information economics

All posts tagged information economics

Book review: Hollywood Economics: How extreme uncertainty shapes the film industry, by Arthur De Vany.

This rather dense and scholarly book that contains some good insights into how markets for information differ from markets for physical goods. But few people will want to read the whole book. Much of the book was originally published as papers in economics journals. It’s better organized than that suggests, but the style is mostly oriented toward professional economists.

Much of the book can be summed up by the conclusion that nobody knows anything about how successful a movie will be. The typical film loses money, and the expected returns are heavily dominated by rare films that are huge successes.

He says through much of the book that returns on investment in movies have infinite variance, and only at the very end admits that that’s not literaly true, and then provides a more credible description of the variance as unstable and generally increasing over time.

His argument that Hollywood makes too many R-rated films takes a good deal of effort to follow. Table 5.3 is confusing, because it shows a mean return on R-rated films as much higher for the returns on PG13 films. This sounds like the opposite of his conclusion. It took 13 more pages before I figured out that that was due to some high rates of return on low budget R-rated films that had little effect on aggregate profits. It appears that his conclusion ought to have been that Hollywood makes too many high-budget R-rated films, and too few low-budget R-rated films.

His description of the antitrust cases that transformed the movie industry provides convincing evidence that the courts were confused and didn’t help the independent exhibitors that the lawsuits were allegedly designed to help. The arguments about how they affected consumers are less clear.

Book review: Infotopia: How Many Minds Produce Knowledge by Cass R. Sunstein.
There’s a lot of overlap between James Surowiecki’s The Wisdom of Crowds and Infotopia, but Infotopia is a good deal more balanced and careful to avoid exaggeration. This makes Infotopia less exciting but more likely to convince a thoughtful reader. It devotes a good deal of attention to conditions which make groups less wise than individuals as well as conditions where groups outperform the best individuals.
Infotopia is directed at people who know little about this subject. I found hardly any new insights in it, and few ideas that I disagreed with. Some of its comments will seem too obvious to be worth mentioning to anyone who uses the web much. It’s slightly better than Wisdom of Crowds, but if you’ve already read Wisdom of Crowds you’ll get little out of Infotopia.

Book review: Information Markets: A New Way of Making Decisions, edited by Robert Hahn and Paul Tetlock
This book contains some good discussions of current issues in the design of prediction markets (aka idea futures).
Since it’s the result of a conference for experts, it is mainly directed toward experts. It shouldn’t be overly hard for laymen to understand, but it probably focuses on issues that are somewhat different from what most laymen would find interesting, so I’d probably recommend reading Surowiecki’s Wisdom of Crowds or some of Robin Hanson’s earlier papers on the subject first.
One surprising result reported here is that the Iowa Electronic Markets show no longshot bias, in contrast to similar markets on Tradesports/Intrade and to widespread types of sports betting. This looks like an important area for research, although that would probably require setting up many variations on those markets (varying things such as the user interface, commissions on trades, limits on how much money can be invested, etc.), which would be expensive and hindered by regulatory uncertainty.
Michael Abramowicz presents an interesting proposal to create incentives to counteract the likely tendency of markets such as prediction markets to discourage people from making public the knowledge that goes into making market prices efficient. I don’t have much of a guess about how well his solution will work. It needs some more thought about how vulnerable it is to manipulation of the intermediate prices used to reward traders who convince others to follow their reasoning (averaging prices over a week or two would be a simple start at deterring manipulation). But I think he understates the importance of the problems he’s trying to solve. He says “while they are endemic to all securities markets, they apparently cause little harm. They are likely to be much more severe, however, in markets with very few active participants.”. I suspect they are significant in most securities markets, and are underestimated because they are very hard to measure. As someone who trades stocks for a living, I’d say that the amount and quality of knowledge that is shared among traders is quite low compared to most professions, although it’s hard to say how much of this is due to desire to keep valuable information secret and how much is due to the difficulty of distinguishing valuable information from misleading information.

