to say that countries do set up walls for social benefits.
Beyond Country Level?
It makes people less comfortable when it goes beyond country level. Now let us look at the data. The following graph plots different countries and different provinces in China, on a two dimensional graph, showing their GDP per capita and life expectancy. It shows the amount of heterogeneity among different provinces in China.www.bit.ly/aV32Mn
As you can see, the country China is like a miniature world (excluding the poorest niche). If it is reasonable for different countries to set up walls of their social benefits, then the same goes for a country like China. In fact, this graph underestimate the amount of heterogeneity, because the biggest difference lies in countryside vs. cities, and thus by mixing them together, some heterogeneity is lost.
Disruptive Flows
Of course, all these are not satisfying. We still want to ask why we need walls? The answer is simple, because flows are disruptive. Flows of migrant worker, while being instrumental for the cities' development, could be highly disruptive when it is extended social benefits too quickly. Consider a minuscule case: flows of mainland Chinese to Hong Kong to shop. These shoppers like certain things a lot, and the flow is disruptive enough for Hong Kong government to impose a ban on sales of certain items to mainlanders. The truth is, supply of public benefits, adjust even more slowly, and when more people demand a slice of the pie, the slice becomes thinner and thinner.Finally, A Model and some General Equilibrium
We now consider the issue using the following model. There are two types of labor: skilled and unskilled labor. In the city, both types of labor exist and for simplicity, the migrant workers to the city are unskilled labor. What happens when we allow the flow of migrant worker to increase? The supply of unskilled labor goes up, and hence the relative wage of unskilled labor goes down. Thus, the flow of migrant worker hurts the welfare of unskilled labor while improving the welfare of the skilled labor (informally by decreasing the price of goods produced by unskilled labor, or more formally it is isomorphic to the Stolper-Samuelson effect in trade theory).In reality, the effects on welfare of unskilled labor will be cushioned by public education, health care, and other benefits provided by the local government. We consider two alternatives--1)extend those benefits to the migrant worker. 2)deny those migrant workers the benefits. If we extend the benefit, since the number of recipients increased the quality will decrease. Thus from the perspective of unskilled labor in the city, it is a double hit--their wage goes down and the public service becomes crappy. From the perspective of migrant worker, they have chosen to come to the city---via revealed preference, must have improved their life from that in their hometown. (On a side note, four years ago, I did use a Computable General Equilibrium model calibrated to model this, and it does suggest that unskilled labor in city will lose, and migrant worker will gain a little from such a flow) Empirically, the unskilled labor is much more dependent on social programs as the rich can afford private schools and now increasingly private health care. Thus, unskilled worker is the only loser in this game, and if we take the status quo as a reference point, there is a reason for denying social welfare to newcomers. What is important here is to realize that we are faced with the tradeoff between unskilled labor native to the city and the migrant worker, it is not the trade-off between rich and poor.
The reason why migrant worker will only gain a little in the model when we improve the access to social benefits is due to its general equilibrium nature. As I commented in the previous blog, we need to think general equilibrium when we consider a policy. Now consider the following shock: we give migrant workers more benefits. What will happen? In the short run, migrating to the cities to work becomes more attractive, and thus, more people will flow into the city, bidding down the price, and adding to the burden of social programs--ultimately these two forces will make working in the city less attractive to induce more flows. These two forces work on the unskilled worker in the city as well, and there is no initial positive shock to counter it--in fact, they only have an initial negative shock. I suspect, this general equilibrium consequences are never in people's mind when they discuss this issue.
Afterthoughts
I have written enough, but this is by no means a complete discussion of the issue. I only wrote out some things that I see blatantly missing in public discussion. This entry is in response to a friend's blog about the system, and I was asked to give some feedback. Thus it is for that purpose, to balance out a more proactive voice. I often feel I am a terrible person to ask for feedback, as I disagree too often. But I think I will stick with it, because not speaking what I see makes me feel worse than disagreeing. Finally, I think economics, especially (good) economic models have a role to play in public discussions. They help us organize thoughts and see things more clearly.Saturday, February 8, 2014
STEM controversy
So I was trying to do research about stem cell controversy when I ran into another STEM controversy--the debate about the policy of opening America up to people pursuing a career in science and technology. Leading the opposition is Norm Matloff, who happened to be a veteran in computer science, actually a professor in UC Davis.
