Memes and Almost Rational Actors

I have yet to see evolved economic theory that does not depend on economic actors being rational - and unboundly so.

From what I see in real life, people do not evaluate their utility functions; they often cannot rationally compare two similar financial products of very simple nature.
What they do instead, is reliance on ready-made recipes, heuristics, or memes.

Instead of evaluating utility of different potential scenarios, people just juggle a lot of "if..then.." memes - many of them taught by media.

One way to develop economic theory would be to decouple actors, who have property rights and some limited rationality, from memes, that influence many decisions.
This might open an interesting dimension, which could bring education, religion, and culture into scope of economic theory.

Attack on Utility

Let's attack established notions of utility function and time value of money.

Settings: economic problems in a world populated by rational consuming actors.

Every actor is characterized by its preferences between different schedules of consumption.

Definition: A schedule s : S =def= R -> Rⁿ is a function from real time to real intensity of n different modes of consumption.

Definition: A preference >= : A =def= S x S is a partial order - a binary reflexive, transitive, and antisymmetric relation between schedules.

In game theoretic term both schedule and preference form a strategy for choosing moves - consumption intensities.

Assumption (unbounded rationality): actors have no problems comparing huge or even infinite objects.

Assumption (decisiveness): actors always prefer one of two different schedules.

Thus all preferences are total orders.

In a world without other rational actors or random nature, the state of world limits the possible schedules.
E.g., if the actor has some bread, and no means to produce or acquire more, then the possible schedules are limited to those where cumulative consumption of bread over time is not more than given.

Definition: A deterministic state of world w : W =def= P(S) is a set of possible schedules.

Under certain natural conditions, every every actor prefers some schedule in every state of world.

Definition: maxWS : A x W -> S.

This induces total order between world states: lift : A -> P(W x W).

TODO: probabilistic states. how do actors know probabilities?
TODO: concurrent actors. how do actors know who caused what?
TODO: long-term decisions.

The Ethics of Money Production

The Ethics of Money Production by Jörg Guido Hülsmann, 2007

We will argue that natural money production can work;
that it has worked wherever it has been tried; and that there
are no tenable technical, economic, legal, moral, or spiritual
reasons to suppress its operation. By contrast, there are a
great number of considerations that prove conclusively the
harmful and evil character of inflation. And in our time
inflation has become persistent and aggravated because various
legal provisions actually protect the monetary institutions
that produce this inflation.

Also:

Central planning or hyperinflation (or some mix between
the two)—this is what the future holds for an economy under
paper money.

Patterns

Brokerage of "double coincidence of wants" and "indivisibility of goods", increasing liquidity (leading to uniform prices), and possibly decreasing number of markets:
# Money (broker of N products and services; N markets instead of N*(N-1))
# Banking (broker of loans and deposits - time market)
# Exchange (broker of participants - money without storage/time market function; futures and options as storage function?)

Joint-stock companies?

http://mises.org/rothbard/mes/chap3a.asp
http://www.econlib.org/library/YPDBooks/Jevons/jvnMME15.html

Force funding - a loop with a positive feedback:
More force obtains more funding, more funding obtains more force
By itself is detrimental (extortion), but can be a vehicle for public benefit.

Marketability/demand for a medium of exchange is another loop with a positive feedback.
# It either originates from a directly useful commodity
# Or via fiat/force
Can protection from force be encoded as tokens, which are "a directly useful commodity"? This would unify two origins of money.

For durable goods, each unit may be sold in toto, or it may be hired out for its services over a certain period of time.
People are both agents with utility preferences AND durable goods, either sold or hired out for their services.
Non-durable goods also perform services, but only once - during their consumption.
Prices of goods are induced by prices of their services.

Prices are determined by beliefs. All agents have limited rationality. Manipulation of beliefs of others may be profitable.

Utility. Elasticity. Substitutability. Complementability.

Making Actuaries Less Human

Making Actuaries Less Human

Work by psychologists suggests
that, as human beings, actuaries are subject to a variety of mental biases and decision
making errors. The field of behavioural finance looks at how such biases affect
financial decisions.

This paper first looks at a selection of these biases including how:

• decisions are often made by adjusting from an existing position
  (anchoring)
  
• people are risk averse when facing gains but become risk seeking when
  facing losses (prospect theory)
  
• the framing of a problem can materially impact the decision that is made
  
• the frequency with which something is monitored can impact the decision
  (myopic loss aversion)
  
• people have a tendency to ignore underlying probability distributions
  
• almost everybody is overconfident
  
• when a number of different options are presented, the number, order and
  degree of difference between the options will affect which option is
  chosen.
  
