Posts from — September 2008

• I’ve GOT to stop reading financial data first thing in the morning. Am too depressed to get through the day. Bah. #
• Final programme for ISNE 2008 is up. Can’t wait for Friday. Actually, can’t wait for today just to be ovah: http://isne08.googlepages.com/ #
• http://tinyurl.com/4cd4k4 #

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Last time we looked at the history of game theory and the components of any game: players, strategies, and payoffs. We also discussed the first equilibrium concept we are going to see: the Nash equilibrium.

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Academic publisher sues academic for making free software which makes the publisher’s work more accessible.

D.U.M.B.

• @damienmulley Nice article in the Times Damien, very timely. #
• @RobinBanks Bailouts’ gonna be much, much worse than we thought. Check Brad DeLong’s site today for details. #
• Dis iz an tweetr test. I can haz tweets? #
• @All is there a better blogging client than Ecto for the mac? I’m getting really sick of it, and hate the wordpress interface. #

Let me elaborate.

Ireland has repeatedly rejected the construction of a nuclear power plant, for a host of reasons, most of them irrational, take this for example, or factually incorrect, see this, or just twaddle, see this. 

I think if the benefits of nuclear power were put to the Irish people in a consistent and intelligent way, they would respond with a different answer. 

The benefits of nuclear power are cheap, reliable energy which is independent of fossil fuel usage and, as we’ve seen, price changes. Not only does nuclear power have negligible CO2 (global warming) emissions, but Western nuclear power has never killed a member of the public or had any measurable impact on public health, miles of column inches to the contrary. France is the shining example of the benefits of nuclear power—78% of French electricity is generated using nuclear fuel.

The costs of nuclear power are, in this order, high level waste disposal, risk of proliferation, severe accidents, and terrorism. Obviously, Ireland would not be subject to most of these risks as it is a (largely) neutral country. 

Running out of uranium isn’t really an issue either: there are approximately 14,750,000 tonnes of the stuff on Earth. Last year we used close to 67,000 tonnes of this. With type four fast breeder reactor technology, we’d have practically unlimited energy resources into the 22nd century [2]. 

Right now, our CO2 emission are 24% higher than our 1990 level. Our Kyoto protocol agreement is for 13% increases, and our energy needs are set to increase by 25% by 2015 [1]. So this is not a problem which will go away, as this ESRI report shows. Ireland is contributing to climate change in much the same way as India and China, albeit on a smaller scale. 

Pollution is the price of development. 

It’s fair to say nuclear power isn’t the solution, but there is no solution in the medium term without it, as we transition away from fossil fuel power solutions. Those electric cars won’t charge themselves. 

I’m not a fan of nuclear power, but there are ways to buy this power from abroad. As Gerard reports, a 25bn pound investment in nuclear power will take place in the UK in the next 10 years, thanks to a recent takeover. This power will need buyers. If it is priced properly, Ireland might be in a position to purchase the benefits of nuclear power without incurring many of its costs. 

Related articles

• Nuclear’s CO2 cost ‘will climb’
• Carbon capture and storage - should Europe invest €12bn?

• Albert Einstein designed a better fridge. Who knew? http://www.physorg.com/news141581384.html #

Take the survey and let me know how I did in lecture 6. Also, remember this message from the lecture:

Now, take the poll.

n

Last time we looked at uncertainty, risk, and probability. We’ll recap those, and move onto Game Theory.

Click below for lecture notes, slides, and links to readings. A podcast of the lecture will be available after the lecture, as will a survey of the lecture. Don’t forget you can print these notes by clicking the  Print This Post icons on the pages.

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• @gerardoneill Read http://tinyurl.com/5yex6f, it shows private companies at the forefront of experimental economic research. V. interesting. #
• @smiaras Hello, there, Piaras’ colleague. #

You can try and swim in the rivers of ink being spilled about the 700 bn dollar bailout, or you can look at this picture, which pretty much says it all. Up to you.
If you want to read about why the US government is bailing out its richest citizens, start reading here.

Take the survey, let me know how I’m getting on. I’ll go over the certainty equivalence principle tomorrow in lectures. 

n

Here’s a little video showing something Finbarr Murphy put together for his classes here at UL. It’s based on the light pen ideas of Johnny Chung Lee from CMU, and you can see the thing working below. The basic idea is to use an led light source, tracked by a wiimote, to translate movements of the led pen into images on a computer, displayed on the projector you see. So it’s like you’re writing on the wall. For about 40 euros.

Light Pen Doo Hickey from Stephen Kinsella on Vimeo.

Related articles

• Use a Wiimote to Make Whiteboards Out of Anything [Clips]
• DIY head-tracker takes Wiimote hacking to dizzying new heights
• Wiimote repurposed for multi-point interactive whiteboard

Bono in the FT on aid. He’s talking about Ireland’s development experience, as well as Africa’s.

This morning I read a beautiful piece by George Dyson (yes, that George Dyson) about the current financial crisis, and what it has to do with the man who helped invent the digital computer.

No, not Alan Turing—John von Neumann, who amongst other things, invented game theory, helped build the first nuclear bomb, began the science of cellular automata and autocatalysis, and, just for fun, changed economics utterly in one paper in 1937 (reprinted in english in 1945), written overnight when he was on holiday. He was that sort of chap.

