Category Archives: Social Science

Free Inquiry on Campus

The “Free Inquiry on Campus: A Statement of Principles by a Collection of Middlebury College Professors” document, published in the “Aftermath at Middlebury” is well worth reading and pondering.

On March 2, 2017, roughly 100 of our 2500 students prevented a controversial visiting speaker, Dr. Charles Murray, from communicating with his audience on the campus of Middlebury College.  Afterwards, a group of unidentified assailants mobbed the speaker, and one of our faculty members was seriously injured.  In view of these unacceptable acts, we have produced this document stating core principles that seem to us unassailable in the context of higher education within a free society.
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On the importance of “viewpoint” diversity…

I am proud to be a member of the Heterodox Academy (see Heterodox Academy members are all professors who have endorsed the following statement:

“I believe that university life requires that people with diverse viewpoints and perspectives encounter each other in an environment where they feel free to speak up and challenge each other. I am concerned that many academic fields and universities currently lack sufficient viewpoint diversity—particularly political diversity. I will support viewpoint diversity in my academic field, my university, my department, and my classroom.”

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Suggested books and readings on finance and risk management

In my opinion, the following 3 books are particularly worthwhile for students who are interested in learning more about finance and risk management:

  1. Against the Gods: The Remarkable Story of Risk, by Peter L. Bernstein.
  2. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, by Burton G. Malkiel.
  3. Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, by Jeremy J. Siegel.

Philosophically, these books present what I would consider to be an “orthodox” perspective; i.e., they fit well with the so-called rational choice, efficient markets view of the world which is prevalent in most departments of finance and economics. For some “heterodox” alternatives, I like (but am nevertheless highly critical of) both of Nicholas Taleb’s books:

  1. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (read this first).
  2. The Black Swan: The Impact of the Highly Improbable (the sequel to “Fooled by Randomness”).

Finally, I would be remiss to not also include two other favorites which are not books on finance or economics; rather they deal with the history and philosophy of applied mathematics. These books include:

  1. Innumeracy: Mathematical Illiteracy and Its Consequences, by John Allen Paulos.
  2. A Brief History of Infinity, by Brian Clegg.
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77 cents on the dollar

The key problem with the “77 cents on the dollar statistic” cited in President Obama’s SOTU speech is that it is based upon a naive comparison of average earnings for females compared with males. There are a number of other wage determinants (e.g., differences in occupations, positions, education, job tenure, hours worked, etc.) which must also be taken into consideration.  AEI scholar Christine Sommers notes (in the Daily Beast article linked below): “When all.. relevant factors are taken into consideration, the wage gap narrows to about five cents. And no one knows if the five cents is a result of discrimination or some other subtle, hard-to-measure difference between male and female workers.”
“It’s the bogus statistic that won’t die—and president deployed it during the State of the Union—but women do not make 77 cents to every dollar a man earns.”
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The Nobel Prize in Economics goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University)

This year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (AKA the Nobel Prize in Economics) goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University) for “…their empirical analysis of asset prices”.  In retrospect, it has never been a question of whether Fama would receive the Nobel Prize; it has always been a question of when, and when is now.

In a nutshell, Fama is famous for his “efficient market hypothesis” as well as a number of important empirical asset pricing contributions. Fama’s Chicago colleague Lars Hansen is famous for his work in financial econometrics, and Shiller provides an important behavioral counterpoint to the efficient market theory.

Here are articles worth reading about this prize:

1. The “official” announcement posted at “The Prize in Economic Sciences 2013″. Nobel Media AB 2013. Web. 14 Oct 2013.

2. Wall Street Journal (10/14/2013): U.S. Trio Wins Nobel Economics Prize

3. Also, a trio of postings this morning by University of Chicago finance professor John Cochrane (10/14/2013)

a. Fama, Hansen, and Shiller Nobel

b. Gene Fama’s Nobel

c. Understanding Asset Prices (this is the Nobel Committee’s “scientific background” paper which explains why the Fama, Hansen, and Shiller received this award)

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Michael Mauboussin rocks!

From Knowledge@Wharton: “How do we know which of our successes and failures can be attributed to either skill or luck? That is the question that investment strategist Michael J. Mauboussin explores in his book “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing“. Wharton management professor Adam M. Grant recently sat down with Mauboussin to talk about the paradox of skill, the conditions for luck and how to mitigate against overconfidence.”

I also recommend Mauboussin’s book entitled “Think Twice: Harnessing the Power of Counterintuition“. Mauboussin does a wonderful job explaining how to use modern social science findings (particularly behavioral finance) to become a better decision-maker when facing risk and uncertainty.

