Broken Symmetry

Wolfram on "Facebook World"

Very interesting article and graphics here:

I have to say that as I look at the plots above, I’m struck by their similarity to plots for physical processes like chemical reactions. It’s as if all those humans, with all the complexities of their lives, still behave in aggregate a bit like molecules—with certain “reaction rates” to enter into relationships, marry, etc.

Harnessing the Power of Feedback Loops

From Thomas Goetz at Wired:

The basic premise is simple. Provide people with information about their actions in real time (or something close to it), then give them an opportunity to change those actions, pushing them toward better behaviors. Action, information, reaction. It’s the operating principle behind a home thermostat, which fires the furnace to maintain a specific temperature, or the consumption display in a Toyota Prius, which tends to turn drivers into so-called hypermilers trying to wring every last mile from the gas tank. But the simplicity of feedback loops is deceptive.

Via Farnam Street.

I hadn't heard about Bandura's work in the 1960s, although I find that he was cited in Csikszentmihalyi's Flow in passing. It was unclear from the citation how much of an influence he was on C.'s own theory. Although C. does not emphasize flow as a feedback loop, from a systemic perspective that is pretty much what one observes when people are in a state of flow. The topologies get complicated since many experiences of flow involve other people. Think of a jazz quartet and its audience -- live and for its recordings. Or of Congress and the stock market.

I like how this dovetails neatly in with Dweck's mindset theory also. The fixed mindset interrupts any feedback loop, and hence disrupts learning. But too little self-criticism and introspection and there is no feedback.

One of C.'s observations in Creativity is that creative individuals often lose a parent early in life. It seems to me that one would have to develop a capacity for self-criticism earlier on in that instance. Perhaps such individuals have a better capacity for self-generating feedback than do the rest of us, who are looking to others -- especially family -- for queues as to whether we are doing well at this ambiguous assignment that is our existence.

Mechanisms for Cultural Evolution

From Lesley Newson and Peter J. Richerson:

The basic cultural evolutionary mechanism is a “teaching bias” in the terms of Boyd and Richerson (1985). Most people normally espouse values, norms, and behaviors similar to those held by others in their community. Thus, younger people’s values, norms, and behaviors substantially refl ect those of the previous generation, and culture includes an inertial effect simply by consequence of people learning from each other. However, the same people when communicating with a close relative are slightly more likely to express variants of conventional norms that favor reproductive success, while those communicating with a friend, coworker, or other non-relative are slightly more likely to emphasize other goals. Newson et al. (2007) report role-play experiments that show this effect and also present a theoretical model that indicates how a decrease in the ratio of relatives to non-relatives in a social network can lead to the decline of norms favoring inclusive fi tness derived from the biased teaching effect. The rate of decline depends upon the strength of the teaching bias and on the ratio of kin to non-kin in social networks. But, even if the change in network structure is rapid and the teaching bias is quite strong, it is still likely to take several generations for a population to approximate a new equilibrium in norms related to reproduction.

Via @GarrettJones on Twitter. The paper is interesting throughout.

Symmetry and Entropy in Market Bubbles and Crashes

From Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam:

Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.

Via Physics arXiv blog.

What I like about this work is how at the conceptual level it fits with other theories of markets making phase transitions between high and low entropy states, with symmetries breaking as the transition begins and picks up steam.

There is a lot of talk about whether Quantitative Easing has done much. Folks like Scott Sumner seem to be arguing that it has not because market expectations were adjusted at the moment QE was announced (or quickly thereafer). I'm more skeptical about that claim because I imagine that it takes more than days or even weeks for organizations to propagate new information about prospective rates through their entire ranks, such that there remains an impedance mismatch between Fed signals and market reactions. But at an even more fundamental level, the market response to Fed signals does not appear to be linear within some regimes, including the one we live in now, which looks to me like a liquidity trap, albeit not homogeneously sticky for all industries and firms. (Consumer internet, in particular, seems to be attracting capital investment at an accelerated pace compared even with hardware and software solutions providers.)

