tit-for-tat in the New Congress

In a repeated prisoners' dilemma, [play coauthor Mike Shor's online game against 5 different players], the best strategies exhibit the following characteristics: 

• Be nice--no first strikes 
• Be provokable--retailiate immediately if your rival cheats 
• Be forgiving--don't punish cheating too much 
• Be clear--make sure your rival can interpret your moves 
• Dont be envious--focus on only your slice of the profit pie

Tit-for-tat is the winning strategy (examples)

The WSJ reports that new Republican House Speaker is doing exactly what the previous Democratic House Speaker did, in order to deter future abuses of power:

Republicans believe that if they don’t play tit-for-tat like this, Democrats will feel empowered to keep escalating. Maybe if Democrats get the same ill treatment, the GOP thinks, Democrats will revert to better form the next time they’re in the majority.

Of course, this works only in an evenly divided Congress. If one party gains the majority for a long time, it need not fear retaliation.

Play the repeated prisoners' dilemma

By playing against one of five types you learn how to sustain cooperation:

1. Be nice--no first strikes
2. Be provokable--retailiate immediately if your rival cheats
3. Be forgiving
4. Be clear--make sure your rival can interpret your moves
5. Dont be envious--focus only on your slice of the profit pie

HT: Jordan

When are between group differences evidence of discrimination?

WSJ: Disparity doesn't necessarily imply Racism 

To measure the effects of discrimination, one has to rule out skills, education, or other factors that could explain between-group differences. 

To understand this, go to LearnRegression.com and click on the "Differences between groups" page.  Then click on the X,Y graph to create data that shows two things:  (i) a  statistically significant mean difference in Y for the blue and black groups:And (ii):  once we account for the differences in X, the between-group differences lose statistical significance:

 

The author finds the same pattern in data for "unemployment, teen pregnancy, incarceration and other outcomes."

The solution isn’t to look away from discrimination. It does exist. But we also can’t point at every gap in outcomes and instantly conclude it’s racism. Prejudice must be measured rigorously. Statistically. Disparity doesn’t necessarily imply racism. 

Housing bubbles in Australia, Canada, and Sweden?

The Economist:

House prices are now starting to fall after years of vertiginous growth. And it is overheated markets, overheated markets, like those in Australia, Canada and Sweden, that are facing some of the sharpest drops. A mortgage binge fuelled by rock-bottom interest rates has left each country with enormous quantities of household debt. As a share of disposable income, such debt sits at 185% in Canada, 202% in Australia and 203% in Sweden. By contrast, debt levels have shrunk in countries that bore the brunt of the last crash, including America, Ireland and Spain (see chart).

ver·tig·i·nous: /vərˈtijənəs/ adjective, causing vertigo, especially by being extremely high or steep.

Mercedes "crimps" its electric vehicles

Mercedes is degrading the acceleration of some electric vehicle models in order to offer two products, at different prices, to appeal to high and low value consumers.  Classic indirect price discrimination:

Mercedes-Benz is the latest auto manufacturer to unveil a subscription fee to unlock perks, such as the ability to boost acceleration. 

The $1,200 yearly subscription is called "Acceleration Increase" and can be found on Mercedes' online store. 

"COMING SOON - Accelerate more powerfully: increase the torque and maximum output of your Mercedes-EQ," reads the description on the online store. It's available for all upcoming EQ electric models that will "improvement in acceleration of 0.8 to 1.0 seconds (0-60 MPH)."

Similar to what Tesla's does with range (Tesla "Crimping?")

Tesla "Crimping?"

Alex Tabarrok over at Marginal Revolution thinks Tesla may have unwittingly committed a marketing faux pas. As Hurricane Irma bears down, they expedited an over-the-Internet update to the cars' software to extended battery life.

Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?

The idea of offering both premium and discount versions is common, as is purposely 'damaging' the product one so as to make the discount version perform more poorly than the premium version (i.e. "Crimping").