When it seems that Matloff's experience would give him more credibility at the issue, I would argue it is exactly his experience that brings suspicion of conflict of interest. This policy, after all, pits the technology industry against veteran IT workers. At the risk of caricature, here is how: veterans cannot compete against the new international comers, in terms of cost efficiency, so they lose from the policy. The tech companies, now having a larger pool of labor to draw from, benefit. It is very much the same idea in medicine, when cardiologists set up associations, and refuse to recognize degrees from other nations (like EU or India, which is doing an amazing job in cardiology), they are setting up a monopoly, so as to shield them from competition. Since I mentioned conflict of interest, I should disclose mine: I am an international in US, but I am not in STEM. Thus even if I chose to stay in US after graduation, I do not benefit from STEM, and in fact, since the policy is leaning towards STEM and away from others, I might lose from it.
The main opposition is that STEM brings in cheap labor that replaces American labor, instead of "best and brightest" as in the rhetoric. Of course, reality and rhetoric is different. So I ask what is the alternative? no STEM law. Unlike medicine, which is non-traded goods/services. Technology is traded. Now we are looking at factor intensity differences, and I tend to think of the classic HO model, which tells you that trade in goods/services makes trade in factors unnecessary. What does that mean in plain English? So if we have different economies, India and US. Suppose India has more skilled labor and US has less. Then one would expect that in India, the relative wage for skilled labor will be lower than in US. HO's insights are that if you allow the country to trade, these two countries will specialize in such a way that equalizes the relative wage. Of course in reality, trade frictions prevents perfect equalization, but the force more or less works. The wage differential we observe today between rich and poor countries are mainly due to the premium to skills (that is they are different labor, rich countries have more skilled labor so they get paid more). According to HO, US will begin to outsource many of its IT job (though it gonna be a slow process, during which veterans like Matloff will still enjoy the benefit), and the demand will not grow as fast. More specifically, when an entrepreneur have an idea, he will find it more expensive to find technical people to implement it, and this deters potential innovations. It is not a new story--after all, US manufacturing lost its dominance due to outsourcing, which takes place in the absence of cheap labor inflow.
What is the bottom line? Matloff is right in that STEM will not matter for the "best and brightest", but for an industry it is not the "best and brightest" that matters. What matters for the thriving of an industry is a ready pool of competent, and cheap labor. Above all, the dynamics of being able to replace old, impotent, expensive labor with new , competent, and cheap labor is the core of growth.
What about welfare. First of all, IT people are not underpaid. They earn way more than the average American. When I say cheap, I am still talking about 100k. Second, it is THE misconception that to be labor friendly, we have to kill mobility. We have to guarantee that a laborer can always hold on to his job at the price he used to get. Some of us know it is bad for the economy in the long run, but they feel it is a fair price to pay. This needs not be true. Denmark has one of the lowest inequalities, and yet it has no minimum wage law, does not restrict companies to fire its workers. Indeed, if you look at it, their labor has high turnover rate. But they retrain themselves and find a job in a different industry. This ability to cope with change is the essence of growth, it is the best security a laborer can get.
Finally, I wish to talk about general equilibrium. Basically, I told a general equilibrium story about how trade balance things out. I never conceal my conviction that economists have a fetish for general equilibrium. We do, every models we write now must be a general equilibrium one. This has its problems because as I said general equilibrium is not immediate and the economy could be out of equilibrium for a while. Thus it will be impossible to explain some of the stylized facts we observe with a general equilibrium model. Nevertheless, I believe that any story that is not general equilibrium is not complete--it is temporary. It is fine to explain things with it, but to debate a policy with it is unacceptable. You are leaving things out with an incomplete story. You are not telling the whole truth.
