Sunk Cost Fallacy, Except It Need Not Always Be A Fallacy

About a decade or so ago, my wife and I went out on a date. Because our daughter was a toddler back then, this didn’t happen all that often. But that day was a rare ol’ oasis: a meal (lunch) followed by a movie. What a treat!

And so lunch was had, and off we went to watch the movie. It is at this point, dear reader, that our little tale of love turns into one of horror.

For the movie that we had chosen to see on that fateful afternoon was a movie called Happy New Year.

There are no words in any known language that can describe how bad the movie was. Vogon poetry makes more sense than did the plot of that movie, and I wouldn’t blame the Vogons if they destroyed the planet all over again because of what I said.

But here, I tell my students when I narrate this horrible tale of horror in class, is where this turns into a teachable moment.

Within five minutes, I tell them, I and my wife knew that this movie was going to be crap. Actually, I’m lying, I tell ’em, because the other four minutes and fifty five seconds weren’t needed. I and my wife, I remind them – both of us with PhD degrees in economics. And even though we knew how bad the movie was, and even though we knew that sitting through it would be a complete, utter waste of our time – even then, dear friends, we sat and watched the whole damn thing.

I could have helped out at the popcorn stand outside, and that would have been a better use of my time. I could have stood on one leg in the men’s washroom for three hours, I say, and that would have been a better use of my time. I could have slapped myself for three hours – and I should have too, for having chosen this movie – and that would have been a better use of my time.

But because we had gotten the chance to go out after so long, I tell ’em, we stayed here and saw the whole damn thing.

And that, my friends, is the sunk cost fallacy. I’ve told this story before in these parts, but why let that get in the way or a good story, no?

But is it possible to use the sunk cost fallacy to one’s advantage?

Perhaps, and Aaron Nicholas tells us how in a blogpost:

A second, less obvious benefit is actively using the fallacy to your advantage. For example, many gym memberships require upfront payments regardless of how much you use the facilities. If you find it hard to ignore sunk costs, choosing gym memberships that have large upfront fees and minimal pay-per-usage fees may be a way to commit yourself to a regular gym habit.

This can also apply to other activities that involve short-term pain for long-term gain – for example, paying for an online course will make you more likely to stick with it than if you found a free course.

But be warned, this doesn’t work for everything: it seems that spending wildly on a wedding ceremony or engagement ring doesn’t have a “sunk cost” effect – it fails to increase the likelihood of staying married.

Oh and by the way, while it is true that spending wildly on a wedding ceremony or an engagement ring doesn’t (always) have a sunk cost effect, skimping on these things ain’t a good idea either.

It’s hard is what it is, this econ business!

