SuperFreakonomics contest

Today I wasted 45 minutes on a contest to win a £9.99 book.

Not rational at all - except for what I learned from the experience, and the satisfaction of feeling cleverer than 651 other contestants.

Background information on the contest is here. In short, you need to guess how many Google hits there will be for SuperFreakonomics on November 3rd, two weeks after the eponymous book is published. This is the sequel to Freakonomics, so it should be popular. But how popular?

Now this kind of contest has some interesting idiosyncrasies. Like guessing the price in The Price Is Right, or like guessing the weight of a nun - or whatever it is they do in travelling carnivals - your best strategy is not to try to accurately work out the weight. Instead, you should look at what other people have guessed and pick your number to maximise the chance that you'll be just a tiny bit closer than them. You might also recognise this strategy from the "beach vendor problem".

In the simplest case, if the other contestants have guessed 100 lbs, 130 and 135 lbs you might think that the most likely weight is, perhaps, 132 lbs. That may be true, but you would be an idiot to put your bet there.

Instead, you can maximise your chances of winning by bidding 99, 101, 129 or 136 lbs. With a 132 lb bid, the only way you can win is if the weight is exactly 132, or 133, or maybe 131 if there's a tiebreaker. What are the odds of that? Not big unless you are really good at weighing nuns. If that's your fetish, you don't need economic theory to help you.

While if you pick 136 lbs, anything over 135 results in a win for you. Similarly, if you pick 99 lbs, anything under 100 is yours; and at 129, anything from 115 to 129 wins it for you.

Of course judgment must come into this somewhere, and you may simply glance at the nun and be certain she's well over 100 lbs. Which eliminates the 99 lb guess. And if she is definitely slimmer than the 136-lb nun who taught you at boarding school, you won't be guessing that either. But the less idea you have of the real answer, the more guidance you should take from the distribution of the existing answers.

How does this apply to the SuperFreakonomics contest? Well, I honestly have little idea how many hits SuperFreakonomics will get. I can be fairly confident it's well under the 1.3 million that Freakonomics has, and well over the 11,000 that it has accumulated so far. But how far over? I don't have much of a clue - it could be anywhere from 50,000 to 500,000.

Other things being equal, it's more likely to be at the low end. I believe that Google hits - like many distributions, especially where network effects apply - are subject to a power law. That is, there are ten times as many words with 1,000 hits as with 10,000; and a hundred times fewer again with a million hits.

So to reflect this combination of strategic targeting and statistics, I downloaded all the existing guesses (651 of them so far), sorted them and projected them onto a logarithmic distribution. I then calculated the gaps between them in order to find the biggest gap in which to place my estimate.

Turns out that there's a nice space from 88,281 to 97,538 - natural logarithm 0.099717 - which is therefore where I wish to place my bet. Of course I'm better off placing it at the low end than the high, because of the same power law effect; so my estimate is 88,282.

Admittedly there are other factors to consider. The second biggest logarithmic gap is 0.080298, between 137,400 and 148,888. If I felt the number of hits were substantially more likely to be around the 140,000 mark than the 90,000 mark I should put my money up there instead. Perhaps the higher probability would outweigh the tactical disadvantage of being closer to other contestants.

In a more extreme version of this argument, I might have a powerful predictive Google model - let's say I were an SEO professional, and one with an improbable respect for statistics - which predicts that there will be between 200,000 and 230,000 hits. In this case I'd choose the biggest available gap within that range, which is 204,000 to 210,000, and guess 204,001. Bad luck to the 204,000 guy ("James") but all's fair in love and game theory.

Another factor is that the variable we're measuring is not independent. It is subject to influence by the participants in this contest - should any of them care enough. If the number of hits by 28th October or so is (let's say) 80,000, a determined competitor whose bid is 150,000 might find a linkfarm network which will take his money to put "SuperFreakonomics" on seventy thousand websites in a week. Will Google fall for it? That depends on many factors, but given that this is the raw total number of hits and not the duplicates-eliminated count, it might work. So by guessing honestly (for some value of "honest") I am assuming that winning a signed copy of SuperFreakonomics will not incentivise people sufficiently to impact the number of hits meaningfully.

