Archive for the ‘Economics’ Category

Player as firm: The unit of analysis

June 7, 2010

An important part of the research process is identifying the smallest feasible unit of analysis. So what is the unit of analysis in WoW? Well, it’s the player! This may seem obvious, but to my knowledge it has never been explicitly recognized in any of the economics work I’ve seen. Let’s take a moment to understand why.

WoW players often have multiple characters on a single server. The reasons for this are many, but there are three that are most important to understanding the WoW economy. First, players like to create bank and auction house characters, and often these roles are mixed. The bank character becomes a store of cash and valuable items that it can quickly mobilize to participate in the economy. For some players who particularly enjoy dealing with the economy, the bank alt is more like a main. Second, players like to have access to multiple professions. Not having to tip other players for their, say, enchanting or blacksmithing skill, can save a little cash. (This is notwithstanding that the cost of actually learning and levelling the tertiary professions could be quite high for the player). Lastly, players who want to experience a different perspective on the game will most likely create alts on the same server as their more powerful high-level characters. That way, they can participate in a sort of nepotism with their alts, moving them through the game more quickly.

What should we make of this? A player’s characters on a single server are jointly engaged in production, and each has access to the same information about the market. They constitute the productive units of a ‘firm’. (One could also argue that they are individual firms in perfect collusion with one another, but I think this overly complicates the picture). The CEO, board, and shareholders are all embodied by the player. Players, not characters, are the smallest productive units in the game economy. On this view, competition within the economy should be viewed as taking place between players (“firms”) who have interests in multiple sectors of the economy. The organization of firms is heterogeneous and occurs on a spectrum: at one end are players who do not engage in a lot of inter-character interaction, as if they were wholly-owned subsidiaries of a conglomerate. On the other end are players who actively engage their characters with one another to meet a single economic end, and this would include both gold/item farmers and players who get the most fun out of participating in the economy.

We are left with several practical and theoretical questions. On the practical side is the very real problem of identifying players when you can only directly observe the actions of single characters. This is not easy, but there are ways to do it. On the theoretical side, a whole host of interesting research topics presents itself: How are player-firms organized? What is the nature of competition in the economy? How economically organized are guilds? What role does arbitrage play in the economy? How influenced are players by day-to-day fluctuations in the market? I hope to take up these and other questions in future posts.


A brief note on experimental design

February 26, 2009

On the Metro ride home I was just starting into an article (on matching estimators, if you must know) when I had a moment of inspiration that got me around a major blockade standing in the way of my hopes for a research project.

I won’t get into specifics on the off-chance that the solution I “discovered” gives me a competitive edge in the short run, however:

Experiments in social sciences are difficult because you can rarely control all of your variables – i.e. the humans whose behavior you are trying to understand. Nonetheless, we often run across situations that are very nearly controllable experiments except for some minor detail which, lacking the means to control for it in some way, renders our scientific foundations too shaky to merit the pursuit (or, at least, the avenue of that pursuit). The way around this problem (if such a way exists) often eludes us because we focus on what we see in our frame. Stuck in that state of mind, one is prone to forget that a subject can not affect an experiment if it is demonstrably absent from the experimental frame while measurements are being recorded.

It’s ceteris paribus in action. Except sometimes you realize that you don’t need to hold everything else constant by sheer statistical will and force of data. If you’re paying attention, you will see that sometimes things will hold themselves constant for you, and you just have to show how they did that.

Wanted: Candidate PhD programs

January 11, 2009

With the turn of the year, I am now shifting into a higher gear in my pursuit of a PhD in economics. I have sought advice from several of the economists at my job, including former university faculty and recent PhD recipients. Their advice tends to coincide with what I’ve already seen online:

1) Apply to the best programs for which you have a reasonable chance of admission.

For me, this excludes the Ivy League, but still includes members of the top 25, and all members of the top 50. With an interest in macroeconomics rooted in the fact that I have come of age in a major financial crisis, I am particularly interested in programs with faculty who specialize in macro. I have a strong interest in the broad area of industrial organization and its role in short and medium term macroeconomic performance. Consequently I am currently seeking advice on programs with strengths in these areas of research.

2) To the extent that you can, look for programs with permanent faculty in the fields in which you are most interested, and try further to determine how committed they will be to your success.

Though I have been spoiled in my past by an economics faculty that was very supportive of my academic pursuits, I am highly self-sufficient in my own success. Nonetheless, I will want an advisor with more than a passing interest in my dissertation. Other advice in this area would be much appreciated.

3) Develop a solid trio of individuals who can speak positively and authoritatively to your ability to succeed in an economics PhD program.