When it seems that Matloff's experience would give him more credibility at the issue, I would argue it is exactly his experience that brings suspicion of conflict of interest. This policy, after all, pits the technology industry against veteran IT workers. At the risk of caricature, here is how: veterans cannot compete against the new international comers, in terms of cost efficiency, so they lose from the policy. The tech companies, now having a larger pool of labor to draw from, benefit. It is very much the same idea in medicine, when cardiologists set up associations, and refuse to recognize degrees from other nations (like EU or India, which is doing an amazing job in cardiology), they are setting up a monopoly, so as to shield them from competition. Since I mentioned conflict of interest, I should disclose mine: I am an international in US, but I am not in STEM. Thus even if I chose to stay in US after graduation, I do not benefit from STEM, and in fact, since the policy is leaning towards STEM and away from others, I might lose from it.
The main opposition is that STEM brings in cheap labor that replaces American labor, instead of "best and brightest" as in the rhetoric. Of course, reality and rhetoric is different. So I ask what is the alternative? no STEM law. Unlike medicine, which is non-traded goods/services. Technology is traded. Now we are looking at factor intensity differences, and I tend to think of the classic HO model, which tells you that trade in goods/services makes trade in factors unnecessary. What does that mean in plain English? So if we have different economies, India and US. Suppose India has more skilled labor and US has less. Then one would expect that in India, the relative wage for skilled labor will be lower than in US. HO's insights are that if you allow the country to trade, these two countries will specialize in such a way that equalizes the relative wage. Of course in reality, trade frictions prevents perfect equalization, but the force more or less works. The wage differential we observe today between rich and poor countries are mainly due to the premium to skills (that is they are different labor, rich countries have more skilled labor so they get paid more). According to HO, US will begin to outsource many of its IT job (though it gonna be a slow process, during which veterans like Matloff will still enjoy the benefit), and the demand will not grow as fast. More specifically, when an entrepreneur have an idea, he will find it more expensive to find technical people to implement it, and this deters potential innovations. It is not a new story--after all, US manufacturing lost its dominance due to outsourcing, which takes place in the absence of cheap labor inflow.
What is the bottom line? Matloff is right in that STEM will not matter for the "best and brightest", but for an industry it is not the "best and brightest" that matters. What matters for the thriving of an industry is a ready pool of competent, and cheap labor. Above all, the dynamics of being able to replace old, impotent, expensive labor with new , competent, and cheap labor is the core of growth.
What about welfare. First of all, IT people are not underpaid. They earn way more than the average American. When I say cheap, I am still talking about 100k. Second, it is THE misconception that to be labor friendly, we have to kill mobility. We have to guarantee that a laborer can always hold on to his job at the price he used to get. Some of us know it is bad for the economy in the long run, but they feel it is a fair price to pay. This needs not be true. Denmark has one of the lowest inequalities, and yet it has no minimum wage law, does not restrict companies to fire its workers. Indeed, if you look at it, their labor has high turnover rate. But they retrain themselves and find a job in a different industry. This ability to cope with change is the essence of growth, it is the best security a laborer can get.
Finally, I wish to talk about general equilibrium. Basically, I told a general equilibrium story about how trade balance things out. I never conceal my conviction that economists have a fetish for general equilibrium. We do, every models we write now must be a general equilibrium one. This has its problems because as I said general equilibrium is not immediate and the economy could be out of equilibrium for a while. Thus it will be impossible to explain some of the stylized facts we observe with a general equilibrium model. Nevertheless, I believe that any story that is not general equilibrium is not complete--it is temporary. It is fine to explain things with it, but to debate a policy with it is unacceptable. You are leaving things out with an incomplete story. You are not telling the whole truth.
Tuesday, January 21, 2014
The Pursuit of Happiness
Pursuit of Happiness, is considered as important as life and liberty by Thomas Jefferson when he drafted the Declaration of Independence. Of course, I am not going to engage in such a high level political conversation now. I am going to take a more personal approach.