Notes from Vietnam

  1. Half the width of the footpath is for businesses, and this is formally/informally understood. The reason for the “/” is that in some cases, there is a white line running along the length of the footpath that kinda sorta officially sets the boundary.
  2. The other half is not necessarily always for walking, it can be used for parking too. In this sense, walking in Hanoi was very similar to walking in India. Some cafes actually have little wooden blocks that are kept adjacent to the footbath, so that bikes can be pushed onto the footpath. Can be used by paying customers of the cafe only, of course.
  3. Traffic is as chaotic as India, but pedestrians assume that the vehicles will stop for them (and they do). Here, of course, it is the other way around.
  4. Coffee rules. I approve. We stayed next to a lake, and sitting on one of those small chairs and sipping on black coffee is a wonderful way to spend an hour or so.
  5. I couldn’t help but wonder if the word “banh” comes from “pain” in French, which means bread. But apparently not.
  6. The drop-off in quality of visible infrastructure is as startling as it is in India. You know how the areas around where the bigwigs stay and immediately outside the airport in your city are much better than the neighbourhoods where aam janta stays? Hanoi is exactly like that, but marginally cleaner.
  7. You can’t go wrong with the food, and in more ways than one. Almost all of the stalls and shops along the main roads and with fronts opening up on the streets are tourist friendly, and the food is excellent.
  8. When I say tourist friendly, I don’t mean to say the rest of the city is not friendly. I mean the dishes are tourist friendly. Which is why a food tour is recommended – because you’ll never get to even see some of the more “hidden” places. If you’re feeling adventurous, try the balut. I did, but couldn’t manage more than one bite.
  9. There is a lot more to Vietnamese cuisine than just the pho and the banh mi, and the best way to learn about it is to walk, mostly through the old part of town. Walking is also the best way to experience the city.
  10. The higher the rating for a place on Google Maps, and the more the number of ratings, the more likely it is that the place is a favorite with tourists. This is a good example, but there are many such places. This will be good food, but it won’t be truly Vietnamese. It will be a somewhat decent version of heavily touristified Vietnamese cuisine.
  11. But when you’re traveling with a ten year old, that may not be a bad thing. What are you optimizing for?
  12. But while walking to your restaurant of choice, feel free to stop and try as much of the food from the street side shops as you possibly can. Surprises abound on virtually every corner.
  13. I observed shop-owners and friends sit down for a meal in their shops, or in front of their shops, on more than one occasion. A sense of community is palpable, and if not a meal, often a cigarette and a coffee, or a beer. Wonderful.
  14. Staring at your phones isn’t a thing if you are in charge of a streetside shop. At least, isn’t as much of a thing as it is in India. Note that these things are hard to quantify!
  15. Don’t order a dish for yourself in restaurants. Order, instead, lots of small dishes and share.
  16. The food is not spicy. The flavors are, as a rule, more subtle than in, say, Thai cuisine, or Malay cuisine.
  17. Our food tour guide told us that cats are considered unlucky in Vietnam because the meowing of cats sounds similar to the word “poor” in Vietnamese. Huh.
  18. I was hoping for better bakery products.
  19. Don’t waste a meal by going into a truly fancy place. If your time is limited, have every single meal in as many local places as possible.
  20. The Vietnamese National Museum of Fine Arts is well worth a visit, and you could easily spend half a day there, if not more. The ground floor and the third floor were my favorites.
  21. Bottomline: heavily recommended!

My Random Question to My First Year Students

I just wrapped up a semester of teaching at the Gokhale Institute. It is my favorite course (Principles of Economics) to teach, at my favorite place, so a bittersweet moment of sorts.

And the last class was an extended five random questions session, with lots of fun questions coming my way. One of which, it turns out, was a request for me to ask them a random question. Fun request, and here is what I have asked them:

“You get to redesign higher education from the ground up. All higher ed institutions are scrapped, and society, industry and academia will go along with the institutions, culture and regulations that you choose to construct/create to make higher education as good as it can possibly be – good itself being defined howsoever you like.
What will you do, and why?”

They have all the time in the world to answer, and of course it is not mandatory to do so. But should you choose to answer, I would love to hear it! So please, do let me know the how, the what and they why of your proposal to change higher education in India for the better.

Happy Diwali, everyone!

(I hope to post everyday next week, but am very much on leave. We’ll see!)

What is the Liar’s Dividend?

Well, what is it? Here’s a definition:

The benefit received by those spreading fake information as a consequence of the environment in which there is a great deal of fake information and hence it is unclear what is real and what is fake.

The first and immediate problem with deep fakes, or pictures generated with AI, isn’t the fact that they exist. Just the idea that it could exist is enough.

Fake images are problematic in and of themselves. But they are also problematic because it is now all too easy to deny that real images are, well, real.

Amid highly emotional discussions about Gaza, many happening on social media platforms that have struggled to shield users against graphic and inaccurate content, trust continues to fray. And now, experts say that malicious agents are taking advantage of A.I.’s availability to dismiss authentic content as fake — a concept known as the liar’s dividend.

That picture of a murdered (insert religion and nationality of choice here so as to not offend your sensibilities) child?

Real if it is a convenience for our worldview, fake if it isn’t. And it is very, very easy to convince yourself of the truth value of either of these statements, because who can tell these days?

And so fake images being fake isn’t the only problem.

Real images can also be dismissed as being fake. They are being dismissed as being fake.

The greatest trick AI ever pulled, it turns out, was in convincing the world that it might exist.

Here’s the original definition of the liar’s dividend:

Hence what we call the liar’s dividend: this dividend flows, perversely, in proportion to success in educating the public about the dangers of deep fakes

Realize the utterly delightful paradox: the better we get at convincing people of the problem of deep fakes, the easier it is to convince them that parts of reality itself are fake.