Evidence of strategic periodicities in collective conflict dynamics

From Simon DeDeo, David C. Krakauer, and Jessica C. Flack:

We analyze the timescales of conflict decision-making in a primate society. We present evidence for multiple, periodic timescales associated with social decision-making and behavioral patterns. We demonstrate the existence of periodicities that are not directly coupled to environmental cycles or known ultraridian mechanisms. Among specific biological and socially-defined demographic classes, periodicities span timescales between hours and days, and many are not driven by exogenous or internal regularities. Our results indicate that they are instead driven by strategic responses to social interaction patterns. Analyses also reveal that a class of individuals, playing a critical functional role, policing, have a signature timescale on the order of one hour. We propose a classification of behavioral timescales analogous to those of the nervous system, with high-frequency, or alpha-scale, behavior occurring on hour-long scales, through to multi-hour, or beta-scale, behavior, and, finally gamma periodicities observed on a timescale of days.

Via Physics arXiv blog.

Tyler Cowen on Methodological Individualism

Over at MR, Tyler offers some thoughts and a wealth of interesting links on the subject.

Foucault understood how actual historical explanation relies on the use of broad categories, classes, and exemplars, and in a manner which is not logically reducible to statements about individual beliefs and desires. The writer (theorist) has nothing close to a complete mental model of how the interacting categories reduce to component individual parts, and so some or most of the moving parts of the explanation retain their autonomy at a partially macro level. The Austrians will kick and scream on this one, but if you combine imperfect information and the sense/reference distinction, methodological individualism ends up as more of a slogan than anything else. There is a reflective equilibrium to the explanatory process, and micro relies on some macro foundations, not just vice versa, and individuals rely on the social for some of their cues. Atomistic reduction to the level of the individual in general will not succeed.

For earlier posts on the horribles that result from methodological individualist theory in antitrust law, see here. Also note that Kenneth Arrow has expressed at least strong skepticism about methodological individualism. The picture that develops is of a feedback loop between individuals, groups, and the set of formal rules and procedures for encoding and transmitting them. We can't understand the behavior of the system with a myopic focus on any single part.

Facebook and Ennui

Rick Bookstaber gives an interesting take on the alternative trajectories of society and Facebook over the next few decades:

I am not going to enter the discussion of how secure Facebook's position is, or how much advertising it can generate. Insread, I am going to discuss the implications of Facebook for our individuality as we increasingly embrace Facebook and similar systems that replace real interaction with the virtual, and the implications of this world for the success of Facebook.

The basic point is that either the world changes and Facebook become marginalized, or Facebook continues [to] thrive and we live in a world of existential alienation. ...

Interestingly, Facebook wins relatively few friends in Japan. I wonder how Bookstaber would interpret this in view of his thesis.

Macroeconomic Resilience Revealed

Welcome to the non-anonymous blogosphere, Ashwin!

It only took six months for my prediction to come true.

Looking forward to hearing more about the stealth project.

Improving on Mean Field Approximations of Consumer Behavior

From Coco Krumme, Manuel Cebrian, and Alex Pentland:

Much of economic theory is built on observations of aggregate, rather than individual, behavior. Here, we present novel findings on human shopping patterns at the resolution of a single purchase. Our results suggest that much of our seemingly elective activity is actually driven by simple routines. While the interleaving of shopping events creates randomness at the small scale, on the whole consumer behavior is largely predictable. We also examine income-dependent differences in how people shop, and find that wealthy individuals are more likely to bundle shopping trips. These results validate previous work on mobility from cell phone data, while describing the unpredictability of behavior at higher resolution.

Traditionally, economic data hasn't had the granularity to distinguish between different groups of consumers. Like the exact solutions to the Ising Model, rational expectations theory is a kind of mean field approximation. Now that we have digital trails for individual consumers, improvements are being made to economic models of consumer behavior.

Note that this kind of theory and data doesn't fit easily within the scope of behavioral economics and finance. This isn't a laboratory study. This isn't a theory of psychology. When it comes to consumer behavior at least, we can now say with some empirical support behind us, that indeed "more is different."

A Genetic Substrate for Shared Intentionality?