• the use of separate mental accounts impacts financial decisions (mental
  accounting)
  

Asynchronous Collaboration in Online Games

Asynchronous Collaboration in Online Games

Reasoning the Fast and Frugal Way: Models of Bounded Rationality

Reasoning the Fast and Frugal Way: Models of Bounded Rationality

Humans and animals make inferences about the world under limited time and knowledge. In contrast,
many models of rational inference treat the mind as a Laplacean Demon, equipped with unlimited time,
knowledge, and computational might. Following H. Simon’s notion of satisficing, the authors have proposed
a family of algorithms based on a simple psychological mechanism: one reason decision making.
These fast and frugal algorithms violate fundamental tenets of classical rationality: They neither look up
nor integrate all information. By computer simulation, the authors held a competition between the satisficing
“Take The Best” algorithm and various “rational” inference procedures (e.g., multiple regression).
The Take The Best algorithm matched or outperformed all competitors in inferential speed and
accuracy. This result is an existence proof that cognitive mechanisms capable of successful performance
in the real world do not need to satisfy the classical norms of rational inference.

Iterative Combinatorial Auctions: Achieving Economic and Computational Efficiency

Iterative Combinatorial Auctions: Achieving Economic and Computational Efficiency

A fundamental problem in building open distributed systems is to design mechanisms that compute optimal system-wide solutions despite the self-interest of individual users and computational agents. Classic game-theoretic solutions are often prohibitively expensive computationally. For example, the Generalized Vickrey Auction (GVA) is an efficient and strategy-proof solution to the combinatorial allocation problem (CAP), in which agents demand bundles of items, but every agent must reveal its value for all possible bundles and the auctioneer must solve a sequence of NP-hard optimization problems to compute the outcome. I propose iBundle, an iterative combinatorial auction in which agents can bid for combinations of items and adjust their bids in response to bids from other agents. iBundle computes the efficient allocation in the CAP when agents follow myopic best-response bidding strategies, bidding for the bundle(s) that maximize their surplus taking the current prices as fixed. iBundle solves problems without complete information revelation from agents and terminates in competitive equilibrium. Moreover, an agent can follow a myopic best-response strategy with approximate values on bundles, for example with lower- and upper- bounds. My approach to iterative mechanism design decomposes the problem into two parts. First, I use linear programming theory to develop an efficient iterative auction under the assumption that agents will follow a myopic best-response bidding strategy. Second, I extend the approach to also compute Vickrey payments at the end of the auction. This makes myopic best-response a sequentially-rational strategy for agents in equilibrium, inheriting many of the useful game-theoretic properties of the GVA. iBundle implements a primal-dual algorithm, CombAuction, for the CAP, computing a feasible primal (the provisional allocation) and a feasible dual (the ask prices) that satisfy complementary slackness conditions. An extended auction, iBundle Extend & Adjust, interprets a primal-dual algorithm, VickAuction, as an iterative auction. VickAuction computes the efficient allocation and Vickrey payments with only best-response information from agents. Experimental results demonstrate that iBundle Extend & Adjust, which keeps iBundle open for a second phase before adjusting prices towards Vickrey payments, computes Vickrey payments across a suite of problems.

Algorithmic Mechanism Design

Algorithmic Mechanism Design

We consider algorithmic problems in a distributed setting where the
participants cannot be assumed to follow the algorithm but rather their
own self-interest. As such participants, termed agents, are capable of
manipulating the algorithm, the algorithm designer should ensure in
advance that the agents’ interests are best served by behaving correctly.
Following notions from the field of mechanism design, we suggest a
framework for studying such algorithms.
In this model the algorithmic solution is adorned with payments to
the participants and is termed a mechanism. The payments should be
carefully chosen as to motivate all participants to act as the algorithm
designer wishes. We apply the standard tools of mechanism design to
algorithmic problems and in particular to the shortest path problem.

Draft

Identity Mechanisms
Jurisdictions
As libraries of implied contracts.
Not necessarily defined geographically, but must define how conflicts between jurisdictions are resolved.

Strategic preferences as main influence on the outcome
Manual commands for socializing
Automated suggestions to bring preferences in sync with observed behavior

attenuated needs
the more some means to achieve satisfaction is exercised, the deeper this need becomes
this amplifies both positive and negative effects

(almost) no service that works 100% reliably - communication, transportation, search, and reports are performed by agents with their own limitations and agenda
all UI is built from interaction with agents - e.g., no automated "satisfy this purchase order" button, but you can have an assistant agent to whom you can express such a request (which may fail to be satisfied by mistake or malice)

SUBJECTIVE PERFORMANCE MEASURES IN OPTIMAL INCENTIVE CONTRACTS

SUBJECTIVE PERFORMANCE MEASURES IN OPTIMAL INCENTIVE CONTRACTS

Incentive contracts often include important subjective components that mitigate
incentive distortions caused by imperfect objective measures. This paper explores the
combined use of subjective and objective performance measures in (respectively)
implicit and explicit incentive contracts. We show that the presence of sufficiently
effective explicit contracts can render all implicit contracts infeasible, even those that
would otherwise yield the first-best. We also show, however, that in some
circumstances objective and subjective measures are complements: neither an explicit
nor an implicit contract alone yields positive profit, but an appropriate combination of
the two does. Finally, we consider subjective weights on objective measures.