For me, I think that my success in mathematics courses speaks to my ability to handle quantitative aspects of success in a PhD program, and as a research assistant I am in an excellent position to seek out an economist who has seen what I can do. It is important to receive recommendations from individuals who can speak to my skill, creativity, and success in developing and executing original research. To me this will include at least one former professor (probably my academic advisor) and one economist with whom I currently work. I have been warned that more than one recommendation from either my college or my current work environment may not be the best, but would not be the worst, mixture of recommendations. Suggestions on sources of a third recommendation that I could pursue would be appreciated.

4) Get as close to an 800 as possible on the GRE math section.

Tough, doable, and wholly self-explanatory.

5) A stellar statement of purpose.

Though I understand that the importance of the SoP varies across institutions, it is nonetheless an integral part of the application. I also think my relatively unique past and current experience as a research assistant affords me an opportunity to develop an interesting account of how I came into the field of economics and flourished in it.

6) Any publications, including revise and resubmits.

I have an opportunity in my current position to get one of these, which would be fantastic. I’m currently working as hard as I can towards its completion given the resources at my disposal.

What is Real (Analysis) is Real (Analysis) in its Consequences

December 10, 2008

It has been seven months since my last post, and much has changed but I will only update readers on these matters in the context of this blog’s stated purpose.  Some details are in the recently updated biographical post on the right hand side of this page.

As of last night, I have completed my first graduate level course in any topic.  On the advice of many an economics PhD or PhD candidate, both at my job and on the various and sundry related internet forums, I enrolled in a course in real analysis at American University.  For those who don’t know, real analysis is essentially one long, rigorous proof of everything you ever learned in Calculus I and II. 

It was also, by far, the most humbling academic experience I’ve ever had.  Ultimately, my grade will be more or less acceptable (I’m expecting a B+ or better), but this was only after putting in an unbelievable amount of hard work and long study sessions.  I can not describe to the uninitiated what a real analysis course is like, but I would like to point out three things I’ve learned as byproduct of this experience.

1) Working full time and going to school is exceptionally difficult.  This is all the more true when the class is graduate level, but I have a new and more visceral respect for adults who pursue degrees in any field while working to support themselves and their family.

2) I’m not as smart as I thought, but I can still hold my own.  I’ve done proofs before in other upper level math courses at Mary Washington, and these I could usually complete in a sitting.  Not so in real analysis.  After working two hours on a single problem, I would often have to go for long walks and wait for inspiration to come to me.  Nonetheless, the answer did eventually come, and consequently I often did very well on homework assignments and take home tests.  However, I did very poorly on timed assignments such as exams.  Lesson:  I can figure just about anything out if given the time to do so.  This is a personal trait ripe for a careful optimization analysis at a later time.

3) Economics is “real.” There was a bright if awkward senior in my class who often opined that “economics isn’t real”.  I found this to be a frustrating and pseudo-intellectual comment, but I also found it difficult to immediately respond when he said it.  Eventually, I settled upon a good retort that I planned to unleash the next time it came up:  “Economics purports to be the study of human choice under the conditions of scarcity and uncertainty.  By all accounts, it succeeds in being  just that, regardless of whether one agrees with its methods or conclusions.” 

I never actually had the chance to say this, but last night after I finished my final exam, I was walking to my car when a different thought occurred to me: 

Economics is real, because it is real in its consequences.  (A slightly modified take on the Thomas Theorem).   Economics may or may not make undue assumptions about humanity; its conclusions may or may not be patently, objectively false.  Nonetheless, those conclusions inform policy that has real effects on the quality of life for billions of people.  The point is not to preach some particular and unchanging view of the human condition, but to constantly tweak and present new and innovative means to understand and, yes, manipulate that condition.  Even if it isn’t objectively ‘real,’ it tells a very compelling story, of which I would like to be a co-author.

Mathematics in Economics

November 17, 2007

I am entirely too impressed with myself at the moment. 

I have been working since this morning on trying to tease out a model from my various notes and ramblings on corruption, the topic of my economics thesis. Suffice to say that I spent a good portion of my time standing in front of a whiteboard jotting down equations, solving for n, binomially expanding, etc. 

I’ve been told (or is the word warned?) by my professors that mathematics is a tool of economics, but it is not required to do economics.  I buy that; however, had I not my knowledge of mathematics and the ability to apply it to economics, I would find it extremely difficult to formalize what would otherwise be a model weaved together by notions that often escape the notice or care of economists.  Economics has a language, and mathematics is a very important part of that lexicon. 

It is much easier for me to go to my professors, or other economists, with a set of descriptive equations, point at n, and say “That’s the state-civil society dissonance factor.  That’s what we need to find a way to measure.”  I am capable of weaving an analytic story, but why say with 1000 words what you can illustrate with a couple equations? 

Mathematics may only be a tool in economics, but more and more I find it to be an absolutely essential and integral tool for understanding and expanding on my field. 

More Fed Transparency?

