Saturday, February 18, 2017

Doing it Better with Computers

I have just read a fascinating article describing how political campaigns, most recently the Trump campaign, use the internet, social media, AI, and related technologies to target and influence voters. Assuming its account is accurate, what it is describing is what political campaigns have long done, just doing it better. It is a normal part of campaigning to try to target ads and campaign speeches to particular groups of voters, telling each group what the campaign believes its members will find most convincing. The difference is the granularity. 

This time they have it down to the individual voter.

The first step is to get information about voters at the individual level. Facebook provides one way of doing so, by looking at what people and pages each individual likes, along with the information individuals report about themselves. From that, deduce as much as you can about personality, beliefs, all of the things that will make one argument more persuasive than another. Target each individual with the campaign ads you think will persuade him. Watch what ads each person clicks on and use that feedback to steadily refine the model, improving both your information about what sort of person he is and about what sorts of ads work with that sort of person.

That approach to persuading voters is no more dishonest than conventional campaigning, just better done. Indeed, one might argue that part of what it is doing is reversing the effect of earlier technological change. In the world of 19th century whistle stop campaigns, where most of what you knew about a candidate was what you or your friends had actually heard him say, candidates could and did tell different stories to different groups of voters. The rise of national media made that harder to get away with. The speech telling farmers that, if elected, you would do all you could to keep crop prices high might be less persuasive to urban voters who read about it in the newspaper, heard it on the radio, saw it on television. 

But now, through the power of newer technologies, you can not only tell farmers you are particularly concerned with their problems without anyone else overhearing the conversation, you can target your ads to sugar beet farmers in North Dakota. And you can vary the particular version of the ad according to what sort of argument each individual farmer finds most compelling, as reflected in which ads he reads and shares as well as the information deduced from his other online activities. 

So far, it is merely conventional targeting done better. The anonymity of online conversation adds another tool for persuasion—fictional identities. The technique is familiar from online arguments where three of the four people supporting a position may be sockpuppets of the fourth. Done on a professional scale, the hundred people arguing for a position, insulting opponents, praising supporters, may be three people in one office.

It is an interesting article and worth reading for a more detailed account of the technology. The author obviously has his own axe to grind, since he believes that at the moment the leading practitioners of the new dark art are working for the wrong side; he makes what he is describing  sound more sinister than it actually is, most of it being simply new and better versions of ancient tricks. 

As he makes clear, it is a technology that could be used for any political cause. It could also be used for non-political causes, and is. Presidential elections are  every four years, but people are always buying and selling. Technologies that tell a political campaign what arguments will persuade a voter to vote for their candidate can as well be used to persuade a buyer to buy what the seller is selling.

Seen from this standpoint I find the technology considerably less sinister. It is true that it can be used to produce bogus praise for products from fictional users, but I already knew that and discount such praise accordingly, more heavily the more it feels like something that could have been churned out by a computer program. But it can also be used to try to sell me the sorts of things that I want to buy. I would much rather receive emailed ads for opal rough on ebay—one of my hobbies is lapidary work—than be interrupted at dinner by a phone call from someone trying to persuade me to refinance my nonexistent mortgage.

Friday, February 17, 2017

Fictional Economics: A Request for Aid

My current nonfiction writing project, which I have been working on for some years, is pretty close to complete—with luck I will be sending it to my agent by the end of the semester. That raises the question of what I should do next. One possibility is a second edition of either Hidden Order or Law's Order. Another is fiction–I have partly written sequels to both of my novels, one of them pretty far along. 

But there are two other book ideas that I have played with, and this post is mostly to see if any of my readers can offer suggestions for one of them: a collection of works of literature that teach economics.

So far I know of only two such works. One is a science fiction story, "Margin of Profit" by Poul Anderson. Its central point is that in order to make someone stop doing something you do not want him to do it is not necessary to make it impossible, merely unprofitable. 

