THE BIZOP NEWS

Game Theory is an exercise in modeling strategic interaction. Strategic interaction is familiar to transactional lawyers, who must make contingency plans based upon what they think the other parties might do, and implement those plans into contractual language.

Trying to judge what sort of person you are responding to is no simple task, as an analysis of the Monty Hall problem shows.

The Monty Hall problem reveals the difference between layman, experts, and players.

The Monty Hall problem is easy to state. There are three doors, behind one of the doors is $100 and the other two doors have nothing. The prize is distributed at random, equally behind the doors.

You get to pick a door, say Door 1. But before opening it, Monty Hall offers to show you what is behind another door, say Door 2. He opens Door 2, which is empty. Next, Monty Hall allows you the choice of switching your choice between Door 1 and Door 3. Should you switch? (By the rules of the Game, Monty Hall, cannot open the door which shows the prize.)

The layman will reason this way. First, he might say, is Monty Hall trying to trick me into taking a choice I might regret? Well, there are only three possibilities: the prize is behind Door 1, Door 2 or Door 3. If I picked Door 1, and it contained the prize, then Monty Hall could always open Door 2 or Door 3. But if Door 1 did not contain the prize, Monty Hall could also open one of Door 2 or Door 3, to show me an empty door. It doesn't appear that Monty Hall is giving me any new information that would make it reasonable for me to switch.

The expert, who loves models, draws up the situation differently. He draws a pay-off table like the one below. He first realizes that there are not three possibilities, but four. This gives him great confidence that he has discovered something important. He also likes to talk about states of nature, which he denotes by Si because this too sounds important. Again, assume that Door 1 has been chosen.

S1 is the state of nature where Door 1 has the prize and Monty Hall opens Door 2
S2 is the state of nature where Door 1 has the prize and Monty Hall opens Door 3
S3 is the state of nature where Door 2 has the prize and Monty Hall opens Door 3
S4 is the state of nature where Door 3 has the prize and Monty Hall opens Door 2

Our expert realizes two things. The probabilities of S3 and S4 are the same, 1/3. The probabilities of S1 + S2 also equal 1/3, and the probability of S1 = S2, i.e. S1=S2=1/6. He comes to the startling conclusion, when Monty Hall reveals Door 2, eliminating S1 and S4, then changing from S2 to S3 dramatically improves your chances of winning the prize, since S3 occurs twice as many times as S2. Thus, the expert recommends to always switch.

The player dismisses the layman, and sees the expert's result for what it is: an inherently incomplete model, which can never be made complete. The player wonders about whether Monty Hall really has to open a Door with no prize, whether the prizes can be moved once the choice is revealed, whether the $100 is real or not.

The player also notes a flaw in the expert's scheme: if the expert commits to playing switch all the time, and will pay to switch, what happens if Monty Hall commits to always opening Door 2, if the prize is behind Door 1?

This commitment defeats the expert's analysis: if S2 is eliminated by Monty Hall's play -he never opens Door 3, then all the states are equal and the layman's analysis is correct. Can he get the expert to take the bet? Once the expert finds out he has been had, will he demand a replay which allows him to change or switch each round? Can the player make enough money from the expert before this happens?

If you don't know whether you are a layman, expert or player -you are a layman. If you think that you are expert, you probably are. Players know who each other are and are frequently wrong.

Posted by michael webster at 8:30 AM | Permalink | Comments (0) | TrackBacks (0)

I have created a new sub-category, which will contain articles about research into brain behaviour and decision making.

Here are three interesting research developments.

At ScienceDaily: Dopamine-related Drugs Affect Reward-seeking Behavior, we learn that the brain processes rewards differently than losses.

""The results show dopamine drives us to get what we want, but not avoid what we fear," said study author Mathias Pessiglione, PhD, who now works at the Salpetriere Hospital in Paris, France."

This is an interesting research observation. Seekings gains is not automatically associated with avoiding losses. Expected utility theory, on the other hand, treats both of these processes as unitary.

From a due diligence aspect, you would do well to concentrate on eliminating that which you fear before getting too high on dopamine rewards.

The second paper has a different take on rewards versus losses, Scientific American: The Prospects for Homo economicus

"In “The Neural Basis of Loss Aversion in Decision-Making under Risk,” in the January 26 Science, Poldrack, Fox and their colleagues Sabrina M. Tom and Christopher Trepel presented the results of their fMRI study, in which they offered subjects a prospect of accepting or rejecting a gamble that offered a 50–50 chance of gaining or losing money. As the potential for gains rose, they found increased activity in the mesolimbic and mesocortical dopamine systems (dopamine is a neurotransmitter substance associated with motivation and reward). As the potential for losses increased, they found decreasing activity in these same reward-sensitive areas. Interestingly, it appears that losses and gains are coded by the same brain structures—the ventromedial prefrontal cortex, associated with decision making and learning in the context of reward and punishment, and the ventral striatum, associated with learning, motivation and reward. Individual differences in loss aversion were predicted by how much more the brain was turned off by losses than it was turned on by gains."

Finally, the last paper discusses what is happening in the brain when individuals play the ultimatum game. This game is fairly simple to describe. There are two players, A and B. A moves first and proposes a split of $100; B can either reject or accept A's proposal.

Generally, most economists believe that if A proposes a split of $99 for him and $1 for B, then B would be irrational not to accept the proposal.

Yet most offers are in the $45 to $50 range. The challenge is to explain B's power in extracting such offers.

