Al Roth’s new book on matchmaking and market design

Alex Tabarrok reviews Al Roth‘s new book, Who Gets What — and Why: The New Economics of Matchmaking and Market Design, in the Wall Street Journal. An excerpt:

Most economic theory focuses on commodity markets, in which anyone willing to pay the price gets the good and anyone not willing to pay the price doesn’t. In matching markets, price isn’t the only determinant of who gets what. Willingness to pay the price is one determinant of who gets into Harvard but not the only one. Willingness to accept a certain wage is one part of who gets a job but not the only one. In some cases, such as assigning kidneys to dialysis patients, price isn’t part of the equation at all—at least in the United States.

Mr. Roth’s work has been to discover the most efficient and equitable methods of matching and implement them in the world. He writes with verve and style, describing many market malfunctions—from aboriginal tribes in Australia arranging marriages for children not yet born to judges bending every rule in the book to hire law clerks years before they have graduated from law school—and how we ought to think about them.

Mr. Roth’s approach contrasts with standard debates over free markets versus government regulation. We want markets to be thick, quick, timely and trustworthy, but without careful design markets can become thin, slow, ill-timed and dangerous for the honest. The solution to these problems is unlikely to be regulation legislated from on high. Instead what Mr. Roth practices is nuanced market design created mostly by market participants.

We have discussed Roth’s work and market design topics many times here at Knowledge Problem (link to links). Tabarrok mentions the review at Marginal Revolution. Al Roth’s Market Design blog is here.

NOTE: If the WSJ link does not work for you, here is a link to review on the Mercatus website.

Pauline Maier on colonial radicalism

With Independence Day upon us, my bedtime reading for the past couple of weeks has become timely. Pauline Maier, the MIT historian who unfortunately passed away last year, published From Resistance to Revolution in 1972. It’s a carefully researched and well-written account, weaving together reports from contemporaneous sources, of the increasing radicalization of American colonists from 1765 to 1776. How did the beliefs of so many colonists evolve from being loyal British subjects to supporting revolution and independence from Britain — why this radicalization?

Maier’s ultimate conclusion is overreaching and misinterpretations on the part of the British government, which is consistent with the “generally received” historical narrative. But what I have found most interesting and novel from her argument is Chapter 2: An Ideology of Resistance and Restraint. Maier grounds the intellectual origins of revolution in the 17th-18th-century English revolutionary writers — John Locke is best known among Americans, but also John Milton and Algernon Sidney (see here my summary of Sidney on illegitimate political power) and Frances Hutcheson. She describes a category of political belief called “Real Whigs”, and argued that the Real Whig beliefs in both the people as the ultimate source of legitimate political power and the value of social order meant that the colonists were inclined to resist the illegitimate exercise of authority, but not to jump quickly to a radical revolutionary position. For example:

Spokesmen for this English revolutionary tradition were distinguished in the eighteenth century above all by their outspoken defense of the people’s right to rise up against their rulers, which they supported in traditional contractural [sic] terms. Government was created by the people to promote the public welfare. If magistrates failed to honor that trust, they automatically forfeited their powers back to the people, who were free and even obliged [as per Sidney’s argument — ed.] to reclaim political authority. The people could do so, moreoever, in acts of limited resistance, intended to nullify only isolated wrongful acts of the magistrates, or ultimately in revolution, which denied the continued legitimacy of the established government as a whole. …

The fundamental values of the Radical Whigs were realized most fully in a well-ordered free society, such that obedience to the law was stressed as much or more than occasional resistance to it. (pp. 27-28)

This chapter really resonated with me as a clear explanation of the primacy of individual liberty combined with a society ordered using universally-applied general legal principles (otherwise known as the “rule of law”). This combination of resistance and restraint is the key to understanding the political philosophy underlying the American republic, and Maier’s chapter is the best articulation of it that I’ve read.

Given the fractious and polarized political climate we inhabit today, I think a refresher on these ideas and their foundations is a good idea. We should be having a larger conversation about what constitutes legitimate and illegitimate political authority, particularly in the wake of the Snowden disclosures, the expansion of federal executive branch assertion of authority over the past 14 years, the expansion of administrative regulation (which is a sub-category of executive assertion), and the ability of business interests with political power to influence that regulation’s form and scope. There are a lot of arguments from all parts of the political spectrum that mischaracterize or misunderstand the ideas that Maier lays out here so clearly. We’d still be likely to have a fractious and polarized political climate, but we’d have better-informed public debate.

Take a gamble on “The Bet”: It is a balanced history of the Simon-Ehrlich conflict on population and scarcity

Paul Sabin, “The Bet,” Yale University Press, 2013.

