Posted on

Article Summary: Noisy Directional Learning and the Logit Equilibrium

The paper is here (ungated).  The ideas.repec entry is here.  I believe that this (1999) was an early version of the same.  The authors are Simon P. Anderson [Ideas, Virginia] , Jacob K. Goeree [Ideas, CalTech] and Charles A. Holt [Ideas, Virginia].  The full reference is:

Anderson, Simon P.; Goeree, Jacob K. and Holt, Charles A., “Noisy Directional Learning and the Logit Equilibrium.” Scandinavian Journal of Economics, Special Issue in Honor of Reinhard Selten, 2004, 106(3), pp. 581-602, September 2004

The abstract:

We specify a dynamic model in which agents adjust their decisions toward higher payoffs, subject to normal error. This process generates a probability distribution of players’ decisions that evolves over time according to the Fokker–Planck equation. The dynamic process is stable for all potential games, a class of payoff structures that includes several widely studied games. In equilibrium, the distributions that determine expected payoffs correspond to the distributions that arise from the logit function applied to those expected payoffs. This ‘‘logit equilibrium’’ forms a stochastic generalization of the Nash equilibrium and provides a possible explanation of anomalous laboratory data.

This is a model of bounded rationality inspired, in part, by experimental results.  It provides a stochastic equilibrium (i.e. a distribution over choices) that need not coincide with, nor even be centred around, the Nash equilibrium.  The summary is below the fold.

Continue reading “Article Summary: Noisy Directional Learning and the Logit Equilibrium”

Posted on

The end of the London evening freesheets? (thank god)

The Murdoch Empire ™ has decided to pull the plug on their free newspaper for the going-home-on-the-tube market, The London Paper, after making a pre-tax loss of £12.9 million in the year to June 2008.

That they’re hemorrhaging cash right now is no surprise since advertising expenditure is strongly pro-cyclical — it plummets in a recession and explodes in a boom.  To some extent, they’ve been unfortunate that the credit crisis and it’s associated advertising caution has been around for two of their three years and obviously the competition with Associated Newspapers’ London Lite won’t have helped.  Nevertheless, I’m not sure that it was ever a viable business model and frankly, even if it were, I’m glad that they’ve folded.  Ian Burrell puts it mildly when he says:

For the past three years, the sight of purple-and-mauve jacketed vendors thrusting free newspapers into the hands of office workers as they headed home from work has been a familiar feature in the capital.

“Thrusting” is the correct word to use, but I would prefix it with a few choice adverbs, “obnoxiously” being the most polite.  The vendors are seriously rude.  They make a deliberate point of blocking traffic and getting in your face.  It is genuinely infuriating — I find myself wanting to scream at them — but I know that they’re just doing what they’re told to do.

On their way home from work, nobody cares which of the free papers they read.  Since the papers themselves are desperate to get your eyeballs, the ideal economic situation would therefore be for them to pay you to choose them.  But that’s impossible on a practical level, so instead they end up forcing a non-monetary cost on everybody by slowing everyone down and annoying the hell out of people.

Since Associated Newspapers still have a 24% stake in the Evening Standard, this will probably mean the end of the afternoon freesheet (I imagine that the Metro in the morning will stick around), but even if it doesn’t, it will almost certainly mean the end of the obnoxious vendors forcing themselves on people.  They’ll just stick the London Lite in the same bins that they use for the Metro instead.  Presumably those vendors are being paid (minimum wage, I would guess) and so getting rid of them might make it narrowly profitable if there is just one afternoon freesheet.

Hallelujah.

Posted on

A question for behavioural economists

How true is the old adage “easy come, easy go”?  More formally, is it fair to suggest that an individual’s marginal propensity to consume (MPC) — the share of an extra dollar of income that they would spend on consumption rather than save — depends on the origin of the income?  The traditional wisdom would suggest that:

MPC (fortuitous income) > MPC (hard-earned income)

Have there been any studies on this?  If so, have there been any studies that apply the results to the evolution of US inequality in income and consumption?

