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So let's get started. For a second I want toÉyes youÉthe studentsÉI'm talking to
you. I have been asked to compareÉJeff Perloff,
professor at large, has asked me to show you these two figures. Here's one figure.
Does anybody ever know what this figure shows?
Utility. Utility and? What else? What is the other
one? What is it showing? Indifference curves?
Indifference curves and utility function. So the first question isÉwhich one do you
like more. This one or that one? Let's do a vote. This one? Everybody has to vote.
Or that one? I would say that would be a minority.
It's the indifference curve between two goods, essentially. And this is actually a
useful concept. Actually, it's pretty bloody obvious when you think about it, but the
whole idea is that you've got zero consumption down here of either good. And as
you increase the consumption of Q1 or the consumption of Q2, you're getting more
utility, which is actually this three-dimensional idea. So the X, Y, Z. This third axis
here. You guys can see that, right? So you start off with zero utility down here, and
as you consume more of each of these goods, not reaching satiation, you're going to
get more utility, and the indifference curves are on the surface of that three
dimensional surface. They're just showing you the tradeoff at a given level of utility.
So utility starts at zero and it goes up, but it goes up in a shape, which is going
to be, essentially, following the shape of the indifference
curve. So this is the projection down. This indifference curve is at a certain
utility at a height here, and it projects down onto the actually surface (The floor)
showing the tradeoff between the two goods, maintaining utility. It's an iso-utility
curve. Does that make sense? Yeah? It's meant to demonstrate the concept of utility
increasing, and the concept of trading between those goods as you move back
and forth from utility on the indifference curve.
And then so then the other question Professor Perloff asked isÉis this figure, for
example here, helpful, or would you prefer to have just a discussion of what utility
isÉand an indifference curve only on a blackboard? Who likes the blackboard and discussion idea?
And I don't mean complete [inaudible]Ébut who likes this figure more
than a blackboard idea? So that would be a no.
And thenÉwould you prefer to see both figures or one figures?
If you have to look at them, or you're forced to by meÉ
Is that an aerial view? It's an aerialÉthe helicopter view. Well
this one, the axisÉthis has been rotated. So
now you've got your second good goes up here and up there, And then this
indifference curveÉbecause the surface is still increasing as you're going up, and it's
just been rotated around. And here's the indifference curve on the utility
moundÉthe mound of happiness (which has all kinds of third party connotations).
And then you have the projection downwards from utility piles. So it's the mound
down to the flats. Does it help to see both, or do you want to
only see one? And you chose this one, by the way. Do you want to see one or do you
want to see two? Two? One? OohÉclose.
Okay, we'll go for two. Almost a split decision. And now, we'll get rid of all of that.
All right. So...thank you advancing the cause ofÉProfessor Purloff has authored
textbooks, so I'm assuming you just inflicted your opinions on the next students that
will be buying that textbook. Congratulations. Let's do some logistical stuff.
What's on our menu today? Auctions. I'm going to pass these books around, so that
those of you who want to inspect the merchandise will have the opportunity to.
I'll just randomly pass themÉlet's not do random. Let's do two form this side, and
they'll follow. Those two should just stay with each other and follow some kind of
pattern. So these are going that way, and these are going this way. So pass it back
and forth along the rows. And my margin notes will not be getting you Nobel Prizes.
And we'll be doing the auction as number 4 today. I hope you guys broke open your
piggy banks. I also will beÉI promised that I would send you price information on
Amazon, which I failed to you, but I printed them out, and I will reveal that
information to you before we run the auctions. I have office hours today. That appears to
be one logistical question. That's at 3:30. Also, Sabina sent me a very good e-mail worthy
of a bonus point, which I'm awarding to her.
That's not the pointÉ I know that's not the point. But I get to
award points when I want to. I am the federal reserve of grade points. I get to
award them. So what she said isÉin simplest form isÉHey, the briefing grading
structure, in which you have to rank (if you're grading). Everybody has three papers
to work with. They get to rank them gold, silver, bronze.
And that creates what's called determinant competition. Only a winner in each
ranking. There's going to be a winner, and there's going to be a second place, and
there's going to be a loser. And so she saidÉbut wait a second. Doesn't
that mean that students are going to see this more as a zero-sum game, which it is?
