January 6, 2008

Sometimes you win, Sometimes you lose. Highlight (Chapter 6-10)

My highlight for the second half of Harford's book is Chapter Seven "The Men Who Knew the Value of Nothing". The reason this section particularly grabbed my attention was two fold. First I'm a big fan of puzzle solving and problem construction, so as soon as I got into the Game Theory and Auction Theory parts of the chapter I was hooked.

I think the reason why this fascinates me so much is the whole idea of people trying to predict what others will do in a given situation and acting accordingly. Read this as poker or establishing auction roles or negotiations etc... Again, similar to my highlight for Chapters 1-5 it goes to the basis for what economists do, understanding your choices, those of others. And then tying it to personal economics by deciding how it can best serve your interest or on a more philanthropic level the economics of others.

I read this Chapter and started to think of it's relationship to establishing political policy, economic policy or any other sort of regulation. It comes down to understanding the entire scope of incentives available to everyone involved and what information they have available to them and should have. The chapter goes on to show the failure of not understanding the player's involved as well as what the benefits of successful outcomes can be and how games work to produce efficiency in the market and how they also fail to.

This leads me to more extended questions, "Can anyone who makes policy for a group for 'their benefit' (health care for example) be able to do it better then the market?" Well of course not, but when a corrupt or lopsided market system exists sometimes it's necessary.

I think it's funny when I see people play a game without reading the rules. It's important to be able to partcipate with a degree of skill that you know what you're doing and what others can do to you. This reminds me of the first time a pawn of mine was taken 'en passe' in chess. I eventually lost the game (I'm not a very good chess player anyhow), but more so it was an early lesson to me of how important it is to understand all the 'rules' of what you're into and the ramifications of what happens when you're not. It's a testimony to educating yourself and others.

The second more subtle part of it was the reinforcement of what Harford spoke to earlier in the book regarding the lopsided effect of asymmetric information. As we look at the examples of the auctions they worked properly when everyone was allowed to read the signals that were given out by the other participants and after the auction design team had been able to set up a game (a mini market) where all parties were open to the same rules, had the same information and protected themselves and all the parties involved.


Larry Eubanks said...

"but when a corrupt or lopsided market system exists"

I don't think I know what a corrupt market system is, or what a lopsided market system is. Can you give illustrations?

I'm especially interested in the idea of a corrupt market because it seems to me "corruption" is a concept that applies to a political system and not a market system.

Douglas Loeper said...

Prf. Eubanks,

I was using the term corrupt in the idea of something not working as intended such as a corrupt file. I'm sure that there is a better term for what I was trying to indicate. I suppose what I was getting at was just a drastic market inefficiency.

An example of what I was getting at was the chapter Harford writes regarding the health care system in the United States. His example being of the asymmetric information involved and the cascading results that forces buyers and sellers out of the market, therefore the market does not as intended and it is corrupted from it's original intent.

With respect to the terminology I used for lopsided markets again I was more indicating a market inefficiency with lopsided surplus distribution between consumer and producer (monopolies, oligopolies etc.) Again I'm sure I just mislabeled something that already has a name.

Hopefully that explains my intent better.