Finally, we are disadvantaged by the New York Times's blog moderation process. Unlike the BBC, who have people on duty 24 hours a day to approve the intemperate comments on Robert Peston's blog (hello there, John_from_Hendon), the NYT seems to keep their interns in front of the PC only during working hours. So, even assuming that my guess is still eligible, there could be a queue of forty people in front of me who have applied exactly the same logic. In which case I should assume that one of them has already picked 88,282 and I should choose 88,283. Indeed they may have applied the same logic themselves, and so I better bump it up to around 88,350 just to be sure. Which, of course, they'll have figured out too. Maybe it's safest just to pretend I'm smarter than everyone else after all. Maybe I'll find out on Monday; more likely my illusion will be dispelled on 3rd November when eight million Google hits show up for SuperFreakonomics - I can only hope that this page, which has mentioned it at least seven times, is one of them.

p.s. my 45 minutes did not include 20 minutes of writing this post.

p.p.s. I'm trusting that hardly anyone will see this between my writing it and the closing of the contest, or that you will be too honourable to go to the NYT and pick a number one higher than me. If you do want to make an entry and not mess too much with my attempt, try 204,001, 137,401 or 80,002.

p.p.p.s. I do actually think the real result will be higher than my guess. But I'm more confident in the game strategy than in my ability to estimate Google counts. And the guesses are pretty crowded around the level I would have picked, meaning that my second-best option is probably the preferred strategy. But on reflection, maybe 178,649 would have been a better choice.

Women of Iceland, my sympathies

According to this article, you wouldn't want to be a woman in Iceland right now:

Iceland, unlike many of the other nations that went mad for credit, has lots of things going for it: an average age of 37, a highly educated work force, a nearly positive birthrate...

Ouch.

An open letter to Tyler Cowen (or his publishers)

Dear Tyler

I'm very much looking forward to reading Create Your Own Economy and even more encouraged by your offer on the blog today.

And yet I have a dilemma. It seems that it won't be published in the UK until September (not in fact, as per amazon.co.uk, last February). I can order it now from Amazon US, but the estimated delivery time is 18-32 business days - which might take me nearly up to the UK publication date anyway. Unless I pay more for priority courier service than the price of the book. And that option - even if it still generates positive consumer surplus - just doesn't feel right.

On the other hand, I can buy the CD version which is available in the UK and get it delivered next week. Or I can get an audio version online - but that isn't downloadable until Tuesday 14th.

And anyway, either of the audio editions will take longer to consume than the hardcover version. I am pretty sure I can read faster than Patrick Lawlor can speak. Not as long, admittedly, as waiting till the middle of August; but I really would rather consume the book with my eyes than my ears.

I even looked into buying a Kindle so I could download it on that - but Kindles are not available in the UK either.

The only downloadable "Create Your Own Economy" I could find is not the one I want at all.

What is a British Tyler fan to do? I am keen to create my own economy but it seems that there are some real barriers to gathering, slicing or ordering the digital information I need to do so. Maybe someone should write a book about that.

Warm regards,

Leigh.

p.s. (I would normally label this an "Update" but seeing as this is notionally a letter...) Thanks for the tip missmarketcrash - I went back onto Amazon and have now managed to find a Marketplace seller (the_book_depository) who can deliver it to me in about a week. Click here to try them out.

Europe swamped by 0.007% increase in population

The BBC reports that:

Nearly 37,000 immigrants landed on Italian shores last year, an increase of about 75% on the year before.

This increase means that last year's invasion - making up 0.004% of the EU's population - has leapt to an overwhelming 0.007%.

Clearly this army of economic refugees must be stopped. Otherwise Europe's carefully designed demographic timebomb will be accidentally defused. Instead of declining by 9.4% in the next 25 years, Europe's population will fall by only 9.2%. If they're not careful, European countries may actually be able to pay some of their pension commitments.

The question the BBC has to ask itself is not: what should we do about this incoming flood of one immigrant for every 13,480 Europeans? It's not even: why are you publishing ridiculous stories like this? After all, the BBC covers plenty of ridiculous stories.

The question that matters is: why do you bring attention to the laughable opinions of Nick Griffin? Just let the guy shout himself hoarse in the wilderness and in five more years we'll be rid of him.

Bubble-detection technology

Pointing out a speech by William C. Dudley, president of the New York Fed, Simon Johnson says:

Dudley says that the Fed can pop or prevent asset bubbles from developing. This would represent a major change in the nature of American (and G7) central banking. It’s a huge statement - throwing the Greenspan years out of the door, without ceremony.

It’s also an attractive idea. But how will the Fed actually implement? Senior Fed officials in 2007 and 2008 were quite clear that there is no technology that would allow them to "sniff" bubbles accurately - and this was in the face of a housing bubble that, in retrospect, Dudley says was obvious.

But is that true?

If we define a bubble as "overvaluation of assets relative to their future returns" then to spot one, we would need to compare asset prices with future returns. But although asset prices are measurable, future returns are not - and this is why people generally think that bubbles are unspottable. We wouldn't want to put the brakes on, say, a fast run-up in the shares of biotech companies just because we don't know what their profits are going to be in ten years.