If you're grading one person as a gold, you cannot have three gold medals for grading
somebody, for example. And is that can be true. That's actuallyÉlet's see hereÉit
could create a bad atmosphere in the class. And that can be true. And that's actually
the whole idea of curve grading. And I thought about this when I sat down with
the grades in this class, as you guys know. And several people have asked meÉare you
going to curve things or whatever. The problem, really, with curve grading, or the
way that some people interpret it is, if we all get an 80% do we all get B minuses, or
are you going to curve it up so we all get A
minuses. That's one interpretation. The other interpretation of curve grading
is that you're going to have a certain distribution of gradesÉthe midterm grades
were similar to a normal distribution. And the idea of curve grading is, well, let's
just give this percentage As and this percentage Fs as a rigid set of proportional
grades. And even if you get a 65%, if you are the lower half of that lower part of the
class, you would get an F I f I had applied a rigid curve. And maybe if you get over an
80, if that is what this cutoff is, you would get an A if I had applied a rigid curve.
It is very easy to sit there and say ahead of time, because I'm applying this curve,
I do know that 10 percent of you or 15 percent of youÉI think the proportions
are usuallyÉB, C, D, FÉ 15, 15, 20. 20 (that's 70) 30. Something like that. I could
do that if I wanted to, guaranteeing that 15% of you would fail this class, which would
make a lot of you very upset, including guaranteeing that only 15% of you would get
As, which would also make a lot of you upset. Because we're all A students, right?
So I haven't decided to set this down. In fact, I'm not going to do it. Just so you
know. But thing is that no matter what you do in terms of a curveÉnoÉif you do anything
related to curve, what that means is that if you get more points than your neighbor,
you're going to get a higher grade than your neighbor. Now that is obvious. In
a sense, competition, in that sense, which is what you're bringing up, okay?
Making it explicit, as in gold, silver, bronze, or however you want to call it, is only
making obvious what is true. The other way to do it, of courseÉI would call it the
kindergarten method, is everybody gets an A for what? Effort. This is auction week
for David, and I'm auctioning stuff on eBay. Some guy set me an e-mail, and we're
auctioning off some old watches, and he said, "Hey, I just bid a 99 cents for your
watch. Can we do a "Buy it Now" so I can just buy it. Because I don't want anybody
else to bid for that watch. I want it a lot." And I wrote back, so I saidÉI wonder how
much this watch is worth because I just put it up thereÉbecause I'm likeÉthe market
will decide. The last time one of these watches sold, it sold for $100. And before
I looked it up, I was like, "Eh, it's probably worth $20. Maybe I'll sell it to him for 15
on "Buy it Now". But then, I was likeÉwait a secondÉso instead of putting it up for
"Buy it Now", I wrote back to him and I said, "Sorry, no can do," and I put a note on my
auction and said "by the way the last one of these sold for $100. Just keep that in
mind. That, in auction terminology, is creating a reference point. Or you create
a focal point, in more broad terminology. As far as I'm concerned, of course I want
to tell people, "Oh, it's worth a lot".
So what I'm getting at with this guy complainingÉhe
actually wrote back and said, "Well, you knowÉI just lost my job. And I really want
this watch." And it's likeÉwhoaÉyou just lost your job and you're buying ***
on eBay? What are you doing? "And I can only afford this much." And I looked
at another website this morning, because someone linked to it called something
like karma net. And the idea is that you put up something that you want, and then
when someone gives it to you, in terms of a trade, then you get to ask for
something. So it's kind of a pay it forward, or
good karma, and I was looking, I clicked on the United States and like Wichita,
Kansas, and someone was like, "I can't pay my utility bills. Can someone pay my
utility bills?" And it's just weird. That doesn't seem to be exactly what's going on
with karma. It's like, "Hey you know what? I'm not making enough money. Can you
give me 20 grand?" That's a weird kind of karma, but that's apparently what some
people are thinking of. And as far as your grades are concerned, or
as far as your student fees are concernedÉcan we please pay nothing? Or can
you please give us all As? Well that's fine. But as Sabina well pointed out, the
world is much more competitive than that. And after you leave kindergarten, you don't
get an A for effort. When you go to an auction, if you have more money, you win.