Check out Dyson’s article. It’s really very clever, and uses the current crisis as a foil to help the reader understand complexity theory and the history of economics.

• @paulbradshaw wp-print is your only man. Works fine for me. #
• Ed. Solution du jour: 10 yrs of Tax Credits for choosing a course. What 18 year old cares about tax credits? http://tinyurl.com/4tyen2 #
• Test: Check out this SlideShare Presentation : EC4333 Lecture3 2008 http://tinyurl.com/4gh6r3. Can anybody actually see the presentation? #
• @eeekkk Cheers We can do it. #

Image by Getty Images via Daylife

This is the second part of the course, where we look at strategic behaviour under uncertainty. Lectures one, two, three, and four were all about establishing the theory of demand under certain conditions. We don’t live in a world of certainty, but its exact opposite, so we must change the theory to account for the presence of the unknown in economic life. We have not been too successful at this, but the theory remains, and we will learn it.

The mainstream theory of how we deal with choice under uncertainty and our interactions with others is built on probability theory. 

Definition (Probability). The probability of an event occurring is the relative frequency with which it occurs. 

Example. Toss a coin a large number of times, and the likelihood you get Heads will be 1/2. Roll a dice a large number of times, and you will roll a 6 on average 1/6 of the time.

Definition (Expected Value). The expected value of a game with several uncertain outcomes is the size of the prize the winner will get, on average. It is the average outcome from an uncertain gamble. 

Example. In a 2-player game of tossing a coin and predicting whether it comes up heads () or tails (), with payoffs to each player being +1 and -1 respectively, then the expected value of the game is 

So in this game, neither player would make out too well over time. 

Risk Aversion. People prefer less risk, especially when the stakes are quite high. The reason is the interaction of the potential payoff (the above) and the probability of obtaining that payoff. We say there is diminishing marginal utility from the consumption of further and further amounts of risk. In terms of pricing risk, we can look at Figure 1 below:

Here we see the utility associated with a certain level of risk is concave to the origin—meaning when things get more risky, the person is less likely to derive a correspondingly high utility from that risky situation. If the person were truly risk-neutral, then they would pay for a gamble, but they don’t, because for them, the bet simply is not worth it. As the HET site writes:

Notice by comparing points D and E in Figure 1 that the concavity of the elementary utility function implies that the utility of expected income, u[E(z)] is greater than expected utility E(u), i.e. u[pz₁ + (1-p)z₂] > pu(z₁) + (1-p)u(z₂). This represents the utility-decreasing aspects of pure risk-bearing. We can think of it this way. Suppose there are two lotteries, one that pays E(z) with certainty and another that pays z₁ or z₂ with probabilities (p, 1-p) respectively. Reverting to our von Neumann-Morgenstern notation, the utility of the first lottery is U(E(z)) = u(E(z)) as E(z) is received with certainty; the utility of the second lottery is U(z₁, z₂; p, 1-p) = pu(z₁) + (1-p)u(z₂). Now, the expected income in both lotteries is the same, yet it is obvious that if an agent is generally averse to risk he would prefer E(z) with certainty than E(z) with uncertainty, i.e. he would choose the first lottery over the second. This is what is captured in Figure 1 as u[E(z)] > E(u).

We have many ways to cope with this type of risk, but the three most common are:

1. Insurance
2. Diversification
3. Options

We’ll go through each of these in class with a demonstration about the market for used cars. 

Not that there is always and everywhere a fundamental uncertainty—we can’t know what we don’t know. For more on this, see The Black Swan by Nassim Taleb, or my review of that book here. 

Related articles

• Black Swan Quote Of The Day
• Outliers
• The Turkey Problem
• Confirmation Bias
• Nassim Taleb, Black Swan Author, To Participate in JSM Panel Discussion
• Paint it Black
• Black SwaNS Everywhere

To get a sense of just how big the bailout is, consider this:

1 million seconds is 11 days
 1 billion seconds is 32 years
 1 trillion seconds is 3 centuries.

So, if the bailout cost the US economy 1trillion, paying it back at a dollar a second could take centuries. Nice comparison.

The Big Picture

• How’s the economy, Ben? http://tinyurl.com/2e79ce #
• Just read this book, gonna experiment with the approach in lectures this week: http://tinyurl.com/4fexyu #
• Top ten open problems in economics: http://tinyurl.com/3k233z . Don’t agree with the list, but it’s a good thing to start thinking about. #
• @gerardoneill Great article yesterday. Been meaning to write something on the wpi for ages. @All: check it out http://tinyurl.com/44quuj. #
• Merlin Mann gets all proselytize-ly and evangelical on blogging as creation of non-shite internet things: http://tinyurl.com/4jtym6. #

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I’m just about to be in a position where I can announce something I’ve been working on for over 18 months in UL. Everyone who reads this blog knows I have an interest in health economics, but, as a teaser, here’s a paper from the Journal of Health Economics based on experimental health economics.

Abstract: In rational addiction theory, higher discount rates encourage drug use. We test this hypothesis in the general framework of rationality and behaviour under risk. We do so using an experimental design with real monetary incentives. The decisions of 34 drug addicts are compared with those of a control group. The decisions of drug users (DU) are not any less consistent with standard theories of behaviour over time and under risk. Further, there is no difference in the estimated discount rate between drug users and the control group, but the former do appear to be more risk-seeking.

Exciting times ahead, folks.

Three Panel Soul