When I was young, I was indoctrinated to believe that the purpose of life is to bring justice to all serve the whole humanity. We are taught that we need to be healthy, not for ourselves, but to better serve the humanity. You might laugh at this, but that period of simple-mindedness was characterized by more happiness than the later period when I was more deliberate in pursuing happiness.
I started to take pursuit of happiness as my prime goal around high school. All else, like money, is subordinate to that. In sophomore year, when I was chatting with a professor about his different experience with jobs in private sector, government and academia, I asked bluntly:" Which job gave the best lifestyle?" That professor was amused and said "It is probably too early for you to consider that." He is probably right, for reasons I will explain later.
I will start with an anecdote.Walking back to home today is enlightening. I was checking the weather forecast the other day, and noticed that it gonna be very cold today with a possible snow storm. I was depressed because I anticipated that I will be miserable when I had to walk 45 min from school to home. I was agitated at the prospect of this suffering. It turned out I was, to my surprise, very happy during the commute. The snow storm, far from making me suffer, actually took the usual boredom of commute. It was more fun walking on the snow, slippery as it could be. My heart was buzzing for joy. It is amazing that when I left office, I was anticipating the worst and five minutes into the snow, I was elated.
May I suggest that happiness is mysterious?
I started thinking about this topic a long time ago. In my usual nerdiness, I started making predictions about what will make me happy. I divided them into three categories, short horizon(1 day), medium horizon (1 week-1 month) and long term horizon (1 year). I am curious how accurate am I able to predict how happy I will be for different horizons. For short horizon it is 63%, medium 46%, and long term 0%. The caveat is that I only have two observations for long term, so it is not precise estimate.
This is quite startling. I made plans to maximize happiness. I thought everything I did was in pursuit of happiness.
I am sure I am not alone in my pursuit of happiness, and I am not alone either to be frustrated by the elusive quest for happiness.
The sad/exciting truth is, this is no engineering problem that we can sit down, and find a solution. Happiness is a state of mind, and it is a gift. When we run after it, it might disappear. It pops us when we least expect it. The popular self-help literature does not lack advice. Do something fun. Have friends. Develop a hobby. Let go of negative feelings. Duh....Hobby is something we feel happy doing it. Friends are people we feel happy hanging out with. It is quite circular to give such advice. There are more: Exercise. Eat food that makes you happier. These pieces of advice remind me of someone who collect coupons to become a millionaire.
Why do I wrote this? It came out of my observation that by deliberately pursuing happiness, I am scaring it away. By being obsessed with happiness, I become anxious to achieve it, agitated in anticipation of potentially unhappy ordeals. The truth is, I know nothing. I do not know if something gonna make me happy or unhappy. If history is any guidance, a coin flip could do better for medium horizon prediction. Yet, I planned for things, weighing trade-offs, and get tormented by my mentality. I was obsessed with making the choice that will make me happiest (or I thought will make me happiest). I got anxious about making the wrong choice, and anxious about not getting the first choice.
Before coming to Harvard, I was sure that I gonna suffer in winter. I gonna hate the winter commute (though I do realize that I am likely to enjoy winter sports). It turns out quite the opposite. This month, I led a very happy life.
It is perhaps time to let go. To let go of my pursuit of happiness so as to achieve true happiness. I am not an idealist, thinking that we should have no plans, and just let life takes us where it takes. I am however, letting go of obsession, the obsession to control. From my limited exposure to buddhist teaching, they preach that obsession （执） is the source of all pain.
Finally, I dedicate this blog to my Williams friends, in particular, Qiao Zhang , Sungik Yang, and Roshan Sharma who mysteriously brought so much happiness to my undergraduate years. It is not through alcohol or drugs, but through your mere presence.
When I was young, I was indoctrinated to believe that the purpose of life is to bring justice to all serve the whole humanity. We are taught that we need to be healthy, not for ourselves, but to better serve the humanity. You might laugh at this, but that period of simple-mindedness was characterized by more happiness than the later period when I was more deliberate in pursuing happiness.