If you're applying for a job, if you're a better candidate, you win. If you write a
better briefing that whoever else you're competing with (because of this randomization)
you win. And if somebody gives you a bronze, or whatever
you want to call it, on your scores, because you could have three scores, if you
get a 15, which is the lowest you can get (because it's a gold, silver bronzeÉthe point
scores are 10, 7, 5). I actually thought of lowering this to three, but that might
be more cruel. But if you get 15, I think that's a message. Don't go into the briefing
business, or work harder. What I want you to do on this stuff is work hard. It doesn't
mean you're a bad person, it's just about school and learning. And learning is
about working. So that is my tutorial as to why I'm doing this grading method. I am
not going to change it. There is going to be this ranked grading. And also remember,
by the way, the people that are handing in these grades, for every grader that you
give as a grader, you are actually going to be getting a written comment that I will be
grading according to my randomized procedure ofÉI think this is good or bad.
And maybe everybody's going to get an A for effort on that. I don't know. Diana and
Fei and I are going to grade those. So if you give somebody a 5, you sayÉand this is
your comment to them, you are going to get a zero from me. So when you grade other
peoples' stuff, and then you should know that you should be putting good effort
into justifying why you are giving them that rank. And just saying, "This is worse
than the one I read," is not fair. You have to give them a careful analysis about why
you gave them that third place out of the three that you read.
With the grading system, though, feasibly, you could go up against 8 other really good
writers, and somebody else can go up against 8 other really bad writers.
No, no, it's only 2. Well because like 2 and thenÉoh sorry, I
thought three different people areÉ You'reÉone paper, it's going to be 3 copies,
to 3 different people, and so you're going to have 3 copies going to Mr. A, Mr. B, and
Mr. C. Don't they each have three papers though?
Or are the each just grading yours? Oh, I see what you're saying, yeah.
You're competing against 6 people soÉfeasibly you can go against 6 great writers, and
somebody else can go up against 6 really poor writers, and they could get a 30 and you
could get a 15. Right, but the whole point of randomization
is that it's unlikely to happen, isn't it? Yeah, that's true.
So if you think that you're the unluckiest person in the world, then it would happen
to you. But that means all these other people are going to be fine. So thank you.
Another question? Do you just average out the score that you
get? Yeah. If you get 10, 10, 10, we're just going
to take the average. So you're going to get 30. And if you get one of each because
of some interesting combination, then you get 22 divided by 3. Yeah, you'll get
the average. Wait, so this out of 30 points, or out of
10? No, it's out of ten. So you're just going
to getÉI just said to assign it this way because
I was being a little bit sloppy, but it will be the average of the three scores you get.
Including your grading of our comments, what is briefing one out of total?
Briefing one is worth ten. The comments on briefing one is worth 5. They'll be
separate grades. On the syllabus I said your briefing one is worth 10, the peer
grading on briefing one is worth 5. Briefing two is worth 5. The peer grading on
briefing two isÉso 30 points is your total grade on these two briefings.
What is the standard that we're judging it by?
Which one is better. I mean likeÉwhat specifically are we looking
for? Which one is better. It's your objective judgment.
You're the politician in the elevator deciding if you like it using your
analytical powers to decide. But you just said that we couldn't write on
itÉ"Well, one and two are better than yours, and that's why you got three.
You can say that, but you must give a longer explanation than "just because". Right?
Any other questions? So if you get a bronze, you fail?
If you don't hand in anything, it's a fail. But I meanÉ5 out of 10 is a fail.
According to this thing, yes. I don't know where the cutoff is going to be for "fail"
for in this class. I will make sure that if somebody
fails this class, they deserve it. And I will warn them ahead of time, as I É "come
and see me now". I might have to look at grades right now, but I haven't looked at
the distribution of grades. Somebody asked me, they were very nervous, "Oh, I just
did the midtermÉwe've only assigned 35 of the points out of this class so far.
And the blog, essentially, is like a gimme. Anyways, we'll see how it goes. You can keepÉ
If you're nervous about gradesÉI don't knowÉyou're students. I'veÉafter awhile
you just give up and work hard. Any other questions?