Book review: Synthetic Worlds: The Business and Culture of Online Games by Edward Castronova
Castranova is one of the first intellectuals to notice the importance of new societies that are being created in cyberspace. Much of this book is devoted to (sometimes redundant) explanations of why they are more than just games.
Around the middle of the book, he switches from describing a typical world for the benefit of those who doubt the importance of virtual worlds to describing how to design good worlds. This is where I started to find the book interesting and the questions thought-provoking, but the answers often unconvincing.
His most important discussion is about the near-anarchy that prevails in most virtual societies. He attributes this partly to the “Customer Service State” of for-profit world builders who are too cheap to pay for as much government as he assumes citizens want. But he seems to believe this is too inevitable to be worth much analysis. His more interesting question is why don’t the world’s citizens organize a government of their own? His answer is that citizens don’t have enough power over each other to enforce laws they might create. But he doesn’t convince me this is true (are boycotts useless? is repeatedly killing an outlaw not punishment?), nor does he explain why the designer face little pressure to change the design of the world to make it easier to enforce laws (what would happen if the world were designed to enable one person to effectively banish a person she doesn’t like from her view of the world?). I suspect part of the answer is that there’s less demand for government than he expects. I see some hints that his desire for government in cyberspace is a simple reflection of his desire for government in the real world. Yet I’d expect the analysis of whether government is desirable to be nontrivially affected by such differences as whether poverty and death cause much harm.
He claims “A fun economy should have property, theft, and jail too”, but only gives a few cryptic hints about what theft and jail add to an economy.
He claims “there should be no goods which never depreciate”, and partly justifies that by pointing to some benefits of a continuing need to produce new goods, but leaves me wondering why the rule should be universal or even close to universal.
He hints at the desirability of creating p2p virtual societies so that control over them can be decentralized instead of being determined by a corporate owner, but I’m disappointed that he fails to analyze whether this is practical.
One insight I liked was this description of how to deal with the desire for everyone to have high status: “How do you make a world in which everyone is in the top 10 percent? The answer: AI.”
He has a disturbing idea about the military uses of virtual worlds – an aggressor need not be hampered by unfamiliarity with the land he’s invading if he has unlimited ability to practice the invasion in simulation.
He has some ideas about how virtual worlds might help deal with threats such as grey goo, but doesn’t develop them as well as I would like. His ideas on using virtual worlds to make AIs more friendly appear to anthropomorphise AI in a rather naive and dangerous manner.

Book Review: Knowledge and the Wealth Of Nations: A Story of Economic Discovery by David Warsh
This book is an entertaining (but sometimes long-winded) history of economic thought that focuses on the role of technological knowledge, showing how sporadic attempts starting with Adam Smith to incorporate it into the mainstream of economic thought kept getting marginalized until a paper by Paul Romer in 1990 finally appears to have convinced the profession to include it in their models as a nonrival, partly excludable good.
Warsh writes in a style intended to be appropriate for laymen, but I find this rather frustrating, as it leaves out a fair amount of technical detail that I would like to understand, but probably fails to satisfy laymen since the subject of the book will only seem important to readers who already have enough familiarity with economics to handle a more technical discussion.
I liked an analogy that the book reports of the history of maps of Africa, where improved standards of accuracy sometimes caused mapmakers to produce less informative maps as they removed unverified reports of features from interior parts of Africa well before they were able to replace them with something more reliable. The book shows how similar processes in economic models have resulted in similar blank spots in economic thought.
He claims that Romer’s theory amounts to an argument against free markets and in favor of some poorly specified state management of some aspects of the economy. But I saw no analysis to support that conclusion. All I see are arguments that classical economic theory is too simplistic, that we probably need to study lots of messy empirical evidence before deciding what Romer’s theory says about state action.
His analysis of the Microsoft antitrust case provides a better argument than I’d previously heard for breaking up Microsoft into an OS company and an Apps company, but still leaves me wondering why it would make much difference – most of the causes of Microsoft’s OS monopoly power would remain unchanged. His claim (apparently reporting Romer’s remarks) that Microsoft solved the double marginalization problem in a way that a breakup wouldn’t alter seems confused. He is right to point out that those pricing effects weren’t the main issue, although he doesn’t seem to understand why (see Lessig’s The Future of Ideas for a good explanation of how monopolies stifle innovation).
He has a chapter titled “How the Dismal Science Got Its Name” which says nothing about the actual origin of that term (which was coined by a racist who hated Mill’s belief that blacks could be productive without being slaves).

Book review: The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor–and Why You Can Never Buy a Decent Used Car! by Tim Harford
This book does an excellent job of describing economics in a way that laymen can understand, although experts won’t find much that is new in it.
Harford’s description of price discrimination is the best I’ve seen, and the first to describe how to tell the extent to which an instance of price discrimination has good effects (the extent to which it expands the number of sales).
His arguments that globalization reduces pollution are impressive for most types of pollution, but for carbon dioxide emissions I’m very disappointed. He hopes that energy use has peaked in the richest countries because he’s failed to imagine what will cause enough increased demand to offset increases in efficiency. For those of modest imagination, I suggest thinking about more realistic virtual reality (I want my Holodeck), personal robots, and increased air conditioning due to people moving to bigger houses in warmer climates. For those with more imagination, add in spacecraft and utility fog.
Some small complaints:
He refers to Howard Schultz as the owner of Starbucks, but he only owns about 2 percent of Starbucks’ stock.
His comment that Amazon stock price dropped below its IPO price fails to adjust for stock splits – a share bought at $18 in 1997 would have become 12 shares worth $8 each in the summer of 2001.
His claim that “Google is the living proof that moving first counts for nothing on the Internet” is a big exaggeration. It’s quite possible that Google success was primarily due to being the first to reach some key threshold of quality, and that many small competitors have matched its quality without taking measurable business away from it.