I started to take pursuit of happiness as my prime goal around high school. All else, like money, is subordinate to that. In sophomore year, when I was chatting with a professor about his different experience with jobs in private sector, government and academia, I asked bluntly:" Which job gave the best lifestyle?" That professor was amused and said "It is probably too early for you to consider that." He is probably right, for reasons I will explain later.
I will start with an anecdote.Walking back to home today is enlightening. I was checking the weather forecast the other day, and noticed that it gonna be very cold today with a possible snow storm. I was depressed because I anticipated that I will be miserable when I had to walk 45 min from school to home. I was agitated at the prospect of this suffering. It turned out I was, to my surprise, very happy during the commute. The snow storm, far from making me suffer, actually took the usual boredom of commute. It was more fun walking on the snow, slippery as it could be. My heart was buzzing for joy. It is amazing that when I left office, I was anticipating the worst and five minutes into the snow, I was elated.
May I suggest that happiness is mysterious?
I started thinking about this topic a long time ago. In my usual nerdiness, I started making predictions about what will make me happy. I divided them into three categories, short horizon(1 day), medium horizon (1 week-1 month) and long term horizon (1 year). I am curious how accurate am I able to predict how happy I will be for different horizons. For short horizon it is 63%, medium 46%, and long term 0%. The caveat is that I only have two observations for long term, so it is not precise estimate.
This is quite startling. I made plans to maximize happiness. I thought everything I did was in pursuit of happiness.
I am sure I am not alone in my pursuit of happiness, and I am not alone either to be frustrated by the elusive quest for happiness.
The sad/exciting truth is, this is no engineering problem that we can sit down, and find a solution. Happiness is a state of mind, and it is a gift. When we run after it, it might disappear. It pops us when we least expect it. The popular self-help literature does not lack advice. Do something fun. Have friends. Develop a hobby. Let go of negative feelings. Duh....Hobby is something we feel happy doing it. Friends are people we feel happy hanging out with. It is quite circular to give such advice. There are more: Exercise. Eat food that makes you happier. These pieces of advice remind me of someone who collect coupons to become a millionaire.
Why do I wrote this? It came out of my observation that by deliberately pursuing happiness, I am scaring it away. By being obsessed with happiness, I become anxious to achieve it, agitated in anticipation of potentially unhappy ordeals. The truth is, I know nothing. I do not know if something gonna make me happy or unhappy. If history is any guidance, a coin flip could do better for medium horizon prediction. Yet, I planned for things, weighing trade-offs, and get tormented by my mentality. I was obsessed with making the choice that will make me happiest (or I thought will make me happiest). I got anxious about making the wrong choice, and anxious about not getting the first choice.
Before coming to Harvard, I was sure that I gonna suffer in winter. I gonna hate the winter commute (though I do realize that I am likely to enjoy winter sports). It turns out quite the opposite. This month, I led a very happy life.
It is perhaps time to let go. To let go of my pursuit of happiness so as to achieve true happiness. I am not an idealist, thinking that we should have no plans, and just let life takes us where it takes. I am however, letting go of obsession, the obsession to control. From my limited exposure to buddhist teaching, they preach that obsession （执） is the source of all pain.
Finally, I dedicate this blog to my Williams friends, in particular, Qiao Zhang , Sungik Yang, and Roshan Sharma who mysteriously brought so much happiness to my undergraduate years. It is not through alcohol or drugs, but through your mere presence.
Friday, January 10, 2014
Unknown unknowns
Larry Summers talked to our class today. His talk is usually wonderful. Though sometimes I disagree with what he said strongly, I love his talk nevertheless. Just as he said, a valuable paper/talk makes points that some people would disagree with rather than obvious things. I guess the public does not feel this way, or perhaps with the distortion inherent to the media, this advice might not be golden as far as public relation is concerned.
He mentioned unknown unknowns. Basically he is trying to illustrate that there are many factors (unknowns) that we are not even aware of when we make a judgment/estimate. Consequently, our estimates are overly confident. The obvious implication is that, when we make estimates, we should be cognizant of the fact, and in addition to allow for uncertainties around the factors we consider, but also allow for further uncertainties left out in our model (I usually call it "model risk").
