Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Friday, August 27, 2010

Failed Cooperation in Fashion

Posted by Simon Halliday | Friday, August 27, 2010 | Category: , , | 1 comments

I didn’t ever think that I’d comment on the game theory of the fashion industry, but hey the fashion industry contains profit-maximising firms that rely on a brand to maintain their profits, so why not? We’ve known for a while that various fashion houses employ many tactics to improve their branding, for example sending free products to celebrities so that their products are associated with these celebrities. This morning, though, I came across an article in which it was shown that fashion houses also send out their opponents’ products to sub-lebrities, that is, those people at the lower end of the celebrity spectrum with whom the fashion houses would rather not have their products associated in case it jeopardises their brand.  You get your opponents' customers to see that some loser sub-lebrity has their branded goods, which makes those customers come and buy your goods instead. Eureka!

But what the fashion house that started this didn’t realise is that the best policy with these kinds of games is not to commence playing them at all. Unless all the fashion houses can come to a simultaneous agreement to cease doing this 'unbranding' or ‘anti-branding’, they’ve now permanently increased their branding costs. Why? Not only do they have to pay for sending their products to celebrities, but they have to pay for sending their opponents’ products to sub-lebrities. I can see that the very first fashion house to do this thought “Wow! What a great idea! We can damage our opponents and increase our market share. We’re geniuses!” They didn’t realise they were initiating a multi-player prisoner’s dilemma in which each fashion house has an option to Cooperate (not anti-brand) and Defect (anti-brand).  How does this work? Well, for each fashion house, it’s in their interests to anti-brand if no other firm does (they defect, when the others cooperate) because they will end up looking like a superior brand at relatively low costs. Secondly, they would also much rather not be the firm that is not anti-branding when any other firm is anti-branding.  Together, these imply that Anti-branding is a strictly dominant strategy in the game.  Consequently, an All Anti-brand equilibrium obtains, at which all the firms are worse off than they would have been had no firm chosen to anti-brand, or at least chosen not to allow anti-branding into their set of potential strategies.

What do they need to do to get out of this situation? As someone who doesn't consume these goods, I don't really care, but the consumers of the goods should because the costs are probably going to be passed on to them (depending on the elasticity of demand for these goods, which might be quite great given that they are luxury goods).  Anyway, I suspect that they would like to alter the game so that the incentive to anti-brand is removed.  I suspect, though, that now all firms have done it, there is no credible way to get rid of it. All the firms will continue to do it, in the interests of attempting to get more market share, but ultimately damaging their profitability because if everyone does it, no single firm is likely to improve their market share.  Doh! Did no one at Gucci or Prada study game theory? What's probably even more frustrating for a consumer of these goods is that the outcome is not like the breakdown of cooperation in a cartel in which consumers might eventually benefit from lower prices, here, instead, consumers may suffer.  Poor fashionistas! Your Prada, Gucci and other famous brand's will cost more now.

Images: Gucci Bag from, Snooki trio from

Monday, August 09, 2010

Comments on Review of Ridley's Rational Optimist

Posted by Simon Halliday | Monday, August 09, 2010 | Category: , , , | 1 comments

I've just read this review - by John Gray - of Matt Ridley's book The Rational Optimist.  I originally intended to comment on the article's content, then realised that I had to refer to some commenters who would probably just troll (because, I suspect, their ignorance displays their misunderstanding of the position that they advocate).  Anyway, here's the extended version of the comment I planned to write.  My comment is intended to be about the comments and not so much about the review itself. 

I get the sense when reading the comments on Gray's review that people are misconstruing  as a philosophical point what Gray intended instead as a description of an historic process, i.e. when Gray says "Laissez faire [...] was imposed through state power".  What Gray seems to be saying is that what we mean when we talk about 'laissez faire' occurred not only as a consequence of decentralized decision-making by people, but also because of the application of state power to reinforce and support (an approximation of) laissez faire.  In terms of British, Dutch and US history that makes sense: these countries had people who made decentralized decisions to create and sustain free markets, and then used state power to mobilize the populace to protect these free markets.  So-called laissez faire was not only the result of a decentralized process, but also a consequence of people coming together and asserting the primacy of free markets through state power and democratic systems. 

