Indifference, Transaction Costs, Women, And Bus Drivers (Things That Matter But Cannot Be Modeled)

I am sitting in my office. I hit another bottom. I wasted a day debating whether it was worse to be indifferent to the world or the world being indifferent to you. They are both pretty damn bad.

Note to self: This up and down shit has to stop.

I am walking to the bus. Two average looking women pass by me. They look like they are going somewhere. I want to ask them "why not?" I am not a bad guy. I can make conversation. Why not?

But I am scared shitless. As usual I try to explain fear away by rationalizing. I am scared shitless.

I am sitting on the bus. Two average looking women get on. I am still scared shitless. I think they were lesbians. But I was still scared shitless.

The bus stops. I tell the driver if he leaves on time it will be shorter for me to continue riding than walking. I tell him it is close. He says "While you wait to make a decision, the decision is being made for you."

Afternoon Pep Talk To Myself

And I decide this lifestyle is not what I want. A beautiful girl is sitting in front of us talking to some bald dude. At first I would have killed to be that bald dude. But the whole scene is fake. No that is not true. The whole scene does not fit me. I am an angry guy who likes to think. No I am not an intellectual, never will (or can) be. But "I ain't no glamour boy; I am fierce."

It is okay to bitch and complain. It is okay to be me. I have been on this kick where I think I am too American-centric. I think I am too serious. But damn it, that is me. Why am I apologizing? Why am I so worried about changing myself? I care. I cannot change that. Don't even want to.

People I respect keep telling me to find something I care about and pursue it. They keep telling me economics needs people like me. Economics needs guys who won't keep their doors open just to get tenure. The profession needs people who care about honesty, not making themselves a buck or intellectual pride. They are right.

Yeah, I am lonely. Yeah, I am depressed. But so what? I am not going to feel better compromising. I am not going to feel better trying to be someone I am not.

I have made some mistakes. All I can do is live and work through those mistakes. I am not going to change the past. And I am not going to change anything worrying about the future.

Boudreaux Does It Again

Poverty was the natural state of man for thousands of years. Now it is something that requires study?

At dinner last night, two college educated guys talked about how they wanted to rough it for a period of time. Admittedly, they wanted to make money while doing it, but it always worries me when smart people think poverty is a learning experience.

I do not know much. But I know I do not want to be poor.

Things I Learned Today

It takes courage to get up in front of a crowd.

No matter how much alcohol I have consumed, some bands are not going to sound good.

It can rain anytime.

Vegetarian pizza tastes like shit unless you are with a woman who wanted it.

Everything tastes better when a woman wanted it.

While eating pizza, men should talk about sports and sex.

Past relationships need to stay in the past.

Long legs that go all the way up... are a beautiful thing.

If a man stares at a woman's ass long enough, he will find something he likes.

Vanity Is Not Necessarily A Bad Thing

Sam told me everything I say is a non sequitur. At first all I could think about was that great cartoon called "Non Sequitur." But then I got mad. What was Sam trying to pull?

My first realization was I had no idea what non sequitur really meant. So I looked it up:

non sequitur (from dictionary.com)

n 1: a reply that has no relevance to what preceded it 2: (logic) a conclusion that does not follow from the premises

Sam might have a point.

But most of my arguments reconsider initial premises. Should government be involved? Is this the correct way to approach the problem? Is there a problem?

So maybe I am a non sequitur, but my arguments are relevant.

I am reminded of a quote from Metropolitan:

Jane Clark: Why should we believe you over Rick? We know you're a hypocrite. We know your "Polly Perkins" story was a fabrication...

Nick Smith: A composite.

Jane Clark: Whatever. And, that you're completely impossible and out of control, with some sort of drug problem and a fixation on what you consider Rick Von Sloneker's wickedness. You're a snob, a sexist, totally obnoxious, and tiresome. And lately, you've gotten just weird. Why should we believe anything you say?

Nick Smith: I'm not tiresome.

