The Efficient Frontiersman

Moving Picasa to a New Computer

2011-05-25T16:12:00.000-07:00

Picasa stores edit information in the .ini files in each directory. So if you just move all your photo directories to a new computer, your Picasa edits will be preserved. Unfortunately album definitions (and apparently faces) will not be. So the right way of moving Picasa computer is to use the backup/restore feature.

The restore functionality gives you the option of restoring to the original or a new directory. I could not get the latter to work. Thankfully the former worked and was somewhat intelligent. For example, files original stored in "C:\Documents and Settings\X" (Windows XP) were restored to "C:\Users\X" (Windows 7).

If you want to rearrange folders, you're supposed to use Picasa's built-in "file move" functionality. However, it turns out that you can simply move a folder in Windows Explorer if (a) Picasa is running in the background and (b) the folder is marked as "scan always" in Picasa. Obviously you might want to test this.

I found this post in the Picasa help forums useful.

Chavez' Cultural Revolution

2007-06-11T15:51:00.000-07:00

CNN reports: "Venezuelan President Hugo Chavez told his supporters to give away possessions they do not need such as an extra refrigerator because he only wants true socialists to be members of a new single party he is forming."

Purging the party and eliminating unneeded possesions? Sounds a lot like Mao's Cultural Revolution. Let's hope it doesn't share the same disastrous outcome.

Value Bets in Backgammon and Poker

2007-03-02T20:04:00.000-08:00

In backgammon, the doubling cube allows a player to double the stakes at any point in the game. The opponent can either immediately forfeit the original stakes or accept the cube and keep playing for the doubled stakes. What is the mathematically correct way of using the cube? My analysis follows. Caveat: I'm not actually a good backgammon player.

Let the probability of winning be p. Assume for the moment that you and the opponent make the same assessment of p. If p > 0.5, you should offer the doubling cube. Your opponent should accept the cube if p <, i.e., the opponent has at least a 25% chance of winning. Consider two examples:

p = 0.51. You should double. If the opponent (correctly) accepts, you expect to win 0.51 * 2 - 0.49 *2 = $0.04, which is greater than the expected value ($0.02) if you didn't double. But if your opponent incorrectly refuses the cube, you do even better: $1.
p = 0.99. You should double. If the opponent (correctly) refuses, you immediately win $1, which is still greater than the expected value ($0.98) if you didn't double. But if the opponent incorrectly accepts, your expected value is even higher: 0.99 * 2 - 0.01 * 2 = 1.96.

To use poker terminology, the first case (0.5 < p < 0.75) is betting to protect your hand. You're hoping your opponent folds, but you're still ahead if he doesn't. The second case (p > 0.75) is betting for value. Here you're hoping your opponent calls. A third case is bluffing: p < 0.5.

Of course estimating p is not easy. This is particularly true in poker where there is hidden information. The better your estimate of p--and the worse your opponent's--the more you win.

Fortune's Formula

2006-11-18T14:23:00.000-08:00

Let's consider a game with a positive expected value. Say I offer you even money on a biased coin with a 55% chance of landing on heads. You start with a bankroll of $100. How much should you bet? If I offer you just a single toss, your expected value is maximized when you bet your entire bankroll on heads. But if we play the game repeatedly, this is not a good strategy; on any flip there is a 45% chance of losing your entire bankroll. Turns out that your long-term expected value is maximized when you bet exactly 10% of your bankroll on every flip. This is known as the Kelly criterion. Surprisingly, it is equivalent to maximizing the expected mean of the logarithm of your bankroll--i.e., utility--or the geometric mean of outcomes.

William Poundstone's book Fortune's Formula gives a history of the Kelly criterion in the context of gambling, organized crime, and investing. With such juicy topics, you can't help but enjoy the book. At the same time, the book is big deal about nothing. The author knows that the Kelly Criteria isn't an investing panacea--it results in great volatility, and you need to fight the efficiency of the market--so he just makes endless hints and casual suggestions. It's like listening to the president talk about Iraq.