From Replicated Typo:

At 14 months of age for example, human children are able to successfully pass an object-choice task. In this task, children are presented with two upside-down buckets, one of which contains a toy, and the experimenter points toward the bucket where the toy is hidden. The child then turns to the right bucket and retrieves the toy. Although this task may appear simple, it is remarkable that chimpanzees fail it. In contrast to children, they fail to see the pointing gesture as a relevant cooperative signal within a shared attentional frame. Instead chimpanzees seem to think something along the lines of: “‘A bucket. So what? Now where’s the food?’ They do not understand that the pointing is intended to be ‘relevant’ to the searching as a shared activity (see Sperber & Wilson, 1986)” (Tomasello & Carpenter 2007: 122).

But this result is reversed in chimpanzees when instead of pointing cooperatively towards the bucket, the experimenter makes a prohibiting gesture by holding her arm out towards the correct container with her palm out, says something like “Don’t take this one” in a firm manner and then leaves the room. In this competitive context chimpanzees can successfully infer where the hidden reward. What is equally interesting is that 24 month old children do not retrieve the hidden toy possibly because they were better at cognitive control than 18 month old children and chimpanzees and were aware of the social and communicative conventions of the prohibiting action (Hermann & Tomasello 2006, see e.g. Miller et al. 2002, Tomasello 2008: 208ff. ).

How Property Rights Evolve

From Darren Cahr at Legally Social:

If you take something from someone else in a virtual world, is it theft? How can you control your brands in a virtual world? If you create an “outfit” for yourself in a virtual world that incorporates what would be the proprietary rights of a third party were it done in the “real” world, is that still actionable? Who actually even owns the content created by members of virtual communities?

There are already lawsuits arising out of these type of concerns. In Pennsylvania, a class action was filed against Second Life alleging that the ownership rights promised by Second Life’s operator, Linden Research Inc., were undermined by unilateral changes in the terms of service. This follows another case that held elements of the terms of service to be a contract of adhesion, and thus unenforceable. The rights of “property” owners within these virtual worlds may be stronger than the creators of those worlds ever imagined.

I am reminded of what Holmes had to say about possession at common law:

Is possession a fact or a right ? This question must be taken to mean, by possession and right, what the law means by those words, and not something else which philosophers or moralists may mean by them; for as lawyers we have nothing to do with either, except in a legal sense. If this had always been borne steadily in mind, the question would hardly have been asked.

A legal right is nothing but a permission to exercise certain natural powers, and upon certain conditions to obtain protection, restitution, or compensation by the aid of the public force. Just so far as the aid of the public force is given a man, he has a legal right, and this right is the same whether his claim is founded in righteousness or iniquity. Just so far as possession is protected, it is as much a source of legal rights as ownership is when it secures the same protection.

Property rights emerge through judicial and legislative acts to protect things. There is nothing in this definition that would (or even should) limit "things" to being tangible. Whereas a web of contracts may suffice while popular appreciation for the personal value of such things is still nascent, a system of property rights will emerge once the social cost of the system is less than the benefit of relying on contracts and self-protection alone. Property rights constrain the set of rights and obligations -- which, through contract, may have been infinitely customized -- into a limited set of forms, which in turn facilitate smoother exchange and interaction by stabilizing and settling expectations as to how others will act.

The cost of modifying our current system of personal property to accommodate particular rights and obligations in virtual goods is so small that it seems to me inevitable that some form of property right will emerge. Prior to the enclosure movement in England, I'm sure that some livestock owners argued that enclosure was unnecessary because of their preexisting contractual relations with the farmers. Given the amount of human capital spent in virtual worlds, there is little doubt for me at least that some judge or legislator is going to recognize user rights to virtual property in virtual worlds.

Experts vs. Crowds: The Central Limit Theorem and the Social Benefits of Conformity

Above the Law has a post today, which provides an excellent illustration of the pitfalls to relying upon markets (and "crowdsourcing") to answer specific questions:

American Needle, a significant antitrust case, asked whether or not the NFL and its member teams counted as one entity for the purposes of merchandise licensing. The court, in a unanimous decision, reversed the 7th Circuit’s ruling that they were one entity and exempt from the Sherman Antitrust Act. Only 37% of our members predicted the reversal, and out of approximately 200 predictions, 24 got the split correct also. The SMRs for the justices indicate there was going to be a consensus, even if the direction was wrong. One easy explanation is that the majority of users thought that baseball’s antitrust exemptions would be precedential instead of a characteristic peculiar to America’s Pastime. Even in that consideration however, there is not much of an opportunity for partisan division in this opinion, although our statistics do show that there was no particular support of monopolies among the different justices and ideologies.

