You're not transferring wealth if you're buying something with it

There's a weird meme around (similar to the one I've written about before, that renting is throwing money away). This meme is: the U.S. is transferring wealth to oil-producing countries. That is, we're giving those countries lots of money. (One example can be found here; to be sure though, I was not able to find sources proving that President Obama had actually said this. I do remember Senator McCain saying it during the 2008 campaign. But, again, don't have sources.)

Indeed, we are giving those countries lots of money. But we're quite obviously not transferring that money, because we're getting something in return. Oil, that is. Since we seem to value oil, this isn't really a transfer of wealth, but more of an exchange thereof.

I guess the lesson here is that those who rent an apartment or a house and pay to heat it are real chumps. Not only are they throwing away money on rent, on top of that they're also transferring money they pay on their utility bills.

Preferences dressed up as beliefs

This discussion at OB got me thinking about preferences masquerading as beliefs. Let me explain what I mean. I am sure most of us have heard the following argument in favor of employer health insurance mandates: mandates are good not just for the employees but for employers as well, because workers with coverage are more productive and therefore businesses providing coverage do better in the marketplace.

There are two curious things about this argument. First, if used in order to convince people who don't already agree (for whatever reason) that employer mandates are desirable, it is a terrible rhetorical strategy (that's because the statement is 1) false and 2) patronizing towards the very audience you're claiming you want to persuade). Second, it seems to be used mostly by people who think employer mandates should be instituted for normative reasons; even if they were shown that mandates are bad for business owners, they'd still want them as policy.

Political debate is rife with arguments like that, and they're used equally often by the left and the right. (The Laffer curve comes to mind here.)

Here's my main point: arguments like the one above can't really be used as a means of persuasion, but rather are a very elaborate way of preaching to the choir. But then there's another puzzle. As preaching to the choir goes, this seems an inefficiently elaborate way of doing it. If all you're doing is signaling that you prefer employer mandates to other people who prefer employer mandates, why not just say you prefer employer mandates and leave it at that? The effect of saying either thing is the same: you're showing people with different preferences that you're not one of them. Why then the need to dress up your normative preference as a positive belief? I see two possible explanations, the applicability of each depending on how much people who use arguments like that know about their own preferences. Both explanations involve two-dimensional signaling: you're signaling not just your preference, but some other quality as well.

First scenario: Suppose you're aware that your policy preference is a normative one. Now every once in a while in your social interactions you will have to signal that preference in order to locate like-minded people. But doing it each and every time by just saying "I think x is great policy" would soon get pretty boring. Instead, you might try and invent new and clever arguments for why everyone should believe that x is great policy. By doing that, not only are you showing that you support x but also that you're a very clever person. And since, by construction, you're not using those arguments to persuade non-believers, they don't have to actually work; all they have to do is appear clever.

Second scenario: Suppose that you're not aware of the fact that your policy preference is normative. Instead, you honestly believe that employer mandates are good for employers, and you try to convince them of that fact--even though your argument can't possibly work on them. Why would you do that? Answer: to signal not only the direction of your preference but its strength as well. That is, you're signaling which policy you prefer, and that you're deceiving yourself about the true reasons why you prefer it. Since self-deception can generate certain forgone benefits, this signal is costly and therefore more credible than just talk. Note that, for this to work, the listeners can't be aware that that's what's going on. Instead, they'd have to be programmed to perceive delusional arguments as inherently more trustworthy.

Even though it sounds more convoluted, I prefer the second explanation; here's why. If you know what your preferences are but express them as cleverly stated beliefs, then, on top of your preferences and your intelligence, you also inadvertently signal a certain degree of cynicism. Groups don't like cynics (even, or perhaps especially, the highly intelligent ones) because on average they're less trustworthy than non-cynics. So the inadvertent signaling of cynicism would probably defeat the message of group loyalty.

Addendum: One example of usage of the "businesses that insure their employees do better in the marketplace" argument is by San Francisco Supervisor Tom Ammiano.