In Response To Helibroner's Introduction To The Worldly Philosophers

This is what floats my boat. All the math, the bullshit, discourages me. It is just a means to an end. I love making money and knowing making money is good for the world.

It is all normative. Well, anything worth a damn is normative. It isn't good enough to say "it is" and that is it. A model is only as good as what it predicts. An idea is only as good as what it can change. One must say that artificial product differentiation is perverse before he can decide its effects, before he can be man enough to admit he is wrong.

My finance professor (and the professor I am most indebted to) told us "the greatest financial market is a grocery store." He was right.

No matter how much I delude myself, I cannot escape the grocery store. I love two things in the world: women and economics. I am getting neither right now.

Hemmingway's Story

Just sitting here
Waiting for the Blues to go away

Mom, I don't want to be like you
I don't care if I am one of your chosen few

Just sitting here
Waiting for the Blues to go away

I have seen and thought things that force me to be alone
The best years, the best times of my life are blown

Just sitting here
Waiting for the Blues to go away

I was a young man
Dapper, Dapper
I could dance and sing and...
All night long
Now I am an old beyond years
My life has been shit down the crapper
Can't you see my fountain of tears?

I used to love women in the month of May
I used to love women everyday
Now they bore me
All I desire is to flee

Just sitting here
Waiting for the Blues to go away

Dad can give me the car
But I won't get very far

Just sitting here
Waiting for the blues to go away

Boudreaux, Bastiat, Krugman, Competition, And Freedom

Here is a link.

Bastiat captures the importance of "I have the right to exist." You cannot expect a man to produce if you take away what he produces. You cannot expect a man to think if you punish his thoughts. You cannot expect a man to live if you emphasize death.

"There can be no contradiction."

"When You Were Out Of Luck, Luck Was Doing Alright"*

I am riding the bus. A girl gets on with a muffin. She cups her hand under her mouth to prevent making a mess. She finishes the muffin. She rides five miles with a handful of crumbs. She does not throw them on the bus floor. She waits until her stop. She empties the crumbs in the grass for birds, squirrels, and decomposition.

She acted beautifully. And I could not find the courage to tell her.

ML told me love was a choice. You decide to love someone. You decide to ignore or forgive their faults. You decide to compromise.

I never believed her. I thought love was magic. Something happened and you woke up next to a wonderful woman for the rest of your life.

I am an idiot. ML is right. The things I want are not magic. They are not unattainable. I want to be challenged. I want to be called an idiot. I want a pat on the back. I want to watch good movies and talk about them afterwards. I want to listen and discuss jazz. I want to be happy.

Colleagues have been telling me I have to make a decision. "Fat, drunk, and stupid is no way to go through life." I have to start wanting to get out of bed. I have to decide how I want to live.

Unfortunately I am having a difficult time making that decision. But I have to make it. I cannot continue to let beautiful acts go unnoticed.

*John Hiatt's "Paper Thin"

Find Carmen McRae's "The Ballad of Thelonious Monk." Listen to it.

"Kind Of Blue"

Parking lot is empty;
It always is
You are alone
By yourself
Is that such a bad thing?
So what?

Had a girl
Not really
She was never mine
Is that such a bad thing?
So what?

Knew a man
Said he had a good plan
I am not gay
But he was a handsome Dan
Is that such a bad thing?
So what?

Who do you want to be today?
Who would you like to be today?
What do you want to see?
I don't know
Is that such a bad thing?
So what?

I make up wonderful stories
They say things that need to be said
Fantasies so real
I should have a book deal
Actually they are bed time stories
To get me thorough the night
Is that so bad?
So what?

Funniest Thing I Have Heard

Another employee to my Dad: "You are three Doritos away from maternity leave."

"Whose Constitution Should Be Spread Where?"

