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review 2016-03-15 16:53
Who Gets What — and Why: The New Economics of Matchmaking and Market Design
Who Gets What — and Why: The New Economics of Matchmaking and Market Design - Alvin E. Roth

[Preface/Warning: This is a long-ago unfinished review, but, in light of Lloyd Shapley's recent death, I figure it's time for me to just let it fly free as is.]

 

And let the review begin:

Well guys, I think I've discovered a real up and comer in the field of behavioral economics. Wait— what's that? He already won the Nobel Prize in Economics?!? Ok, so maybe I'm not the first to catch on to the brilliance of Alvin E. Roth (damn those Swedes for always being one step ahead of me).

 

However, the greatness of Who Gets What — and Why: The New Economics of Matchmaking and Market Design, Roth's first foray into “popular science” writing, isn't all about sheer intellectual horsepower. Roth (below, L) takes something complex, the economics of matching markets (markets in which price isn't the only determinant of who gets what”), and manages to make the ideas accessible without losing nuance or oversimplifying.*

Roth and Shapley by Jac Depczyk

Roth's fellow laureate, Lloyd Shapley (above, R), co-wrote a seminal paper on similar tricky transactions (those involving “indivisible” goods, without the use of money) in a 1974 issue of the Journal of Mathematical Economics with Herbert Scarf. The Scarf Shapley paper established a set of cyclical trades called “top trading cycles” in which all parties are ideally matched. I'm sure the paper is totally brilliant, but before you jump up to find a copy, just remember that, for most of us, it's…well, I'll let GOB tell you. 

 

GOB Half in English half in squiggly

So what's all the fuss about market design?

Markets are everywhere, and the role of market design is to “helps solve problems that existing marketplaces haven’t been able to solve naturally.” 

 

Kidney Swapping Fun

Roth, being the clever guy he is, starts out with a “market” in which proper matches are a matter of life and death— kidney transplants. When tasked with creating a sort of “clearinghouse” for kidney exchanges (now known as the New England Program for Kidney Exchange or NEPKE), there were several salient factors that Roth and co. had to take into account:

1. Kidneys are “indivisible goods” (you can't just give four people quarter-kidneys and tell them to go on their merry ways)

2. At least in the U.S., money can't be involved (buying kidneys falls into the category known as “repugnant transactions”)

3. There are “paired” patients and donors (people willing to donate a kidney for a relative, or friend, but whose kidneys weren't biological matches for said person)

4. Whenever humans (donors, recipients, doctors, hospital administrators) are involved, there's the possibility of “gaming the system”

kidney exchange chain

Avoiding a level of detail that I will, undoubtedly, misconstrue, I'll just tell you that Roth adeptly describes the intricacy of creating kidney swap

“‘top trading cycles,’ with the property that no group of patients and donors could go off on their own and find a cycle of trades that they liked better.”

Even if kidneys are the last thing on your mind, the challenges overcome in order to make the market: thick (by attracting lots of buyers and sellers), quick (time is of the essence, and congestion is to be avoided), and safe/secure are fairly universal.  

 

Sounds easy enough…

Ok, let's try this new knowledge on for size. Perhaps in a case that's not so far to one side of the commodities—matching market spectrum. 

Archer How Hard Could It Be

You've got your product (say, a metric tonne of it, meaning 1,000 kilos), which means you're looking for someone who wants what you have (supply, demand, nothing fancy here). 

 

What problems could a marketplace possibly have? Well, kind of a lot. In order for things to run smoothly, you have to have the right amounts of: thickness (players at the table), speed, security, and simplicity.

 

Humans, the unpredictable sneaky lot of us, pose a wide array of challenges to marketplaces and market designers. For one, there's the trust factor (security). Even with kidney swapping, they had to deal with scheduling “simultaneous” surgeries, for fear that, once a donor's patient partner had received a kidney, the donor might later renege on the offer. Though this fear turned out to be pretty unwarranted, the point is that you can't just take people at their word (or palabra, if you will). 

 

Archer palabra oc

 

Speaking of trust, how does one know that what one is buying is legit? Parties on either side of a transaction need to have “enough information in order to make an optimal decision.

With “commodities” this often takes place by way of quality control.  In fact, without quality control (think grading of flour, or maple syrup) commodities markets would have to be "matching markets," which would be highly inefficient.

 

Pseudo-conclusion:

So, yeah. This review isn't done. There are so many more Archer gifs, and so many more ideas to communicate. But, seriously, just read the book…

_________________________________

* I'm sure my review with be chock full of oversimplifications, but, then again, I'm no Nobel Laureate

† For his purposes, Roth defines these as “transactions that some people want to engage in and that are objected to by people who may not themselves experience any direct harm.”