I don't know any expert in antitrust law who expected the Supreme Court to uphold the Seventh Circuit in American Needle. None. FantasyScotus is not an efficient market.

So what about all those studies that show that a crowd's estimate of the number of jellybeans in a jar is better than almost any individuals?

Those studies are examples of what mathematicians call the Central Limit Theorem in action. Many startup companies that proposed to change the world through their crowdsourcing of solutions would do well to understand this theorem more deeply. Frankly, most wouldn't exist if their founders did.

Here's a non-mathematician's summary of the Central Limit Theorem: A series of measurements of the same thing, made independent of each other, will be normally distributed (i.e., gaussian, or bell-shaped) with error of the mean inversely proportional to the square-root of the number of measurements.

In the case of the jelly beans, it's easy to see how the CLT applies. The way the experiment is normally conducted, each student looks at the same jar of jelly beans, makes an estimate, and writes his or her answer down on a piece of paper, which is then tallied up along with everybody else's. The measurements (i.e., the individual estimates) are identically distributed because basically everybody's view of the jar is the same, and everybody's eyes and visual processing work basically the same. The measurements are independent so long as none of the students talk to each other before giving an answer.

Independence is particularly important to achieving a good result in the jelly bean experiment. Without it, the answers become correlated, potentially deviating far from the actual number of jelly beans. This could happen, for example, if one member of the group were persuasive to others, but wrong.

(In fact, something very much like this happened inside the financial industry, when analysts had to price difficult-to-value mortgage back securities and credit derivatives. Some influential analysts started using VaR, ratings agencies priced super-senior tranches at AAA, and then everybody followed suit. As a result, the market prices were tightly correlated such that the whole market collapsed when a single set of assets dropped in price. Regulators would do well to think about how regulatory systems could ensure statistical independence in valuations without overburdening market actors with transactions costs.)

Thus, the problems for FantasyScotus could have resulted from at least two different causes. First, the individuals who participated may not have been taking measurements correctly or of the same thing. (For example, they may not have known anything about antitrust law, or may not have read any of the relevant opinions.) Second, even if some individual did take a reasonable (but off the mark) measurement, other market actors may have adopted that measurement as the correct measurement rather than making their own measurements independently.

Could these problems be overcome? Suppose the market were constituted by experts, each of whom was capable of making a correct measurement. And suppose these experts were not permitted to talk to each before betting on the outcome.

On my view, this is an impossible experiment. Almost by definition, experts arrive at their opinions through a process of communicating and understanding other expert opinions, which eliminates the possibility of (at least complete) statistical independence as a practical matter.

In fact, when it comes to legal opinions, this is probably a good thing for society. Society benefits greatly from the fact that different people from different backgrounds are more likely than not to interpret the law in the same (or at least similar way) when faced with a particular, never-before-decided set of facts.

Consensus is a public good in other fields too, although the details are interesting and complex. Mathematicians might be understood as the most rigid. But mathematical formalism is simultaneously the most abstract, and thus the most susceptible to multiple interpretations -- a fact that physicists make good use of. Conversely, literary criticism seems to lack any definite form whatsoever. But at least to this outside observer, the field of scholars active in this domain are more insular and elitist than even economists. Perhaps we all need stability and consistency in our work, and that stability comes from social networks if it can't be found within our individual neural networks.

Facebook and Privacy

Via Bayesian Heresy, this quote from Susan Herring:

What the statistics point to is a rise in Facebook, a decline in blogging, and before that, a decline in personal Web pages. The trend is clear, Facebook is displacing these other forms of online publication.

It's seems only five minutes ago that Facebook took off because it offered its users a simple, foolproof way to share their lives online without worrying about unknown strangers capitalizing on personal information to perpetrate fraud or abuse. I guess nobody much cared when Facebook opened signups to people without university addresses because it didn't matter so long as only people with university addresses could see your info.

At bottom, the value that Facebook offered its users was simple, easy to understand privacy on the web, and not (at least not at bottom) the network effects of having other friends on Facebook. Friendster and MySpace offered network effects too, and look at where they are now.

