Knowing and Making

Bruce Schneier ( via Farnam Street ) makes the by-now-unoriginal observation * that: ...we pick a defense, and then the terrorists look at our defense and pick an attack designed to get around it. Our security measures only work if we happen to guess the plot correctly. If we get it wrong, we’ve wasted our money. This isn’t security; it’s security theater. Probably true. But then, terrorism isn't exactly "real" either: by design, it's a theatrical exercise too. Or perhaps a reality TV show. The clue is in the name - terrorism isn't designed to kill people, it's designed to make them scared . Thus, if we design this game for terrorists to play, they can win it just by smuggling a bomb through the security measures, regardless of whether it goes off. Notice that all the recently-discovered terrorist plots - the shoe bomber, the underpants bomber, the soft-drinks bomber, the printer-ink bomber - have failed? If the goal is simply to make us worry, make us r...

While watching the latest news on the passage of the health reform bill, I am having a conversation about a traveller community in southwest England. Some of the stories are about personalities, others about the institutional "structures" that have grown up - without the recognition of specific rules or laws, but simply the emergence of ways of doing things that are "enforced" by social norms. This is very reminiscent of Elinor Ostrom's Nobel-winning work on the emergence of self-managing rules and structures within communities. These rules are most obvious in the management of common-pool resources such as fish stocks - where it's hard to establish, enforce or even design the classical economic solution of property rights. Without them, the tragedy of the commons soon destroys the fish stocks permanently. Communities in practice are surprisingly successful at establishing such norms for themselves. But ironically, there's another level of tragedy of...

Game theory has always been one of the most stylised, theoretical - and unrealistic - disciplines within economics. Its assumptions are much too strong for the real world: pure rationality, perfect mutual knowledge of the rules of the game and the payoffs for each player. Game theory does certainly provide insight into many realistic phenomena - the prisoner's dilemma is the classic example, variants of which can be seen all over the economic world. But I have never been especially inspired by the exercise of working out Nash equilibria, because they usually illuminate only the stylised game that has been written down, and not the world that it is meant to model. However, two relatively new variations on game theory are making the field more interesting. The first is the idea of learning . For example, Fudenberg and Levine's book, The Theory of Learning in Games , sets out ideas of how real people playing games can come close to rational behaviour by trial and error, pay...

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...

A fascinating question today on Robert Peston's blog which mixes rationality and game theory. Do shareholders of the merged Lloyds-HBOS want to retain the management (inherited from Lloyds) which got them to where they are today? The strictly rational answer is to look only at the future, and the expected value of retaining versus terminating the managers. Rational agents do not consider the past, as you cannot incentivise for past actions - they have already happened and there is no possibility to change them. In which case, shareholders should make a prediction about these executives' likely future performance. Of course, they do  need to use past actions and performance as data points in estimating future performance. Thus, absorbing HBOS which was probably an error of judgment, should be set against the other (generally smart) actions that they took while managing Lloyds. However, in reality people do consider the past while making these kinds of decisions, as if their cur...