The other is a poem, "The Peace of Dives" by Rudyard Kipling. Its point is that economic interdependence produces peace, since nobody wants to kill his customers or destroy his own property that happens to be located in someone else's territory. The poem was written in 1903, so arguably turned out to be somewhat optimistic, but it is still an interesting and important idea.

I want more. I want readable works of literature, prose or poetry, that demonstrate economic ideas and get them right. Any suggestions?

My other book idea, for which I could also use suggestions, would be titled "Bad Economics." It would consist of advertisements, quotes from the speeches of politicians, bits from textbooks written by people who don't understand economics, each accompanied by an explanation of why it is wrong. A simple example would be one of the radio advertisements I have heard that offers listeners an opportunity to speculate in heating oil futures, on the grounds that winter is coming. A somewhat less simple example would be almost any statement by almost anyone about the distribution of the burden of taxes, since such statements usually take it for granted that what matters is who actually hands over the money to the government.

Thursday, February 16, 2017

The Economics of Insider Trading: A Puzzle

The standard story on insider trading is straightforward. I have knowledge that implies that a stock is going to go up, so I buy it. The seller sells because, absent that knowledge, my offer is more than he, and presumably most of the rest of the market, thinks the stock is worth.

There is a problem for this story if we assume that all the players are rational. If there are a significant number of insider traders in the market, the fact that I offered more for the stock than the owner thought it was worth should be evidence to him that I know something about it he doesn't, and so a reason not to sell.

To put the point differently, if the insider traders are making a higher return on their invested capital than the market average, which is the point of insider trading, everyone else must be making a lower return than the market average. But anyone who wants can get the market average by buying the whole market, or an index fund, or a random selection of stocks. All he has to do to protect himself against insider traders is to avoid the strategy of estimating stock values for himself and selling when the price he is offered is above his estimate, buying when below.

One possible explanation is that some traders are insiders and some think they are, believe they have better than average knowledge or judgement but are wrong. But I am assuming, as economists often do, that all the players in the game are rational.

This puzzle first struck me when I thought I had an ingenious explanation of why, on average, stocks outperform bonds, as it is commonly asserted that they do. If buying stock and holding for ten years is practically guaranteed to give you a better return than buying bonds and holding for ten years, one would think that everyone investing for the moderately long term would buy stock and their doing so would drive the price of bonds down and their yield up until the two investments were equally attractive. 

One could avoid that by assuming that there was enough risk averse money looking for short term investments to drive bond prices up and the yield down to a point where the yield was below the return on stocks. That conjecture could lead to interesting empirical work testing it. But I am by nature a theorist not an empiricist, so I was looking for a different answer and thought I might have found it.

Imagine a market where everybody is an inside trader on a small scale. I know more than the market about the firm I work for. You know more than the market about a firm you have repeatedly had dealings with. He knows more than the market about a technology he has worked with extensively that will affect the performance of several firms.

Each person invests some of his money where he has an edge and, by the standard analysis of insider trading, makes an above market return. But because he is risk averse he wants to diversify his investment, so part of his money goes into other investments. His marginal return is the return he can get without inside knowledge, his average return is a suitably weighted average of that and his insider return. Bond investments only have to do as well as his marginal investments, so the return on bonds is lower than the average return on stocks.

I thought it was a lovely theory–until it was pointed out to me that an investor who wanted to get the average return on stocks could do so with no inside information by simply buying the whole market, or an index fund, or ... . And, if the average return on stocks was higher than on bonds, he would.

Which brings me back to my puzzle. Does anyone have a good solution? I have wondered if it has some deep connection with Robin Hanson's old puzzle of why each of us prefers his own opinion to that of others even if he has no reason to think he is better informed on the subject than they are.

Wednesday, February 15, 2017

Anyone want a talk in Brazil this fall?

It looks as though I will be speaking in Brazil on the 10th and 11th of November. I expect I will want to spend at least a week in the country, given the time and effort of getting there and back, so was wondering if anyone else was interested in having me give a talk. An honorarium is nice, but the minimum requirement is expenses plus an interesting audience.

