Thursday, April 19, 2012

The Oncoming Trit Bubble

About a week ago, I found myself back in a game I hadn't played in years: EVE Online, an MMORPG. It has the most sophisticated economy I've seen in a game with tens of thousands of people buying and selling hundreds of goods.

On April 24th, EVE will alter the rules of the game (a "patch" as they call it) which will radically change the economy. Basically it means players will have to create more things themselves, rather than just getting it from killing computer characters. This increased focus on player production (and it is already quite focused) will increase the demand for the game key mineral: tritanium, or trit.

When the patch notes came out earlier this month, trit prices exploded, along with veldspar (an ore that's refined into trit) and hulks (a ship that's really good at mining veldspar). (All screen shots were taken on April 19 at about 19:45 EVE time, or 3:45 EST, in the game region of Verge Vendor.)

(That recent dip in hulks is interesting; I'll get to that in a sec.)

As predicted by basic economics, the price is rising. If the demand shifts out (more people want something), the price will rise. This is why I, and many people in EVE, are mining. Prices are really high. But a friend of mine who plays insists I shouldn't sell my veldspar now. I should sell it after the patch is released because then the price is even higher.

But if the price is over-inflated, as I think it is, then this is a horrible decision. I should sell while the price is high. Like a house in 2007, get out while the getting's good.

It's hard to tell if something is a bubble or not. Is this price increase just the beginning? Or are people holding on to the veldspar and trit because everyone assumes the price will rise, only to find it dropping when they want to sell. I'm inclined to believe the latter for the following reasons:

Elasticity. This is the measure of how sensitive the supply and demand curves are to price changes. It's really easy to mine veldspar. Thus the supply of veldspar is elastic: a small change in price will radically increase how much people will bring to market. This price increase will be small.

But the price increase isn't small. It's gone from from 4.50 to 5.75, a 27.8% increase. The price is probably too high.

Quantity. According to the little model up there, quantity should be off the charts. But the amount of trit sold (seen as the green bars) is (slightly) falling. Hulk sales, on the other hand, saw a jump in quantity when the patch was first release. They're the first thing you'd buy if you're a semi-experienced player (thus able to fly one and can afford one) and want to respond to veldspar prices. But we're not seeing veldspar and trit quantities rising. People are holding onto them. And now that the hulks have been bought, quantity's fallen and price is beginning to, as well. (Though I don't want to read too much into a short-run dip in a price.)

The Winner's Curse. Estimations are normally distributed. Some people will overestimate the future price of trit and others will underestimate it. The person who over estimates the most will pay the most. They will win the bid and they will regret it. Prices are driven by the winning bid so things will seem more valuable than they are. And this is made worse because...

Prices are correlated. EVE uses an English auction: if you're buying you place your bid and the high bid will buy the auction. You can up your bid if you want. But people tend to use other people's prices as information. If someone keeps outbidding me, then I might think that they know something important I don't so I outbid them. They then use my bid to think I know something they don't so they outbid me. Around and around we go until we wise up and the market crashes.

This prediction comes with caveats. (1) I may know that the supply curve is elastic, but I don't know how elastic. I may know the demand will shift, but I don't know how far. It's entirely possible that a 27.8% increase is modest and this is just the beginning. (2) If players can't sell their trit at a price they want, they will probably just hold on it. You don't have to pay a store fee after all. Thus prices might not crash. But if they don't, quantity sold will.

So I could be wrong--I'm not selling all my veldspar now--but I'm selling most of it. In less than a week, I'm going to look either really smart or really dumb. C'est la vie.

Sunday, April 15, 2012

Too Many Stars

Imagine there are two types of jobs in the world: stars and support. Stars are the jobs where you're the center of attention. They are the decision-makers, the bosses (or at least appear to be): CEOs, professional athletes, entrepreneurs, newscasters. Support are all those jobs that make the stars' job possible: administrative assistants, janitors, supply chain management. Support is logistics.

We tend to romanticize stars. People often dream of being the Most Important Person in the Room, the one who orders others around and makes the Big Decisions. College encourages students to be leaders: "training future leaders" is common theme in mission statements. While grading senior projects (which are typically a detailed business proposal), students seem to prefer starting a high-end specialty store rather than something more humdrum, even if the humdrum one makes more sense.

And so good support is hard to find: advertising over supply chain management, boutiques over discounts, cooks over waiters, researchers over teachers, Apple over Wal-Mart, etc. It even happens in online video games (where the main goal is killing stuff): damage dealers are a dime a dozen but players interested in keeping their allies alive are a bitch to find.