I just had a question about the briefÉlike the topicÉhow do you define a special
interest group? You go to Wikipedia and you read about it.
It's essentiallyÉthat's when you read The Logic of Collective Action. You know all
about what that means. Do we need to define that in the briefing?
No. In the briefing I said no jargon. And you can't abbreviate it. SIG. Just to fit
in on the page. You can abbreviate whatever you
want to fit on the page, but remember, it's got to be fluid. It's got to be as good
as an editorial in the San Francisco Chronicle or The Wall Street Journal or The Economist.
I want good writing; and I want good writing because you as readers want good writing.
So that's what I'm telling you. Let's leave this behind and move right along.
Last question. I'm confused about what the jargon would be
like. If you just said cost and benefit, would that be considered jargon.
I meanÉif you say money, that's not jargon. If you say it's a moral hazard situation,
that's jargon, right? What the hell does moral hazard mean? No one knows. I don't
even know. So, sorry you have to work. Life sucks sometimes.
So let me make a little excursion on what I call Scientific Method. I got an e-mail
from one of my loyal readers of the blog: "It seems that many of your students (this
is about your blog posts) are starting from a conclusion and then trying to find
facts that support that conclusion. I would hope that you are teaching them to start with
facts and then the conclusions come of their own account."
Difficult question. Because the blogpostsÉI said to write something that you care
about. But he has a good point, which is that at some point you have to worry
aboutÉam I just trying to justify my opinion, am I trying to rationalize my opinion?
Or am I actually trying to find (as Schumpeter was very famous for doing, which is
why I read his biography)Éam I trying to find reasons why my argument is wrong?"
And then examine each of those reasons or objections and make sure that I address
them. You can't just say, "And some people might disagree with this, and they are
stupid." Right? You cannot use adhomonym logic to defend your
position. So let me explainÉlast class I mentioned
this notion of falsification, and I said I don't
know what the guy's name is. It's Karl Popper, who has one of the best names ever; I
should've remembered it. And Karl Popper basically said, "Look, it's not science if
you can't falsify it." If you have a theory, and it cannot be falsified, then you are not
talking about a scientific theory. You're just talking about an opinion.
It's a very simple idea, all right? I just stole this from the Wikipedia on this topic.
All men are mortal. Can you falsify that? Technically
not. Why can't you falsify that? Did you say no?
Because you can't prove that someone's immortal. You can't prove that someone is immortal.
It's kind of like a statement; it's not reallyÉ It is a statement. But let me compare it with
this one: All men are immortal. There's no way to really test that.
This one or this one? Either one of them. Well I guess mortalÉyou
could say people die, butÉ Can you falsify this? Yes. You can watch somebody
die. Well, you don't shoot them. You could shoot the, actually, right? That
would be the scientific method for Schwarzenegger, right? You are dead. Right?
So Schwarzenegger would get his PhD in this one. How would he do this one?
Try and kill everyone. Try and kill everyone. No! No! You've got
to findÉit's hard to find a person who's immortal. The worst problem of all is that
whenever you come along as a scientist, there's some kid that just got born who you're
never going to outlive, right? You can never prove that all men are immortal. You
can never prove that all men are immortal. Sorry. You can never falsify it.
That's what I mean. How can you falsify this?
You can never prove that all men are immortal? Mortal. How can you falsify this expression?
You can't. Obviously we don't believe it, but we don't know. There could be some
guys up in the hills, in the Himalayas, who's immortal. The whole vampire thing right?
There's some vampire out there besides in the movies. Yeah?
But even if you find someone that's been alive for like 200 years, it doesn't prove that
they're immortal. They could die the next day.
That's right. But you can't falsify that they're immortal, because you don't know that
they're going to die the next day. Unless you kill them, but you killed them then,
right? It's like God. You can never prove that God
is there. Right. The whole God exists or God doesn't
exist. Or God is dead, or whatever. What was that jokeÉso and so says, "God is dead."