I wish to make two points.
Three years ago, when I was writing a paper for a tutorial with Jerry Caprio, I thought about this and actually sent out a survey to investigate this further. I was shocked to find that, even when I remind people of the model risks, people choose to ignore it by and large. Most people felt pretty good about the decision, and when I did follow up, they usually tell me 1) yeah, I know, but I don't know how much difference the model risk gonna matter so I just ignored that 2) oh, I though model risk does not make much difference--models might be wrong, but it is not that wrong, right? so I ignore that. Well, as I noted in my paper that surveys are surveys, you cannot read much from this, because things might be different when people have real stakes involved.
Another thing is personal. I was quite hesitant to come to harvard for econ before August (I do not wish to discuss what changed my mind). I wrote down on a scale of 1-100 how happy I expect myself to be in different places and programs. Well, I probably should not disclose the results as one number that I did get to observe is grossly wrong. One important thing is the weather, I feel as outdoorsy as I was, I would be happier with the gorgeous weather in stanford. What is more, I love rural areas more. As it turned out, I am much happier than I could ever imagine after coming here. In the end, factors I never considered mattered dramatically. The people in my office are awesome, and I got to make friends with some people outside the program and outside my year. There are some other factors that I never thought would matter. but they mattered, to put it mildly. When I tried to make the decision, I probably realized that people around me matters, but not as important as it turned out to be. Part of it might be because I do not know anything about the people about me, so I choose to ignore it, or more precisely I choose to focus on what I can see concretely. I slightly considered the possibility that I might not have a clear picture with all factors considered, but in retrospect, I allowed too little room of error. In the end, it is a combination of some factors and my own realization that my forecast has always been wrong in the past that pushed me to discard my own forecasts and made the choice I did. What I learnt? Actually, not much or not that useful. at least it is not very reassuring to realize that we often optimize for nothing. but I probably will not through away an option that seems crappy at first sight. Yes, we never know.
He mentioned unknown unknowns. Basically he is trying to illustrate that there are many factors (unknowns) that we are not even aware of when we make a judgment/estimate. Consequently, our estimates are overly confident. The obvious implication is that, when we make estimates, we should be cognizant of the fact, and in addition to allow for uncertainties around the factors we consider, but also allow for further uncertainties left out in our model (I usually call it "model risk").
I wish to make two points.
Three years ago, when I was writing a paper for a tutorial with Jerry Caprio, I thought about this and actually sent out a survey to investigate this further. I was shocked to find that, even when I remind people of the model risks, people choose to ignore it by and large. Most people felt pretty good about the decision, and when I did follow up, they usually tell me 1) yeah, I know, but I don't know how much difference the model risk gonna matter so I just ignored that 2) oh, I though model risk does not make much difference--models might be wrong, but it is not that wrong, right? so I ignore that. Well, as I noted in my paper that surveys are surveys, you cannot read much from this, because things might be different when people have real stakes involved.
Another thing is personal. I was quite hesitant to come to harvard for econ before August (I do not wish to discuss what changed my mind). I wrote down on a scale of 1-100 how happy I expect myself to be in different places and programs. Well, I probably should not disclose the results as one number that I did get to observe is grossly wrong. One important thing is the weather, I feel as outdoorsy as I was, I would be happier with the gorgeous weather in stanford. What is more, I love rural areas more. As it turned out, I am much happier than I could ever imagine after coming here. In the end, factors I never considered mattered dramatically. The people in my office are awesome, and I got to make friends with some people outside the program and outside my year. There are some other factors that I never thought would matter. but they mattered, to put it mildly. When I tried to make the decision, I probably realized that people around me matters, but not as important as it turned out to be. Part of it might be because I do not know anything about the people about me, so I choose to ignore it, or more precisely I choose to focus on what I can see concretely. I slightly considered the possibility that I might not have a clear picture with all factors considered, but in retrospect, I allowed too little room of error. In the end, it is a combination of some factors and my own realization that my forecast has always been wrong in the past that pushed me to discard my own forecasts and made the choice I did. What I learnt? Actually, not much or not that useful. at least it is not very reassuring to realize that we often optimize for nothing. but I probably will not through away an option that seems crappy at first sight. Yes, we never know.