We have too many people dreaming of becoming stars and it's incredibly wasteful. Think of all of the people who would be great at "mediocre" roles but instead are instead wasting their time trying to be actors or entrepreneurs. Being a star has more prestige and for good reason--don't get me wrong, stars are important--but we place too much emphasis on stars. We rarely think of training and encouraging good support and that should change. It's not the generals who win wars; it's the logistics.

Monday, April 09, 2012

How Libertarians Are Different

Tennessee Senate approved a bill allowing teachers to present challenges to evolution and climate change theories.

Conservatives: It is absurd to deny teachers and opportunity to encourage critical thinking skills.

Liberals: It is absurd that we would allow teachers to present definitely false material as credible.

Libertarians: It is absurd our only option is to choose between these two extremes.

At the heart of all of the quality and content discussions of education should be the virtual monopoly on secondary and primary education the government has. This discussion is not evidence for one or the other side; it is evidence for why we need more direct competition between schools because what's optimal depends on what families want to prioritize. The best option is the middle ground:

Yes, we should take every opportunity we can to develop critical thinking skills. If students get excited about evolution v. creationism, then the teacher should leverage that interest into instruction.

And yes, we don't want nonsense to crowd out good ideas, especially ideas which are hard to understand or have a lot of interesting applications.

Should we focus on breadth (critical thinking skills) or depth (deep understanding or an important subject)? The answer should be up to you, not politicians.

Thursday, April 05, 2012

A Mathematical Definition of Evil

I told my Advanced Micro students the other day that economists don't really believe in good and evil. There's just good or bad incentives. They protests: what about rapists and murders? This lead me to the following (working) definition of evil:

A person is evil if the derivative of his/her utility function with respect to actions with negative externalities is positive because such actions have negative externalities.

-A utility function is a mathematical formula that describes how different variables affect how happy someone is.
-Taking the derivative of the function with respect to a variable tells us if this person is happier (result is positive) or sadder (result is negative) if they get more of something.
-A negative externality is something that makes others' worse off.

So if someone enjoys playing loud annoying music because he enjoys the fact that he is annoying people, he is evil by this definition. If someone enjoys killing someone because the victim doesn't want to be killed, this person is evil. If someone enjoys torturing someone, but only if the victim doesn't enjoy being torture, then that person is evil.

Note that the victim would have her own utility function with a negative derivative with respect to the activity. The louder your music, the greater the torture, the sadder she is.

We can further qualify levels of evil by either (a) how much the person enjoys making others miserable (the size of the derivative) and/or (b) how much the negative externality hurts other (the size of the derivative of victim with respect to that same activity).

You can quibble--how much do we control our own utility functions?--but I think this is mathematically close to what most people imagine "evil" to be.

How Common Are Functional Families?

Happy families are all alike; every unhappy family is unhappy in its own way.

Before I begin, let me emphasize I'm talking in very large generalizations. This is for clarity purposes; please don't mistake my simplifications for being rude.

I was born and raised in a "functional family." I always got enough to eat, I got help with school work, and my parents showed love and affection. They never hit my brother or myself and their fights were rare and civil. I had an excellent upbringing (thanks, by the way, Mom and Dad). For my brother's and I's part, we were good kids. We weren't angels by any means, but we stayed out of major trouble, did well in school, etc.

So when I wonder if most families are functional--perhaps little a better, perhaps a little worse than mine--I naturally think back to my childhood and conclude my childhood was typical. This is, of course, a poor way to draw a general conclusion. You can tell because when I would ask my friends who come from dysfunctional families, they would make the opposite conclusions: "we're not unusual, David, you are." They are, in all likelihood, making the same mistake I am.

So I might say "But we had many family friends who are also functional families." Of course, functional families like to hang out with other functional families so that's not very good. It leads to dysfunctional families drawing one of two conclusions:

(a) They were somewhat dysfunctional, which means they would be friends with other somewhat dysfunctional families (functional families won't have them and the somewhat dysfunctional won't hang out with the really dysfunctional one). Thus they cite the other families they know and use that as more evidence of how common people like them are.

(b) They were really dysfunctional, which means, based on this rough model, that they will have few to none family friends. So they would probably say "look, my family was really bad; it seems reasonable that something somewhat better than what I experienced would be the norm."

(This says nothing about the families that are functional to a level that's annoying. As this episode of South Park suggests, such families would have trouble finding outside friends as well.)

So how common are functional families? I have no idea and unless someone did a random sample and came up with a good measure of functionality (good luck), then I'd say no one really knows. But what learning about others' families have taught me is that while the average is hard to figure, the standard deviation is huge.

Wednesday, April 04, 2012

Quote of the Day

Mental retardation caused by early childhood malnutrition disqualifies about a quarter of potential military conscripts in North Korea...
From Escape from Camp 14.