Zuckerberg ought to take a page from Apple, and refocus on the core value proposition that Facebook offered: a simple, clean, interface that gives individuals users understanding and control over how they share their information with other people online.

Hundreds of millions of people won't stop using Facebook because it isn't as good as it used to be. But Facebook's clear goal of becoming the market-share leader in social networking online is in jeopardy now.

So Herring was right -- but maybe not anymore.

Property Rights as Cultural Genome

From Hernando de Soto:

Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity.

Where to find the mind: Identifying the scale of cognitive dynamics

from Luke Conlin, Ayush Gupta, and David Hammer:

There are ongoing divisions in the learning sciences between perspectives that treat cognition as occurring within individual minds and those that treat it as irreducibly distributed or situated in material and social contexts. We contend that accounts of individual minds as complex systems are theoretically continuous with distributed and situated cognition. On this view, the difference is a matter of the scale of the dynamics of interest, and the choice of scale can be informed by data. In this paper, we propose heuristics for empirically determining the scale of the relevant cognitive dynamics. We illustrate these heuristics in two contrasting cases, one in which the evidence supports attributing cognition to a group of students and one in which the evidence supports attributing cognition to an individual.

What is a democracy?

From Gus diZerega:

To put this point in terms of systems theory, democracies are spontaneous orders that are in continual flux. That are variously enlarging and shrinking their boundaries by means of widespread consent rather than conquest, and are similarly acquiring and devolving decision making authority from other democratic bodies of which they are constituted. The image of stability and permanency that we associate with states is evidence of a breakdown in democratic processes. The organizations within a spontaneous order always have a tendency to seek to freeze adaptive processes at points where their dominance can be assured.

Is Intellectual Arrogance the Reason Why Accounting Rules Have No Theory?

More from Menand's The Marketplace of Ideas:

Accounting is a trade, but the history of accounting is a subject of disinterested history -- a liberal art. And the accountant who knows something about the history of accounting will be a better accountant. That knowledge pays off in the marketplace. Similarly, future lawyers benefit from learning about the philosophical aspects of the law, just as literature majors learn more about poetry by writing poems.

Judge Posner makes a similar point about legal education in The Problematics of Jurisprudence. The context in Menand suggests that accounting may indeed have been neglected as a subject of liberal inquiry (i.e., as a subject of disinterested literary, historical, and/or scientific theory) because of its rep as a trade.

My personal experience suggests this to be an accurate depiction of how accountants are educated. They were even more parochial in their interests and education than the physics and chemistry majors I rubbed elbows with as an undergrad and grad student.

Could this be part of the explanation for the repeated failures of our financial system? Many earlier posts on this blog have addressed the serious weaknesses of financial accounting theory as a basis for measuring and managing our finanical system. But others see the problems, as Northwestern, Chicago, and Stanford Law Schools have begun teaching accounting theory to their students, at least through electives.

It's the unsexy, quotidien words that carry the heavy baggage in language -- a lesson learned early by every patent litigator. Similarly, its the unsexy, quotidien rules of accounting that move the cash-flows that represent the very life blood of our economy.

Click the accounting category at right for earlier posts. A fascinating historical fact, which I believe is not without larger significance, is that both a patent system and double-entry bookeeping were adopted around the same time in Venice in the 15th Century.

From The Marketplace of Ideas by Louis Menand

I will almost certainly have more to say about this book, which represents extraordinary vision. The conceptual scheme fits very well within the ontology of systems theory -- "knowledge" is an evolving system of neural networks, social networks, and the phsyical objects used to mediate communication among them.

For now, try on for size this quote from the introduction:

In 1908, the Cambridge classicist F. M. Cornford, in his satirical guide for young academics, Microcosmographia Academica, advised that the basic rule of faculty governance is, "Nothing should ever be done for the first time."

Alexander Hamilton on Our Interconnectedness

Although Phil Weiser spoke eloquently, I thought it worth pointing out that the conception of society as a system of interconnected networks has venerable historical antecedents. Consider what Ron Chernow has to say of Alexander Hamilton's address to the the Annapolis Convention of 1786, which led directly to the Constitutional Convention:

The Annapolis address, with its conception of the political system as a finely crafted mechanism, composed of subtly interrelated parts, had a distinctly Hamiltonian ring. It reflected the penchant of systemic solutions, his sense fo the fine interconnectedness of things.