Smart Gambling

2006-10-28T10:55:00.000-07:00

Frugal gamblers prefer games with the highest expected value, i.e., the lowest house edge. However, it's important to remember that the house edge applies to every bet you make, not to your bankroll. Say you're playing a game with a 1% house edge. If you start with $100 and make 50 bets of $10, you should expect to loose 0.01 * 50 * $10, not 0.01 * $100. Thus the frugal gambler might also control the number of bets made. One way of doing this is to put your bankroll on the left side, and move winnings to the right side. As you repeat this, you can easily track the total number of bets and thus your expected cost of playing. Of course your actual performance can deviate well from the expected value!

More generally, you need to be aware of the hourly cost of playing. This is the house edge times the average bet size times the number of bets per hour. For example, you might not want to bet the maximum coins playing video poker. Although this increases the house edge, it decreases the cost to play per hour. The intelligent gambler will only play games were the entertainment value outweighs the hourly cost to play. Brisman's Mensa Guide to Casino Gambling has a good discussion of this.

A somewhat neglected concept is risk (variance). In investing you want to minimize risk for a given level of return. This doesn't appear to be the case for gamblers. Take roulette. Most bets have the same expected value, so the choice of bet is purely psychological. Do you prefer the occasional big payoff or the frequent small payoff? Are there strategies, for example, in Video Poker that decrease (or increase!) risk with only a small increase in the house edge?

Of course the truly frugal gambler will leave the casino.

Shuffling Cards

2006-10-25T00:25:00.000-07:00

How many shuffles of a deck of cards does it take to get sufficient randomness? The classic answer according to Diaconis is 7. But it depends on how you measure randomization. (Details.)

Computer Backgammon

2006-08-19T10:51:00.000-07:00

Computer backgammon programs using neural nets rival the best human players. Kit Woolsey, a noted backgammon expert, writes of one program:

I find a comparison of TD-Gammon and the high-level chess computers fascinating. The chess computers are tremendous in tactical positions where variations can be calculated out. Their weakness is in vague positional games, where it is not obvious what is going on.... TD-Gammon is just the opposite. Its strength is in the vague positional battles where judgment, not calculation, is the key. There, it has a definite edge over humans.

Computer programs have also discovered some novel plays that have caused humans to rethink some strategies.

Backgammon

2006-08-17T09:21:00.000-07:00

Backgammon is my new favorite game. It requires strategic thinking, but there's also a good amount of luck. This makes games more interesting between mismatched players--and it allows you to blame your losses on poor luck. Backgammon is a relatively fast-paced game, especially with a doubling cube. You can play it on your Google personalized homepage.

Bold Play

2006-07-20T21:39:00.000-07:00

Say you are playing blackjack (or any other unfair game). You have $x and wish to play until you increase your worth to $L or go broke, whichever comes first. (So L > x.) What betting strategy maximizes the probability of reaching L and minimizes the probability of going broke?

A famous result from Dubins and Savage ("How to Gamble if You Must") is that bold play is an optimal strategy (but not the only 0ne). That is, bet min(x, L - x). So if you have $100 and need to make $1000 to pay a loan shark, bet all $100 on the first hand. If you only need to make $20, just bet $20.

This more recent paper also gives a good survey of the literature in the introduction. This survey of gambling problems also covers the problem. Interestingly, if you are play a fair game (positive expected value), timid play is the optimal strategy.

The Gambler's Ruin

2006-07-18T23:31:00.000-07:00

A game of blackjack is a good example of a random walk. There is some good theoretical material on this available online (see p. 487).

An example is illuminating. Assume you start with $10. Each game, you have a 49% chance of winning $1 and a 51% chance of losing a dollar. (Real blackjack odds are better.) Say you decide to play until you have $11 or go broke, whichever comes first. In this case, you only have an 11% chance of going broke and an 89% chance of winning the $11. But if you play until $15, you have a 40% chance of going broke. Play to $20 and it increases to 60%. The longer you play, the lesser your expected value. Play forever--greedy you!--and you have a 100% chance of going broke. This is known as the gambler's ruin.

Bad Writing About Reading

2006-05-06T10:01:00.000-07:00

Last Sunday's San Jose Mercury News contains a reprinted talk by the chair of the NEA on the importance of reading. His argument boils down to two points:

"What literature does is put us in the inner lives of other people--in the dailyness of their existence."
"If you are a reader, you are overwhelmingly more likely to engage in positive social and civic behavior, versus non-readers."