And who is that philosopher who said thatÉNietzsche. And then Nietzsche died,
and God was like, "Ha Ha." Right? But this cannot be falsified. Bad. Good. This
is falsifiable. This is scientific, this is not scientific. This is what I was trying
to tell you without having a really nice example. So this gets us to this question,
a very important question on scientific method on the difference between deductive
and inductive reasoning. What does deductive reasoning mean?
Where you start with an assumption, and you kind of work your way down to finding if
it's false? So you go from, essentially, general down
to predictions. And those predictions should be falsifiable, right?
What does inductive reasoning mean? You look from the end, and then you go backwards?
What does that meanÉthe end and you go backwards? You look at the results, and you try figure
out where it started. So you look atÉlet's call it facts. And then
you try and get a theory from the facts. You try and generalize.
So in economics, a lot of economics is done in this way. This is whyÉif you do have
an economics textbook, and you might open it up, and they talk about consumer
theory, and they say, "Let us begin at the start. We say that consumers have
preferences. And the preferences areÉwe say that they must be transitive, and they
must be commutative," and from these assumptions we get these implications. And
these implications are, for example, that consumers will always prefer more.
Consumers willÉno sorry, I don't know if that's an implication. But they build that
up (they, essentially the mathematical economists, of which I am not one) into a
theory of consumer choice, or how consumers are going to behave or interact. And
they say, "And now, we can go and test these things out." What I have been pointing
out is that sometimes these predictions are very mathematically true, but they are
actually false in terms of what we see in the experiments. That kind of thing on the
trust game, okay? So, this is a dominant paradigm in economic methods, whereas
thisÉthis is the kind of thing that I say which is, or you guys are doing your
blogposts, which isÉwhy is that it costs more to park in Berkeley than it does
inÉwhateverÉWalnut Creek. You just ask yourself a question, and then you try and
come up with a plausible explanation. Robert Frank's book is full of those plausible
explanations. The on that a lot of people don't like is theyÉwhy is milk shipped
in a square container, and soda in a round container? You guys remember that in
the book? Do you remember the explanation? Or did you agree with the explanation.
I don't remember what it was. Was it the stacking? It was space, right?
The squares conserve thermal inertia in the refrigerator. But what's the more obvious
reason? Physics people. Why is soda in a 2-liter bottle that's round, and milk in a
square container? Because it's pressurized?
Because it's pressurized. We don't have pressurized milk containers. A square
container won't hold pressure, right? That's why the egg is one of these amazing
little things. This little pressure vessel, right? I think people build things on egg
shells. LikeÉyou can walk across them because they are soÉthe structure is so
strong in terms of resisting crushing. So going from facts to generalizations, true
or not, you want to make them falsifiable. You can do that. They're both
valid scientific methods. You just have to realize that one is one way of doing things,
and one is another way of doing things. So this isÉI just wanted to make that comment.
So for example Olson's theory would be inductive right? BecauseÉactually, can it be
falsified? Aren't a lot of the big economic theoriesÉthe theory that big groups don't
get public goods becauseÉ
The small exploit the large. So I meanÉis thatÉthat's not falsifiable
because technically we don't know if maybe in
the future, that comes along, or if there's a society in which people do that, but we
don't know if they're discovered or whateverÉ Right. That's a perfectly good question that's
especially applicable with the briefing and such things like that. It canÉso Olson
saysÉand I think OlsonÉwhat he was trying to do was just describe a phenomena,
which was inductive, right? What we notice often in the real world is that a small
group, a special interest group, will be able to collaborate to create some exploitation
of a large group, right? And there's a million different examples.
So it's like heyÉthere's something going on here. Is it always true that the small
will exploit the large? No, right? Does Olson really
care? Not necessarily, right? He's trying to describe a phenomena. And this is
a huge question. Is it falsifiable? If you did want to create a falsifiable situation,
then you could do an experiment, you could get a group of people and thenÉbut
thenÉno the whole idea is that they always exploit them is wrong. "They never
exploit them" is falsifiable. Right? So what I mentioned in the last lecture is in
the course of doing your studies, and this happens more at the PhD level, butÉif you
actually create a hypothesis that you want to falsify, then you can do that, right?
But you just reverse the wording. Do the small always exploit the large? I don't know.
