Constrained Bliss Point

I don’t mean that dating has anything wrong with it. I am thinking: How would you reduce dating down to a solvable problem? The problem itself would probably be very hard. Like you would need dynamic programming to solve it, or it wouldn’t have a closed-form solution or something.

Here’s how I would frame The Dating Problem: You are trying to find your optimal match given a set of constraints. The constraints include imperfect information, finite time, some restrictions on preferences, etc. But the imperfect information constraint is very broad. Not only is it costly to determine information about a significant other, but it is also costly to determine your own preferences.

Let’s pin things down a bit more. Imagine a game with an open-ended number of rounds. Each round is a pairing between you and someone you’re dating (ignore how you might actually find such possible significant others for now). You are trying to 1) see if they are a good (best) fit for you, and 2) you are also trying to define your preferences regarding what would make for a best fit.

That is crazy.

I think the best strategy is where, early in the game, most of your matching is geared towards determining your preferences. Then in the later stage, your rounds become shorter, since you only need to make sure you have a good (best) match. I guess the downside is you could erroneously break up with someone in one of the early stages who you would have  been better off with. But given the constraints, it’s not like you could have known, right?

And no one ever said local optima are necessarily global optima.

The economics of slavery is an incredibly interesting topic to me. More accurately, what I imagine “the economics of slavery” entails is very interesting, as I have only begun studying it, and only at an amateur level.

And what got me started thinking about the economics of slavery? Robots. Specifically the movie “I, Robot”. I’m a fan of imagining in vivid detail post-apocalyptic futures, and a robot revolution is up there with a Class 4 zombie outbreak. At the end of that movie, the overtones of Sonny freeing a generation of robot “slaves” got me thinking about the economic distinction between capital and labor (I was taking a class in intermediate macroeconomics at the time).

If we had an entire workforce of humanoid robots doing things that people usually do, what would this make the economy look like? Traditional economics would probably treat the robots as capital. But then your capital is kind of producing labor, and that is weird. The only other time that happens (that I can think of) is slavery.

I still think it’s insane that people used to own people. But, from a strictly analytical perspective, if people are owning people (and not just purchasing their labor from them), doesn’t it make sense to treat owned people as capital? There are similarities, like people tend to depreciate rather quickly if you don’t feed them and give them shelter. I read somewhere that slavery is the only time when capital and labor are equal.

I guess I’m still not convinced that there should be a tight delineation between capital and labor. Need to look into that in the future.

I think a lot about peoples’ preferences and how individuals make decisions to achieve their desired ends. Microeconomic theory touches on these sorts of questions, which I think is why I’m drawn to it. But while micro theory does some good explaining, it doesn’t go the whole way. I don’t just want a descriptive framework that maybe works good enough in most cases. I want some heuristic models that I can apply to my everyday life.

So I’m going to bastardize microeconomics and use it as I see fit. Here goes:

A rational decision maker will be better off the more malleable his preferences are. Imagine a continuum of control over one’s preferences. At one end, individuals are endowed with perfectly stable, static preferences at birth. At the other end, individuals can change their preferences however they see fit, so that only if they starve to death will their utility be less than infinite.

Now, I’m pretty sure standard utility theory presupposes stable preferences. With malleable preferences, you’re essentially optimizing two things at the same time: the mix of goods and services you purchase, and how you feel about the goods and services you purchase. That would probably lead to some pretty ridiculous maths assuming a tractable solution exists.

Behavioral economics has shown us that, no, preferences are not always pre-formed and stable. For a very cool paper on this point, try reading “Tom Sawyer and the construction of value” by Ariely, Lowenstein, and Prelec. I mean, sometimes our preferences are well-defined, like if I know I dislike strawberries. But to me the interesting case is when we are in a new situation and don’t have our preferences defined. For example: Do I like guava? I’m not sure. Allow me to assume that I do. Some other behavioral economics studies have shown that you can actually frame experiences so that you are more inclined to like (or dislike) them.