According to this research, described in the Economist

"One explanation of the rejectionist strategy is that human psychology is adapted for repeated interactions rather than one-off trades. In this case, taking a tough, if self-sacrificial, line at the beginning pays dividends in future rounds of the game. Rejecting a stingy offer in a one-off game is thus just a single move in a larger strategy. And indeed, when one-off ultimatum games are played by trained economists, who know all this, they do tend to accept stingy offers more often than other people would. But even they have their limits. To throw some light on why those limits exist, Terence Burnham of Harvard University recently gathered a group of students of microeconomics and asked them to play the ultimatum game. All of the students he recruited were men.

Dr Burnham's research budget ran to a bunch of $40 games. When there are many rounds in the ultimatum game, players learn to split the money more or less equally. But Dr Burnham was interested in a game of only one round. In this game, which the players knew in advance was final and could thus not affect future outcomes, proposers could choose only between offering the other player $25 (ie, more than half the total) or $5. Responders could accept or reject the offer as usual. Those results recorded, Dr Burnham took saliva samples from all the students and compared the testosterone levels assessed from those samples with decisions made in the one-round game.

As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species."

Posted by michael webster at 6:01 PM | Permalink | Comments (1) | TrackBacks (0)

Mike Dash wrote a wonderful about the Tulip Bubble in Holland, which occurred between 1634 and 1637. Many of the things we believe about the Dutch tulip mania turn out to be false. There was no widespread bankruptcy, no devastating loss of credit. In a few years after the crash, Dutch growers were selling their bulbs to a wider market -partly because of the infamous reputation of the tulip.

Dash puts the tulip in historical context, and discusses briefly other tulip like manias - which like viruses lay dormant only to reappear under the right conditions.

What are those conditions?

Dash describes the Tulip Mania as resulting from the following factors:

a) The trade in tulips started off as bulb exchange, physical commodities. But the bulbs in question had an odd property - at random and undetectable, because of an undetected virus- the bulbs would change their properties, from dull unicolors to wildfire colours. There was an essential randomness about the product. But the original trading season was short- between growers and horticulturists.

b) There was an extraordinary belief, for the period and time, that "social mobility was the birthright of every Dutchman."

c) The Dutch had both a propensity to save and gamble.

d) The bulbs bought and sold in 1630's were not the out and out rarities, which were limited in numbers. This was a market in futures, which was technically illegal at the time. The Government had tried to prevent several times. It was believed that futures were like naked shorts - selling what you didn't have.

e) The actual tulip mania last from 1634 to January, 1637 - when the price of a bulb could double in a week between December 1636 and January 1637.

f) What was being sold, by the florists, from 1634 to 1637 were promissory notes. As described by by Dash "it became perfectly normal for florists to sell tulips they could not deliver to buyers how did not have the cash to pay for them and had no desire ever to plant them."

g) The margin requirements for purchase was 10% down, but there were no other credit checks.

h) The peculiarity of the auction, yes conducted in Taverns, favoured accepted reasonable bids.

i) In the end, the Government suspended the legal enforcement of the contracts, to allow the individual provinces the time to "investigate" the problem. It appears that most growers eventually accepted 3 cents on the dollar in compensation for the right to cancel the sale.

j) The local banking economy was not threatened by this mania- there weren't any banks. So there were few alternatives to investing surplus cash.

Dash's book contains a wealth of interesting details, and I recommend it.

Posted by michael webster at 10:22 AM | Permalink | Comments (0) | TrackBacks (0)

In 1959, Evon Z. Vogt and Ray Hyman wrote "Water Witching". It was a fascinating objective review of the practice of water witching -using a forked stick to find or indicate an underground source of water. The book was reprinted in 1979 and 2000, and despite our technological advances, it appears that dowsing is still with us.

I almost passed this book over -who in their right mind could believe that dowsing has any merit? But I would have missed a fascinating examination about human decision making and the utility of "magical thought".

In their chapter, entitled "Water Witching as Magical Divination", the authors argue that when an individual is faced with a one-shot decision, uncertainty and the need to make a decision, water witching makes sense as measure of psychological control over the state of nature -even if the practice is completely unscientific and unsupported by evidence. When we need to make a decision, a decision which is not going to be repeated, modern decision theory offers us thin gruel, focussed as it is on the long run or similar situated choices. "The key feature of this picture [of rational decision making] is that we assume that the decision he is making is one that is to be repeated over a large number of trials. And, in this way, it becomes meaningful to speak of his average gain from repeated events over the long run. But what happens to our hypothetically rational man his decision is restricted to one event? ... Water witching from the scientist's point of view is "irrational" divination; he is evaluating a large series of outcomes from water witching. But from the viewpoint of an individual decision it is perhaps meaningless to call water witching "irrational". At least, if we do label it, we must be careful to specify precisely in what way we are making the transition from the institutional [long run] view to the individual situation."

The author's conclusion is based on their scientific observations that dowsers have no better than chance of being correct in locating water and that the regions in which there is high dowsing activity could be characterized as Pascal's Wager with respect to water - it is better to take a chance, any chance, that water will be found than do nothing. There is nothing to lose, if action is going to be taken. Modern decision, if informed that dowsing is no better than guessing about water, would recommend flipping a coin between the two method -assuming the costs of dowsing and guessing were roughly equal. (They appear to be, since according to Vogt and Hyman, view dowsers make a living from their "talents".)