Do the largeÉdo the small never exploit the large? Well, we can falsify that
by only finding one example of one special interest group exploiting the large.
So that's how you would make it scientific by literally justÉlike clever wording.
Well, when you talk about them always exploiting, can you just kind of find one
situation and that's falsifiable? Yes you could. You use the word always, absolutely.
But the thing isÉthen you're intoÉare they always exploiting? Is this
part of a logic game of not exploiting today, but maybe exploiting tomorrow? That kind of
gets back to the immortal man problem, right? So you might be able to do
it with a good enough construction of your hypothesis? But it's much simpler just
to say that they never do, right? And falsify it that way.
So just basically save yourself the effort, which is what the lesson of that is.
Would that point to you, basically, that you would have to look at the time frame and
as soon as you extend it indefinitely to the future, you always have toÉyou're already
out of the game. You can never falsifyÉ Yeah I mean it depends on how you falsify
the borders of the game. If the game is unlimited, then you're in trouble.
So you'd have to say in modern society, or whatever.
Right. And you can go to all the post-desconstructivists and stuff like that. So
this is the big philosophy of science kind of discussion.
It probably doesn't even belong in this class, but it's curious to keep on track.
Does anybody, by the way, need a copy of The Tragedy of the Commons and didn't
get it? Anyone? Briefings? Anyone? Anybody need the briefings?
Okay. Auctions. Right. So I'm going to talk a little bit about theÉa little bit of
auction theory, not very much. Who here has participated on eBay auction? Like
bidding. Not "Buy it Now". In factÉlet's do it the other way. Who has never
participated on an eBay auction? Okay. Who has never participated in any auction
period? Okay, couple people. Alright. So let'sÉwait a second. So you guys didn't
go to section? OhÉyeahÉ
That was my second question. How did section go? How were the auctions in
section? You did participate then? It was, unfortunately, a winner-take-all number
of points for somebody, right? So what did you guys learn in those discussion
section auctions? Some people are ruthless.
Ruthless! What were we doing? I forget what the auction wasÉoh yes, it was
trading, right? People were endowed with a certain number of goods. And there
was a buy and a sell. Ruthless. Meaning ruthlessly trying to make a profit?
Yeah. Did they come and hit your or something?
No, but just the pricing at firstÉprices would like jump up and down, but then people
were likeÉthey'd go from like $5 to $5.05É So people were annoying, is what you're saying.
Or boring. It's like $5.06, $5.07Éso people were really trying to get the last
penny, in a sense, out of that? You didn't even have to. Because a lot of
times where you sit, and who speaks rightÉ Where you physically sit?
Yeah because likeÉthe order that we were inÉlike just before youÉwho speaks right
after you. Like if a buyer goes first, and you're like $8, I'll just be likeÉokay.
So that's the problem of creating a reference point. It's an access toÉdid you sit
there today to get better access to a book for the auction? You did. Okay. That's a
very strategic nod. I was going to say the same thing.
Same thing. You guys stop talking to each other, or you're going to start sharing
your comments. Yeah? For some reason I thought the buyers had the
advantage. The buyers had the advantage of?
For this simulationÉeven if we rotated or traded the order of the gameÉI still thought
the buyers had the advantage. How did the buyers have an advantage?
I feel like they had a higherÉlike they were able to buy things and their valueÉwell
yeah. They were able to buy it a lot cheaper. The buyers were able to buy it by definition,
right? So you're saying that they were getting a surplus?
I think that their profit margin was a lot higher.
So the whole idea of these auctions is that taken together, you guys in the class have
a supply and demand schedule. So these are the sellers, and these are the buyers.
And what you're saying is that you might have a buyer with such and such a
valuation for that unit, and a set of sellers, and they'll say, "Oh, I'll offer that." And
they would make a sale. Is that what you're saying? So then the total surplusÉmore
went to thatÉin that particular transaction. But you're saying it was unfair, because
the buyers had more of an advantage. Were you on the sell side? Who was on the
sell side and felt that they were being exploited by the buyers?
Who was on the buy side and felt that they were being exploited by the sellers?
Who was on the buy side and was so happy that they were on the buy side?