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review 2015-03-02 18:12
Flash Boys: A Wall Street Revolt
Flash Boys: A Wall Street Revolt - Michael Lewis

On Reading & Rating

For my money (which, since I'm neither a Wall Street tycoon, nor a Russian coding genius, isn't a whole heck of a lot) this isn't Michael Lewis' best work. My reading experience was a mix of fascination and frustration. Why the latter? Lewis covers (and condemns) a whole bunch of different things. Agreement aside, as a human who reads books, this lack of distinction is what resulted in the bulk of my star-docking (and, I'm guessing, some of the backlash against the book among insiders). Lewis' books often seem to spawn ‘for’ and ‘against’ camps, but with this one I can't for the life of me figure out where I fall!!

 

I was hoping to have come to a resolution before attempting to write a review, but, as time passes, it seems like that's just not in the cards…

 

Since Flash Boys evoked some pretty heated internal debates between Mara and Other Mara I'm gonna let you know where I'm coming from (by all means, feel free to skip ahead—I'll even spoiler-ize this section it to make it easy for you).

 

My knowledge of markets and how they work in general is definitely skewed. Lacking any sort of formal training, most of what I know comes from reading "popular economics" featuring the "behavioral" side of things (e.g. what's going on in the head of this so-called homo economicus), and I definitely love a good narrative account of financial crises new and old.

 

Other relevant characteristics? Well, I'm terrible at capitalism. I dabble in quantitative analysis and other data-y goodness by day, and often find myself wanting to qualify everything I do with ‘but I used framework (or package) x, y, z’ as if, otherwise, everyone will assume that I derived my results from first principles (it's ridiculous, I know, and I'm working on it). That being said, I'm also learning that people are willing to pay you (despite my protests) for accessing and compiling information that's out there for free because, well, you know how to get it, and they simply don't have time. 

(spoiler show)

 

In reality neither I nor the voices in my head know much about the logistics of trading beyond the scope of this book, but what follows is a list of some of the points of mental contention.

 

1. The Need for Speed

While I'm very pro Net Neutrality and public access to public goods, I had trouble discerning an appropriate analogue for Dan Spivey and his super straight, super fast, fiber optic cable.

HFT Express Lanes Map

Let's say that information travel is like human travel. If information highways are the equivalent of, well, highways, then yes, everyone should have equal access. However, there are people who are willing to pay a premium to get to and from wherever they need to be more quickly and more reliable—perhaps by helicopter or private jet. Heck, us common folk can cough up cash to get better bandwidth, so that much seems fair. 

 

However, what about all the eminent domain stuff? Well, I don't know. Is this any different from 'air rights' transactions?

 

2. Information Asymmetry 

Let me start by zooming out a bit here. Some games are games of “perfect information.” Chess is probably the most commonly cited, but backgammon, and tic-tac-toe both share the same requisite attributes: both players are completely aware of the state of the game at all times.

 

In order to avoid launching into a treatise on Bayesian Nash Equilibrium and such, I'm gonna just lump games like poker or crazy eights, or the Prisoner's Dilemma in together as games of imperfect/incomplete information. 

 

Information asymmetry, on the other hand, exists when one party has more or better information than another. And, FYI, we deal with transactions of asymmetric information all the time! I don't care if you go on car fax, or get a whole bunch of quotes from contractors before remodeling your kitchen—even if we have access to information, we deal with people who could, theoretically, screw us over because they simply know more.  

 

Of course, there are different types of information asymmetry when it comes to financial markets. For example, “insider trading” is an example of information asymmetry that, in most cases, is illegal.* Most of the time when one refers to “information asymmetry” it's not a good thing, but it seems to me (and, again, I'm no expert) certain types of information asymmetry make the world go round. It’s not that it’s always innocuous, it’s just that we allow (and encourage) it on so many other levels. The market would be static if everyone thought that they had the same amount of information (or less than) everyone else out there. Right? (Seriously, I’m asking…)

 

3. The Fight for Fairness

My dad, who read this book a while back, contended that before *something* (high-frequency trading, I'll assume), the market used to be a level playing field. My knee-jerk reaction was that this simply wasn't true. But, then again, there are many different types of unfairness (and I'll have to ruminate on this some more before I figure out what exactly these are). 

 

This is definitely the part of the book about which I feel most conflicted. Other than Brad Katsuyama, the Patron Saint of Fairness, who exactly are the good guys supposed to be in this all?