I am reminded of a talk in which a famous philosopher declared that modern decision theory was irrational. His example was this. His wife was tied to the train tracks and only if he could warn the train, coming from the east or west we know not which, to brake could his wife be saved. The train needed to brake 100 yards from his wife, a distance our philosopher could reach in 10 minutes. He is told that a train is coming, from the east or west we know not which, and the train will be 100 yards away in 10 minutes. The famous philosopher opined that modern decision theory dictated that he must stride of in one direction, not look back and hope for that the choice was correct. While, it was clear to him, that he would run a little bit east, backtrack and go west, trying to cover all bases. But our famous philosopher was clearly irrational -you have ten minutes to achieve one goal, the consequences of running around and ignoring what you have to do are severe. You may go in the wrong direction, but going in no direction is completely wrong.

Posted by michael webster at 8:01 AM | Permalink | Comments (0) | TrackBacks (0)

Seth Godin questions whether the winner of auctions are usually irrational. This question was researched almost 25 years ago. In 1992, Richard Thaler re-published a series of articles about anomalies in economics. Thaler published an interesting article entitled the "Winner's Curse" in 1988.

In brief, his point can be understood as follows. Why does buyer's regret exist? Why do the winner's of auctions or mergers feel that they have overpaid in the end? Thaler had an interesting observation.

Well consider the following card game. Player A is dealt one card, from ten cards -the ace to the ten. Player B must make one bid for A's card. The value to B of winning A's card is $10 x 150% of the face value of the card. The value to A is just $10 x the face value of the card. So, for example, a winning bid for "card 6" gives B a return of $90 and A a return of $60. Finally, if A shows his card to B, B may take the card without paying for it.

What should B on average bid for A's card? Well, you might think that since on average the return is between $15 and $150, then B should bid around $60 or $65. However, Thaler points out that as the game is set up, B should never bid! Why? Well any bid by B that is accepted by A must be for more than the card is worth, otherwise A would not accept the bid. For example, suppose A accepts a bid of $30, then his card must be a 1 or 2, which on average produces ($15 + $30)/2 return, or $22.50, to B. Eventually, B should go broke playing the game. This is a simple two person demonstration of the winner's curse, and the same result holds for larger auctions.

Thaler argues that rational individuals would not play this auction.

But this is a completely unsatisfactory analysis, as far as it goes. The possible joint gain is always positive not matter what A is dealt. For example, suppose A is dealt the 4, then A could get $50 = $40 + $10 and B , if B could be convinced to bid exactly 4 and split the surplus equally, $60 - $40, with A. B can achieve $10 by coordinating with A. Can they ever reach this coordinated result? If they don't, A will get $40 and B nothing.

I don't know if they can, but I do know that social and economic life is as much about coordination as it is about competition, the reason we have four way stops.

So if you were A holding the 4, how would you respond to a bid by B for $60? Take the money and run, or point out that the "price tag" on the card is only $50 and do the deal at the lower price? If there is a price tag, then both parties have the chance of reaching the cooridinated outcome, otherwise they may well miss out out on the joint gain.

Posted by michael webster at 10:10 PM | Permalink | Comments (0) | TrackBacks (1)

I have been tagged by Victoria Pynchon at Gotta Get Goals : Settle It Now Negotiation Blog to "to respond to Alex Shalman's Gotta Get Goals by "list[ing] and writ[ing] about the top 5 to 10 goals that you gotta' get so that you can truly say you have achieved your wildest dreams in life. These have to be your best, most exclusive, and over-the-top goals that you can pick off your goals list."

Why? Why do we need goals? This is not a flip response to what appears to a very successful meme/linkbait project. There is a serious question here, raised by Daniel Gilbert in his provocative book "Stumbling on Happiness."

As Daniel Gilbert so eloquently writes:

"If we the things we successfully strive for do not make our future selves happy, or if the things we unsuccessfully avoid do, then it seems reasonable (if somewhat ungracious) for them to cast a disparaging glance backward and wonder what the hell we were thinking. They may recognize our good intentions and begrudgingly acknowledge that we did the best we could, but they will inevitably whine to their therapists about how our best just wasn't good enough for them.

How can this happen? Shouldn't we know the tastes, preferences, needs and desires of the people we will be next year, or at least later this afternoon?" (my emphasis)

This partially imaginary dialogue between the present self and possible future self is a clever rhetoric device infusing Gilbert's prose.

"How can they [or future self] be disappointed when we accomplish our coveted goals, and why are they [our future self] so damned giddy when they end up in precisely the spot that we worked so hard to steer them clear of? Is there something wrong with them? Or is there something wrong with us?"

Our frontal lobes give us the ability to plan for what we to happen later, much later or even for when we retire. (Odd word that, rhyming with "expire"). Gilbert argues that in order to escape living in the perpetual present we need to imagine the future, using the frontal lobes as "a time machine that allows each of us to vacate the present and experience the future before it happens."

Here comes one of many punchlines for goal setters. We think about the future because it is pleasurable, but "forestalling pleasure is an inventive technique for getting double the juice from half the fruit". Might we not be more inclined to think about our future rather than doing something to get there, if we only set goals?

But the more radical punchline is this.

"We want -- and we should want to control the direction of our boat because some futures are better than others, and even from this distance we should be able to tell which are which.