A colleague asked me this question earlier this week. She challenged me to reconsider my views on constitutional government. She challenged me to stop being so American-centric. Classic liberalism must have limitations. And, classical liberalism never supported violently pushing constitutions down people's throat. And, how can one allow starvation and war in the name of an ideology? She said I wanted to spread my constitution everywhere.

My first reply was to rehash the difficulty of the initial endowment question. If I screw up, it is my fault. I had a good home and have been given every opportunity in the world. But with that kid in Africa or that poor inner-city kid, how can I talk about individual choice? Can we really punish children for their parent's mistakes? Can I really watch children starve in the name of libertarianism? Without taxes, I could give more to charity. Would I? I do not have an answer to these questions, but aren't the answers essential to my position?

For a little while, I was in a quandary, but then Sam sent me this Email:

I read this article and thought you would be able to appreciate it. What does this say about local knowledge? I am sure there are smart business people in the developing world but what to you do about the equally stupid and unruly populists? It seems wrong to let them starve, but what else is there for them to do if they forsake property rights and the rule of law?

I have no problem with someone who believes in something. A man who looks you in the eye and says "I am right, and here is why" can do great things.

So my constitution consists of one mandate stolen from Ayn Rand, "I have the right to exist." This means I have a right to the fruits of my labor and acumen. I have the right to property I earn. I have the right to choose. I have the right to my sphere. Of course this is vague, but it is true. It requires people to be honest with themselves. It puts responsibility on the individual instead of blaming non-existent entities.

It does not mean that the people of Baghdad have to accept American ways, but they as individuals have to decide. Neither majority rule nor dictators can decide for them. Each person has to look inside himself and decide what he or she wants.

And this constitution should be spread everywhere.

Bastiat's Rules For Football Fans

1. Respect the game. You can drink. But if you are stupid, stay at home.

2. Know the difference between punt block formations and punt return formations. Frank Beamer (or any special teams coordinator) has studied film all week. He knows when to go after one and when to set a wall.

3. Respect the fact that the players and coaches have spent all week preparing.

4. If you do not know anything about football, shut up. If you knowledge is limited to College Gameday, do not speak unless spoken to.

5. Be honest. If your team sucks, admit it. If your quarterback underthrows all deep balls and is visibly indecisive, then consider the back-up. It is no sin to say something bad about your team. For example, the Redskins suck. Their quarterback has no arm and no legs. He might win games, but he will not win a Super Bowl. The days of the one-dimensional quarterback are gone. I do not know if the back-ups are any better, but I am willing to consider them.

This was inspired by this post which I found from this site.

"Baby, I Could Walk You All The Way Home"*

Before I review Engelmann and Strobel's “Inequality Aversion, Efficiency, and Maximin Preferences in Simple Distribution Experiment,” I think Bolton and Ockenfels bring up the essential question, “...what it is that experimental economics can hope to accomplish.(?)”

Bolton and Ockenfels like most economists consider themselves scientists. Experiments must be explained. Researchers must find causations. Economists must write theories. They want to “present a broader, more valuable map of economic behavior.”

What for? Why? Do economists really think they can predict behavior? Do they secretly hope that with these new theories they will be able to usher in a new wave of social planning with themselves doing the planning? What exactly is “economic behavior?” Until we attempt to answer these questions, economists cannot progress. I am not saying Bolton and Ockenfels are wrong. But they do not try and make their case. They do not tell the reader what a “broader, more valuable map of economic behavior” should be or what it will do. We are ignoring the fundamental philosophical question that forms any discipline. What is an economist's purpose?

I cannot answer this question, but I do know economic experiments yield individual decision information from a controlled setting that suggest how people will make other decisions. The ultimatum, bargaining, and distribution games are not parallel with real life. Subjects will never be told to split $10 in their life like they are told in the experiment. They will make similar decisions with their spouses, friends, and children but never will it be as blatant as in the experiment.

But just because we cannot ex ante predict behavior does not mean the
experiment has no value. That logic is a stupid way to examine the problem. The experimenter created this experimental institution, and certain results occurred. If we changed the experimental institution, the results would change. The main lesson from experimental economics is institutions matter. You cannot separate the decision from its context.