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The game theory behind the new NBC show called “Take it All”

There’s a new NBC game show called Take it All which recreates a well-studied problem in game theory called the Prisoner’s dilemma.   According to the Prisoner’s dilemma Wikipedia article, a “classic” example of this game is as follows:

“Two men are arrested, but the police do not have enough information for a conviction. The police separate the two men, and offer both the same deal: if one testifies against his partner (defects/betrays), and the other remains silent (cooperates with/assists his partner), the betrayer goes free and the one that remains silent gets a one-year sentence. If both remain silent, both are sentenced to only one month in jail on a minor charge. If each ‘rats out’ the other, each receives a three-month sentence. Each prisoner must choose either to betray or remain silent; the decision of each is kept secret from his partner until the sentence is announced. What should they do?”

This game is called the Prisoner’s dilemma because the solution to the game involves joint betrayal rather than joint cooperation, even though joint cooperation is the better outcome for both.  To see this, consider the following “payoffs” (in terms of prison time) that Prisoner 1 and Prisoner 2 associate with the strategies “Betray” and “Keep Silent”.


Prisoner 2

Prisoner 1


Keep Silent


A) 3 months in jail, 3 months in jail

C) Go free, 1 year in jail

Keep Silent

B) 1 year in jail, Go free

D) 1 month in jail, 1 month in jail

Suppose Prisoner 2 decides to betray Prisoner 1.  Under the “Prisoner 2 Betrays Prisoner 1” scenario, Prisoner 1 will only have to spend 3 months in jail if he betrays Prisoner 2 (corresponding to cell A above), and a full year in jail if he keeps silent (corresponding to cell B above).  Now suppose Prisoner 2 decides to keep silent.  Under the “Prisoner 2 keeps silent” scenario, Prisoner 1 goes free if he betrays Prisoner 2 (corresponding to cell C above), and spends 1 month in jail if he keeps silent (corresponding to cell D above).  So no matter what Prisoner 2 does, Prisoner 1 always spends less time in jail if he betrays Prisoner 2.  By symmetry, no matter what Prisoner 1 does, Prisoner 2 always spends less time in jail if he betrays Prisoner 1.   Thus the dilemma…

Now, let’s consider how Take it All recreates the Prisoner’s dilemma.  The show begins with five contestants playing a first round, four contestants playing a second round, and three contestants playing a third round.  The final two contestants after round three advance to the “Prize Fight” which mimics the Prisoner’s dilemma game shown above.  In the Prize Fight, the strategy pair for each contestant is “Keep Mine” (i.e., keep my winnings from Rounds 1–3) and “Take it All” (i.e., keep my winnings from Rounds 1–3 and also take my opponent’s winnings from Rounds 1–3).  If both contestants choose to “Keep Mine,” they will each keep the prizes they have won in the prior rounds (this is analogous to ending up in cell D in the Prisoner’s dilemma payoff matrix shown above). If one contestant chooses “Keep Mine” and the other chooses to “Take it All,” the contestant that chose “Take it All” will go home with all the prizes — theirs and their opponents (this is analogous to ending up in either cell B or cell C D in the Prisoner’s dilemma payoff matrix).  But if both choose “Take it All,” they both go home with nothing (this is analogous to ending up in cell A in the Prisoner’s dilemma payoff matrix).  If one were to play this game purely on the basis of self-interested action, then the obvious strategy would be to always “Take it All”, in which case NBC doesn’t have to pay out at all.  However, the interesting (and somewhat creepy and provocative twist) here is that the show’s host (Howie Mandel) gives both contestants time to try to convince each other that they won’t betray each other.  Thus, the “suspense” is whether one’s opponent follows through on his or her verbal “promise” to “Keep Mine”.

Now consider what happened earlier this week on a “Take it All” episode:

From a business perspective, I think that it is quite clever to produce a game show based upon a prisoner’s dilemma game.  The production costs for a show like this are nominal, and most of the time the production company won’t have to pay out a jackpot.  It doesn’t take a game theory expert to figure out that the incentive structure of the game is incompatible with a (Keep Mine, Keep Mine) outcome.  The  likely outcome is (Take It All, Take It All), in which case no prize is paid.  Occasionally one can expect a (Keep Mine, Take It All) outcome, as was the case earlier this week.  This also works to the NBC’s benefit; the “drama” of the game creates a buzz and possibly more viewership (thus bringing in more revenue from commercials).  In all likelihood, NBC also manages the risk of a (Keep Mine, Take It All) outcome by purchasing an insurance policy covering the cost of the jackpot from Lloyds of London…

Let me make one final point about Prisoners Dilemmas and television shows.  The next time you watch a Law and Order re-run, keep in mind that virtually every Law and Order episode is organized around some variation of a Prisoners Dilemma game.  The downside of realizing this is that this makes Law and Order much less interesting to watch, since you can often deduce what will likely happen just a few minutes into each episode!


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