I don't disagree with the author's point--being able to read well is important--but his argument is a terrible one. On the first point: why are we to believe that reading is any better at this than television? Surely a multimedia experience can give better insight on someone's live.

The second point is a classic confusion of correlation and causation. The author cites numerous statistics showing that readers are more likely to go to museums, do charity work, exercise, etc. This proves nothing. These people are probably simply inquisitive and intellectually curious; reading didn't necessarily make them this way.

Self-Service Gas

2006-04-28T09:30:00.000-07:00

Did you know that it's still illegal to pump your own gas in New Jersey and Oregon? The governor of NJ says he'd consider making self-service gas legal. Of course the usual argument for this type of regulation is "jobs", which is just a code-word for "special interests".

Here's my proposal: make it illegal to cook your own food. We all know how many people injure or poison themselves cooking every year. Think of the boon to the restaurant industry!

Monopolistic Pricing in Ballparks

2006-04-27T09:49:00.000-07:00

According to the Boston Globe, several baseball teams are switching to smaller ballparks. The article cites two reasons:

Fans get a more intimate stadium, with better sightlines to the field. Shrinking the ballparks also has another effect: By making tickets scarcer, teams create urgency among fans and drive up demand. When fans worry about getting seats, they buy earlier and invest in season tickets -- which brings guaranteed money for the teams and insulates them from slumps on the field.

I don't think this analysis is quite right. The better sightlines are still available in the old stadiums (at higher price), and it's not obvious that this will increase season tickets. More likely explanations:

It restricts supply, which increases prices and profits--classic monopolistic pricing.
It makes the game more exciting, which increases its fan base and further drives up prices.

Guest Blog: Why Are Japanese Restaurants Expensive?

2006-04-01T14:51:00.000-08:00

The Efficient Frontiersman's younger brother asks: why are Japanese restaurants more expensive than Chinese restaurants? His theories:

Japanese food often requires fresh ingredients, and labor-intensive presentation.
There are insufficient Japanese restaurants for an efficient market, so competition doesn't push down prices.
Japanese restaurants cater more to non-immigrants, who are willing to pay a premium for exoticness.
An American dollar goes a long way in China, but not in Japan. If these restaurants are run by and catering to immigrants, the may have a skewed idea of the worth of a dollar.

Personally I don't think (4) is true, as many Japanese restaurants are actually run by Chinese. (3) is plausible, except in many parts of the country Chinese restaurants do not cater to immigrants. (1) could be tested but comparing prices of sushi against other Japanese food. I suspect (2) is most likely; there's simply a glut of Chinese restaurants, so competition pushes prices down.

Paying for That Aisle Seat

2006-03-26T11:34:00.000-08:00

I've long argued that raising prices are usually the only way to deal with scarcity. Most of my rants have been about underpriced Red Sox tickets. I also argued over a year ago that airlines should auction aisle seats.

Hence I was pleased to see that Northwest is now charging more for aisle and exit row seats. It's an extra $15, which I'm more than willing to pay for a long flight. Most passengers seem pleased with this, but a few are complaining. One person quoted in the article says, "I am totally for raising fares a few bucks per passenger. Instead, we're getting fee'd to death." If we followed his logic, restaurants would have a surcharge for all patrons so they could give expensive wine to a random few!

I hope airlines start charging for large carry-ons next.

In Defense of Sweatshops

2005-12-25T09:09:00.000-08:00

I firmly believe that sweatshops are better than the alternative. Many economists agree. The Indonesian in a Nike sweatshop is there because there are no better-paying jobs. To believe otherwise you would have to accept that the Indonesian doesn't know better.

But I wonder if regulation could make things better. For example, say Nike pays an a worker $1 to make 100 shoes sold for $100. Now instead that all countries required a minimum salary of $2. (If just Indonesia adds regulations, Nike might move to another country.) Assuming a highly competitive market, Nike is making little profit on that shoe, so it has no choice but to pass the costs on to the consumer. So each shoe is now selling for $100.01. Let's assume--perhaps unrealistically--that the increase in price is so small that demand doesn't change. The new situation isn't more efficient in a traditional sense. Although the worker has $1 extra, 100 consumers have $0.01 less, which means they will spend less elsewhere. Moreover, no additional wealth is created.