Here's an excerpt of the address to which Chernow seems to refer:

If in expressing this wish, or intimating any further sentiment, your commissioners should seem to exceed the strict bounds of their appointment, they entertain a full confidence that a conduct dictated by an anxiety for the welfare of the United States will not fail to receive a favorable construction. In this persuasion, your commissioners submit an opinion that the idea of extending the powers of their deputies to other subjects than those of commerce, which had been adopted by the State of New Jersey, was an improvement on the original plan, and will deserve to be incorporated into that of a future convention. They are the more naturally led to this conclusion, as, in the course of their reflections on the subject, they have been induced to think that the power of regulating trade is of such comprehensive extent, and will enter so far into the general system of the Federal Government, that to give it efficacy, and to obviate questions and doubts concerning its precise nature and limits, may require a correspondent adjustment of other parts of the Federal system. That there are important defects in the system of the Federal Government is acknowledged by the acts of all those States which have concurred in the present meeting; that the defects upon a closer examination may be found greater and more numerous than even these acts imply, is at least so far probable, from the embarrassments which characterize the present state of our national affairs, foreign and domestic, as may reasonably be supposed to merit a deliberate and candid discussion in some mode which will unite the sentiments and councils of all the States.

You're in good company, Mr. Weiser.

Meditations on Calendar Reforms

From the WSJ:

Creating a calendar is like fitting a lot of round pegs into not quite as many square holes. Western tradition demands a seven-day week. Ancient custom, rooted in moon cycles, calls for a 12-month year. The Earth's tilted axis produces four seasons. But the Earth, uncooperatively, takes 365 days, plus a tad more, to go once around the sun, and 365 is divisible by none of seven, 12 or four. And thanks to the extra bit of time -- about one-fourth of a day -- required for a complete orbit, leap years are needed to keep things on track.

Religious and civil authorities in the past have reformed the calendar in ways not unlike how local and state authorities govern daylight savings time today. Calendar reform is a historical subject that gives us insight into what organizations had true authority over everyday lives at a given moment in history.

Such reforms are also a direct regulation of how people synchronize activities. But unlike the bells of Venice, which lengthened in the summer and shortened in the winter, the intent of reformers now seems to be achieving a more symmetrical match between the frequency of astronomical and human activities.

But why should we prize symmetry with the stars above human needs? Consider the Pythagorean comma. The fact that perfect fifths cannot be made to coincide with octaves does not prevent us from making beautiful music. What a comment on our culture: Calendar reformers seek not to accommodate the human need for stability and consistency, but to measure life out in a more symmetrical (and hence aesthetically pleasing?) increment.

The calendar should be our slave, not we its servant.

Easley and Kleinberg on Synchronization

From Chapter 21 of their treatise on Networks, Crowds, and Markets:

When looking at public-health data, it is natural to look at periodic oscillations in the number of cases of a disease and to try positing external causes for the effect. For example, cycles in the prevalence of syphilis across the U.S. over the past 50 years have traditionally been attributed to large-scale societal changes, including changes in sexual mores and other forces [194]. While such factors clearly play a role, recent research has shown that oscillations and synchronization over time can in fact result largely from the contagion dynamics of the disease itself, and that similar patterns can be created in direct simulations of the disease using the types of models we have been considering here [194, 264].

We now describe how such effects can be produced using simple epidemic models. The crucial ingredients appear to be a combination of temporary immunity and long-range links in the contact network. Roughly, long-range links produce coordination in the timing of flare-ups across dispersed parts of the network; when these subside, the temporary immunity produces a network-wide deficit in the number and connectivity of susceptible individuals, yielding a large “trough” in the size of the outbreak that directly follows the “peak” from the earlier flare-ups. We now describe how to make this intuitive picture concrete using simple models.

Want an explanation for how markets all over the world seem to have become more correlated?

As financial institutions have become more densely coupled through new financial instruments and leverage, what used to be only local bubbles and crashes are now global epidemics.