The idea is so obvious that it barely seems worth mentioning, but I am going to mention it anyway. Indeed, I am going to spend the rest of this book mentioning it because it will probably take more than a few mentions to convince you that what looks like an obvious idea, is in fact, the surprisingly wrong answer to our question. We insist on steering our boats because we think we have a pretty good idea os where we should go, but the truth is that much of our steering is in vain --not because the boat won't respond, and not because we can't find our destination, but because the future is fundamentally different than it appears [to us now]."

So, gotta get goals? Why?

Posted by michael webster at 8:37 AM | Permalink | Comments (0) | TrackBacks (0)

Misleading Advertising Law: Strategic Thinking - What Trial Lawyers can Learn from Poker, my review of Steven Lebut's book on Poker and Trial Advocacy was the most popular post in February.

The second most popular read was my post on Salvatore Fatava's $30 million Ponzi scheme, which involved mortgage fraud. It was reported that his own lawyer may have blown the whistle on Mr. Fatava's scheme.

Finally, the third most popular post was our perennial favourite hedge fund fraud criminal, Kirk Wright, and the description of how he was caught in Miami, Florida with numerous pre-paid cell phones, identity forging materials, and lots and lots of cash. Why was he hiding out? Kirk said he was getting threats from the people he stole money from. Really, I cannot think of why.

Posted by michael webster at 7:37 AM | Permalink | Comments (0) | TrackBacks (0)

Now this is the way to play Rock, Paper, Scissors

Posted by michael webster at 10:09 PM | Permalink | Comments (0) | TrackBacks (0)

Is there something about New York lawyers which requires extensive control over their advertising?

Well according to, Law.com: N.Y. Courts Adopt Moderated Version of Lawyer Ad Rules, under

"the reform proposals embraced Tuesday, lawyers would be barred from soliciting mass tort clients within 30 days of a disaster, unless a filing requirement makes earlier contact critical. The rules also would be updated to encompass computer and Internet-based ads.

Significant restrictions would be imposed on the use of fictionalization, and lawyers would be banned from using nicknames or monikers -- such as "heavy hitter" or "dream team" -- that imply an ability to obtain results.

Additionally, lawyers would face new requirements for filing and retaining their advertisements, which would be subject to review by grievance committees. And the judiciary would specifically exert jurisdiction over out-of-state attorneys advertising in New York." (my emphasis)

There is no mention of whether the advertisements would have to carry notification about whether the lawyer or law firm had professional insurance.

One of the supporters of the new restrictions, John DeFrancisco, stated

"I see the image of trial lawyers who happen to represent people in court being compromised by individuals who have advertisements that sound too aggressive, as if the job of the trial lawyer is to convince people to file lawsuits rather than to represent people with legitimate claims, said DeFrancisco, himself a trial lawyer. I thought a better balance should be struck and wrote to [Chief Judge Judith S. Kaye] about this a year ago".

Larry Bodine believes that "Could the courts come up with anything more anti-marketing and more prehistoric?" and wonders whether there will be a legal challenge to the restrictions.

While, the blog at Riverside wonders just how the exemptions will work, there are exemptions on soliciting a close friend, relative, or former or existing client.

Do people who visit your website, and made a comment fall under this exemption, I wonder?

Technorati Tags: new york lawyers, advertisements, disaster

Posted by michael webster at 10:43 AM | Permalink | Comments (0) | TrackBacks (0)

As a professional skeptic, I am often slow to react to what others see as ground breaking news.

For example, I just don't get MyBlogLog and said so over at Shoemoney, who had made a prediction about how great MyBlogLog would become.

I stated that:

"Re MyBlogLog:

Colour me confused about MyBlogLog.

Why do people care about who visits a particular blog?

This seems to me as pointless, and hopefully as short lived, as large blogrolls.

Why I am wrong"?

Both Shoemoney and another poster responded as:

"I think a lot of people are confused. Its not really a blogroll as much as it is a community building tool. Also it shows you really cool stats like what is popular with your users on other sites and stuff like that. Its actaully very cool I recommend you play with it on your own site a bit."

"Shoe is right on here. It takes people a while to "get" what MBL is about, but once they do, it's infectious. The community-building aspect makes it a kind of intentional Technorati: you can find blogs that are like yours, not based on linking, but on community membership. Very cool, and very easy to waste a lot of time surfing.

I keep seeing MBL pop up on more and more blogs. It'll take off big in 2007".

I remained recalcitrant saying:

"I remain confused as to the useful benefits of MyBlogLog, at least for my site.

The only value I can see would be this: if I could put together individuals who had similar search patterns at my site.

For example, if A and B both searched for "Coldstone Ice Cream", it would be useful for A and B to know that -assuming each had give their consent to share their search information.

But otherwise, I see no value in a general listing of visitors.

MyBlogLog is not providing community building tools.

MyBlogLog is like a vanity plate: I have more of a "community" than you.

But, no matter what I argue, it will in the end turn out to be an empirical fact about how well MyBlogLog performs."

That was a few short days ago. Today, there are a number of stories on Techeme about the purchase of MyBlogLog, for $10 million.

Well, it was nice being an unproved skeptic for two or three days. Still can $10 million Yahoo dollars get it right?

Technorati Tags: shoemoney, ground breaking news, i am wrong, mbl, skeptic, blogroll, blog

Posted by michael webster at 1:25 PM | Permalink | Comments (0) | TrackBacks (0)

This Fall one of the Highlights of the ABA Forum was the Negotiation Seminar, which was put on by the Harvard Negotiation Project.