November 14, 2007

I just finished reading this articleover at Yahoo! Finance that the FOMC has moved to increase both the frequency and long-term outlook of the Fed’s publicly released economic forecasts.  All this, Chairman Bernanke says, will make it easier for the Fed to do its job by increasing the lines of communication between the central bank, investors, and consumers. 

So to a certain extent I can buy that greater transparency on the part of the Fed is good.  When markets are able to make more reliable predictions of interest rate activity, firms and consumers can adjust their investment and spending decisions accordingly.  This will decrease the intensity of a policy shock on the economy, insofar as the latter can impose growth-mitigating volatility on the economy.  It should also increase accountability, which I’m sure makes some people quite happy. 

However, I think there are some important drawbacks to still greater transparency on the part of the monetary authority.  For one thing, when the Fed does not act as expected, the adjustments that markets will make will be far more drastic as participants – firms and governments (both international and domestic) and consumers – will have likely developed more unflexible forecasts – explicit or implicit – of interest rates;  that is, greater transparency may reduce the flexibility of market participants thereby creating the risk of high degrees of volatility when the Fed does not act as suspected.

The other problem, which I think is less understood and perhaps therefore more insidious, is that as the Fed increases transparency it risks its position a source of nominal changes in the economy and instead becomes nothing more than an instrumental variable in market decisions.  In econometric-speak, Fed actions may lose their causal link to economic activity and instead become only highly correlated with it.  To the extent then that households now rely, with justification, on changes in Fed policy to make investment and spending decisions, they will become unmoored from this bastion of economic stabilization.  Might the federal funds rate go the way of the yield curve as those who have come to rely on it to make safe bets on the economy will at some point in the future find themselves suffering huge losses due to their suddenly-unfounded faith?  I think it’s possible. 

Greater transparency is a victory for the free-marketeers at Cato (which is where, incidentally, Bernanke announced this decision), but it may have unintended consequences the magnitude of which we can only begin to guesstimate.  One I can think of off the bat is that more impetus may fall on government to affect the economy through fiscal policy.  That’s not going to make Cato, Bernanke, or any other free-market advocate, very happy. 

Currently Reading – Greenspan’s “The Age of Turbulence”

October 14, 2007

I am not quite halfway through Alan Greenspan’s “The Age of Turbulence,” the central banking legend’s part memoir, part treatise, which was published just a few weeks ago.

It really is a fascinating book.  I am reading it not as someone who is of a particular political mindset, nor as someone who would feign to have the highly developed skill set that would be necessary to target the man with either criticism or approbation for his term as the chairman of the Federal Reserve.  Instead, I am reading it as a student of economics, and I am finding Greenspan to be a surprisingly lucid writer with a dry wit, a reasonably humble personality, a keen intellect, and a single-minded fascination with all that his field of study has to offer.  Whether or not he paints a rosy picture of himself, his techniques, or his attention to detail, at the very least I find his portrayal of a man devoted to uncovering the driving forces in markets to be both inspirational and educational. 

I am inclined to recommend this book as assigned reading in a classroom.  I think his methods are exemplary, and in that sense, certain chapters would give students a sense of the importance, limits, and possibilities for collecting and interpreting data.  At the same time, he has been on the front line of most economic booms and busts for the past 50 years, and as such much of the first half of his book would be an excellent supplement to more in-depth analyses and/or class discussions.  The latter half of his book (though I have not finished it yet, but I will be sure to comment on it later), provides a normative assessment of the world around him and the present and future of the global economy.  It is, as such, an excellent conversation starter for any class discussion on economic issues or policy for students at any level in the field.

I would not mind hearing the opinions of others on their take of this book, but regardless of how one feels about the man’s policies, he strikes me as a prolific thinker and an astute observer, and his thoughts are worth the trip to the library or the bookstore.   

Socially Responsible Investing @ The Green Festival

October 9, 2007

I wouldn’t call myself much of an activist, but I spent a very satisfying weekend in DC attending the Green Festival, an annual gathering of the progressive tribes promoting social and environmental justice (I’m not trying to define those terms – just quoting my gracious hosts).  I’m wary of people on the extreme ends on either side of the political spectrum, because I often find the level of misinformation (and disinformation!) to be beyond my tolerance level.  Yet while there was a fair amount about which to be skeptical this weekend, by and large the discussions were reasoned and moderate.  I was particularly fascinated by the idea of Socially Responsible Investing (SRI, in the biz), in which investors pay a premium both in transaction and opportunity costs over normal investment portfolios in order to ensure that the businesses in which they invest conform to standards of labor, environmental impact, human rights issues, and more.

You heard right: People using capitalism to get the social and environmental justice they seek.  To me, this is a fascinating development.  I really wondered if there wasn’t an unspoken undercurrent of division amongst different factions at the convention:  Those who see the market capitalistic system as a means to an environmentally sustainable end, and those who still believe that, by its very nature, capitalism is incapable of providing incentives for such sustainibility.  