In this case though, there may have been no deception. There is a report that owners may have opted not to pay for the better battery life.

The real meaning of Thanksgiving

Peter Klein gives us the story of the first Thanksgiving that you never learned in school:

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

 This year I am giving thanks for private property. 

 Related:  Good short video on the how private property saved the Pilgrims, China and Vietnam from our friends at MarginalRevolution University

Netflix's decentralized organizational form

https://jobs.netflix.com/culture

1. encourage independent decision-making by employees
2. share information openly, broadly, and deliberately
3. are extraordinarily candid with each other
4. keep only our highly effective people
5. avoid rules

We can put this "culture" into the taxonomy of our textbook (decision rights, performance metrics, reward schemes):

1. Decision rights are decentralized (employees have tremendous freedom)
• There are virtually no spending controls or contract signing controls. Each employee is expected to seek advice and perspective as appropriate. “Use good judgment” is our core precept.
• Our policy for travel, entertainment, gifts, and other expenses is 5 words long: “act in Netflix’s best interest.” We also avoid the compliance departments that most companies have to enforce their policies.
• Our vacation policy is “take vacation.” We don’t have any rules or forms around how many weeks per year. Frankly, we intermix work and personal time quite a bit, doing email at odd hours, taking off weekday afternoons for kids’ games, etc. Our leaders make sure they set good examples by taking vacations, often coming back with fresh ideas, and encourage the rest of the team to do the same.
• Our parental leave policy is: “take care of your baby and yourself.” New parents generally take 4-8 months.
• Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.


2. Subjective performance metrics designed to identify the highest performer
• We focus on managers’ judgment through the “keeper test” for each of their people: if one of the members of the team was thinking of leaving for another firm, would the manager try hard to keep them from leaving? Those who do not pass the keeper test (i.e. their manager would not fight to keep them) are promptly and respectfully given a generous severance package so we can find someone for that position that makes us an even better dream team.


3. Rewards are set at the highest level (including a "risk premium" to compensate employees for the risk of getting fired)
• To help us attract and retain stunning colleagues, we pay employees at the top of their personal market. We make a good-faith estimate of the highest compensation each employee could make at peer firms, and pay them that maximum. Typically, we calibrate to market once a year. We do not think of these as “raises” and there is no raise pool to divide up. The market for talent is what it is. We avoid the model of “2% raise for adequate, 4% raise for great”. Some employees’ market value will rapidly rise (due both to their performance and to a shortage of talent in their areas) while other employees may be flat year-to-year, despite doing great work. At all times, we aim to pay all of our people at the top of their personal market.

I love this interview question

 

Tell me a time when you went around your manager to make a decision. Why did you do it, and what was the outcome?

The question is so good because the answer reveals so much. 

• If you has never done this, does it mean that you are not very experienced, or that you are a corporate sheep, going along to get along. 
• If you have done this, does it mean that you are following your own agenda rather than trying to implement your company's strategy.  

Using the idea of incentive alignment,(make sure employees have enough information to make good decisions and the incentive to do so), it becomes clear what a good answer might be:

I have gone, and would go, around my manager if I thought I had better information than she did. But if I thought she had considered my point of view, I would defer to her judgement, as she may be trying to achieve goals or have concerns that do not occur to me.   

From Amazon (link)

11/22: Is the stock market over-valued?

Price of a stock is supposed to go close to its value in the long run. But how does one determine value? We have talked about Shiller's P/E ratio. From your Finance class, you know that the "value" of a stock is its discounted future earnings. But cannot observe future earnings, so Shiller used a moving average of past earnings and found that stock prices seem to revert to about 17 times earnings.

The current Shiller P.E Ratio for the S&P 500 is 39.89. Last month the ratio was at 38.68, and a year ago was at 34.51. In fact, the ratio is now at its highest level in the last 20 years.

Another value metric is the total capitalization of the stock market relative to GDP (From Zerohedge).