Paul Sabin’s The Bet offers perhaps the best-researched, best-written and most thorough account of the history and meaning of the famous 1980 bet between population pessimist Paul Ehrlich and resource optimist Julian Simon. Sabin is unceasingly fair in his treatment of the antagonists, a tough trick to pull off when working with such charged material.

In fact I’d say Sabin is too fair to Ehrlich, who predicted famine and social collapse in the 1960s, 70s, 80s, and 90s and recommended policies that (inadvertently / unintentionally / because he didn’t know better) would have helped cause those calamities.

The book is recommended if you are interested in population, natural resources, or environmental policy.

Michael Chwe’s Jane Austen, Game Theorist

As trenchant observers of human nature, great fiction writers are often very good social scientists. Jane Austen, one of my favorite authors, was a writer with great analytical depth and insight. In addition to the irony and wit for which she is famous, Austen’s writing reflects the philosophical and cultural mindset of the “long 18th century” (1688-1837, from the Glorious Revolution to Victoria’s ascendancy), including the Scottish Enlightenment and writers like Samuel Johnson. Most of the action in her plots revolves around the tension among law, social mores, and economic considerations in the choices her protagonists make. Take Sense and Sensibility, for example – facing legal constraints on inheritance and social norms against professions for women of a certain social status, how do Elinor and Marianne strive to achieve happiness with severely limited economic resources? Reading Austen through the lens of social science shows how well she analyzed human choices and the structure of social interaction, a point my friend Marc Sidwell recently made in his City AM column.

I am not alone in my appreciation of Austen as a social scientist. Michael Chwe, a game theorist in the Political Science department at UCLA, has written a new book, Jane Austen, Game Theorist (full disclosure: Michael and I went to graduate school together, and I’ve long been an admirer of his work). Michael argues that among the ways we think of Austen and her work, we should think of her as a social scientist, and indeed as an early game theorist. In May, Michael wrote this précis of his argument for a post at the PBS Newshour Business Desk blog:

This popular and beloved writer used little mathematics or economics. But Austen’s novels, written in the early 1800s, anticipated by more than a century the most fundamental game-theoretic concepts, including the emphasis on choice, the theory of utility, and the theoretical analysis of strategic thinking. In fact, Austen’s novels contain game-theoretic insights not yet superseded by modern social science. …

Austen has several names for strategic thinking, including “foresight” and “penetration.” For example, Mr. John Knightley warns Emma that Mr. Elton might be interested in her, but Emma is certain that Mr. Elton is interested in Harriet Smith. Mr. George Knightley had earlier warned Emma that Mr. Elton would never marry Harriet because of her lack of wealth. After Mr. Elton drunkenly proposes to Emma in a carriage, however, Emma admits to herself, “There was no denying that those brothers had penetration.”

Game theory assumes that a person thinks strategically about others. However, sometimes a person clearly does not. The conspicuous absence of strategic thinking, what I call “cluelessness,” is not something modern game theory tries to explain. But Austen does.

Michael’s argument proceeds along several dimensions in the book, but I’ll focus on a couple and encourage you to read the book yourself to experience his full argument (see also the resources available from UCLA to get a sense of his analysis). He points out, correctly I believe, that Austen focuses on choice in her plots – what choices do her protagonists confront, what constraints do they face (formal and informal), and what informs their individual characters that either enables them to make good choices or not? In this sense her focus is similar to that used in economics in general, not just game theory. Austen is also analytical; she is rightly famous for her deep and sensitive character development, and her pioneering use of the omniscient narrator to clue the reader in to the thought processes of her protagonists and what she as the author thinks you should think about them. Her narrative is more than descriptive (in fact, some readers are frustrated by her lack of description, and the variation in film adaptations indicates how much room for descriptive interpretation her narrative leaves!).

What’s interesting and original about Michael’s argument is his focus on Austen’s use of strategic thinking in her characters. In doing so he uses the modern tools and language of game theory to show how game-theoretic her perspective was, and I believe he does so pretty convincingly. He relies on the modern idea of strategic interaction to discuss the interdependence and interaction of the choices and behavior of individuals, and the idea that an external focus on the thoughts, incentives (motivations), and actions of others informs individual choices. For example, “[t]here are more than fifty strategic plans specifically named ‘schemes’ in Austen’s six novels” (p. 108), and “… in Austen’s novels, people calculate all the time without the slightest intimation that calculation is difficult, ‘cold’, or unnatural” (p. 109). Strategic thinking is not inherently mathematical, negative, or manipulative, but rather reflects an ability to imagine likely outcomes of various scenarios of interactions (a theme that Austen and Adam Smith share).