Kleinberg and Easley on Networks, Crowds, Markets, and Intellectual Property

Kleinberg (as in the Kleinberg algorithm) and Easley have posted online an amazing book Networks, Crowds, and Markets: Reasoning About a Highly Connected World . The last chapter addresses the question of intellectual property, and gives the clearest, most concise summary of costs and benefits I've read in a while. The chapter concludes with the following observation:

[T]he investment in research and development needed to create many patentable commodities is very large relative to the investment needed to create most works of art. The pharmaceutical industry, for example, spends large sums on R&D and it seems likely that this would not occur without the ability to patent discoveries. So the case for restrictive and strongly enforced patent law is more compelling than that for copyright law.

Via Michael Nielsen.

How Persuasive Are You?

When you recommend a new product to your friend and she tries it out, is it because you've persuaded her, or because she shares your preferences? If you're like me, you don't generally bother recommending things to people unless you know they happen to share your tastes along some dimension. Yet in principle there are some people out there whose opinions are "influential" -- coaxing otherwise disinterested people to try new things despite having different tastes. In principle, that's part of why professional athletes and celebrities are paid to endorse products. But teasing out exactly how much of the adoption of a new product is due to influence and how much is due to shared characteristics (i.e., "homophily") in the network can be difficult.

One cut at this question is forthcoming in PNAS in an article titled, "Distinguishing Influence Based Contagion from Homophily Driven Diffusion in Dynamic Networks" by Sinan Aral, Lev Muchnik,and Arun Sundararajan (as noted on the OrgTheory blog) (try emailing Aral for a copy):

In the context of product adoption, peer influence is associated with the presence of adopters in one‟s local network... However, identification of causal peer influence effects is complicated by the unobservability problem. Each user either has adopter friends or not, making it impossible to observe whether those with adopter friends ... would have adopted had they not had adopter friends. Homophily in this case creates a selection bias because treatments are not randomly assigned: adopters are more likely to be treated due to similarity with their neighbors. Thus, frequently used methods such as regression analysis, which can only establish correlation, are insufficient. Causal treatment effects can on the other hand be estimated via matched sampling, which controls for confounding factors and overcomes selection bias by comparing observations that have the same likelihood of treatment.

Toward this end we adapt matched sample estimation for use in dynamic networked settings. Conditioning matches on a vector of observable characteristics, behaviors and attributes yields influence estimates that account for the homophily that may make product adoption decisions cluster in the network even if no influence exists. This procedure establishes upper bounds on the degree to which influence (rather than homophily) explains assortative mixing and temporal clustering in networks. Since influence can vary over time, our framework provides estimates of its evolution. We can also assess the marginal influence of having an additional adopter friend for any arbitrary number of friends.

The upshot of this work is that shared characteristics among individuals accounts for almost all of the "viral" spread of new product adoption -- i.e., that preferences are largely fixed within the time-scale of weeks or months after a new product is introduced. There exists, nonetheless, a small group of people who are "influenced" into adopting a new product -- i.e., whom adopt the product through social interactions with other adopters with whom few characteristics are shared.

At least on its face, the work seems to affirm the use of fixed preferences as an approximation in this context. This validates the use of this approximation by economists. It also demonstrates, however, that the approximation is not without exception. Also of interest to economists.

One question I had on considering the work is whether it would be possible to single out the "influenced" and "influencers" in this survey, and determine whether or not such people occupy a position as bridges or "weak-tie" links within the social networks. Along the lines of Granovetter, the idea is that influence here is largely a function of whether or how often individuals come into contact with others with characteristics far different from their own. It would be interesting to know whether these individuals could be identified using this approach, which isolates "influence" from homophily.

Rolfe Winkler Looks Like a Major New Blogging Talent

From his post "Markets need rules":

Anyone in business knows how much trust matters on both sides of any transaction. When trust disappears, transactions stop. The market breaks down and individuals are forced to rely on themselves. In a perfectly free market, where economic Darwinism means competition always trumps cooperation, trade quickly grinds to a halt.

No one wants this. As economist Russell Roberts has argued, “self-sufficiency is the road to poverty.”

Laws align incentives so that cooperation can be more profitable than competition. So that individuals in the free market don’t have to worry about the market eating them alive.