Experimental economics and economics will not progress until researchers decide what economic theory should do. Classical theorists ignore reality, but their theories still hold didactic and normative value. Nash equilibrium makes a young student look at a problem in a different way. As Engelmann and Strobel suggest new theories based on experimental results do not predict any better than older theories. But the new theories and the experiments that birthed them challenge students to think.

Economics has to decide what it wants to do. This competition between different economists pursuing different objectives can lead to progress. But researchers trying to match experiments and theories will impede economics. Experimentalists need to design new games and institutions that allow new behavioral hypotheses to be tested. Conducting the same simple experiments in an attempt to test new theory is a lazy exercise that will not push the boundaries of economics but instead stifle thought. We need new experiments and different contexts to see how people make decisions given different institutions. We need our experiments to be more parallel.

Economics must recognize its normative basis. Positive economists cannot refute this normative basis. No matter how many free riding experiments one does, Milton Friedman (or myself) cannot be convinced that taxes are a good thing. Economics is not mature enough for experiments to prove the validity or invalidity of economic theory, because our theory is still normative. We do not know enough about the brain, genetics, and environmental effects to “make a map of economic behavior.”

And it is foolish to pretend that economists can or should do this. Since Adam Smith the best economists have mixed philosophy, a loose interpretation of the scientific method, and a general desire to question their surroundings to create important works. Modern economics has forgotten philosophy, and it rarely questions reality but emphasizes what other economists have done. Equity, efficiency, and selfishness are normative issues that require debate in a philosophical forum. Economists cannot continue to argue over these issues in a positive forum without stagnating the profession.

Engelmann and Strobel's “Inequality Aversion, and Maxmin Preferences in Simple Distribution Experiments” has many interesting results. Their main conclusion is people's decisions cannot be predicted by a number of new and old theories. The game matters.

Distribution games entail an individual deciding how income is distributed amongst two other players. The decision maker's payoff stays the same in all three scenarios, but his fellow players' values change. The decision maker basically decides how equal all three players' payoffs are. He is implicitly trading off between equality and aggregate wealth for all three players.

Engelmann and Strobel vary the values to form the taxation, envy, and rich and poor games. Their results are mixed. The classic economic arguments of efficency, maxmin, and selfishness, probably does the best job of predicting decisions. People want to get as much money out of the researcher as possible, but it clearly does not explain all of the decisions. Other theories do better in certain games, but there are no clear predictors even for these simple games.

And their conclusions are what experimental economics can hope to accomplish. People differ. People care about different things. People are absolutely crazy. For some reason and because of market experiments, I find comfort in their craziness.

*The Boss

My Playlist

I put the MP3 player on random, and I got a hell of a playlist. I do not know how to copy and paste it. But I assure you it was great. It started with Bruce Springsteen's "Cover Me" and ended with Ella Fitzgerald's "I Won't Dance." It had some Janis Joplin and John Coltrane in the middle.

Jeff sent me this link yesterday. It is one of those things that makes you examine what exactly you are doing with life. And more importantly, what you should be doing with your life.

"Great Things Come From Angst"*

Matthew Rabin (1993) sets out to “Incorporate(ing) Fairness Into Game Theory and Economics.” He, other economists, psychologists and most adults have observed that individuals do not behave like “economic man.” People care about equity. People punish selfishness at the expense of their own welfare. Economic theory does not consider fairness, and Rabin works to rectify this obvious shortcoming.

This paper strikes me personally. Game theory was the first economic subject I studied outside of the classroom. A professor briefly introduced the subject. I bought Morton Davis's Game Theory and Fudenberg and Tirole's upper level textbook. I bought John Nash's biography with the original “Nash equilbrium” paper. I thought game theory described life. If we could define all strategies, payoffs, and rules, we could describe the world. Every decision could be broken down into payoff matrices. The subject infatuated me.