In any event, I really admired the SRI business model, though I’m certain the jury is still out on whether it will gain more influence.  It also raises a very interesting question.  To the extent, say, that investors are taking a hit in the realm of returns in order to ensure that the firms in which they invest conform to “sustainable” standards, the question of whether this is wise investment must turn on whether firms that practice business in a way acceptable to SRI investors are going to be more profitable in the long-run.  This, in turn, will depend on the ultimate causes of problems like global warming, and on whether governments begin to regulate business in such a way that those which received SRI dollars would be more adroit in maneuvering through any new constraints.  

Finally, SRI raises all sorts of interesting research questions, not least the standard willingness-to-pay research that might be used to determine the expected value of new environmental initiatives, international labor standards, etc. to firms making their own investment decisions, as well as to society-at-large.

So I just want to say to (most) of the exhibitors and speakers at the Green Festival that this skeptic was more impressed than discouraged by what he saw, heard, and read this weekend.  Keep up the good work and the impressive degree of innovation. 

Enjoying Economics (and Nevermind the Anthropology)

September 12, 2007

A couple weeks ago, more as a note to myself than to any reader, I wrote an entry describing my course schedule for this, my final semester as an undergrad.  In a twist that really suprises me given my initial expectations for this final semester, I have made several moves that sacrifice diversity of interest for depth in the field I most enjoy: economics.

I dropped Existentialism:  Fascinating but far too time-consuming this semester.

I dropped Symbolic Anthropology:  My interest in the field begins with discussion with my anthro major friends over coffee…. and apparently ends when I actually have to read and discuss the impenetrable stuff that is ethnography.

To keep me (and my financial aid status) full-time, Professor Greenlaw was gracious enough to take me on today in what is technically the third individual study I will be completing this semester.  Informally titled “Readings in Advanced Macroeconomics,” I’m actually looking forward to both readings and discussions a great deal. 

The switch means that I have three economics courses and an upper-level stats course, which is a far narrower educational agenda than I initially planned.  Why the switch?

I think the predominant part of the decision has to do with my realization that I enjoy nearly all aspects of the study of economics.  It is a field that contains several diverse and comparably powerful frameworks that allow you to elucidate whole swaths of human phenomena.  All you need to start out is curiosity and a good teacher, and I happen to have lucked upon several of the latter at the University of Mary Washington.

But I think the best part about studying economics is that I get it.  And I mean I really get it – as if it came natural to me.  Even better, my professors know that I get it, and I think it excites them that I desire, under their guidance, to dig ever-deeper.  I think it becomes a feedback loop, where the lights keep switching on in my head and, encouraged, my teachers start trying to flip even more switches.

Experiencing such vibrance in one’s mind is addictive.  This, I think, is what many college kids miss out on, and it is precisely what I would have missed out on if I had returned to school any sooner than I did.

Structural Unemployment and Job Training

September 11, 2007

Today’s Wall Street Journal contained a page one article about the uses to which ex-auto workers are putting their buyout money from the Big Three auto makers.  Workers cite the exciting atmostphere of healthcare and the earning potential as reasons to move into healthcare.  Says the article “[Detroit automakers GM, Chrysler, and Ford] are holding up [worker buyouts of $100k or more and education grants] as an example of socially responsible cost-cutting…”

This is an intereseting phenomenon, and if it really works, I hope it motivates other corporations and the federal government to take similar approaches to sources of structural unemployment.  For every surplus of labor in one sector in America, there is always a shortage in some other sector.  Healthcare in general and nursing in particular are examples of the latter; other areas include IT, CIS, biotechnology, etc. etc. etc., and the shortages are not necessarily the result of lack of interest – people, I think, are genuinely aware of the possibilities of employment, but they are unable to take advantage of the opportunities because they can not afford the requisite education. 

I would like to see the government take a similar approach to farming.  The recent (bad) decision by Congress to spend millions on subsidies for developing the ethanol industry rather than importing it from (for instance) Brazil is a perfect example of money that would be better spent offering individual farmers the option of placing themselves or their children in an education program of their choice, instead.  Higher prices on everything from corn to cucumbers at the grocery store evidences that that massive ethanol subsidies could have a profound, negative effect on consumer spending, and such a shift would ripple throughout the economy.  Instead of keeping farmers artificially afloat, why not offer up education grants to farming households?  Though farming may be an honorable trade, that does not mean that farmers should not be offered the opportunity to exit the industry.  This would reduce supply, increasing prices, while reducing the need for government subsidies.  It is certaily political suicide for any midwest farmer to suggest removing these subsidies without any sort of fallback; it remains to be seen if a billion dollars shifted away from farming subsidies to technical and higher education grants would attract the ire or admiration of voting farmers.  Certainly the ex-auto workers seem happier.