Obviously if your preferences are malleable enough, you will be happy with pretty much anything you consume. On first face this may seem like a trivial point. But I think the question “What shall I choose to consume to maximize my happiness?” is one step too far. The question instead should be “How shall I best maximize my happiness?”. Utility theory should help answer that question, I think, in as rigorous a manner as possible.

I wonder if I can formalize this idea using a neoclassical utility framework.

As a loyal reader of Marginal Revolution, I enjoy Tyler and Alex’s “Markets in Everything” segment, where they point out all the cool and unexpected markets that spring up in every sort of circumstance. For example, markets in souls? Awesome.

But there aren’t really markets in everything. Sometimes there are market voids, or specific needs and wants consumers demand that markets don’t provide. Sensing a market void, I think I’ll attempt to elucidate these market voids as I see them.

Earlier this week I was in my local CVS looking for a birthday card for my step-mom. I found my way to the card aisle, more specifically the birthday card aisle (since there are a few card aisles), past the section of birthday cards for “someone special”, into the birthday-cards-for-females section. There was about half a row of cards just for all the ladies you could have in your life: moms, grandmas, daughters, cousins and aunts, mothers-in-law — but none for step-mothers.

Maybe step-mom birthday cards were there but I just couldn’t find them. Or maybe not enough step-sons go out to buy birthday cards. Perhaps the step-mom birthday cards were not in the section with the rest of the female family member birthday cards? It could be an oversight on my part, but I did scan that aisle at least twice.

I wound up going with a “someone special” card, in case you were wondering.

I am glad that nowadays I don’t need to download TV shows illegally in order to catch up when I miss an episode. To my knowledge most shows are available streaming online from whoever is lucky enough to own their respective distribution rights. Not only is firing up a web browser easier than torrenting, but I feel good that I’m doing The Right Thing. Studios can make some money from advertising, and the ads are shorter than commercials. And I can watch whenever I want. Nice and easy.

Except studios don’t want to make my life easy. Fox and ABC are not interested in making me happy. I used to be a die-hard fanatic of House and Grey’s Anatomy. I did not miss an episode until my senior year class schedule got really crazy, when the opportunity cost of my time became too much. “I will catch up on these shows later,” I thought. “After all, they are available for free online from the good folks over at Fox and ABC.”

No. Never bank on the goodness of TV studios. They are self-interested profit-maximizing vampires. After I realized that the episodes available for both House and Grey’s were restricted to the first in season five, and the last few of the same season, my dreams of catching up were defenestrated. I guess I’ll have to go back to illegal downloads, or wait until I have Netflix to catch up.

Why would pissing me off be in any studio’s best interest? It can’t be because of technical issues, since the previous episodes must have been taped and posted earlier, but then taken down. The issue must be economic. Studios are trying to get me to substitute TV-over-internets for a more lucrative medium, like TV-over-TV or TV-over-DVD. I hope they did their cost-benefit analysis carefully. Weighing foregone internet ad revenue against 1) the number of people who would then download the shows and 2) the number of people who would buy DVDs or watch it on reruns on TV, I guess they decided that they’d make more money making peoples’ lives difficult. My inclination is that they’re wrong: those watching TV online are disproportionately young, who are probably more likely to download illegally rather than have the money to spend on DVDs.

Well, good for them. As it stands I probably won’t be catching up on House or Grey’s any time soon, which means next season they’ll both have one fewer viewer (hehe, inadvertant rhyming). Pissing off your customers probably isn’t the best business model.

Let’s say you’re a rational actor bent on maximizing your utility (happiness). If your preferences are fixed, you do your best to make yourself happiest given the constraints you face. But if you can control your preferences, or even shift them around a little, you can be even happier.

The endowment effect causes people to value something more because they own it — or they feel like it’s theirs. Ever feel like you deserve something, and then you don’t get it, and you’re pissed? Bam, that’s the endowment effect messing with you.