But there's another word in the definition, apart from "assets" and "future returns": and that word is "overvaluation". How about if we could directly measure overvaluation? If we could determine directly whether investors are putting an irrationally high value on the things they buy?

As it happens, we can.

Experiments have been designed to measure investors' attitudes to asset valuation - for example lots of Vernon Smith's work, including Caginalp, Porter and Smith (1998) (details of other experiments also available here). This experiment was particularly interesting in understanding recent events, as it showed that the valuations of identical assets with identical returns were strongly correlated to the amount of cash available to investors.

That may be exactly what took place in the 2000s, as a loose monetary policy found no outlet in consumer prices but instead flowed into asset valuations (Scott Sumner has argued that money did become tighter later in the decade, more so than signified by interest rate movements; if true this could be one reason that asset prices are not recovering despite very low interest rates).

Outside of the laboratory, precise knowledge of the returns of some assets does become available at times, and it would be possible to measure investors' behaviour with regard to those assets. If investors, in aggregate, become overconfident about returns it will be possible to spot this from certain types of price change.

If we can't find suitably measurable instruments in the market, it may still be possible to set up the appropriate conditions in a laboratory; but that would be less reliable than using market price signals. So a preferable next step is to determine which kind of assets can be tested and under what circumstances, to reveal the risk attitudes of different classes of investor. These measurements would then be combined with data on the cash balances of those investor classes to detect bubbles in their inflation rather than collapse phase.

What regulators can do about these bubbles is the next question; consumer-level financial regulation is one area to consider, but there are other tools too. More on this later.

(see also my VoxEU papers [1], [2] on this subject)

The economics zeitgeist, 5 July 2009

This is a word cloud from all economics blog postings in the last week. I generate this every Sunday so please subscribe using the links on the right if you'd like to be notified each time it is published.

It has been constructed from a list of economics RSS feeds from the Palgrave Econolog and other sources, and uses Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery. The millionth Wordle is coming up in about a week, so look out for that.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Signalling, rationality and blunt levers

What trouble it causes in life when you can't just act directly on your preferences but need to signal indirectly.

Chief example at the moment: tomorrow's vote at Marks and Spencer. The shareholders don't really want to get rid of Stuart Rose - he's done a good job - but they do want to tell the M&S directors to stop messing around with corporate governance. So there's a proposal to get him to step down as chairman (not chief executive); but if it passes, or gets significant votes, it's likely to be interpreted as a vote of no confidence in Rose himself.

What else? A debate over on Worthwhile Canadian Initiative about the bluntness of the interest rate tool as a way of controlling inflation. If inflation is low anyway, for other reasons, but interest rates are kept low to boost economic activity, price pressures can leak over into asset prices - causing a house price bubble for example. A tool, when not designed directly to address the problem it is meant to address, has unintended consequences.

Commerce is full of these effects. Signalling is a common technique used by companies (sometimes without being fully aware of it) to influence customers' perceptions. For example a firm might spend more money than it needs to on advertising, fancy literature, business cards or office decor in order to demonstrate that it is a market-leading firm and worth trusting with your money. Banks and their marble lobbies are a classic example - the sunk cost is supposed to make you feel the executives are less likely to run off with your money. But that just led to prices that customers didn't want to pay - and ultimately to competition from online providers and non-banks.

Nowadays you're more likely to see this behaviour from large law firms or accountants: signalling quality by extra spending on offices or sponsorship of sporting events. The problem is that while it does signal high status, it also signals to savvy customers that their money is being wasted. The additional expense of these signals are borne either by the customer through fees, or by the shareholders through profit margins. Either way the firm becomes less competitive. Firms presumably judge the net effect to be positive - the benefits of the signals outweigh the drawbacks - and they might be - but is that an objective judgement? Or do the executives just enjoy the perks and trappings?

Other examples? Please suggest them and I'll update.

Companies and regulators then have two jobs to do. One is to continue to design better levers - so that they can signal quality without wasting money, or control inflation without creating asset bubbles, or get a new chairman without losing their chief executive.

The other is harder, and that is to understand psychology better. At one extreme we can encourage a new attitude of directness. Instead of influencing one thing in order to indirectly achieve another, just do the thing you want to do and be honest to people. If a firm needs to signal that it can afford to spend lots of money, it can just give a parcel of cash back to the client!

At the other extreme we can develop better models of how customers, shareholders or investors make decisions, and then construct a set of interventions which directly act on the relevant factors. This for example is at the heart of my behavioural risk regulation proposal: instead of using universal blunt price signals like interest rates, act directly by providing information to the investors who are unknowingly taking additional risks.

This latter aspect requires the development of much more subtle and personalised cognitive models than those we have now, but if achieved, there will be a transformation both in the successful management of the economy and in consumer welfare.