Posted on

A description of Australia’s healthcare system

John Hempton has gotten to it before I did and written it far better than I would have anyway.  Have a read.  Although I agree that Australia’s system is much, much better than America’s current system or any of their proposed frameworks, I would add three negative comments about Australia’s system:

  • Medicare payments to GPs for a consultation by a patient are determined centrally (at the federal level) and have not increased with inflation.  At first that meant that GPs shortened each consultation to fit more people in per day, but in the long run served, I believe, to reduce the supply of GPs and as a result pushed people with minor ailments to hospital emergency rooms.
  • I don’t know if it is better or worse than other countries, but the administrative overhead in the state government health departments is surprisingly large, even to me.  I am led to believe that adminstrators and middle-managers exceed more than 50% of the staff of Queensland Health (and that does not include admin staff on the wards).
  • The federal-state funding arrangement in Australia is a real problem.  I don’t know whether the best policy is to put all health care in federal hands or to grant the states more revenue-raising posibilities, but something does need to happen.
Posted on

Playing cricket in England

On Saturday night, just before midnight, Daniela and I were roped into playing a game of cricket on Sunday for a team of ex-pats.  Well … “roped” is the wrong word and much too unfair: we signed up with enthusiasm.  No, that’s not quite right, either. Dani gets incredibly excited by this sort of random adventure and she signed up with genuine enthusiasm.  It was inevitable at that point that I sign up as well (with Australia levelling the Ashes up in Leeds, I did have a patriotic duty to join the fray), but my enthusiasm was buoyed somewhat by the wine and had a slightly greasy patina of apprehension.  I hadn’t played a proper game since October 1992 when I was in my high school team and Dani had only played a couple of games of backyard cricket with the dog chasing the ball.  Still, we were assured that experience and ability were by no means necessary, so we agreed con gusto.

We only got to bed at 3am on Sunday (it was a big night – a friend was leaving London), but managed to wake in time to gather with the rest of the team in central London at 11:30am, coffee in hand.  To the casual eye, my whites may have looked a bit like an old pair of khakis supplemented with a borrowed white polo shirt.  Dani, of course, was resplendent in white from top to bottom.  The team we played for represents a charity and, it turns out, there are charities that offer transportation services to other charities, so we all piled into the mini-bus more usually used for carrying disabled children to be driven for an hour and a half to the interminable maze otherwise known as the Oxfordshire countryside.

We must have spent 40 minutes twisting and turning and silently swearing at the perpetually manic directions of the lady in the SatNav (“Recalculating.  After point four miles, turn left, then turn left.”).  I was sitting next to our captain – an Indian chap with an easy grin who was about to submit his Ph.D.  He alternated between trying to figure out where we were, pouring scorn on the English badminton team for pulling out of the world championships in India and declaring confidently that, as an Australian, I must be a fantastic fielder who would happily throw himself horizontal to stop a boundary.  I mumbled something about a bit of practice in the nets before the match and stared anxiously at the six-foot hedges.

redkites

We eventually found the Ipsden Cricket Club [Google Maps].  It’s a beautiful ground that backs onto a (recently harvested) wheat field and has a gigantic ash (?) tree down on the long boundary at the western end.  The pavilion even has a piece of the original floorboards of the Long Room at Lord’s.  The weather was superb, with barely a cloud and a fair breeze coming from the north west.  I guess that the temperature would have been in the mid-twenties (Celsius).  There were some Red Kites in the sky and quite a few gliders were out for the day.

A couple of the guys padded up and we took turns bowling in the nets.  I somehow managed to keep mine in the general direction of the stumps, managed a few yorkers and even clean bowled one of our batsman once.  The captain told me that I would bowl in the match and our friend that had invited us expressed some joy that he wouldn’t have to be bowler number five all on his own.  I started to pick up some confidence.  It was fun.  It was relaxed.  I didn’t suck.

The game was to be 35 overs each; we fielded first.  The Canadian on our team used to play as a catcher in baseball and became the wicket keeper.  Dani alternated between Third man and Long on, while I swapped between Point and Mid-wicket.  We had two good bowlers, two pretty-good bowlers, and me and my mate who’d invited us.  We did pretty well in the first 10 or 11 overs.  We got a couple of wickets and they weren’t scoring too quickly (maybe four per over?).  I didn’t fumble my first couple of touches of the ball and Dani was enjoying herself.

Then I missed a ball badly.  I froze, didn’t get down to it and had to run swearing after the thing only to watch it dribble over the boundary.  Not to worry, it was only one mistake and other people were occasionally missing some too.  After a couple more overs I was called up to bowl.  I was okay in my first over:  clearly nervous and not very good, but not obscenely bad either.  My second over, however, was a shambles that in hindsight I’m almost oddly proud of.  It was chaotic, occasionally dangerous to the batsman and very, very expensive.  I was “rested” after that.