But then I was working at the grocery store and a woman bought a liter of Canada Dry Ginger Ale for $1.39. She could have bought two liters for $1.29. I explained to her that she could throw the extra liter away and still be better off, but she did not care. She bought the one liter bottle. I was perplexed. I told my Dad. He replied: “Son, you have to let people do what they want, and you can't spend your life thinking other people are stupid. She knew what was best for her.”

My Dad was right. Game theory might be predictive if we could decipher utility functions and determine payoff matrices, but we cannot. And if we could, they would be instantaneous and have no practical value. So if Rabin really wants to describe and predict behavior, I assure him that he will fail.

But if Rabin wants to change the way people look at problems, he succeeds. The idea of expectations, fairness equilibriums, and mutual-maxes and mutual-mins is an interesting way to examine problems. His stylized facts and new concepts challenges the logic of Nash equilibrium. Rabin makes economists think.

His examples are also interesting. Especially the idea that one person chickening out is not an equilibrium with his criteria. (Mutual destruction does occur.) His suggestion that monopolies cannot set a profit maximizing price is also interesting. (If Wal-Mart has such market power, why aren't their prices higher?) His labor market suggestion is also a more complete formalization of the employer-employee relationship. (My Dad, Granddad, and uncle are/were entrepreneurs. My Dad and Granddad treat workers kindly and get good effort. My uncle treated people unkindly and got little effort.) Again Rabin challenges conventional game theory, and at the least, he makes readers think.

His assertion that “As the material payoffs involved become arbitrarily small, equilibrium utility levels do not necessarily become arbitrarily small” makes wonderful sense. As anyone who has been in a relationship can attest, the small immaterial things can mean a lot. Rabin's Proposition 6 depresses me. I want to say his wrong, but I cannot. There always seems to be a lose-lose outcome that can occur in every situation.

Rabin's new theory satisfies economist's criteria. It uses equations, calculus, and even has proofs in the appendix. It also attempts to incorporate reality. Anyone who has been in a relationship knows considering others feelings can be rewarding.

But feelings cannot be represented by equations and variables. Feelings change. Feelings grow. Feelings wane. Feelings are completely subjective.

Given this, I do not understand Rabin's conclusions. If he recommends future researchers follow his lead and challenge conventional game theory, I commend him. If he is challenging economists to consider psychology, sociology, marketing, religion, and other things that affect decisions, I commend him. But if he is trying to predict human action, then I suggest he spend some time at a grocery store. The fact is people do crazy things that only make sense to them. Game theory helps us think about these crazy things, but it cannot tell us when or why they occur.

*S.A.

James Taylor's "Steamroller"

Steamroller

Well, I'm a steamroller, baby, I'm bound to roll all over you.
Yes, I'm a steamroller now, baby, I'm bound to roll all over you.
I'm gonna inject your soul with some sweet rock 'n roll
and shoot you full of rhythm and blues.

Well, I'm a cement mixer, a churning urn of burning funk.
Yeah, I'm a cement mixer baby, a churning urn of burning funk, god damn right.
Well, I'm a demolition derby, yes, a hefty hunk of steaming junk,
Mister McGee got the blues for you and me, way down, yeah.

Now, I'm a napalm bomb, baby, just guaranteed to blow your mind.
Yeah, I'm a napalm bomb gotta tell you one more time to sit down, stand up, go home, yeah.
No guarantee to blow your mind, momma, yeah.
And if I can't have your love for my own to take home and keep me warm,
there’s only one thing left to find, oh, bokka nine, bokka nine, bokka.
I just don’t seem to can’t lose these here low down, no way up, half flying,
freeze drying, fat frying, chicken choking, mother fucking can’t, oh, roll on over,
I got those steamroller blues.

Economics

Guth, Schmittberger, and Schwarze's “An Experimental Analysis Of Ultimatum Bargaining” challenges itself to experimentally “investigate the so-called ultimatum bargaining behavior.” The authors achieve their goal. But they fail in their presentation.

