Blake Riley

Archive for the ‘economics’ Category

Market Scoring Rules

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Decision-makers in need of information face the dual tasks of finding experts and then motivating them to give accurate forecasts. If there is an obvious expert to rely on, proper scoring rules are a well-understood means of eliciting honest probabilities. Alternatively, if there is a large enough pool of people willing to participate in a market, prices from a continuous double auctions of contingent securities do well at aggregating information, without any need to screen for expertise. However, most prediction tasks are stuck between these two methods, with only a few, hard-to-identify individuals who can meaningfully give input. Market scoring rules bridge this gap, working with an arbitrary amount of agents without becoming deadlocked or breaking the bank of the decision-maker.

Market scoring rules, and their equivalent formulation as cost-function-based market makers, debuted in “Logarithmic market scoring rules for modular combinatorial information aggregation” by Robin Hanson, first circulated as a working paper in 2002 and published somewhat perfunctorily in 2007. Mechanisms that solved similar problems, like David Pennock’s dynamic pari-mutuel markets, came out around the same time, but Hanson’s innovation has shaped up to be the seminal advance in prediction market design.

At first glance, a market scoring rule is an almost trivial extension of typical scoring rule: each participant receives the difference between the score of his report and the score of the previous participant. This doesn’t affect incentive-compatibility or willingness to participate, because in the worse case, a participant could match the report of the previous agent and have no net payment. As a result, the sum of all the payments to participants telescope, leaving the sponsor of the market liable only for the difference in the scores of the last participant and some initial report.

Although developed in the context of a sequentially applied scoring rule, this system turns out to be equivalent to an automated market maker that sells shares of contingent securities. This feels more like a prediction market, but with some striking advantages. First, the prices of securities always form a coherent probability distribution by construction, simplifying interpretation. Second, the market has infinite liquidity because all transactions are conducted through the market-maker. Third, prices for all securities are updated whenever a sale or purchase is made. Together, these advantages mean markets for conjunctive or conditional events can be feasibly priced. Even if no one else ever trades on a joint security that Obama wins the 2012 presidential election and it snows in Washington DC on inauguration day, this security can be bought and the information expressed in the purchase percolates out to all other combinations of events.

The modern prediction market literature largely revolves around market-makers inspired by Hanson. A decade later, the logarithmic market-maker now has a air of classic elegance to it, in contrast to the seemingly primeval prior literature and the complex refinements that have followed.

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Written by blakeriley

2012.01.23 at 23:29

Posted in economics

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Incentives to Exercise (2009) – Charness and Gneezy

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Monetary incentives are tricky things. At one point, economists thought payments could only increase the frequency of the behavior being rewarded. Following the psychological literature, the possibility of extrinsic motivations (e.g. cash) crowding out intrinsic motivation is now widely accepted. Especially if a reward is given and then removed, people can be much less inclined to engage in the behavior. Deci (1971) is the classic paper on intrinsic motivations being displaced.

Alternatively, cash rewards could give a person a boost in adopting a habit. If the payment is removed, but the habit has been established, rates of engagement could be higher than the baseline. Given the public policy interest in making or breaking habits like regular exercise or smoking, respectively, knowing whether payments have a positive or negative effects is vital. I’m agnostic whether public policy should encourage better lifestyles, but at the very least it should do no harm.

Charness and Gneezy (working paper) address crowding-out vs habit-formation by paying undergrads at two universities for gym attendance. In addition to a control, one group was required to attend the gym once to receive payment, while another was required to attend eight times in a month. If a participant did not attend the gym regularly prior to the intervention and was in the eight-time treatment, they went to the gym about 0.75 times more per week than the control after the reward period. This group also showed some health improvements. For everyone else, regulars or one-time, the intervention had no or slightly negative effect. So, with a positive, lasting effect for some and no apparent downside, monetary incentives for exercise might be worth considering. This may be due to the subjects acquiring a habit rather than losing one, because incentive programs for quitting smoking for instance lose effect once the payments stop.

Written by blakeriley

2011.02.1 at 20:31

Posted in economics, psychology

Microfoundations of the city

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Geoffery West, a physicist associated with the Santa Fe Institute, concluded that cities scale superlinearly: when cities double in size, per-capita wealth, crime, innovation, traffic, construction spending, AIDS cases, etc, increases by 15%. Firms, on the other hand, scale sublinearly. While cities and firms are integral parts of economics, this looks nothing like modern economic theory. Where are the optimizing agents with preferences and budget constraints? Theoretical economics is something more like a method than a subject area, with little room for laws established by observation. Economists are happy users of statistics, but any overarching patterns should be reinforced by a model suggesting how the relationship emerges from interacting agents. Cosma Shalizi doubts whether macroeconomic theories really need these microfoundations. Certainly it would be great to know exactly how the law arises, but how necessary is it?

As I make the transition from economics student to economics researcher, questions like these are at the front of my mind. What exactly are economists trying to accomplish? My current opinion is that, contra Friedman, economic theory is not about prediction. Instead economics models are frameworks for ex ante understanding and evaluation of counterfactuals. I see strong ties between economics and evolutionary biology. If anything, economic tools like game theory are better suited to evolution than their original domain.

Written by blakeriley

2011.01.20 at 20:52

Division of labor at the LHC

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By my rough calculation, this paper from the LHC has 3,146 coauthors.

(ht: MR)

Written by blakeriley

2011.01.19 at 18:12

Posted in economics

Microplane graters and socialist calculation

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Today I was listening to an EconTalk episode about Ludwig von Mises, including his kicking-off the socialist calculation debate. Especially as expanded by Hayek, the argument is that prices aggregate distributed knowledge, guiding resources in ways that are very hard to predict, much less plan. Case in point: the Microplane grater.

“I didn’t set out to make cheese graters,” Mr. Grace, an engineer by education, said recently… “I thought I was making serious woodworking tools,” he continued. “To see them used in the kitchen, that was frankly a personal disappointment.”

“We laughed when people told us they were using our products in their kitchens,” recalled Microplane’s Web site and woodworking-products manager, Maria Grace, one of Richard Grace’s daughters. “But we didn’t turn down their orders.”

(hat tip: Kottke)

Written by blakeriley

2011.01.19 at 17:51

Posted in economics

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