Quote of the day

From NY Times:

...Once upon a time, finding a mate was considered too important to be entrusted to people under the influence of raging hormones...

Gains from Marriage

Excerpt from Elaina Rose’s article that nicely summarizes the issue (formatting is mine):

The theory of marriage, as developed by Becker [1973, 1974, 1981, 1985] and others specifies several sources of gains from marriage.

First, when one partner has a comparative advantage in market work relative to home production, a couple can produce more total output by forming a household and engaging in specialization and exchange. Typically, it is the husband who has the comparative advantage in the labor market. In one version of this model (Becker, 1985) small initial differences in relative productivities arise when, say, men are advantaged in the labor market because of gender discrimination, or when mothers are inherently advantaged in home production in their children’s early months. Post-marriage human capital investments (and investments in anticipation of household roles) reinforce the initial differences in productivity and gender specific returns.

A second source of gains from marriage is production of household public goods. Household public goods – such as a clean living room – or a “high-quality” child – are those for which one spouse’s enjoyment from consuming the good does not interfere with the other spouse’s ability to enjoy it.

Third, gains from marriage arise when there are economies of scale in production of household goods. For instance, it is cheaper in terms of both time and purchased inputs to produce two meals together than separately.

Fourth, when one spouse’s consumption affects the utility of the other, gains from marriage arise through joint consumption.

Fifth, risk averse individuals in two-income households can reap gains from marriage by sharing risk, similar to the way an investor can reduce risk by diversifying his portfolio of stocks (Shaw, 1987).

Finally, gains from marriage may arise from institutional factors, such as tax laws, parents’ approval, and health insurance coverage.

Links:

1. David Friedman on Economics of Love and Marriage and on Economics of Family Law.
2. Gary Becker's Contributions to Family and Household Economics by Robert A. Pollak

The Traveler's dilemma

If you have a few minutes to spare, imagine that you are Lucy or Pete and play “Traveler’s dilemma” game:

"Lucy and Pete, returning from a remote Pacific island, find that the airline has damaged the identical antiques that each had purchased. An airline manager says that he is happy to compensate them but is handicapped by being clueless about the value of these strange objects. Simply asking the travelers for the price is hopeless, he figures, for they will inflate it. Instead he devises a more complicated scheme. He asks each of them to write down the price of the antique as any dollar integer between 2 and 100 without conferring together. If both write the same number, he will take that to be the true price, and he will pay each of them that amount. But if they write different numbers, he will assume that the lower one is the actual price and that the person writing the higher number is cheating. In that case, he will pay both of them the lower number along with a bonus and a penalty--the person who wrote the lower number will get $2 more as a reward for honesty and the one who wrote the higher number will get $2 less as a punishment. For instance, if Lucy writes 46 and Pete writes 100, Lucy will get $48 and Pete will get $44. "

What is your choice? What is your reasoning?

People generally make choices at $100 or just a little lower while game theory predicts that a rational player should play $2. See original article in Scientific American and Letters and Responses that give all the details.

Things never get as close to game-theoretic ideal of rationality and "rationality being common knowledge among the players" as when game-theoreticians play against each other. But even game-theory professionals that know that they play against other game-theory professionals still choose values close to $100. And this is not a problem of lack of analytical skills - nobody would suspect that they can't apply backward induction to the problem.

Finally, the question that I was mostly interested in – how would people play if presented with structurally identical problem but with punishment/reward value increased from $2 to some higher value? To my satisfaction, further research shows that people are more likely to come closer to the game-theoretic prediction (the lowest possible choice) in this case.

More links:

• What were they thinking? chart
• Play the game online
• article "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions" by Jacob K. Goeree and Charles A. Holt
  

Random selection vs profiling at airport security checkpoint

The question of how to select people for extra security check has been discussed at length by people, who like me know very little about security. Usually it was a choice between random selection that was considered morally superior and profiling (read “racial profiling”) that was thought efficient but morally questionable. It was always a consensus that profiling was more efficient than random selection.

I used to be convinced as well - until last night when a friend remarked: "Anybody could be sneaking a bomb for the terrorists". Immediately, it dawned on me that she was right - given any type of profiling in action, terrorists have a very strong incentive to have somebody with the lowest probability of being inspected to sneak the bomb through the checkpoint. It can be a member of their group or an outsider - bribed, threatened, or deceived. The point is that if terrorists can observe profiling in action they can deduce the best way around it.

So being tremendously inefficient and costly in absolute terms, random selection is the only unbeatable strategy when you fight organizations that can spend enough resources to study your profiling strategy and choose a person that surely passes.

Let me finally add a little economic twist to the idea. To perfect the strategy, I would still add some tiny part of racial profiling bias to the mostly random selection at the security checkpoint. The idea is that terrorists have to either sneak the bomb themselves or have to incur additional expense in risk and possibly money to have somebody in the low risk group do it for them. If the selection at the checkpoint is purely random, they can save the expense by doing the sneaking themselves. The tiny racial bias should add just enough risk for people with the terrorist racial profile to make an average terrorist group indifferent between doing the sneaking themselves and having somebody else do it for them. Now, even though the terrorists can be fully aware of our strategy, they can do nothing to minimize their risk. This is the best, I am afraid, we can do with our knowledge of terrorist’s racial profile in this simple model.

Female reproductive strategies

From Jared Diamond's article "Sex and the female agenda - evolution of concealed ovulation in the human female":

Most female mammals are anything but subtle when it comes to telling males it's time for sex. Not humans. For good evolutionary reasons, women have found it's much better to keep men in the dark...

Physchology Today on another long time puzzle of evolutionary theory - function of female orgasm:

Compared with the more frequent and easily achieved orgasm men experience, women's sexual climax has remained a mystery. After all, women do not need to experience orgasm in order to conceive. So what is the function of orgasm in females?

Wisdom of Crowds

I don't remember how I came across Wisdom of Crowds by James Surowiecki but the moment I read the introduction I knew I had to have the book.

The book starts with the story of a famous scientist Francis Galton stumbling upon a weight-judging competition at a Stock Fair. An ox was put on display and passer-bys were asked to look at the ox and give their best estimates of its weight when "slaughtered and dressed". The result was astonishing - while individual estimates varied a lot, the average of the 787 estimates came to be only 1 pound off the real weight. In statistical terms that means that human ox-weight-estimation ability is unbiased - it has no systematic error.

So what is so exciting about research on human estimates and their properties? They may shed some light on some important things - most notably the institute of democracy. In principle, democracy has any chance of functioning only if people can give correct estimates in areas that they are not experts in.

So it would seem to me that the book on wisdom of crowds should investigate the question of systematic errors in human judgement to its fullest. To my utmost frustration, it did not. The term "systematic error" is not mentioned even once in the book. To be fair, the book talks about other conditions conducive to good group estimates and decisions - diversity and independence but the very basic issue of systematic errors is completely skipped over.

Galton's experiment notwithstanding, people do make systematic errors, in particular, when voting on economic issues - see new book by Bryan Caplan The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Some of his papers are also available online.

Welcome!

This blog is nothing more than a hi-tech replacement of the e-mails that I usually write to my friends when something noteworthy comes into my view. As an added benefit all the links will be kept at one place.