Sell side? Who was happy to be on the sell side? So like whatever. A whole bunch
of no hands, right? So look. The thing isÉrememberÉthis is a
very important thing to take out of this particular example, but it applies everywhere.
If you're in this bilateral marketÉbuyers and sellers, a bunch on each
side, and say that you're a seller, who are you competing with? Sellers. Right? What
you really want to do is you want to kill all those people.
You got divided into one half of the room and the other, right? So it's likeÉyou just
want to turn around and push all the other people against the wall. You can't do
anything. Then you are a monopsonist, right? And if you're on the buy side, you're
competing against the buyers. And if you happen to haveÉif you're on the buy side
and you're up here, you are sitting pretty. Because you're going to make a killing
because everybody else is down here. They can't even bid like you can bid to get the
surplus. And if you do get one of these low value ones, you're really happy. Did you
guys end up converging on some kind of equilibrium price? Something? Or was it
like completely irrelevant? A lot of people were like really unwilling
to settle on prices because they knew that they were trying to make the most.
So the bidding would likeÉkeep going a little bit more?
Yeah. Like people would have accepted it if it hadn't been for likeÉoh, we might make
a little more ifÉ So this was the ruthlessness part. But were
both sides ruthless, or was one side more ruthless than the other?
Both sides. Both sides. Those profit maximizers. Yes?
I feel like the winners were not necessarily winning because they were really savvy in
auctioning, but because they lucked out. Yes. That unfortunately is a strong possibility.
Although I have run these things in labs before, and I've seen people likeÉcompletely
fail. They were given a good hand, and failed.
That doesn't necessarily reflect likeÉa real auction though, right? Because you choose
your ownÉ Well, this brings up an interesting question.
So I put up this for sale. This very valuable fake ***. It's what? What is this?
It's a piece of bread? It looks like a *** to me.
So I've got this *** for sale that you really want. And your valuationÉnow this is a
private evaluation right? And in your head, you're likeÉoh my god that's worth $20.
And then Bill Gates is sitting in the back going: "Oh I love turds." And he bids $100.
And you're like, "Oh that's not fair!" Right? But that would be what actually
happens in terms of the world, right? So in the auctionÉessentially we made you
rich or poor in that auction at a randomÉhopefully randomÉway, right? If the GSIs
were taking side bribes as they handed out those supply and demand schedules,
that's a different story. But the whole point was, in a sense, as far
as learning is concerned, and they realize there was some annoyance calledÉit's not
fair. They got three points and I should've if I worked harder. But the whole
point is that even if you didn't get those three points, you would have learned what
the hell was going on. And three points nowÉbut you knowÉlook forward to the rest
of your life. The best class that I ever took when I was in undergrad was an investment
class, and they saidÉdon't play the stock market. And after the 10 years of making
a mistake in trying to play with the stock market, it was a very, very good class,
right? So try and take that question away from it.
Other comment? Yeah? There was one auction in our section that
was a complete gimme. There was a really cheap buy, and someone got a huge profit.
TheyÉthat doesn't even factor in to like the
winnings. The winnings came from the fact that the personÉall three of the units, they
made a profitÉ Right. A steady set of profits. Right. That's
what you want to do. You want to make steady profits.
I was thinking about it, and you can win the game easy if you have two friends working
togetherÉ Collusion. Yes. How do you win the game easy
with collusion? You can justÉlet's say the buyer goes first;
he can bid the lowest price, and the buyers buy at whateverÉ
So when you're the seller going first, did you know who was going to be able to bid
on the buy side first next? Yeah.
You did know ahead of time? And so likeÉdude, you're going next. $1! Right? Was
that happening? You couldn't communicate. So how were they colluding? Brain
Before the class! You're my friend, stay my friend. 3 points!