One concern I have for making this argument persuasive to our humanities colleagues, though, is a rhetorical one. We economists use the language of game theory deriving from von Neumann and Morgenstern’s adoption of the language of the “strategic” in the 1940s, a language that barely existed during Austen’s lifetime. According to the Oxford English Dictionary, “strategy” first appeared in James’ New Military Dictionary in 1810, with “strategic” appearing in 1825. The language we use in economics differs considerably from Austen’s, so Michael’s analysis of her language is important. For example, the Jane Austen’s World blog points to a recent Freakonomics podcast on Michael’s book, and shows a word count of Austen’s words that reflect what we would call strategic thinking: scheme, sagacity, penetration, foresight, calculating. Michael relies heavily on the modern language of the “strategic”, and I think his argument may have a stronger foothold in the humanities if he had bridged a bit more among the modern economic language, Austen’s language, and more traditional literary analysis.

Although he does not employ much of the Scottish Enlightenment literature in his argument, Michael also points out some facets of Austen that reflect the ideas of Hume and Smith in particular. For example, he lists as one of Austen’s innovations that she has some of her characters strategize about themselves (i.e., look at their incentives and their opportunity sets from an external perspective) because Austen is well aware of the potential for personal bias in evaluating one’s own behavior (p. 157). This aspect of Austen’s writing is similar to Smith’s development of the psychological device of the spectator in The Theory of Moral Sentiments, and his analysis of the biases inherent in evaluating one’s own behavior – our spectators are inherently partial, and we can live more happily and peacefully with others in society to the extent that we can view and judge our actions as an impartial spectator.

Michael is also right to evaluate Austen’s insights into what he calls “cluelessness”, or the inability of a character to understand the individual and subjective nature of the choices others make in the situations in which they find themselves. His analysis of the different ways that Austen thinks people can be clueless is the biggest strength of the book.

One thing that’s not clear in the argument is whether or not Michael distinguishes, or thinks Austen distinguishes, between strategic thinking and intelligence. A more typical interpretation of Austen’s use of phrases like “quick-witted” to describe characters like Elizabeth Bennet and Emma Woodhouse is that they are intelligent. Do strategic thinking and intelligence map into each other in any systematic way for Austen’s characters? I think they do, and are highly correlated but not the same. Both may arise from natural endowments and temperaments, both may be cultivated through education and experience. I’d like to have seen this compare/contrast explored more in the book, especially given the sophistication of her character development that makes her strategic (or intelligent?) characters not strategic all the time. Even her strategic thinkers are sometimes clueless, or are clueless in ways that they discover and amend through the experience of interaction with others. The relationship between Elizabeth and Darcy is the canonical example of this nuance, because they are both clueless in meaningful ways while being highly strategic in others.

Social scientists, and game theorists in particular, examine the structure of social interaction. One reason for the longevity of Austen’s popularity and influence (indicated most recently by her forthcoming appearance on the £10 note) has been precisely her insightful analyses of the structure of social interaction, and thus her work reflects game theoretic thinking. One final recommendation for Michael’s book is that he encourages thinking of game theory and strategic thinking not as a sterile, mathematical set of tools, but a more general analytical way of exploring social interaction and interdependence.

Reason book review, Silver and Weatherall

Lynne Kiesling

Well, this winter’s been more hectic than I anticipated! Teaching three classes with two new course preps, a paper at the Public Choice Society meetings, helping coordinate our search for two new members of our department’s teaching/lecturer faculty … and I haven’t been here in a while!

One fun thing I did in the fall was review two books — Nate Silver’s The Signal and the Noise and James Weatherall’s The Physics of Wall Street — for Reason magazine. My review was published in the March issue.

A feature of both books that I really liked was the engaging narrative. Silver is very effective at communicating arcane statistical ideas clearly, and his book is structured as a series of topical vignettes in applied statistics, from weather to poker to gambling on basketball to, of course, political prediction. Weatherall tells stories about several mathematicians and statisticians whose work has informed the financial instrument innovations of the past two decades, and they are well-told and illuminating stories.

In Weatherall’s case I wasn’t as persuaded by his original analysis or his conclusions, which I think are a bit glib and narrow-minded. He brings a physicist’s sensibilities and biases to evaluating the financial crisis, and I think he misses the boat there:

So Weatherall’s conclusion is accurate, but the financial crisis was largely a failure of institutions and incentives that made financial markets more brittle, not solely a failure of mathematical modeling per se. While the Warren Zevon fan in me appreciates his epilogue’s invocation to “send physics, math and money!” to enable better outcomes in financial markets, it’s a prescription that overlooks the distorted incentives that existed, and persist, in financial markets.

According to some other reviews of Weatherall posted in the Reason comment thread, I’m not the only one skeptical of his conclusions; here’s a negative review that also includes links to other reviews, both positive and negative.