One of the negotiation exercises that the group played, which included senior franchise attorneys, is known as the "Get as Much as You Can Game". The game was originally developed by the academic lawyer, Gerald Williams.

The exercise is deceptively simple. There are four players, and each player has two cards: named "C" and "A" respectively.

There are ten rounds in the game, and only on three rounds, 5, 8, and 10 is there communication between individuals.

The pay-offs for each round are as follows:

4 A cards - each player loses $1
3A's 1 C - each A wins $1; C player loses $3
2A's, 2C's - each A wins $2; each C loses $2.
1A, 3 C's - A wins $3, each C loses $1
4C cards - each player wins $1.

On the bonus round, 5, 8, and 10 multiply the scores by 3.

Each round takes 30 seconds to play. Except on the bonus/communication rounds which take 3 minutes.

Before I describe how this game is usually played, I will open it up to the floor for people's analysis.

How much do you think you could win in this game? How would you manage the play of A's and C's? What is the most that you think that you could win playing this game?

There is a ban on predetermined plays.

But suppose that there were no ban, on the 10th play wouldn't at least one person renege on their agreement to play a C card? Knowing that one person will do that on round 10, making playing C a likely losing option, then what happens on round 9?

Well, we can guess that 4 C's are impossible on round 10, since one person at least is going to renege on your suggested agreement to play C, so how will people reason given that round 9 is effectively the last round?

If on round 10, the previous final round, at least one person will renege on the agreement to play a C, now that round 9 is the final round, won't we expect yet another person to renege on the agreement? Someone will play an A card on round 9: so everyone who plays a C on round 9 is losing.

And how does this spiral of logic end: with everyone playing an A card on round one.

How would you prevent this spiral of strategic reasoning? The franchise attorneys couldn't prevent it; can you?

Technorati Tags: negotiation exercises, negotiation seminar, harvard negotiation project, franchise attorneys, cards, aba forum, academic lawyer, game, bonus, communication rounds, gerald williams

Posted by michael webster at 2:38 PM | Permalink | Comments (0) | TrackBacks (0)

By now, late November 7th, 2006 the voters in United States have either voted or not, while in a week the voters in Ontario will vote in municipal elections.

At this time, the usual "paradox" of voting is trotted for examination - why bother to vote, if the chances of it making a difference are marginal?

This particular problem is misguided, but not primarily for the interesting suggestions over at Marginal Revolution: Should you vote?

Voting is an act of coordination. Like stopping at red lights, which ought not require a separate calculation for each and every red light. We see the value of the coordination of individuals having signals when to stop and when to go. Having acquired that knowledge, we also realize that there is no upside to calculating for each red light whether we should "run it" or not. Overly rational individuals create gridlock by making the calculation each and every time when faced with a red light - should I run it and try to make it through the intersection? Invariably, most of these individual calculations are wrong and gridlock ensues.

Voter apathy may result from similar considerations. But, voting is an primarily an act of symbolic coordination and the individual does not calculate each voting opportunity whether or not he or she is making a difference. There is nothing irrational about this meta decision. It is not an act of calculation, despite what some critics of the practice urge.

We already have enough gridlock in Toronto, we don't need to stop to calculate if our vote would make a difference. We just need, collectively, to make difference.

Vote. Don't calculate.

Technorati Tags: marginal revolution, rational individuals, coordination, voting, municipal elections, paradox

Posted by michael webster at 10:21 PM | Permalink | Comments (0) | TrackBacks (0)

I want to make an observation about a strategic inference that we often overlook, sometimes paying a heavy penalty. The inference is easy to state: when considering if A is consistent with B, no matter how convincing the story ends up being, always check whether (not A) is consistent with B.

It doesn't matter how convincing you think the story about A being consistent with B is: always check the reverse implication, and then look for facts which will distinguish the two stories. It is too easy to be tied to one story, if you have not considered the alternatives.

Here is a really nice example of this thinking, from a bridge tip from the famous Zia Mahmood. Consider the following layout and problem.

The contract is six clubs by South, and there are no clues from the bidding as to the location of the missing honours.

Here is the layout of the hand.

North South

S Q2	S AJ10
H 53	H K2
D 1094	D AKQ3
C AK10972	C Q653

Let's suppose that you know that diamonds are going to break. To make the contract then, you can only lose trick between hearts and spades.

There are four finesses that you could take:

1. the backward finesse of leading a small heart from the board and playing the K if the A is not played,

2. the backward finesse of playing the spade 10 from the hand and playing the spade Q if the K is not played.,

3. the straightforward finesse of playing the spade Q from the board and letting it ride if the K is not played, and

4. finally, a ruffing finesse in spades by discarding the 2 of spades on the extra diamond, playing the spade A and J, letting it ride if not covered by the spade K.

The spade suit looks promising because one of the finesses must work, either the straightforward finesse, leading the Q, or the ruffing finesse, leading the J.

Decide what you would do and why.

Now, suppose you are watching this match on television, but with a twist. You cannot see the play by East or West, but can bet or gamble on what cards were played given the play by North and South. Suppose you see the board playing the spade Q, and some spade card from East, and then the spade A from the closed hand, and some other spade card by West.

What are the chances that East, a competent player, covered the Q with the K? If you had to bet on which was more likely, East covered or East did not cover, what would you bet on? How confident are you of your bet?