The Theory of the Firm

The Theory of the Firm

Politics 3

Politics 3

Politics 3 is against: adversary justice and law; amoral science; lower need economics;jungle journalism; medicine from above; technologized nursing; separative expertness; docility education; anti-transcendent religion; intrusive and non-Taoistic social work; nonpersonal psychology and sociology; nonparticipatory ethnology; merely punishing criminology and jails; selfishly antisocial advertising business and industry; business-first radio and television; health as merely survival; the use of personal talents or superiorities primarily to acquire selfish privileges; the use of other human beings without regard to their personal growth; antiquality manufacturing; noncompassionate radicalism; polarizing or relation between classes, castes, subcultures; nonsynergic salesman-customer relationships; and despair art.

Politics 3 is against all that rests on a merely evil conception of human nature or of society, or on a merely good conception of human nature or of society; despair and hopelessness; any we-they polarizing; malice, hatred, revenge; the wish for one's own death or the destruction of others, or of the world; any splitting of mankind into inherent classes, castes, or subcultures; and the assumption that any polarizations or splits which do exist are inherent and permanent.

Smart Contracts: Building Blocks for Digital Markets

Smart Contracts: Building Blocks for Digital Markets

The contract, a set of promises agreed to in a "meeting of the minds", is the traditional way to formalize a relationship. While contracts are primarily used in business relationships (the focus of this article), they can also involve personal relationships such as marraiges. Contracts are also important in politics, not only because of "social contract" theories but also because contract enforcement has traditionally been considered a basic function of capitalist governments.

Whether enforced by a government, or otherwise, the contract is the basic building block of a free market economy. Over many centuries of cultural evolution has emerged both the concept of contract and principles related to it, encoded into common law. Algorithmic information theory suggests that such evolved structures are often prohibitively costly to recompute. If we started from scratch, using reason and experience, it could take many centuries to redevelop sophisticated ideas like property rights that make the modern free market work [Hayek].

The success of the common law of contracts, combined with the high cost of replacing it, makes it worthwhile to both preserve and to make use of these principles where appropriate. Yet, the digital revolution is radically changing the kinds of relationships we can have. What parts of our hard-won legal tradition will still be valuable in the cyberspace era? What is the best way to apply these common law principles to the design of our on-line relationships?

Computers make possible the running of algorithms heretofore prohibitively costly, and networks the quicker transmission of larger and more sophsiticated messages. Furthermore, computer scientists and cryptographers have recently discovered many new and quite interesting algorithms. Combining these messages and algorithms makes possible a wide variety of new protocols.

New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts "smart", because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on these promises.

From Capabilities To Financial Instruments

From Capabilities To Financial Instruments

A major aspect of the emergence of capitalism from feudalism was the rise of contract. By creating a contract, you could define and transfer an arbitrary bundle of rights. The complexity of trade could now bloom, unrestrained by the simple limits of physical matter. During the twentieth century, a great variety of financial instruments were invented. These instruments represent the discovery of many new kinds of rights, and ways of deriving these rights from more primitive rights. We should hope the growth of financial cryptography will only accelerate this trend. For this hope to be realized, we should seek not just the secure computational expression of the contracts representing existing instruments, but the creation of secure material from which similar new contracts can easily be built. Following Nick Szabo [Szabo97], we refer to a partially self-enforcing computational embodiment of a contract as a smart contract.

A Formal Language for Analyzing Contracts

A Formal Language for Analyzing Contracts

The author presents a mini-language for professionals and researchers interested in drafting and analyzing contracts. It is intended for computers to read, too. The main purpose of this language is to, as unambiguously and completely and succinctly as possible, specify common contracts or contractual terms. These include financial contracts, liens and other kinds of security, transfer of ownership, performance of online services, and supply chain workflow.

A Non-Technical Introduction to Bargaining Theory

A Non-Technical Introduction to Bargaining Theory

...
What variables (or factors) determine the outcome of negotiations such
as those mentioned above? What are the sources of bargaining power?
What strategies can help improve one’s bargaining power? What variables
determine whether parties to a territorial dispute will reach a negotiated
settlement, or engage in military war? How can one enhance the likelihood
that parties in such negotiations will strike an agreement quickly so
as to minimise the loss of life through war? What strategies should one
adopt to maximise the negotiated sale price of one’s house? How can one
negotiate a better deal (such as a wage increase) from one’s employers?

RELATIONAL CONTRACTS AND THE THEORY OF THE FIRM

RELATIONAL CONTRACTS AND THE THEORY OF THE FIRM

Relational contracts—informal agreements sustained by the value of future
relationships—are prevalent within and between firms. We develop repeated-game
models showing why and how relational contracts within firms (vertical integration)
differ from those between (non-integration). We show that integration affects the
parties’ temptations to renege on a given relational contract, and hence affects the best
relational contract the parties can sustain. In this sense, the integration decision can be
an instrument in the service of the parties’ relationship. Our approach also has
implications for joint ventures, alliances, and networks, and for the role of
management within and between firms.