Winkler's take is slightly different than mine. What I would (and did) say is this:

What Adam Smith taught us is that cooperation is the source of endogenous growth within an economy. Voluntary exchanges and divisions of labor literally create wealth within society. When it's money rather than goods or services that are exchanged, residual income (i.e., profit) is an excellent proxy for cooperation and endogenous growth. In fact, it's the best the world has ever known.

Crucially, the argument is that cooperation creates wealth, and that laws (or social norms) promote wealth creation to the extent that they facilitate and encourage cooperation. This claim may be quite counterintuitive to competition regulatory authorities, in particular, because much of competition regulatory theory is premised on the notion that competition is the engine of growth, with a few recognizing exceptions for temporary and otherwise limited monopolies (for example, for intellectual property). Winkler falls into the same trap by treating cooperation and competition as dichotomous. Competitions are simply one way to get people to cooperate.

Consider the facts of the American Needle case, for example. An unfettered market for NFL souvenirs is one form of private cooperation. The NFL IP licensing group is another. Both are procompetitive and anti-competitive, but among different stakeholders. NFL IP Licensing group promotes competition among professional leagues (MLB, NHL, etc.). A free market among manufacturers and distributors promotes competition among NFL teams, and probably lower prices and lower average quality in souvenirs overall. The question, which I think the Seventh Circuit got right, is what kind of cooperation/competiton we want to promote. The institution of market competition merely pushes people to differentiate or operate with more efficiency. When the market is already operating at peak technological efficiency and peak diversity, competition will be degrading and wasteful.

More fundamentally, the divisons of labor and voluntary exchanges that create wealth are acts of cooperation. In some cases, competiton is necessary to close the gap between bids and asks. In others, there are enough levers on the transaction such that competition isn't necessary to get overlap. In cases where transactions are occurring despite lack of competition, government should be careful not to destroy social capital -- often hard won over generations. That was Ellickson's central insight.

The Wire and Csikszentmihalyi's Theory of Flow

Last night I finished the last episode of Season 1 of The Wire. If you haven't seen any of this, check it out. The show compares favorably with any film or lit I've consumed in many years.

The show, in fact, provides a good fictional depiction of a complex system, of the kind discussed repeatedly on Broken Symmetry. Of particular note in this regard is the term chosen by characters in the show to describe the complex system of which they are a part -- "the game."

The term naturally calls to mind Csikszentmihalyi's theory of flow, which was discussed in an earlier post, which included this excerpt C.'s book Flow: The Psychology of Optimal Experience at 81:

Cultures are defensive constructions against chaos, designed to reduce the impact of randomness on experience. They are adaptive responses, just as feathers are for birds and fur is for mammals. Cultures prescribe norms, evolve goals, build beliefs that help us tackle the challenges of existence. In so doing they must rule out many alternative goals and beliefs, and thereby limit possibilities; but this channeling of attention to a limited set of goals and means is what allows effortless action within self-created boundaries [i.e., flow]."

It is in this respect that games provide a compelling analogy to cultures. Both consist of more or less arbitrary goals and rules that allow people to become involved in a process and act with a minimum of doubts and distractions. The difference is mainly one of scale. Cultures are all embracing: they specify how a person should be born, how she should grow up, marry, have children, and die. Games fill out the interludes of the cultural script. They enhance action and concentration during "free time," when cultural instructions offer little guidance, and a person's attention threatens to wander into the uncharted realms of chaos.

When a culture succeeds in evolving a set of goals and rules so compelling and so well matched to the skills of the population that its members are able to experience flow with unusual frequency and intensity, the analogy between games and culture is even closer. In such a case we can say that the culture as a whole becomes a "great game." Some of the classical civilizations may have succeeded in reaching this state. Athenian citizens, Romans who shaped their actions by virtus, Chinese intellectuals, or Indian Brahmins moved through life with intricate grace, and derived perhaps the same enjoyment from the challenging harmony of their actions as they would have from an extended dance. The Athenian polis, Roman law, the divinely grounded bureaucratcy of China, and the all-encompassing spiritual order of India were successful and lasting examples of how culture can enhance flow -- at least for those who were lucky enough to be among the principal players.

On my view, this is the most compelling explanation for why the characters are at once enthralled and entrapped by the institution of which they are a part.