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February 4, 2013

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Latest Posts from Economist's View


Posted: 08 Jan 2013 12:06 AM PST
Posted: 07 Jan 2013 02:13 PM PST
Something to think about:
The reason we lose at games, EurekAlert: Writing in PNAS, a University of Manchester physicist has discovered that some games are simply impossible to fully learn, or too complex for the human mind to understand.
Dr Tobias Galla from The University of Manchester and Professor Doyne Farmer from Oxford University and the Santa Fe Institute, ran thousands of simulations of two-player games to see how human behavior affects their decision-making.
In simple games with a small number of moves, such as Noughts and Crosses the optimal strategy is easy to guess, and the game quickly becomes uninteresting.
However, when games became more complex and when there are a lot of moves, such as in chess, the board game Go or complex card games, the academics argue that players' actions become less rational and that it is hard to find optimal strategies.
This research could also have implications for the financial markets. Many economists base financial predictions of the stock market on equilibrium theory – assuming that traders are infinitely intelligent and rational.
This, the academics argue, is rarely the case and could lead to predictions of how markets react being wildly inaccurate.
Much of traditional game theory, the basis for strategic decision-making, is based on the equilibrium point – players or workers having a deep and perfect knowledge of what they are doing and of what their opponents are doing.
Dr Galla, from the School of Physics and Astronomy, said: "Equilibrium is not always the right thing you should look for in a game."
"In many situations, people do not play equilibrium strategies, instead what they do can look like random or chaotic for a variety of reasons, so it is not always appropriate to base predictions on the equilibrium model."
"With trading on the stock market, for example, you can have thousands of different stock to choose from, and people do not always behave rationally in these situations or they do not have sufficient information to act rationally. This can have a profound effect on how the markets react."
"It could be that we need to drop these conventional game theories and instead use new approaches to predict how people might behave."
Together with a Manchester-based PhD student the pair are looking to expand their study to multi-player games and to cases in which the game itself changes with time, which would be a closer analogy of how financial markets operate.
Preliminary results suggest that as the number of players increases, the chances that equilibrium is reached decrease. Thus for complicated games with many players, such as financial markets, equilibrium is even less likely to be the full story.
Posted: 07 Jan 2013 01:08 PM PST
I missed this session, unfortunately:
Romer and Romer on Monetary Policy Complacency, by Matthew Yglesias: Perhaps my favorite paper delivered at the American Economics Association meeting—in part because it had no math—was a historical essay from Christina Romer and David Romer on "The Most Dangerous Idea in Federal Reserve History."
The most dangerous idea, they say, is excessive pessimism about monetary policy. If you look back at the two key eras where we say monetary policy went awry—during the deflation of the 1930s and the inflation of the 1970s—the interesting thing that Romer and Romer find is that if you dig into the archives of the Federal Reserve minutes there weren't really "mistakes" as you might think of it. Policymakers in the '30s knew there was a deflationary slump, and they knew it was bad, just as policymakers in the '70s knew there was an inflationary spiral, and they knew it was bad. But in the '30s, policymakers persuaded themselves that with interest rates already low there was nothing more they could do, while policymakers in the '70s persuaded themselves that inflation represented a purely structural phenomenon that they couldn't cure. So you got a lot of talk about how other people need to step up.
The funny thing, they say, is that in both cases it turned out the problems could actually be solved quite quickly once you put someone in office who thought it was possible to solve them. The Volcker recession, in particular, though painful, was actually remarkably short and achieved its objective decisively. There's every reason to think you could have done the same thing in 1971 or 1978, and it probably would have been even quicker and less painful. ...
If I have any disagreement with the Romers, it's that they emphasize a disagreement about efficacy (as David Romer put it, "fear of impotence is bad for performance"), but I would emphasize an issue of accountability. Economists tend to worry a lot about incentives except when it comes to the behavior of economists. But the operational independence of the Federal Reserve means its personnel have a strong incentive in any troubled time to engage in a lot of blame-shifting and ducking of responsibility. But in the '30s and '70s and today, you're essentially facing problems of expectations management, and a central banker can't steer expectations effectively unless he's willing to put his reputation on the line.
Posted: 07 Jan 2013 10:29 AM PST
I haven't said anything about the platinum coin option, until now, because I am of two minds about it. One part of me says this is a very bad idea. We all understand the intent of the law that would allow this, to permit commemorative coins to be minted. Do we really want leaders who are willing to take advantage of any loophole to do things that are contrary to the intent of a law just because it suits their purposes? How can the public trust Democrats to be responsible if they are willing to do things like this? What other stunts might they pull? If they want to go to war, attack Iran for example, does this mean they will take a Bushian approach and 'just do it' no matter what the intent of the constitution is on these matters? I don't want those kinds of leaders.
But what do you do if the other side refuses to play by the traditional rules? What if they are already using tactics that push far beyond the intent of congressional rules to impose their will? If one side is ignoring the traditional rules of engagement and hiding behind trees rather than marching in straight battle lines, is it okay to do so yourself? If the other side tortures, does that mean you should?
For torture, the answer is no, but in this case I think the answer is different. The Republicans will not play by fair rules of engagement, and worse they have taken members of the public hostage as a way to win/influence the battle (Saddam's human umbrellas come to mind). If we don't get our way, we'll crash the economy and hurt people -- the threat is clear. Obama, in his role of leader of all, not just Democrats, has chosen to, in effect, pay the ransom by giving in on key issues. But if the hostages can be freed another way, one that avoids giving in to the hostage-takers, it ought to be considered.
So perhaps it's okay to match ridiculous tactics with ridiculous responses. Mint the coin, but make absolutely sure the public knows that it is only being done because the other side refuses to play fair, refuses to play by the explicit and implicit rules of political engagement. That's key to winning the battle for public. Putting John Boehner's face on the coin, as Paul Krugman suggested this morning, would certainly be a step in that direction.

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