If you want to make your Monday even cheerier, do read the whole paper.

Ross Douthat and Noah Smith on Asia (kinda)

The reason I say kinda is because Ross Douthat’s column is titled “Why We Should Fear More Than Middle Eastern War“. Noah Smith’s post, on the other hand, is titled “Asia Is Much More Important to US Interests Than The Middle East“.

But both are really talking about the same thing, if for slightly different reasons: the real fight for the USA is going to be with China, and therefore Asia is what President Biden (and whoever comes next) needs to focus on.

Here’s Ross Douthat:

“It makes sense to talk about China, Iran and Russia as a loose alliance trying to undermine American power, but it is not a trio of equals. Only China is an arguable peer of the United States, only China’s technological and industrial might can hope to match our own, and only China has the capacity to project power globally as well as regionally.”

And here’s Noah:

“The EU and the UK together have more than enough people, industrial capacity, and technology to defend against Russian aggression indefinitely with minimal American assistance, should they choose to do so. The only reason the U.S. remains key to Ukraine’s war effort is that Europe has been reluctant to step fully into that role. Over time, that will hopefully change. But in Asia, China is so strong that U.S. power is indispensable.

In sum, Asia wants and needs the U.S. to protect it. It needs U.S. military power and economic engagement, not to crush China, but to preserve the status quo that has worked so well. Developed Asian countries want to keep being rich and free, and developing Asian countries want to keep getting rich on their own, and to do this they need the U.S. to deter Xi Jinping from trying to upend the modern world’s greatest success story.”

Wish it away as much as you like, there is likely to be a showdown of sorts between America on the one side, and Russia, China and Iran on the other. Who else will be with America, and to what extent (and for what reasons) will only become clearer with time, and ditto for the other side. But it is coming – like I said, like it or not.

By the way, Noah Smith has advice for the United States about how to go about getting the answers to the questions I raised in the previous paragraph:

In Asia, meanwhile, the U.S. should be beefing up both our defensive power and our engagement with other countries. We need to accelerate the supply of defensive weapons to Taiwan, Japan, Vietnam, India, and the Philippines, and to keep building and strengthening and expanding multilateral organizations like the Quad. We need to re-engage economically by re-joining the modified TPP, and by creating a dense network of other economic agreements in Asia. And in general, we just need to pay a lot of attention to the region, making sure our allies and quasi-allies and potential allies know we’re there for the long haul, and won’t suddenly withdraw to go plunge into some foolish conflict in the Middle East.

In effect, both Ross and Noah are asking Biden a question I am fond of asking here (and they’re answering it for him too): what are you optimizing for?

And both of them are saying that America should be optimizing for going up against, and not being defeated by, China.

(The way I chose to frame that last sentence is striking to me, by the way, and I realized it as I was typing it out: not being defeated by China. Not, you understand, defeating China. Quite telling, no?)

Why does this matter for the USA?

China hawks tend to argue that losing a war over Taiwan would be much worse than our post-9/11 debacles, worse than letting Vladimir Putin hold the Donbas and Crimea permanently. You cannot definitively prove this, but I think they’re right: The establishment of Chinese military pre-eminence in East Asia would be a unique geopolitical shock, with dire effects on the viability of America’s alliance systems, on the likelihood of regional wars and arms races and on our ability to maintain the global trading system that undergirds our prosperity at home.

And it’s at home where I fear the effects of such a defeat the most. America has experience losing wars of empire — in Vietnam and Afghanistan, for example, where we were extending ourselves without putting our full might into the fray. But we have no experience being defeated in straightforward combat, not guerrilla war, by a great-power rival and ideological competitor.

Whatever anxieties you have about our current political divisions, whether you fear left-wing disillusionment with America or right-wing disillusionment with democracy or both, such a defeat seems more likely than anything to accelerate us toward a real internal crisis. Which is why, even with other foreign crises burning hot, a debacle in East Asia remains the scenario that the United States should be working most intensely to avert.

And what about India? What is our position, and what should be our position?