Flash Boys The Evolution of Wall Street

I don't know how much input (if any) Michael Lewis was allowed to give on the cartoon above, but it captures perfectly what rankled my nerdy feathers most—the idea that, basically, it's these computer-using hoodlums that are responsible for the injustices of Wall Street. 

 

4. Dark Pools and Fiduciary Duty

As far as this part goes, I just felt like I need more information than I was given—dark pools seem shady (they have the word ‘dark’ in their titles, after all), but I also don't know how a client's investment ends up there.

 

Though I'm taking it into a new context, I'm gonna make use of an analogy Chris Stucchio laid out in “A Fervent Defense of Front-Running HFTs” (the thesis of which, BTW, I'm not totally sold on). In the context of a competition (and, let's be real, the stock market is definitely a competitive arena) the rules of engagement are different depending on the relationship between the parties involved. 

Rocky Mickey vs Rocky Apollo

So, if Mickey (who is Rocky's coach) punches Rocky in the face, that's bad. It's unfair, and, as Chris put it, that would mean that Mickey is an asshole. Conversely, if Apollo punches Rocky in the face, this does not make him an asshole. Actually (and here I'm taking it a step further than Chris did), Apollo would be an asshole if he didn't at least try to punch Rocky in the face. There are people counting on him to do just that!

 

Questions? Comments? Snide remarks?

So yeah, I'm just going to leave it there with this loosely related boxing analysis that I haven't even tied back in with the book. I don't want this to add to my growing list of languishing, half-finished reviews, so I'm putting it out there, half-baked thoughts and all.

 

In addition to snide remarks, I'd be happy to field any further reading recommendations, especially anything that begins to describe normal, “just” behavior in and on Wall Street (and those fast, straight wires running across the globe) because, damn, is that stuff ever difficult to find!

 

If you found this book interesting I highly recommend checking out Steve's two-part review (learning and laughing always pair nicely). 

______________________________________________

* Thanks a lot SEC—turns out there is legal insider trading, which is just confusing. 

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text 2014-11-30 17:44
How Markets Fail progress update: I've read 60%.
How Markets Fail: The Logic of Economic Calamities - John Cassidy

I'm not sure if I should be reassured or terrified by the notion that a nineteenth century journalist could describe the "madness of crowds" in a way that captures modern society so well... 

 

Here's to you Charles Mackay for capturing the irascible societal trifecta of "National Delusions", "Peculiar Follies", and "Philosophical Delusions."

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review 2014-11-02 17:28
Fooling Houdini: Magicians, Mentalists, Math Geeks, and the Hidden Powers of the Mind
Fooling Houdini: Magicians, Mentalists, Math Geeks, and the Hidden Powers of the Mind - Alex Stone

The fact that this book was written without a single allusion to everyone's favorite illusionist, Gob Bluth , is basically a crime against humanity (or at least against the laws of pop culture reference-dom). This missed opportunity is especially egregious, given that our author/magician, Alex Stone, is, at one point,kicked out of the Academy of Magical Arts!

”I'll be honest. I'm just more comfortable with an Alliance-approved magician.“

If you're looking for a book that interweaves science and magic (and the interchange of knowledge between the two), I highly recommend Sleights of Mind: What the Neuroscience of Magic Reveals about Our Everyday Deceptions by  Stephen L. Macknik and Susana Martinez-Conde.

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review 2014-08-19 14:55
Think Like a Freak: The Authors of Freakonomics Offer to Retrain Your Brain
Think Like a Freak - Stephen J. Dubner,Steven D. Levitt

This book won't be 2.5/5 stars for everyone. If, like myself, you enjoyed Steven and Stephen's earlier volumes, Freakonomics and Superfreakonomics, then congratulations! — you've found a subject area that interests you (albeit a sometimes nebulous one that can show up under the guise of a variety of disciplines). If, for some reason, you only feel comfortable learning about the ways in which data and patterns can reveal the inner workings of our world with these two Freakonomists, then this book is for you.

 

However, I'm an ever-curious being with little patience; and, thus, haven't been sitting around just waiting for the Steven/Stephens to give me the go ahead. I thought of giving a list of recommended reading here, but one of the cool things about Freakonomics is that its principles can be applied to almost anything — for me this has included books on the philosophical nature of humanity as well as ones that helped me figure out how to run a G-D factor analysis to draft my fantasy football team (spoiler alert: it wasn't that helpful for football purposes, but learning how to use R opened a whole new world of statistical computing fun for me). 

 

So go forth and "Think Like a Freak," but, honestly, you might not need to read this book in order to do that. 

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