However, the Indonesian is much happier, while the consumers may hardly notice the difference. So though overall wealth is not increased, overall happiness may be.* Now it's not obvious that this is fair--the consumers are paying for this increased happiness--but it seems like a good thing. I suppose it's a modest form of compulsory charity.

To summarize, I firmly believe sweatshops are better than none at all. But I do wonder if wage regulations (if they could be enforced) would produce a more optimal situation.

* By "happiness" I'm referring to the traditional concept of utility here. I firmly believe that utility is a sublinear function of wealth. That is, an extra dollar gives Bill Gates much less pleasure than our Indonesian worker. Most people agree with this notion.

Ticket Auctions

2005-11-28T09:36:00.000-08:00

My cousin was complaining about how difficult it was to buy Red Sox tickets. One of the culprits are scalpers, who resell tickets at exorbitant profits on eBay. This suggests that Red Sox tickets are underpriced. Some teams are solving this problem by running auctions to sell tickets. Hence tickets are sold at true market value, which prevents scalpers from profiting.

But what about the poor? Well they can't get the tickets now anyway, unless they're one of the few who got lucky. And an auction at least gives the poor an opportunity to get tickets if they really want them. When supply exceeds demand, someone needs to be disappointed, and it might as well be those who are willing to pay the least.

Now let's hope the Red Sox do something good this year with that money.

Roth IRAs

2005-04-12T22:41:00.000-07:00

I heard a commentator on NPR's "Smart Money" claim that Roth IRAs are always better than regular IRAs. The argument goes something like this: although you have to pay the interest up front, your money grows tax-free, so you don't have to pay the government tax on your earnings.

This is a common argument, but it's completely wrong. Let P be your investment, T be your tax rate, R be your return, and N be your years of investment. With a Roth IRA, you pay tax upon investment into your IRA, so your amount after N years is (TP)(R^N). With a regular IRA, you pay tax when you withdraw, so your amount is T(P * R^N). They're the same!

Except the argument is more subtle. With Roth IRAs you typically can shelter more income. But with regular IRAs, you may benefit if your tax rate is lower in retirement. This article explains the difference and provides some helpful calculators.

Charitable Donations

2005-02-11T09:46:00.000-08:00

How much do you give to charity? The average American household gives 3.2% of their income before taxes to charity. Bill Gates has given away 37% of his wealth. Warren Buffet has only given away 1%. Traditionally the church has asked for 10%.

I see no axiomatic way to determine the right level. One way is to determine the percentage of your wealth that you wish to give away. Another is to figure out how much you really need (or want) and give the rest away. That's difficult to do.

More on the Death Penalty

2005-01-28T10:40:00.000-08:00

A reader asks if I support the death penalty. The short answer is: maybe. In my youth I objected on principal that it was cruel and unusual. With lethal injection, that is a harder argument to make. Briefly, I might support the death penalty if

There is absolutely no doubt of guilt in the case in question, and the crime is truly horrendous.
More generally, it can be established that the death penalty is an effective deterrent to crime--so much so that it outweighs the tragedy of taking another life.

People who argue that the death penalty does not deter crime at all are speaking nonsense; it may not be a perfect deterrent, but there is surely some effect on would-be criminals. The real question is if the benefit to society is worth it. Hanging random people in the town square would also act as a deterrent, but we would be loathe to make that choice.

Misuse of Death Penalty

2005-01-27T10:12:00.000-08:00

The New York Times reports that the prosecutor in Glendale, CA has charged Juan Manuel Alvarez, the man responsible for yesterday's train crash that killed 11 people, with murder with "special circumstances". This makes Alvarez eligible for the death penalty. Recall that Alvarez tried to kill himself by parking his car on the train tracks, then changed his mind at the last minute and fled by foot, leaving his car parked. Ironic, isn't it?