Wednesday, February 08, 2017

Gypsies, Jews and Amish

It is a book I want someone to write. The three groups are in many ways similar, in many different. Each has, for substantial parts of its history, been effectively self governing, imposing its own rules on its own people with or without the permission of the government over it. Each has created and maintained its own culture, complete with its own language. Each imposed constraints on its members that might be expected to make them want to exit the group, and each found ways of keeping most of the members from doing so.

All of the Amish and many of the other two groups ended up in North America, a more tolerant and accepting environment than those they experienced in the past. The Jewish group has mostly dissolved in the wider culture–only about ten percent remain orthodox, and many even of the orthodox are more nearly a part of the surrounding culture than most Jews were a few hundred years ago. Only the more extreme factions, such as the Hasidim, retain the traditional pattern of cultural separation.

The Romani, as I interpret the evidence, are a little farther behind on the same path. For evidence, compare two books on the American Romani by Anne Sutherland, Gypsies: The Hidden Americans and Roma: Modern American Gypsies. The first, based on research done around 1970, described an independent and alien nation with its own language, law, and customs, embedded within modern day America. The second, published last year, describes the gradual collapse of that system.

Only the Amish have been almost completely successful in maintaining their own society, peacefully embedded in ours. They have done it for more than two centuries now and, judging by its current state, may well continue for another century or two. 

Which raises an interesting puzzle.

Those interested in more details on all three will find them in the relevant chapters of the book on legal systems very different from ours that I have almost finished writing.

When someone got very sick, they all flocked to the hospital and to the funeral. The living were never left alone day or night. Everyone brought food or took up a collection for the family so ones far away could come. People took care of each other. That is gone now. In the past anyone could drop by the house and you would feed them, they could stay the night. Now you have to phone if you want to visit, and they often say, “No. We are busy.” Someone throws a party and makes a lot of food and hardly anyone shows up. The saddest thing is the loss of community. We never visit with the Machwaya. They keep to themselves and we keep to ourselves.

The Machwaya still have the slava and pomani and kris. They are mostly not Christian and only go to a priest for baptism of a baby. The ones who have become Christian have their own churches and we do not go to their churches, and they do not come to ours. In the past we all were part of the kumpania, we had slavi together, and we all went to the pomani. Now everyone keeps to his own kind. The children are not taught our language, go to school, and have no respect for elders. We don’t even have any elders anymore. They are all dead.

(Sutherland, Anne H., Roma: Modern American Gypsies)

Explaining Trump

There are two possible approaches to explaining odd things Trump does. One is to assume that he is stupid, crazy, erratic. Early in the campaign that looked like a plausible explanation. After he won twice contests everyone expected him to lose, first the nomination and then the election, it was still possible–he could have been lucky–but less plausible.

The alternative is that he is crazy like a fox, doing odd things for reasonable, perhaps tactically correct, reasons. I am not sure that is what is going on but I think it quite likely and have been trying to make sense of his moves on that basis.

The most recent example, not done directly by Trump, was preventing Elizabeth Warren from speaking against Sessions on the grounds that one senator was not supposed to say hostile things about another. That got a lot of negative publicity and was widely viewed as a blunder.

There is another possibility. The incident raised Warren's visibility and status within the Democratic party. That will tend to pull the party left. Trump may well believe that pulling the Democrats left will make it harder for them to win future elections. He may well be right.

Apply the same approach to making sense of the apparently bungled executive order on immigration. Including green card holders in the initial order made no sense in terms of the stated objective and was a considerable, and highly public, nuisance for those affected. The result was a lot of hostile criticism, greatly increasing the amount of publicity the executive order got. 

Seen from the standpoint of Trump's base, he was doing something about immigration and terrorism, as he had promised and it must be a substantial something if his enemies in the media were so upset about it. As Jack Goldsmith, a former head of the Justice Department’s Office of Legal Counsel and a Harvard Law School professor, put it:
“The president would get a huge symbolic boost with his base while not violating the law and while changing nothing of substance. He would get maximum symbolic value while doing nothing. Trump’s a genius at this.”