Also, semantically, laissez faire is not the 'absence of state power' as some commenters assert.  It is the absence of state intervention in industry and the market particularly, rather than the absence of any government intervention or state power generally.  The absence of state power is anarchism, not laissez-faire.  Consequently, it's entirely consistent for state power to support laissez faire market organizations by using state power to prevent state intervention in markets. This is what Gray said.  Moreover, state power is often necessary to ensure that markets remain free.  Adam Smith made this point in The Wealth of Nations when he observed that "People of the same trade seldom meet together [...] but the conversation ends in a conspiracy against the public." (WoN, Book1, Ch 10) Smith argued later in The Wealth of Nations that government would be required to sustain competitive markets against the forces of merchants operating in the market.  Consequently, it is only through the exercise of state power that free markets, that is laissez faire, can be protected and sustained.  Anarcho-capitalism is a pipe dream. 

Some other commenters also seem to suggest that the kind of capitalism used by China is equivalent to a 'free market'.  I suggest that they read their Hayek on the differences between private property (several property) and state property and what sustains liberty in markets (see, for example, The Fatal Conceit).  The point is not that China was a Communist country, but that China now engages in a form of state-sponsored capitalism (also, anyone who claims that the Chinese economy is a free market obviously forgets that the Renminbi is not a floating exchange rate - they need to read their Friedman).  Ridley apparently ignores China as a counter-example.  It appears he also ignores other east Asian State-Owned Enterprises and their roles in these quasi-capitalism economies.  It's the problem that 21st century capitalism may not only be about private property, but about state property and how states dispose of their property in ways that might contravene principles of liberty, yet their policies result in improved material flourishing of their populations.  It's a problem for those, such as myself and Ridley, who advocate a capitalism based on private property.  We need to examine and confront this problem, not ignore the problem as Ridley apparently does.

Independent of these problems in the comments and the massive problems and glossings-over in Ridley's book, Gray gets several things wrong too.  It would take him some time to cover all of them, so I will try to cover one: it appears as though Gray has not read any of the literature on cultural evolution and group selection, often in counterpoint to and contention with gene-level-only selection arguments.  Consider, for example, the work of Robert Boyd and Peter Richerson, or that of Luigi Luca Cavalli-Sforza.  Gray incorrectly labels cultural evolution a 'misleading metaphor'.  He portrays his ignorance of the topic by saying so - it's not only about memes and Susan Blackmore.  Gray is right to call Ridley on Ridley's poor history, Ridley's mis-characterization of cultural evolution as an ultimately teleological force with laissez faire capitalism as its end, and Ridley's attempts to ignore confounding facts like China.  But Gray should have been more careful in his representation of evolutionary theory as he ignored important ideas in contemporary theory that approach the problems in a theoretically well-grounded manner.

Thursday, August 05, 2010

Cooperation and Competition Lectures

Posted by Simon Halliday | Thursday, August 05, 2010 | Category: | 1 comments

I am slowly uploading my lectures from Cooperation and Competition (EC2007S) at the University of Cape Town to
Cooperation and Competition - 1st Lecture 26 July 2010 from Simon Halliday on Vimeo.
">vimeo, a good video sharing site.  You can see the "channel" for the videos here: Cooperation and Competition.  You can subscribe to the RSS feed of the channel if you're interested.   Cooperation and Competition is a course in introductory game theory using the textbook Games of Strategy by Dixit, Skeath and Reiley (which I mentioned recently in this post).  The videos are a combination of a video of me and a screencast - that is a video and audio capture of the slides that I use for my lectures.  The book is great because it covers all the basics of game theory with many good intuitions.  I try to make the content even more intuitive and accessible in my lectures, brushing over a bit of stuff initially though defining it more clearly later.  I only lecture six weeks of the course, going quite in depth into the ideas and applications of strategic form games, games with many players and extensive form games.