The really big wild card here is India, which has a huge population and a reasonably hefty economy. The USSR was India’s protector during the Cold War, and much of India’s military equipment still comes from Russia (though this is starting to shift). So India can’t be expected to enter into any conflict against Russia. But China is a very different matter. China is India’s main military threat, and the two countries have come to blows recently over a disputed border. They are also rivals for influence in the Indo-Pacific region. This is why India has joined the Quad, forging a loose quasi-alliance with the U.S., Japan and Australia whose purpose is obviously to hedge against China.

We live in interesting times. On that score, there is no doubt.

One person worth following on Twitter on this topic is Elbridge Colby. This is his pinned tweet, if you’re asking why he is worth following on this issue:

Bottomline: buckle up. Life is about to get very interesting indeed.

The Verge Writes About SEO

“In evolutionary theory, this is called the Red Queen phenomenon,” Malcolm said. “Because in Alice in Wonderland the Red Queen tells Alice she has to run as fast as she can just to stay where she is. That’s the way evolutionary spirals seem. All the organisms are evolving at a furious pace just to stay in the same balance. To stay where they are.”

That’s from The Lost World, by Michael Crichton. I loved reading it, back when I was in Junior College, and for some reason, this little excerpt has stuck with me.

I was reminded of it today, when I was reading an excellent article by Amanda Chicago Lewis in The Verge, on the topic of Search Engine Optimization.

You know what search engine optimization is, of course. Everybody does. But still, just in case:

SEO stands for “search engine optimization.” In simple terms, SEO means the process of improving your website to increase its visibility in Google, Microsoft Bing, and other search engines whenever people search for:

Products you sell.
Services you provide.
Information on topics in which you have deep expertise and/or experience.
The better visibility your pages have in search results, the more likely you are to be found and clicked on. Ultimately, the goal of search engine optimization is to help attract website visitors who will become customers, clients or an audience that keeps coming back.

Read that excerpt again, carefully, and see if you agree with me when I say that I find three bits especially important.

  1. SEO is the process of improving your website to increase its visibility in search engines.
  2. The better you are at SEO, the more likely you are to be found and clicked on.
  3. The ultimate goal of SEO is to have an audience that keeps coming back.

The reason I find these three bits to be especially important is because I think everybody would agree with the first bit. Your opinion about whether SEO is a good thing or a bad thing is very dependent on whether you think SEO ever gets to step 3, or just stops at step 2.

And most of us are increasingly under the impression that SEO stops at step 2, so much so that the “practice seems to have successfully destroyed the illusion that the internet was ever about anything other than selling stuff.”

Here’s a lengthy excerpt from the article:

Around this time, in 1997, an Italian professor published a journal article about what he called Search Engines Persuasion. “Finding the right information on the World Wide Web is becoming a fundamental problem,” he wrote. “A vast number of new companies was born just to make customer Web pages as visible as possible,” which “has led to a bad performance degradation of search engines.”

Enter Google. The company revolutionized search by evaluating websites based on links from other websites, seeing each link as a vote of relevance and trustworthiness. The founders pledged to be a neutral navigation system with no ads: just a clean white screen with a search box that would bring people off of the Google landing page and out to a helpful website as seamlessly as possible. Users quickly decided this link-based sorting methodology was superior to the existing search engines, and by the end of 1999, Google was handling the majority of online queries.

Almost as soon as Google took over, a secondary market emerged for links. For a few hundred bucks, a firm in India or the Philippines could provide thousands of links from blog networks built entirely for that purpose. It was easy: buy links that led to your site and watch your ranking in Google’s results rise.

I came to understand that, since the dawn of the internet, there have been people attempting to manipulate search and then people decrying those manipulations as the end of search’s ability to be useful. It works in cycles. People doing SEO find loopholes in the algorithm; critics complain about search results; search engines innovate and close the loopholes. Rinse, repeat.

And that, of course, is why I was reminded of the red queen phenomenon – because of the last paragraph in that excerpt.

There is one more reason this article is worth reading if you are a student of economics, and I’m sure some of the regular readers have figured it out already. Goodhart’s Law, of course! Remember, when a measure becomes a target, it ceases to be a good measure.