Since the review was for a non-technical outlet (and given the limited word count!) I didn’t delve too deeply into the statistics aspects of the Silver book, but this New Yorker blog post does so in a way that lines up pretty closely with my thinking. Bayesian statistics isn’t new, and many of the problems on which Silver focuses are problems where there will be a clear outcome: winner or loser of a political contest, sporting event, or poker game. He also focuses on instances in which the subjective estimate of the prior probability of an event’s occurrence is going to fall in a narrow range, or be commonly agreed-upon or understood based on prior data and experience.

Here’s the problem with that: what about the many instances in which those subjective priors are varied, without any common core or data to suggest one? As Marcus and Davis note in their New Yorker blog post:

But the Bayesian approach is much less helpful when there is no consensus about what the prior probabilities should be. For example, in a notorious series of experiments, Stanley Milgram showed that many people would torture a victim if they were told that it was for the good of science. Before these experiments were carried out, should these results have been assigned a low prior (because no one would suppose that they themselves would do this) or a high prior (because we know that people accept authority)? In actual practice, the method of evaluation most scientists use most of the time is a variant of a technique proposed by the statistician Ronald Fisher in the early 1900s. Roughly speaking, in this approach, a hypothesis is considered validated by data only if the data pass a test that would be failed ninety-five or ninety-nine per cent of the time if the data were generated randomly. The advantage of Fisher’s approach (which is by no means perfect) is that to some degree it sidesteps the problem of estimating priors where no sufficient advance information exists. In the vast majority of scientific papers, Fisher’s statistics (and more sophisticated statistics in that tradition) are used.

Unfortunately, Silver’s discussion of alternatives to the Bayesian approach is dismissive, incomplete, and misleading. In some cases, Silver tends to attribute successful reasoning to the use of Bayesian methods without any evidence that those particular analyses were actually performed in Bayesian fashion.

That is the aspect of the book that I think is its worst failing.

Two new blogs of note

Lynne Kiesling

I hope you are enjoying a fun and relaxing holiday weekend! I’ve been using it, among other things, to catch up on my reading, made more enjoyable by two new additions to the rotation:

askblog: Arnold Kling has started blogging again, this time at his own new site. Given that his tagline is “taking the most charitable view of those who disagree”, I look forward to more of the same insightful and civil discourse that has made Arnold one of the most valuable and appreciated economist voices among public intellectuals.

Political Entrepreneurs: Ed Lopez and Wayne Leighton have a brand-new book out, Madmen, Intellectuals, and Academic Scribblers, and this blog is a companion to that work. From the publisher’s website:

Madmen, Intellectuals, and Academic Scribblers offers up a simple, economic framework for understanding the systematic causes of political change. In order to distill the smorgasbord of scholarship on political evolution, Madmen takes up three fundamental, interrelated questions: Why do democracies generate policies that impose net costs on society? Why do such policies persist over long periods of time, even though they may be widely known to be socially wasteful and even though better alternatives could be implemented? And why do certain wasteful policies eventually get repealed (e.g., airline rate and route regulation), while others endure (e.g., sugar subsidies and tariffs)?

Authors Wayne A. Leighton and Edward J. Lopez examine these questions through familiar policies in contemporary American politics, but also to draw on examples from around the world and throughout history to paint a lively picture and illustrate the pervasiveness of these quandaries.

Both the book and the blog look like a worthwhile read, and have moved to the top of my list.

Hobbes’ Leviathan is 350 years old!

Lynne Kiesling

Actually it’s over 350 years old, but as the Economist points out this week, there’s a new critical edition of Leviathan for the first time in 350 years. The Economist article is a good reminder that what was shocking about Hobbes in the 17th century — his mechanistic materialism — isn’t quite as shocking now as it was then.

Above all, though, it was Hobbes’s scientific materialism that rendered him an anathema. Like Descartes, and other devotees of the “new philosophy” pioneered by Galileo, Hobbes regarded nature as a machine. But he took this idea further than anyone else and maintained that absolutely everything is physical. There are no immaterial spirits: man’s immortality begins with the resurrection of his body. And God himself is a physical being. This is what made Hobbes an “atheist” to practically everyone except himself. For most of history an “atheist” was a man who worshipped the wrong God, not no God at all; a physical God, as imagined by Hobbes, was not really God.

But Hobbes is still relevant, still taught and read, and still controversial, more for his political theory than his materialism. His view of human nature is, to my mind, so uni-dimensional, so narrow, so negative that he cannot imagine civil society in a lawless society. He was grist for the Scottish Enlightenment development of emergent order, of the institutions of civil society arising out of “human action, but not human design“, based on the innate human desire for sympathy and mutual sympathy.

We carry these opposing views of human nature, and the tensions in them, to this day.