I have embedded the first lecture below.  I was quite fortunate to have Helen Zille and Patricia De Lille declare an agreement to cooperate the day before the course started, which meant that I could use that as a starting point for a discussion of agents agreeing to cooperate in political games.  This meant that students could see from the get-go that game theory offers all kinds of interesting insights into various aspects of interactions outside of its immediate purview, that is outside of economics (I'd rather not be accused of 'economics imperialism' here, the idea is for students to see that there are many applications of game theory and then later to develop a more nuanced view of the limits and extensions to the theory once they have a better understanding).

Cooperation and Competition - 1st Lecture 26 July 2010 from Simon Halliday on Vimeo.

Tuesday, August 03, 2010

Illusory Superiority and Signalling

Posted by Simon Halliday | Tuesday, August 03, 2010 | Category: , , , | 4 comments

My sister is an actress, doing more stage acting and dancing than screen work.  My brother is a musician.  I dabbled in acting and singing for much of my youth, even heading up the University of Cape Town choir for a while when I was a student.  Now why is this relevant? As a consequence of these affiliations and activities I occasionally end up watching programs like So You Think You Can Dance (which my brother-in-law did quite well in previously) and IdolsI explained to my students that these two programs create problems for economists and some of our theory.  Why? I shall try to explain below.

Consider signalling theory and let's take the classic example of education.  The idea here is that you try to create a set of incentives such that high ability individuals and low ability individuals self-select into groups such that high ability individuals get an education to signal that they are high ability because to get such an education would be too costly for low ability individuals (this is summarizing greatly).  What this assumes is that people know their own abilities.  But, as Idols and So You Think You Can Dance so readily exemplify, many people do not know that they have low ability.  They believe, falsely, that they are high ability individuals. They are victims of illusory superiority.. 

So, I explained to my students that in the context of Idols and So You Think You Can Dance, that humans are funny creatures.  We're subject to all kinds of cognitive biases.  One particular bias, appropriate for these programs, is the Dunning-Kruger effect.  The Dunning-Kruger effect exemplifies a cognitive bias by which individuals often think that their abilities are better than they are, that is people suffer from illusory superiority.  Consider two people: one of low ability, another of high ability.  If the Dunning-Kruger effect (and, specifically, illusory superiority for low ability individuals) holds, then the individual with low ability does not realise that they have low ability.  This creates a problem for signalling theory.  Why? The low ability person will lack the metacognitive abilities to evaluate their own cognition.  Consequently, they may incorrectly evaluate the costs that they would incur to attend university (get an education).  They might then attend university and fail at a cost to themselves and to society.  The might also, by some fluke, get through university and send the signal of 'high ability'.  But, once they enter the workplace, their employer might then discover that the signal was untrue and they are indeed a low ability individual, which undermines the credibility of the signal for others.

But, the Dunning-Kruger effect has another side.  Intelligent, or high ability, individuals generally have the metacognitive abilities to evaluate their own abilities relative to others.  Consequently, they are often better at measuring when they have high ability in one subject and low in another, but they are also often victims of incorrectly evaluating the incompetence of others: they take their own ability as representative of an average ability to complete a task, therefore underestimating their own abilities.  This adds a second problem: imagine that a high ability individual, falsely believing that she is a low ability individual chooses not to attend university.  This further complicates the signals for companies.  A high ability individual who is hired and found to be a high ability individual undermines the 'low ability' signal of no education. 

Signalling theory in economics consequently faces a host of problems, at least as far as it tries to grapple agents who suffer from cognitive biases, i.e. humans.  I have simplified the problems here, but it does give us a first blush of some of the problems of reconciling actual human thought processes with economic theory.

[Note: I haven't ever read anything about Dunning-Kruger and Signalling theory together, it just struck me that the one contradicted the other, what I know about Dunning-Kruger and other cognitive biases is predominantly self-taught so I may have phrased things slightly loosely.  My apologies.]