In this case, the death penalty achieves nothing. In my opinion, the primary role of punishment is to act as a deterrent. Secondary roles are protecting society from criminals and reforming the wayward. The death penalty may achieve the first two goals in some cases. Retribution, however, is not a goal of the criminal justice system. What would be achieved by taking Mr. Alavarez's life?

New Title

2005-01-24T11:09:00.000-08:00

I've renamed my blog. "Econoblog" was not not unique enough. "Efficient Frontiersman" has no hits on Google. And yes, the new title is a pun on efficient frontier. No, I'm not an economist.

Put Your Money Where Your Mouth Is

2005-01-16T17:24:00.000-08:00

A lot of companies have employee referral programs. Typically the employee is paid some sort of bonus if the candidate is hired. From the employee's perspective, there's much to be gained by referring lots of people, even if some are long shots. This makes it hard for the employer to sort out the candidates that are really good.

I propose a system that forces the employee to put their money where the mouth is. To make a referral, you must wager an amount B. If the candidate is hired, you are paid $B. If they are rejected, you must pay the employer $B^2. That's right, you lose money on bad referrals. It turns out that the employee's income is maximized (and positive) when they wager exactly one half the odds that the candidate is hired.* So if you think a candidate has 2 to 1 odds of being hired, bet $1. If you think they have 10 to 1 odds, bet $5.

This has the nice property of forcing employees to reveal the true strength of a candidate. In practice, of course, this would probably reduce referrals. Real people (myself included!) are usually adverse to risk and don't always try to maximize expected returns. But you could imagine playing the game with play money and giving a quarterly award to the employee with the most winnings.

This technique has many other applications--anytime you want a good estimate of a probability from a single person. Anybody know if this is an original idea? Probably not, but I don't know where to start looking.

* Proof: let p be the probability that the candidate is hired. The referral's expected return is E=pB - (1-p)B^2. To maximize, we differentiate with respect to B, yielding E'=p - 2(1-p)B. Setting this to zero we find that E is maximized when B = 0.5 p / (1-p), or 0.5 the odds of the candidate being hired.

Econoblog

2005-01-16T15:50:00.000-08:00

My longtime friend "Tacitus" points out that the name "Econoblog" is not exactly original. Oops, so much for due diligence. And I thought I was so clever and original.

Social Security Reform

2005-01-12T11:06:00.000-08:00

The recent discussion on social security has largely focused on fiscal issues. Indeed, this is a serious matter. Today's social security benefits are paid by today's taxpayers. Your social security contributions are generally spent immediately, not invested and earning interest. Thus switching to private retirement accounts would be a strain on the social security system.

But there's another issue that has been largely ignored. Increased financial returns never come without risk. (Anybody in finance knows this; apparently politicians don't, or they're not willing to say it.) For some people--those with a long time until retirement or sufficient savings--this is a risk worth taking. For others, it is not. The status quo hurts those in the former category. The proposed private accounts hurt those in the latter who make risky investments. Note that private investment accounts don't necessarily mean risky investments--you can always pick bonds--but it gives you the choice.

So the real question is this: should the government protect people from their own ignorance or stupidity? In this case, I'm inclined to say "yes"; keep the safety net, even if it hurts some. But the issue is not clear-cut and compromises must be made either way.

This is why economics is known as the "dismal science".

New Year's Resolutions

2005-01-04T10:04:00.000-08:00

The parking lot of my gym was packed last night. New Year's is to personal trainers what Christmas is to the retail industry.

Las Vegas

2005-01-03T14:46:00.000-08:00

I visited Las Vegas for the first time this weekend. The neon of the Strip reminded me of Times Square. Other similarities to NY include the plethora of expensive stores and the amazing array of fine dining options. Las Vegas is no longer the home of the $0.99 buffet; it's the home of the $99 pre fixe tasting menu.

Unlike Times Square, Las Vegas makes no attempt to be kid friendly. Everyone smokes, which is really annoying to us Californians. People drink in the streets. Pamphlets for strip shows litter the street. They don't call it Sin City for nothing.

