Saturday, April 18, 2015

Prisoner's Dilemma

This is for my lecture on Monday. The author of this video is Mr. William Spaniel. His complete textbook is here. The textbook is Game Theory 101: The Complete Textbook and it is $3.99. For years, I have tried to understand the Battle of the Sexes game. I learned the solution to the game in 4 minutes by watching his video.

Wednesday, April 15, 2015

Could auto loans be the next big bubble? | The University of Chicago Booth School of Business

Could auto loans be the next big bubble? | The University of Chicago Booth School of Business

When the economy recovers from a recession, employment increases and low income earners start to find jobs.  They drive farther and want want new cars.  These earners often roll their previous loans into one loan.  Banks are allowing these earners to make these loans.  The graphic novel suggests that adverse selection is building the foundation for another bubble.

Tuesday, April 07, 2015

Curse of Knowledge

My mock trial team just completed its season.  One criticism that we heard time and time again, was that our direct exams were "out of context."  After considerable introspection on this comment, I think the judges meant that we had the classic case of asymmetrical information.  In other words, one party knows something the other party doesn't but assumes that they do.  I have come to the conclusion that my team had the "Curse of Knowledge."  Wikipedia defines the Curse of Knowledge as:

The curse of knowledge is a cognitive bias that leads better-informed parties to find it extremely difficult to think about problems from the perspective of lesser-informed parties. The effect was first described in print by the economists Colin CamererGeorge Loewenstein and Martin Weber, though they give original credit for suggesting the term to Robin Hogarth.
The way I understand the curse is that our team works for months on a case.  Over time, facts become assumed and those closely working as a team, just assume that the judges know what we are talking about.  It should be pointed out that fair judges would not know what the case is about so as to be convinced by the weight of the credible evidence.

For those of you who are teachers and mock trial coaches, the original paper by Camerer and Loewenstein is here.

Monday, April 06, 2015

Free Rider

On Easter Sunday, my sister picked me up to drive me to Coralville, Iowa, for Easter dinner.  My sister felt like we were late and started to speed.  The other passengers in the car had no complaints about the speed my sister was traveling even though it was 15 miles over the speed limit.  I would say, "Don't forget that fines double in a construction lane."  I pointed out to her that the maximum fine was $1,000 for speeding.

My sister started to call me an old geezer.  She said I had turned into one of those old men who drive hunched over the wheel and drive 10 miles under the speed limit.  Again, no one else in the car seemed to mind that my sister was violating the law.  I began to wonder why.  I believe the answer is economics.

In economics, a free rider is one who gets all of the benefit, but none of the cost.  If my sister were to be pulled over it would be her that the officer would ticket.  No one else in the car would be fined.  Everyone else in the car had no incentive for her to slow down because they were free riders.  It was only me, the old geezer, who cared about the costs that she would incur.  In this case, the free riders were sitting in the backseat.  I can't think of a better way to describe a free rider than that.