The authors run simple and complicated ultimatum games on economics graduate students (who had no training in game theory). In the simple game, the first subject is given an endowment. He takes an amount for himself. What is left goes to the second subject. The second subject either accepts the first subject's decision or cancels the trade leaving both subjects with nothing. In the complicated game the first subject is given an endowment of black and white chips. The first subject chooses a mix of white and black chips and sends it to the second subject. The second subject can either take the mix chosen by the first subject or take what the first subject has left. These black and white chips are worth different values to the first subject than the second subject.

The results of these games are interesting. Some subjects choose egalitarian splits. Some subjects choose less egalitarian splits. Some subjects choose to leave with nothing. When the endowments differ, subjects choose somewhat different splits. Subjects play the easy and complicated games differently. Experience changes decisions.

But the authors refuse to stop there. They choose to examine economic theory. This approach is common to experimental economics. Experimental economists test economic theory. That is what they do.

Refuting economic theory cannot be done with experiments. Economic theory does not concern itself with human behavior. It is normative theory. The authors even call game theory predictions normative solutions. Nash equilibriums entail what should be. Players should only care about their own payoffs. They should be economically rational. It does not say anything about “what is” or human behavior. At best economic theory provides a way of thinking. A way of approaching problems. Playing the Nash equilibrium ensures a type of outcome. At worst economic theory is “vain playing with mathematical symbols” (from Ludwig von Mises' Human Action). No sane person who has ever spent more than three minutes in a modern grocery store could defend economic theory's positive predictions.

Now this situation does not doom economic experiments or economics. The results of economic experiments are interesting without their insistence to test game theory. They suggest positive behavioral hypothesis. They suggest how complicated human beings are.

In particular this paper's easy games suggest a significant percentage of people care about equality. People do not take all of the money for themselves, and people will punish players at the expense of their own income. Players behave differently when the stakes change and when they have more experience with the game. Also players have different expectations when they are the first and second subject. Some players do not follow “the golden rule of treating people like you want to be treated.” They reject offers as the second subject that they would have offered as the first subject.

The complicated games yield somewhat different results. The game is contrived so two possible mixes make both players payoffs as high as they can be. These mixes make sense. They are envyfree, Pareto optimal, and Nash equilibriums. But players do not necessarily choose these “superior” mixes. And sometimes the secon subject will not choose the bundle that generates the most income for himself. These results might occur because subjects did not understand the game, but again, it seems some subjects prefer equality and will sacrifice their own and total income for equality.

But these results say nothing about Nash equilibriums, Pareto optimality, or any other economic theory. Economic experiments explicitly confront human behavior. Economic theory does not concern itself with reality. As Ludwig von Mises said about economic theory, “...it did not deal with real living beings, but with a phantom “economic man,” a creature essentially different from real men.” This does not mean economic theory is fruitless. It still provides a systematic way of thinking through problems, but it is foolish to confuse economic theory with reality.

My First Take On Development

I wrote the following in William Easterly's The Elusive Quest for Growth:

Can I really give a damn about the poor? Every now and then I talk a good game. But poverty is so far away and then I think about domestic poverty. It is easy to blame poverty on ignorance, almost as easy as blaming it on bad luck. A child might not have opportunity, but he or she is paying for his or her parent's mistakes. Somebody has to pay. Zero-sum is neither complicated nor new, but it is real, relevant, and true.

Three years later, with a trip to the Philippines under my belt, I feel the same way. Poverty cannot be solved in a classroom or by an American researcher. It has to be solved in the bedrooms of Africa. It has to be solved in American ghettos and trailer parks.

The problem with most poverty experts is they do not see the poor as people. They do not care about the poor's ambitions. They want to treat the poor's symptoms but refuse to understand the disease.

Obviously I have no clue about development. But unlike most development economists I am not afraid to admit it.