That as another thing I didn't understand. Because I was a buyer, and my reasoning
was we should start bidding at $1, and it would start going from there. Everybody was
just like $6! It's likeÉwellÉthat would benefit you if you started at $1. You would
get it cheaper, and you would make a bigger profit
too, right? But I didn't understand that trend. Like why people wouldn't startÉ
So there was a questionÉI think part of the questionÉthe nervousnessÉit was by
necessity that we had to do one person at a time because there's 20 or 25 people in
the room. If you look at eBay, like everybody's like piling in at once. Only for one
item for sale. And when we do the auctions in the near future, because we have to
make sure we do it in this class, you guys will all be simultaneously bidding. So that
strategic ordering problem will go away. And that is significant. Ordering is a very
significant issue. Another thing, yes? One thing that I thought was interesting was
that when we started the second periodÉbasically whoever went first, set
a price, and the next seller would say the sameÉwould ask for the same price. And it
was kind of like every timeÉin period two they started off with the buyers in our thing,
and they set a price, and the seller would be like "Accept". And then the next buyer
says the same price, and the seller was like "Accept". And it just keptÉit happened like
6 times. Like people just kept saying the same number, and they weren't learning.
you just have a bid out there, and then no one pays attention to you. Then you don't
sell at all, right? There's an issue with these kinds of auctions which is calledÉI
surplus, okay? But the worst situation is where someone saysÉI'm going to buy
even if lose money. And I've seen this in experiments. I'm doing
low just for the joy of trading. It screws up everything as far as I'm concerned.
Because you're like, "Oh my god! I've got irrational people in there!" But maybe
that's rational. So there was a girl in one of my experiments,
worth $15.50. And she bid $49. And it's likeÉyou're running my experiment! Because
she ended up with all the tickets, and it's likeÉI'm not going to bid $49. I mean
and she had a check for 45 cents for her earnings for the entire experiment, she left
the tickets behind. And I was like, "What happened?" And she's like, "I thought that
Okay, that's where the reality hits the theory. Yeah?
comfortable with the process that even if we can't communicate, peer pressure still
happens because you shoot people evil looks. If the buyers, for example, start really
high, and you can hear this "UGH" and I think that it could, in a situation where
to hate me if I do this, you know? That's right. So peer pressure matters. I
mean the best thing that you could hope for in terms of auctions and efficiency, moving
doing lots of transactions, then peopleÉthey get used to each others patterns,
they get used to the strategy, they get used to setting different values. But if you
round in the whole class period, because like the GSIs just sat there and talked, and
talked, and talked like meÉthen you wouldn't learn anything. Because it'd be almost
hope you guys learned today; have a good class, right? So it's learning by doing,
essentially, in these auctions. And also, that feedback is significant. And the person
aahs, but yeah, I got the item, right? So that will happen when Bill Gates walks in
and buys the ***. Another one? I think people were mad because they didn't
really understand (or upset) because they didn't understand the strategy. Like a lot
of the sellersÉthey weren't seeing a lot of
profit because people didn't understandÉyou set your price really high, and it'll slowly
come down. But people would start offÉif they had something that was valued around
5Éoh I have 10. But if I was a seller (I was a buyer) but if I was a seller, I'd start
from like $100.
But even if you were in the random order, or if you were in the set order, you would
think that you don't have anythingÉ But you might sell it at $100, but you mightÉoffer
it at a $100Éand no one takes your offer. Then you get nothing at all.
But what would happen is that people would pick up on the strategy, and slowly, very
slowly, come down. And it would force the buyers to increase.
Right. The real problem in a sense, bothÉI mean a lot of problems are stemming
from the way I asked the GSIs to structure this in an order. This side, that side. It
was like the trading pits at the Chicago board of exchange. It's like AH and there
would be a price. You know a whole bunch of ex-football players
trade in those pits. Because they are literally like shoving each other. And guys
will like get hernias yelling at each other. It's crazy. Go watch the footage on these
pits. The Chicago Board of Trade. The oil pits, or the soybean, or whatever. It's just
like, "Ah!" or watch Trading Places, which is a good film.
Okay back to theÉmore and more stuff on auctions. And of course auctions have
been very, very popular inÉthere's a huge debate right now about cap and trade.
SoÉshould the permits for cap and trade be auctioned, right? But very successful
auctionsÉanother one for environmental goods (they're very successful) are the
sulfur dioxide auctions. This started after the 1990 Clean Air Act was passed. That
was a cap and trade. And what happened wasÉthey said look. We have emissions
that have been going like this, and here's the trend line. And we want to set a cap on
you guys on Tuesday.