Most people will reason that that if the closed hand played the A it was to capture the King played by East. The lead of the spade Q from the board is the beginning of a straightforward finesse and if the spade K is not played from East, then the closed hand will let the Queen ride to finesse East. Therefore, it is much more likely given the play of the spade A that East covered with the spade K. Right?

Make your bet, then. Again, how confident are you of your bet? Because I am going to bet that the play of the King basically tracked the underlying distribution, a 50/50 proposition. Are you going to take this bet? Confident about that?

Not so fast. Most people don't have the bridge acumen of Zia Mahmood. He reasoned differently. If East doesn't cover, then East's play reveals that he doesn't have the spade King, and so the straightforward finesse is going to lose. (East will not gamble on South holding something like AJx of spades, and so must cover if he has the King.) When East doesn't cover, then West has the spade K and the ruffing finesse is going to work. Although we started with the straightforward finesse, the play has revealed it as a loser, we have time and can now stop: play the spade A, play our diamond, discard the board's last spade, and then take the "proven" ruffing finesse by leading the spade J through West.

Thus, South was going to play the spade A, whether or not East covered! The play of the spade A is consistent with both East covering and not covering, and since the underlying distribution of the spade K is equal, you just lost your bet.

Although the story of the Queen being covered by the King jumps to mind first, possibly as the result of the Queen causing the King to cover, the other harder story, that the ruffing finesse is working, has to be considered. If you were very confident about your bet, then you do really need to explicitly perform this check on your strategic inference. If A is consistent with B, no matter how compelling that story is, check for an equally compelling story about (not A) being consistent with B.

I will discuss this further in relationship with a purported whistleblower, stay tuned.

Technorati Tags: zia mahmood, inference

Posted by michael webster at 8:48 AM | Permalink | Comments (0) | TrackBacks (0)

Alcohol use helps boost income: study - Yahoo! News. When I read this and the researcher's "explanation" I was staggered. And no I had not been drinking.

According to the research, "The study published in the Journal of Labor Research Thursday concluded that drinkers earn 10 to 14 percent more than teetotalers, and that men who drink socially bring home an additional seven percent in pay.

"Social drinking builds social capital," said Edward Stringham, an economics professor at San Jose State University and co-author of the study with fellow researcher Bethany Peters."

Think about this: which story is more consistent? Story A, social drinking builds social capital. Story B, if you drink in a bar, you have on average more money than someone who drinks at home, maybe even seven percent more pay. The facts described in the article are consistent with either story, but somehow story A is the more compelling one. We have seen this false inference before, we are more attracted to causal stories than diagnostic ones. We feel a need to explain correlations as causal rather than as diagnostic. Thus the attachment to Story A, even when upon reflection Story B provides a better explanation.

Technorati Tags: boost, alcohol, income study

Posted by michael webster at 3:53 PM | Permalink | Comments (3) | TrackBacks (1)

In an interesting discussion about reason, rationality and preferences in the Wall Street Journal's Science Section, Sharon Begley writes:

"If suicide bombings and intractable conflicts make you think the world has gone mad, Scott Atran can confirm your impression is correct: In many conflicts, reason and rationality have left the building.

For instance, rational cost-benefit analysis says the Palestinians "should" agree to forgo sovereignty over Jerusalem and the Jordan River in return for an autonomous state encompassing their other pre-1967 lands because they would gain more land and more sovereignty than they would renounce.

They should support such an agreement even more if the U.S. and Europe sweetened the deal by giving every Palestinian family substantial economic assistance for a decade. Instead, the financial sweetener makes Palestinians more opposed to the deal.

The reason is the existence of "sacred values," which make a hash of standard analyses, explains Prof. Atran, an expert on Islamic terrorism who teaches at the University of Michigan in Ann Arbor, at the National Center for Scientific Research in Paris and at John Jay School of Criminal Justice in New York." (my emphasis)

In economics, such preferences are called lexiographic preferences. In this case, we would have (land, money) such that no amount of increase in money could compensate for the smallest loss of sacred land. Are these preferences really rational? Are they merely bargaining chips? It is rather hard to tell because such preferences can never be observed - there is no choice behaviour to observe to derive the preferences. My own sense is that lexiographic preferences are tactical devices designed to increase concessions from the other party. But sometimes these tactics take on a life of their own irrespective of their tactical value.

Technorati Tags: cost benefit analysis, wall street journal, suicide bombings, sharon begley, rationality, autonomous state, sovereignty, palestinian family, palestinians, atran, jordan river, science section, sweetener, forgo, intractable, renounce, hash, rational, jerusalem

Posted by michael webster at 6:03 AM | Permalink | Comments (0) | TrackBacks (0)

Robert L. Park's book on Voodoo science has a great deal of wisdom to offer to the prospective franchisee or distributor and their investigations about the income generating opportunity. In Science, the "no free lunch rule" from the social world is recast as "conservation of energy", or "you cannot get something for nothing".

Instead of the income generating opportunities that promise an endless source of residual income for no work, in the scientific world we have an parade of perpetual motion machines. Dr. Park writes fluidly about some of these characters, Joe Newman, Cold Fusion, and James Patterson. He also maintains a website here.