But it’s not all bad. You can use the endowment effect to maximize expected future happiness — or maybe just hedge your bets. Let me give a totally hypothetical for-instance. Let’s say you’re accepted at a good economics PhD program, and waitlisted at a great one. You’re not sure if you’ll get off the wait list — but if you do, you’ll definitely go there.

So, what do you do? One strategy is to feel like you own the good school. Go for a visit. Meet the friendly interesting students and faculty and tour their fabulous facilities. Note the quality of the campus, and of the surrounding city. Recognize the huge potential to be amazing at this school. And realize how really awesome it would be to go there. In other words, make that school yours.

Then what if you get off the wait list? Aww, shucks, the endowment effect kicks you in the face. How delightfully unfortunate.

Yesterday I visited Princeton University so their admissions committee could get a better look at me. I would summarize the trip and associated interviews as “A+++++ Would Buy Again Great Shipping!!!”. Princeton’s campus is a glorious place, and I totally walked past Paul Krugman’s office.

Here are a few things that may come up if you find yourself in a similar interview in the future:

• The integral of x * e^x is (x-1)*e^x. You need to use integration by parts (or “inverse chain rule” as I like to call it).
• Know how to prove that the derivative of x^2 is 2*x using first principles.
• Don’t ramble on about the behavioral critique of the Walrasian general equilibrium without really knowing what you’re talking about.
• You may get bonus points for knowing how to solve a Master Cube.

Also, I got to thank Alan Blinder for holding the door open for me. I think that puts me two steps away from Bill Clinton if you use really tenuous links to determine your Bacon number.

Addendum: Integration by parts is not the “inverse chain rule”, as I previously thought, but instead “inverse product rule”. It appears my math-fu could use some practice.

Opportunity cost is what you give up to get something. This is explicit in some cases. Say you buy a bag of oranges at the grocery store: the opportunity cost is what you pay for them. You can’t use that money to buy something else now.

I think the biggest opportunity cost is time. Or at least, when I try to think of examples to illustrate opportunity cost, they all have to do with how you spend your time. When you spend your time doing any one thing, you are implicitly choosing not to do anything else. When you hang out with a friend you can’t be doing homework or cleaning your room  (or maybe you can, but with a loss in efficiency). When you choose to sleep, you can’t be reading or eating or partying.

Opportunity costs loom large even if we restrict our domain to tasks that need to be accomplished. When I choose to work on my econometrics homework, it means I can’t be working on my chemistry homework. If I’m reading an ecological economics paper, I can’t be reviewing the behavioral economics literature.

I think this is a large source of procrastination. Obviously it is easy to procrastinate if you choose to party instead of doing homework. But I have found it easy to procrastinate even when  I set aside a block of time for homework only. I think this is because, when something is not due the next day, I cannot choose which assignment deserves all of my attention. The other assignments nag at my psyche leading to inattentiveness and inefficiency.

Solving the opportunity cost problem is a necessary condition for increased productivity.

Relationships are funny things. When you bring a new person into the fold, you are not the only one affected. Getting to know someone means introducing them to your life, including all those people you already know. Your friends and family get to know this person you’re with, and they develop relationships too.

Most relationships end. In deciding whether or not you should end the relationship you’re in, should you consider the effect of breakup on your friends and family? Surely this decision affects you, but it affects them too. A selfish agent in a relationship would make the breakup decision without paying heed to such effects on other persons.

Here we have a situation ripe for externality — that is, if the full costs of breakup are not borne solely by the agent doing the breaking. Then again, no one ever claimed actors in a relationship are rational. So maybe, when you’re considering whether to break up with your significant other, you think about how your friends or family might feel. By asking “how would this affect others”, you can move closer to the socially optimal decision.

Now, I am not one who normally argues against the social optimum. In cases like these, though, I think a little externality is best. In matters of relationships, you should only consider yourself — and optionally the other person.

Spillover effects happen. A relationship is too important to worry about market failure.