My second over also roughly marked the start of our mini collapse.  Without a fifth bowler, our two decent guys had to bowl 11 or 12 overs each (the Ipsden team very kindly waived the rule requiring no more than seven overs per bowler) and they started to get tired.  I was fading mentally pretty quickly and I missed four or five balls in what turned into a pretty farcical fielding display.  I even managed to have my feet slip out from under me on one occasion.  Drinks came out after 21 overs and our captain took the time to observe that we were fielding atrociously.

By that point the batsmen had settled in nicely, though and our fielding was rarely the problem.  Boundaries, boundaries, everywhere became the order of the day.  Poor Dani had to scramble down the embankment past the boundary to hunt for the ball in the bracken on more than one occasion.  I was out at Deep cover point and Deep forward leg by then and under instruction to stay on the boundary (not walk in with the bowler).  I may not have had the reflexes for the infield, but dammit, I could run around like a mad hare as sweeper.  For the last five overs or so, I switched over to the northern side of the field and played Square leg and Deep cover.  I managed to stop the three or four balls that came to me, saving a couple of singles and a boundary, so my fielding ended, if not a high note, then at least having recovered a smidgen of self-confidence.  Ipsden managed 3 for 236 after 35 overs, with one chap on 101 not out.  It had taken three and a half hours.

Our hosts put on quite a spread for the break.  Half a dozen types of sandwiches, some chips (“crisps” to the English) and a bunch of delicious sweet tarts and teacakes filled us up mightily with endless cups of tea.  The black labrador of the club president happily wandered between us, soaking up the attention.  I reminded Dani how to hold the bat (it’s not a natural position for someone new to the game) and we both earnestly hoped that we wouldn’t need to pad up.

Dani’s and my friend opened the batting along with the captain and it shortly became clear that the race was on.  I was surprised.  Apparantly last year the Ipsden team had gotten our lot all out for only 60.  Dani and I ended up sitting and watching a fine batting display as our batters clipped along to seal the win with two balls and six wickets to spare.  One of our lads managed a fantastic century and another 74.  The sun had started to set by the end and the wind, still fresh, began to chill a little.  Jumpers, cups of tea and the dog to the rescue, we were toasty warm through to the end.

It was the last game for our captain, who on top of the win to remember was presented with a bottle of champagne and a first-edition copy of C.L.R. James’s classic, “Beyond a boundary“, by the regular members of the team.  We got back to London about 9:30pm and were home by 10.  It was an absolutely cracking day.  We really enjoyed ourselves and the team was a great bunch of guys.  It was, in many ways, the very best sort of day in England.

Now if only I weren’t so stiff the day after that I can barely walk …

Posted on

US government debt

Greg Mankiw [Harvard] recently quoted a snippet without comment from this opinion piece by Kenneth Rogoff [Harvard]:

Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.

Reading this sentence frustrated me, because the “will have to” implies that these are the only choices when they are not.  Cutting government spending is the obvious option that Professor Rogoff left off the list, but perhaps the best option, implicitly rejected by the use of the word “sharply“, is that governments stabilise their annual deficits in nominal terms and then let the real growth of the economy reduce the relative size of the total debt over time.  Finally, there is an implied opposition to any inflation, when a small and stable rate of price inflation is entirely desirable even when a country has no debt at all.

Heck, we can even have annual deficits increase every year, so long as the nominal rate of growth plus the accrual of interest due is less than the nominal growth rate (real + inflation) of the economy as a whole and you’ll still see the debt-to-GDP ratio falling over time.

Via Minzie Chinn [U. of Wisconsin], I see that the IMF has a new paper looking at the growth rates of potential output, and the likely path of government debt in the aftermath of the credit crisis.  Using the the historical correlation between the primary surplus, debt, and output gap, they ran some stochastic simulations of how the debt-to-GDP ratio for America is likely to develop over the next 10 years.  Here’s the upshot (from page 37 of the paper):

IMF_US_debt_profile

Here is their text:

Combining the estimated historical primary surplus reaction function with stochastic forecasts of real GDP growth and real interest rates—and allowing for empirically realistic shocks to the primary surplus—imply a much more favorable median projection but slightly larger risks around the baseline. If the federal government on average adjusts the primary surplus as it has done in the past—implying a stronger improvement in the primary balance than under the baseline projections—the probability that debt would exceed 67 percent of GDP by year 2019 would be around 40 percent (Figure 4). Notably, with 80 percent probability, debt would be lower than the level it would reach under staff’s baseline by 2019. [Emphasis added]