And the gambling? I have trouble getting into it, knowing that it's a losing game. As you might expect, the more skill required, the better the odds. Slot machines lose you about 8% of your money. Roulette loses 5.4%. Blackjack loses 0.5% if you follow the strategy printed on those laminated cards. (Amazingly I didn't see them very often. Do people just have them memorized, or are they too stupid or proud to pull them out?) Video poker is my favorite game. The odds are very good (close to blackjack), it takes some skill (but not too much), and you can play for hours on very little money.

Flying southwest

2004-12-29T22:12:00.000-08:00

I flew on Southwest for the first time in a while last week. A few thoughts:

Despite my reservations about not having an assigned seat, it actually worked out well for me. All of my flights were aisle seats--even when I had "C" tickets--which makes me much happier. But next time I'm checking in advance to get an "A" ticket. Of course I really wish aisle seats were auctioned off, because I'm willing to pay for that. See my previous post about when demand outstrips supply.)
The flight attendants on my first flight were really funny. ("If there's anything you can think of to make your flight more comfortable...please keep that to yourself.)
The new leather seats are really comfy. Sorry, vegans.
My only complaint: why doesn't Southwest have an in-flight entertainment system? Is it really that expensive?

What is fair?

2004-12-28T21:45:00.000-08:00

The Boston Red Sox routinely sell out of tickets. Demand far outstrips supply. To me, this suggests that their prices are not high enough. My brother says this is not fair; tickets should be given to those who want them the most. I disagree with this assumption, but let's agree with him for a second. So how do we allocate tickets most fairly?

Give them out randomly. This may seem fair, but not according to our definition above. Tickets are most definitely not given to those who want them most. If there is an aftermarket for tickets, it will only increase demand as people try to get tickets just to resell them.
Make people stand in line. Those who really want the tickets will sacrifice their time. The problem is that some people can sacrifice their time more easily. Surely a banker waiting in line is making more of a sacrifice than an unemployed high school student; there is nothing really unfair about this. Plus there is a huge productivity loss here; all those people in line could have done productive work.
Auction them to the highest bidders. Those who really want the tickets will pay for them, making sacrifices as needed. The problem, my brother will argue, is that $100 is worth less to Bill Gates than to a plumber. (The marginal utility of additional income surely decreases.) I think such arguments essentially boil down to "it's unfair that the rich have so much more", but I'm having trouble articulating this.
Auction them, charging more to those with higher incomes. Thus we attempt to charge the same utility for each ticket. It's intriguing, like the progressive fines in some Scandinavian countries, but it has some logical difficulties. The Boston Red Sox now becomes more like the IRS. And obviously progressive prices can't be like this, or there's less incentive for people to earn money, which usually benefits to society.

So none of the approaches is perfectly fair, but auctioning the tickets is at least efficient. Contrast the auction with random selection by imagining two people bidding for a single ticket. Bill is willing to pay up to $100 per ticket while Theresa will only pay $50. Say you instead chose the recipient randomly and Theresa just happened to be picked. Assuming there's an aftermarket, Bill will buy the ticket for $100 from Theresa. (Theresa will agree to the sale, because she'd rather have $100 than the ticket.) So the final outcome is like the auction, except $50 has been arbitrarily transferred from the Red Sox to Theresa.

Now let's reconsider our original assumption that fairness is an ideal goal. I really want a Porsche 911 GT2. In fact, it's possible that I want one more than Bill Gates, who's willing to pay much more. Does that mean that the dealership should sell one to whoever wants it the most, regardless of cost? Of course not.

I think that auctioning is the best approach, but it might have negative PR for the ball club that could eventually hurt profits. Perhaps a better approach is to auction half the tickets and hold the other for people waiting in line.

Of course these same principles apply wherever demand outstrips supply. I think of opening nights at movie theaters in particular. Why not sell those tickets at a premium?

Greetings

2004-12-28T21:35:00.000-08:00

Despite the title, this blog is not intended to be just about economics. In fact I have no economics training other than taking 14.01 at MIT. It's just that I've been reading a lot about economics lately. (More on what later.) It's unfortunate that it's not taught in high school and most people consider it boring. It's a profound tool that explains much human behavior. For example: why do special interest groups rule politics? Because it makes sense for them.