All books are judged by the cover

This essay by Paul Graham contains two insights which are both surprising (at least to me) and undeniably true. 1) The publishing business is, and always has been, selling style, not content. Books are (and always have been) priced based on what the cover looks like, not on the quality of information contained in them. 2) The iTune store is making money not by selling songs to people, but by taxing them.

Graham's essay is a fantastic read. Based on content.

Never say "never in a million years"

P=NP is probably one of the most famous outstanding problems of mathematics. Most researchers working on the problem believe that P does not equal NP, but no one has a proof. However, this post isn't about the problem itself, but about how wrong people can be about the strength of their own beliefs. Here's an anecdote from Richard Lipton:

I once had a long discussion with Ken Steiglitz about P=NP, while I was still at Princeton. Ken was and still is sure that P must not be equal to NP. Okay, I said to Ken, what are the odds that they are equal? Ken said that he thought that the odds were a million to one. I immediately suggested a bet. I did not ask him to "bet his life," but I did ask for a million to one bet. I would put up one dollar. If in say ten years P=NP had not been proved, then he would win my dollar. If P=NP was proved in that time frame, then I would win a million dollars from Ken. Ken said no way. After more discussion the best I could get out of Ken was 2 to 1. Two to one. That was the best he could do. Somehow that does not sound like a sure thing to me. Even a hundred to one was out of the question. Yet Ken was sure that they could not be equal.

Even factoring in things like risk-aversion or utility not being identical with money, there's no way that Steiglitz actually believes the odds of P=NP are a million to one. Apparently, people can deceive about the strength of their convictions not only others but themselves as well. It's evident in politics, for example, where rhetorical strength and apparent sincerity of professed beliefs are often taken at face value. If politicians were required to bet on their beliefs, it would probably turn out that they aren't as sure about the validity of their favorite policies as they claim to be.

(HT: Overcoming Bias)

Collective action problems in team sports

Below the fold is a video that could be used in a classroom, as it contains an extremely vivid example of a collective action problem. It's a clip from an international soccer game, a qualifier for World Cup 2010 between Slovenia (team in white) and Poland (team in red). Slovenia won the game 3:0, and the clip shows the second goal.

It's a counter-attacking goal, but a very unusual one in that the defending team actually has an advantage in numbers (usually it's the other way around). What this means is that as counter-attacks go, this one is fairly easy to defend against. But the defenders somehow just never get around to it. Even someone who doesn't watch a lot of soccer probably gets the impression that the defenders didn't really do all they could to prevent the goal. One of the announcers is saying that they're just too slow, not athletic enough. It's true that Polish defenders aren't exactly demons of speed, but this is way off. No one actually runs this slow. What happened was that they got stuck in a four-player Prisoner's Dilemma. Each of them was thinking: "I'm not going to run faster because if I did, I might actually catch up to the attackers, and then I'll be forced to make a defensive play, and if I screw that up, everyone will think the goal was my fault. There are three of my teammates close by, why doesn't one of them run faster and try to do something." As a result, no one did anything.

Team sports seem like a setting in which collective action problems just run rampant. I wonder what techniques coaches use to deal with them.

You're not throwing money away if you're buying something with it

Whenever the topic of owning versus renting a house comes up, one oftentimes hears the following argument: owning is always better, because with a house you acquire an asset, whereas renting is basically just throwing money away. Of course, this is absurd: if you're a renter, your rent money is buying you something valuable, namely a roof over your head. You can only seriously claim that renting equals throwing money away if you place no value whatsoever on housing, in which case you should stop worrying about whether to rent or own and go live in a tent or something.

Curiously, this type of argument does not seem to me to be applied to other types of rent/own decisions. Whenever someone is considering buying a car, for example, they tend to say something like "I really need a car, and in the long run it will be cheaper for me to own one than to keep renting" rather than "I need to buy a car because then I'll at least have something of my own instead of just throwing my money away on renting a car whenever I need one."

Housing is a good just like any other. To most people, it is actually one of the most valuable ones. Why is it then that renting housing is perceived as a waste of money while renting other, less valuable things, is not?