So I am not really worried about debt levels for America.  To be frank, neither is the the market, either, despite what you might have heard.  How do I know this?  Because the market, while clearly not perfectly rational, is rational enough to be forward-looking and if they thought that US government debt was a serious problem, they wouldn’t really want to buy any more of that debt today.  But the US has been selling a lot of new bonds (i.e. borrowing a lot of money) lately and the prices of government bonds haven’t really fallen, so the interest rates on them haven’t really gone up.  Here is Brad DeLong [Berkeley]:

[A] sharp increase in Treasury borrowings is supposed to carry a sharp increase in interest rates along with it to crowd out other forms of interest sensitive spending, [but it] hasn’t happened. Hasn’t happened at all:

Treasury marketable debt borrowing by quarterTreasury yield curve

It is astonishing. Between last summer and the end of this year the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion–an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp…

I don’t want to bag on Professor Rogoff. The majority of his piece is great: it’s a discussion of fundamental imbalances that need to be dealt with. You should read it. It’s just that I’m a bit more sanguine about US government debt than he appears to be.

Posted on

Demand for sex in Japan

Mentioning sex in a blog post is a great way to generate some interesting traffic.  The last time I filled some time writing about it (on the rise of public sexuality, the rationality of prostitution and the extent of human trafficking), I got hits via some very odd queries on Google.

Titillation aside,  prostitution is a tremendously interesting topic in economics .  As John Hempton discussed initially in July 2008 and more extensively in May 2009, the price of prostitution is enormously flexible, unlike prices (and wages) in most industries.  That means that when, as John discussed, a country is operating under a fixed exchange rate and only prices can adjust in response to a macroeconomic shock, the sex industry will almost certainly move both first and furthest.

But because prostitution has very flexible wages and prices, that also makes it a candidate proxy for estimating changes in the potential output of an economy — the output that would occur if all prices were perfectly flexible.  (Remember there are differences between potential and natural levels of output)

I mention this after reading that the Bank of Japan is conducting surveys to estimate changes in demand in the Japanese sex industry:

The survey of sex shops and restaurants was designed to better gauge demand for services, an area of the economy that’s becoming more important as exports slump. “Any study into services is most welcome,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “We’ve got hundreds of studies on exports and manufacturing. What’s needed is creative thinking on services and if that includes brothels, so be it.” … While services including restaurants and retailing make up about 60 percent of gross domestic product, Japan’s economy has risen and fallen with the strength of its exports.

(Hat tip:  Tyler Cowen).

Posted on

Culinary delights of Washington, D.C.

Half the reason for our recent trip to America was to visit friends in D.C.  Photos for our gallery or facebook will have to wait until Dani gets back, but I thought I’d share a few thoughts on eating in Washington:

  • Tyler Cowen knows what he’s talking about.  The complete version of his dining guide in a single page is here.
  • I ate buffalo (okay, okay. “american bison”) for the first and second time.  The first was in the wonderfully thought out food hall of the National Museum of the American Indian.  The second was in the form of a burger on the rooftop terrace of one of our friends.  Good times.
  • The cupcakes at Georgetown Cupcake are delicious (and well worth the wait in line), but they’re not quite as good as those from the Primrose Bakery here in London.
  • The sandwiches at Dean & DeLuca are pretty damn fine.
  • The burgers at Ray’s Hell Burger (how do they not have their own website?) are utterly incredible.  I can have my burger au poivre?  With Foie Gras?  My mouth is watering just remembering it.
  • Be careful that the Ethopian restaurant you choose doesn’t slap you with $6 + tax + tip cokes (it was in the fine print of the menu).  Nevertheless, you’d be crazy to miss some Ethopian while you were there.
  • The crab cakes in Annapolis, MD are the perfect excuse for a day trip.
  • But hands down, the best food I had in D.C. — our friend Maria’s pasta aside, of course — was at Thai X-ing.  It is one guy in the basement of a house.  It’s freaking tiny and easily the best Thai food I have ever, ever eaten.  Here are two photos that I took on my phone (Click on each for a bigger version.  I apologise for the poor quality – the iPhone 3G only has a 1 megapixel camera and the receptor is hardly impressive):
    The kitchen at Thai X-ing

    Dani and Maria at Thai X-ing

    We somehow managed to fit eight people in the space behind Dani and Maria (the bird cage was moved). The cooking is really slow, so the thing to do is to place your order the day before you go if you’re going to eat there. Unbelievably cheap. I refuse to recommend a single dish.