How should one judge if a website is good or not? Google said that the best way to do it was by measuring the number of other websites that linked to this website. So the number of websites linking to a website was the measure of how good it was – SEO folks turned this into a target. And that, in a way, has resulted in the internet looking the way it does today. There’s much more to it than just that, of course – and an excellent way to get to all of it is by reading this lovely article.

Other things from the article I found interesting, in no particular order:

  1. Matt Cutts is a fascinating person.
  2. So is Danny Sullivan.
  3. What an anecdote!
    “Somebody showed up and brought her Aston Martin to a conference and parked it at the front door. Immediately got a parking ticket.” He suggested she might want to relocate the car before it got towed, but the woman told him she would just move it to the next parking spot and get another ticket. “She goes, ‘It’s cheaper for me to leave the car parked out front and use it as a way to start conversations with potential clients than it is for me to rent a suite at the hotel and get people to go to the suite to have the same conversation.’”
  4. Is E-E-A-T (Experience, Expertise, Authoritativeness and Trustworthiness) a good substitute for other means of ranking search results?
  5. Remember the folks who stop at step 2?
    “Eventually, a site filled with computer-generated nonsense designed to maximize SEO will get removed from search results, Ray explained, but while it’s up, the creator might make as much as $50,000 or $100,000 a month. A lot of the people who did this, she said, live cheaply overseas in places like Bali and Chiang Mai. ”They make a bunch of money, that site dies, and they go do it again,” she said. “It’s like a churn and burn strategy. So if people are seeing those results, it can be very frustrating for users ‘cause it’s like, ‘This is terrible.’””
  6. This last bit I found to be very thought-provoking, in many different ways:
    “Google had started with a noble cause: trying to make the internet easier to navigate at scale. The company did accomplish that goal, but in doing so, it inadvertently and profoundly changed how the internet looked. The problem lay in Google trying to be an objective and neutral arbiter of an information landscape that was meant to pretend it did not exist. You cannot design a free, automated system to help people find information without some people trying to game that system. You can’t just be the most powerful observer in the world for two decades and not deeply warp what you are looking at.”

The Economist on the Iraqi Bank Heist

Mike Sowden on Wikipedia

Oldie, but a goodie. And it is 2023, therefore very relevant.

In Praise of Randomness

In fact, this blogpost will not be enough. Randomness needs an entire book, maybe more.

This post is a reflection on Tim Harford’s excellent column titled “Sometimes a random solution is best“.

Here is the opening paragraph:

Just over a decade ago, Egypt’s Coptic Christians chose their new pope. The names of three favoured candidates were placed in a glass bowl, then a blindfolded boy selected from the trio at random. Religious people can appeal to the idea that the outcome wasn’t truly random; God himself decided on Tawadros II. Yet it is a seemingly unsettling way to deal with a serious decision.

As always, read the whole thing. Lots of advantages to random solutions, and here are the ones that Tim lists out:

  1. It promotes efficiency. Take grants, for example. If the amount of the grant isn’t that large, evaluating the grant can often cost more than the grant that is awarded! So long as everybody who is on a list has met some criteria, allocate grants randomly among these applications.
  2. Implicit in this, of course, is the point that the money that has been saved when it comes to detailed evaluations can be put to other uses. Maybe award twelve grants instead of ten? We have, in other words, increased the (potential) supply of grants.
  3. It incentivizes applications from diverse backgrounds. Folks from ethnic minorities (to use Tim’s own example) are more likely to apply if the process is randomized (can you guess why?). In other words, we have increased the (potential) demand for grants.
  4. Think about it: the market for grants has been made more efficient by making the process more random. Huh.
  5. Sometimes, Tim tells us, a randomized solution is better than listening to the experts, and he points us to the arrhythmia case study from the 1980’s.

Particularly in the case of entrance examinations in India, there is another benefit to applying randomized solutions. Rather than give the seats in a college to the highest rankers in an entrance examination, why not give admission randomly, so long as a minimum cutoff has been met?

Examinations in India, particularly the entrance variety, usually optimize for speed while solving a lot of fairly basic questions. That is, the highest scores tend to belong to those students who are unusually quick at solving a lot of not-very-difficult problems very quickly. The degree of difficulty for these questions varies a bit in the case of different universities, sure, but I would think what I have described here ought not to be too controversial.