Dr. Park has an excellent insight about what the attraction is to these hare-brained schemes. I want to flesh this out in some detail because it demonstrates an important flaw in our reasoning methods. Dr. Park discusses the case of Randell Mill's BlackLight Power, one of the Cold Fusion castoffs. Despite having a theory in which there was "a state below ground state", Mill's company got funding from two utility companies for a total of $10 million. According to Dr. Park, in a conversation with the business editor of the Princeton Packet, "The woman listened ... and asked 'But isn't possible that the laws of physics are wrong in this case, and Randell Mills is right?' ... A better way to phrase the question is 'What are the odds that Randell Mills is right?' To a very high degree of accuracy, the odds are zero. It's Pascal's wager, again." (my emphasis)

What is Pascal's wager, and why is it relevant? It a nutshell, it is the type of argument that runs like this: well, I know that A is highly unlikely to be true, but if I only invest a small amount $Z, the pay-off might be huge.

What is wrong with this form of argument, and if it is wrong or a fallacy, why is it an attractive fallacy?

People are very poor at strategic reasoning, contemplating how to act in a universe that is planning to react to their choice. Consider the following two bets or games, where the numbers represent dollars returned.

How much would you pay to play G1 and how much you pay to play G2, given that you know nothing about the probabilities of S1 and S2? You might reason this way. Well in G1, if I played A and S1 and S2 were equal, then I would get on average at little less than $50, while in G2 I would get about 50 cents. So probably G1 is worth at least 90 times more than G2. Whereas, I might pay very little to play G2, I might spend much more to play G2.

As attractive as this line of reasoning is, it is false if we assume that whatever is choosing S1 or S2 is watching you make your choice, ie a market. The zero sum value of G2, is -25 cents. But the value of G1 is -1 cent! G1 is not even a profitable game to play, despite that lovely looming left hand corner in which you get a return of $100. Why isn't G1 valuable? In a zero sum game, where people are trying to outwit you, S2 is going to be the state of nature in proportion to S1 in the exact ratio of 101:1. S2 is going to played to limit your gains to zero, and S1 will be played rarely -but positively just in case you always played B.

This is what trips people up: in a zero sum game, once you have the pay-off matrix, you have an excellent estimate of the states of nature. But in a decision theoretic version of the problem, the probabilities for the state of nature are not dependent on the pay-off matrix. Reasoning as if they are produces errors in judgment.

Technorati Tags: cold fusion, dr park, voodoo science, james patterson, perpetual motion machines, blacklight power, ground state, residual income, robert l park, endless source, free lunch, joe newman, conservation of energy, randell, franchisee

Posted by michael webster at 8:37 PM | Permalink | Comments (0) | TrackBacks (1)

Victoria Pynchon, at the Settle It Now Blog, reviews some well known cognitive biases to effective problem solving for mediators and negotiators. I have some doubts that these cognitive biases have any special application to mediation or negotiation.

But, one of the things that does surprise me is how little relevant game theoretic illusions have made their way into the mainstream literature. These illusions do have special applications to mediation.

Consider, one of my favourites, the dollar auction game, invented by Professor M. Shubik. Here is the set-up, one of the easier set-ups to analyze. Mr.Auctioneer proposes to auction off a $20.00 bill to Mr. Clever and Ms. Swift. The winning bid gets the $20.00, but the loser has to throw in the value of his or her bid. For example, if Mr. Clever bids $5, but Ms. Swift's losing bid was $4, then Mr. Clever gets the $20.00 for $5, and Mr. Auctioneer also gets $4 from Ms. Swift. Each player has to bid at least once.

So how does the betting go, as between Mr. Clever and Ms. Swift? Well, Ms. Swift jumps out first with a bid of $2, to which Mr. Clever increases to $2.50. Ms. Swift, right on the mark, goes to $5.00, and Clever counters with $5.25. Swift jumps to $10.00; Clever counters with $10.10. Swift takes a pause and jumps to $19.00; Clever takes a longer pause and then cleverly bids $20.00 and grins at Swift.

Swift is now not living up to her name, because after much reflection she realizes that if she passes now, she is out $19.00, whereas if she bids $20.50, and is the winning bid, then she will only be out 50 cents - and so the bid of $20.50 for a $20.00 bill. Mr. Clever realizes, quickly, the strategic situation also and ventures a cautious $21.00 - better to lose $1 than $20.00. Our heroes eventually end up paying Mr. Auctioneer somewhere between $50 and $60 for a $20.00 bill, sadly vowing never to play this stupid game again, until next time that they are in this situation and don't recognize it, a lawsuit perhaps?

This real illusion has been played out many times in experimental games and the conclusion appears to be: don't play this game. You cannot buy a $20.00 bill for less than $50.00?

Well let's debug this illusion with a bit of game theoretic logic. First, if the Swift and Clever could act as one person, then Swift could bid 1 cent, Clever bid 2 cents, and Swift could pass, letting Clever obtain $20.00 for a net profit of $19.98. This is their maximum joint gain- what they could obtain if they could give up control of their actions to some coordination device, something like a stop sign or line-up in real life. Knowing their joint gain, how can Clever persuade Swift not to bid again, after the 2 cent bid? Well, what if he pulled out a $10 spot, waved in front of Swift's nose, got her to smell the real coin of the realm, and handed it over to her after her no bid? Or put the $10. on the table and asked Swift for 2 cents? Put 2 cents on the table and asked Swift for a "loan" of $10.00, offering as collateral his 2 cents and promise not to bid if Swift went to 3 cent? All of these commitment devices will allow Clever and Swift to share their joint gain.

Now, there is no guarantee that once the individuals see what their joint gain could be that they will find the necessary commitment devices that will drive them to their joint goal. Indeed, game theory's preoccupation with Nash solutions has obscured this fact. But repeat after me: find joint gains as the result of coordination, then look for commitment devices to split the joint gain, which are probably off the equilibirum path.