The Loss of Innocence
I cannot help notice the difference, between when I was in elementary school and now.
Obviously, you say.
Yes, it is. But I do like to think about obvious things, as from "a grain of sand", we can see the world.
When I was young, I was care free. I eat what I like--no veggies, tons of butter, all sweet things. I could sit in front of TV for hours never feeling guilty.
Now, before I pick up the cookie this afternoon, words like diabetes flash through my mind. I still sit in front of TV (actually computers) for hours, but full of guilt. I make decisions carefully, painstakingly evaluating the links between cancer, high blood pressure, heart disease and all the things I love to do, and on top of that, I factor in model risks, statistical errors, publication bias....
So from no rules, I began to realize there are rules. And from there, I realize it is not enough to follow some simple rules, but rather a network of complicated rules, and finally, I am not even sure if those rules were accurate.
What a messed-up life! I confess it is, in some sense. You can probably tell, loss of innocence does not stop here. Career, family, love, social, and other aspects do not evade a similar fate.
Knowledge is power. I do not deny that, but it is seldom a power we can control nicely. More often than not, it is a burden.
When we talk about decision making in economics, we often speak of the kind of person as I was in elementary school as "naive agent", and we talk about them with contempt---we believe it is undesirable. Our mission is to inform those naive agent, let them come to grip with the reality, eliminate their irrational exuberance, push down their excessive optimism, and make them "educated". I was an advocate. I believed in the centrality of being informed.
But now I wonder. If a person can be free of worry for decades and the cost is a decade of low consumption, is it necessarily worse off? I would totally be up for that. I am aware some people do lots of welfare analysis for this kind of things, and show that it is not desirable. I think these people have a poor understanding of economic theory. Utility functions are used to model how people make decisions, and their values cannot be compared when it is a different person, or that same person's perspective changes. If we remember how utility function is constructed, it is so constructed that a person with a certain perspective, would act as if he is maximizing the utility function.
Obviously, you say.
Yes, it is. But I do like to think about obvious things, as from "a grain of sand", we can see the world.
When I was young, I was care free. I eat what I like--no veggies, tons of butter, all sweet things. I could sit in front of TV for hours never feeling guilty.
Now, before I pick up the cookie this afternoon, words like diabetes flash through my mind. I still sit in front of TV (actually computers) for hours, but full of guilt. I make decisions carefully, painstakingly evaluating the links between cancer, high blood pressure, heart disease and all the things I love to do, and on top of that, I factor in model risks, statistical errors, publication bias....
So from no rules, I began to realize there are rules. And from there, I realize it is not enough to follow some simple rules, but rather a network of complicated rules, and finally, I am not even sure if those rules were accurate.
What a messed-up life! I confess it is, in some sense. You can probably tell, loss of innocence does not stop here. Career, family, love, social, and other aspects do not evade a similar fate.
Knowledge is power. I do not deny that, but it is seldom a power we can control nicely. More often than not, it is a burden.
When we talk about decision making in economics, we often speak of the kind of person as I was in elementary school as "naive agent", and we talk about them with contempt---we believe it is undesirable. Our mission is to inform those naive agent, let them come to grip with the reality, eliminate their irrational exuberance, push down their excessive optimism, and make them "educated". I was an advocate. I believed in the centrality of being informed.
But now I wonder. If a person can be free of worry for decades and the cost is a decade of low consumption, is it necessarily worse off? I would totally be up for that. I am aware some people do lots of welfare analysis for this kind of things, and show that it is not desirable. I think these people have a poor understanding of economic theory. Utility functions are used to model how people make decisions, and their values cannot be compared when it is a different person, or that same person's perspective changes. If we remember how utility function is constructed, it is so constructed that a person with a certain perspective, would act as if he is maximizing the utility function.
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