But how is optimizing for the ability to quickly solve how far Rahul has walked if he turns right then left then right then left and so on a good measure of your ability to read and understand The Wealth of Nations? It might not hurt, sure, but hey – it might not help either! In fact, I would be much more comfortable with a hypothesis that said it is likely to not help. It has been a while since I read The Wealth of Nations, alas, but not once did I have to rely on my ability to do algebra very quickly in my head. I had to rely, instead, on my ability to persevere.

Would you agree that our entrance exams don’t optimize for perseverance?

What else do they not optimize for?

So, so long as a certain minimum benchmark is met, why not randomize admissions, and see if the cohort that comes in is better than the previous cohorts? And if so, along which dimensions?

It is unlikely that such a system will be adopted anytime soon, because of a variety of reasons. But all I’m saying is that there are, indeed, benefits to being random.


A Tale of Two Charts

On Tuesday, I’d put up a post about Claudia Goldin having been awarded the Nobel Prize.

The original post did not have a chart at the start, it had a verbal description of a table from a rather-boring-to-read-but-oh-so-important PDF. A friend to whom I had sent the post for review suggested that a chart might do a better job instead. He was right, of course, and so I went ahead and added a chart. Here it is:

Here is the same data, but shown in a different way:

Which chart tells a better story?

Chart design and visualization is a subject that has long fascinated me. How long? 16 years, to be precise. One of my managers, back when I was a corporate employee, had taken a chart I had created, and shared it with the whole team. Which in and of itself was fine – but he had then also recreated my chart, but with his ideas for how to make it better. Placed next to each other, they showed pretty much the same thing – but in the same way that a stick figure and the statue of David are the same thing.

Now, I am nowhere close to being an expert when it comes to charts, but ever since that day, I have been fascinated by how powerful a well designed chart can be. Powerful in terms of it being a clear way to tell a story, it being a simple way to tell a story – and how much detail can be fitted into a single chart.

But for today’s post, let us focus on clarity and simplicity. Which of these two charts tells a simple, clear story? Would it be the one that I had in the post, or the second one?

  1. How do I want to group the data? Categories (men, women and total) on the axis, or time on the axis?
    What story do I want to tell? Do I want to emphasize how much the data has changed over time, or do I want to make the point that women’s participation has always been lower than that of men (and of course therefore the total)?
  2. Should I use bar charts, or should I use a line chart?
    The answer to this question depends on the answer to the first question. If I want to emphasize how much the data has changed over time, it should be a line chart. If I want to emphasize the fact that women’s participation is always lower, I should use a grouped bar chart. But what if the line chart actually makes this point even more clearly?
  3. Which color scheme is better?
    Again, do I want to emphasize the difference between the categories? Or do I wish to emphasize the change over time. In my opinion, the second chart looks cleaner, and tells a simpler story.
  4. Note that the second chart doesn’t have a reference scale, but the first one does (the “x-axis” with the numbers running from 0 to 60).
    And therefore, to me, the second chart is better in this regard. It has less information that needs to be processed by the viewer, and they can reach a conclusion rather more quickly.
  5. Do data labels help or hinder?
    In my opinion, they help. In fact, well designed data labels take away the need for a reference scale, and so can help make the chart look cleaner.
  6. What about chart titles?
    Ideally, each chart should have a title, that answers the TMKK question. I didn’t include titles in either case because it was a blog post and not a presentation – but I know I would have got a metaphorical rap on the knuckles. When you create a chart, also create a useful title is a good rule to follow. So follow what I say, not what I do!

There are lots of good resources to follow online if you want to get better at using data visualization to tell better stories. Stephen Few, Edward Tufte, Jan Schultink and Nancy Duarte are just four names to get you started – but these four will teach you much more than you will need. And if you poke around in the alleys and bylanes of this part of the internet, you will be able to find so much more.

But please, do learn the art of data visualization, it is quite a powerful tool to have in your arsenal. And if you think the first chart is better than the second one, please let me know why – because I think the second chart wins hands down.