Technorati Tags: auction game, bid, swift, clever, dollar auction, set ups, relevant game, game theoretic, my favourites, auctioneer, biases, illusions, mediation, loser, cognitive, mainstream literature, mediators, problem solving, negotiation

Posted by michael webster at 6:29 AM | Permalink | Comments (0) | TrackBacks (0)

In 1992, William Poundstone wrote a series of essays on game theory aimed at an introductory audience. One of his expositions was on Martin Shubik's Dollar Auction game, which is summarized here. Much like Thaler's description of the winner's curse, this appears to be another auction not worth playing.

Here is the game, as described by Poundstone:

1. (As in any auction) the dollar bill goes to the highest bidder, who pays whatever the high bid was. Each new bid has to be higher than the current high bid, and the game ends when there is no new bid within a specified time limit.

2. (Unlike at Sotheby's!) the second-highest bidder also has to pay the amount of his last bid - and gets nothing in return. You really don't want to be the second-highest bidder.

Shubik wrote, "A large crowd is desirable. Furthermore, experience has indicated that the best time is during a party when spirits are high and the propensity to calculate does not settle in until at least two bids have been made."

Shubik's two rules swiftly lead to madness. "Do I hear 10 cents?" asks the auctioneer - "5 cents?"

Well, it's a dollar bill, and anyone can have it for a penny. So someone says 1 cent. The auctioneer accepts the bid. Now anyone can have the dollar bill for 2 cents. That's still better than the rate Chase Manhattan gives you, so someone says 2 cents. It would be crazy not to.

The second bid puts the first bidder in the uncomfortable position of being the second-highest bidder. Should the bidding stop now, he would be charged 1 cent for nothing. So this person has particular reason to make a new bid - "3 cents." And so on

Maybe you're way ahead of me. You might think that the bill will finally go for the full price of $1.00 - a sad comment on greed, that no one got a bargain. If so, you'd be way too optimistic.

Eventually someone does bid $1.00. That leaves someone else with a second-highest bid of 99 cents or less. If the bidding stops at $1.00, the underbidder is in the hole for as much as 99 cents. So this person has incentive to bid $1.01 for the dollar bill. Provided he wins, he would be out only a penny (for paying $1.01 for a dollar bill). That's better than losing 99 cents.

That leads the $1.00 bidder to top that bid. Shubik wrote, "There is a pause and hesitation in the group as the bid goes through the one dollar barrier. From then on, there is a duel with bursts of speed until tension builds, bidding then slows and finally peters out."

No matter what the stage of the bidding, the second-highest bidder can improve his position by almost a dollar by barely topping the current high bid. Yet the predicament of the second-highest bidder gets worse and worse! This peculiar game leads to a bad case of buyer's remorse. The highest bidder pays far more than a dollar for a dollar, and the second-highest bidder pays far more than a dollar for nothing.

Computer scientist Marvin Minsky learned of the game and popularized it at MIT. Shubik reported: "Experience with the game has shown that it is possible to 'sell' a dollar bill for considerably more than a dollar. A total of payments between three and five dollars is not uncommon." Possibly W. C. Fields said it best: "If at first you don't succeed, try, try again. Then quit. No use being a damn fool about it."

Without at all diminishing my respect for W.C. Fields, I venture to suggest that there is a more reasonable way to play this game as opposed to quiting. What is it?

Technorati Tags: dollar auction, auction game, dollar bill, parlor game, game ends, game theory, bid, bidder, sotheby, martin shubik, william poundstone

Continue reading "Shubik's Dollar Auction Game - Not Rational to Play?" »

Posted by michael webster at 9:40 PM | Permalink | Comments (0) | TrackBacks (0)

Kahneman and Amos Tversky are well known for their interesting puzzles in rational choice and their clever challenges to rational choice theory.

Typically, their examples involve seeing the same problem from two different perspectives which draw out two very different choices.

Here is one of my favourite examples.

Consider the following problem. In a population of 600 individuals, serious viral infection has taken place. There are two courses of action possible.

A: You can cure 400 individuals for certain.

B: You can cure 600 individuals, but with only 75% certainty.

As you are thinking about your decision, a new medical program becomes known. It offers the following choices.

C: You will doom 200 individuals for certain.

D: You will doom no individuals, with 75% certainty.

Which do you choose, A over B and D over C? This is the typical choice pattern. Faced between curing 400 people for sure and a 25% chance of failing to cure anyone, take the sure thing. But when faced with having to lose some individuals, perhaps it better to take a risk to save everyone.

Now it takes no great imagination to see that choice A is the same a choice C, and B is the same as D for a population of 600. If you cure 400 people for certain, then 200 people were doomed for certain. The same with with B and D.

But having seen the equivalence of A and C and B with D, it is still hard to resist the framing effects: when faced with sure gains, be risk adverse; when faced with sure losses, be risk seeking.

Why is this relevant to distributors who have lost money in business opportunities scams?

Technorati Tags: rational choice theory, daniel kahneman, nobel prize, doom, choices, typical choice, viral infection, professor daniel, amos tversky, vernon smith, medical program, new medical, clever, puzzles, perspectives, economics

Continue reading "Why Biz Op Distributors Fail to Recover Their Losses" »

Posted by michael webster at 10:04 PM | Permalink | Comments (0) | TrackBacks (0)