Are reciprocal ratings the cure or the curse?

You take a Uber ride. You get off the car, open your Uber app, and leaves the driver a 4.0 / 5.0 rating. As you walk away from the car, the driver pulls out her app, and gives you a 5.0 / 5.0 rating. This is an example of reciprocal ratings, i.e., where both parties get to rate each other.

There are many examples of reciprocal ratings, especially in areas where the experience is co-created and / or shared by both parties (albeit could be in different ways). For example, on Airbnb, the guest(s) get to rate the host(s) and vice versa. In debate competitions, the adjudicators score the speakers and the speakers often get a chance to rate the adjudicators in return based on the justification of their decisions and the quality of their feedback.

The question I’d like to discuss in this post is: do reciprocal ratings bring net benefits or net harm?

The Case For Reciprocal Ratings: Fairness & Incentives to Perform

Starting from principles, it seems fair to let both sides rate each other, especially if both sides share responsibility in an experience and / or are impacted by the other side’s actions. For example, the holistic Uber ride experience is affected by both the driver’s performance (e.g., cleanliness of vehicle) and the user’s behavior (e.g., arriving on time).

I really like the concept of The Wittgenstein’s Ruler, which Nassim Nicholas Taleb (the author of “Black Swan”) talked about in a Tweet:

It is worth repeating: “When you use a ruler to measure the table, you are also using the table to measure the ruler.” Sometimes, the best measurement of how good a ruler is is not an external judge, but the tables that are measured by itself.

brown ruler with stand

If we look at practical consequences, reciprocal ratings may help both parties become more accountable for their behavior and / or decisions. In the example of a debate competition, for example, letting debaters rate adjudicators in return incentives the adjudicators to: (a) be more responsible in reaching a decision, and (b) be more detailed & elaborate in explaining their decision. Just as an adjudicator’s feedback could help debaters improve, so does a debater’s feedback let an adjudicator learn how to better judge a debate. Taking a step back, this type of benefit is not unique to reciprocal ratings, but to ratings in general: when people know that their performance is being measured (and that measurement is linked to some carrots or sticks), they are more likely to put in more effort. It is all about incentives. Economics 101.

You could say that reciprocal ratings make the interests of both parties more intertwined with each other – because debaters have a chance to rate adjudicators, it is now in both the debater and the adjudicators’ best interests to let debaters receive well thought-through feedback after a debate round. Reciprocal ratings put everyone “in the same boat” in a way.

two people shaking hands

The Case Against Reciprocal Ratings: Inflated Ratings?

But sometimes you could go from two parties being close to each other to two parties being too close to each other. Making the interests of both parties interrelated provides incentives to cooperate, as well as incentives to cheat. For example, if debater feedback for adjudicators were submitted using their real names in a debate competition, then one could argue some debaters may inflate their score for an adjudicator for fear of retaliation by that adjudicator (assuming the debaters have a significant chance of running into the same adjudicator in a future round).

There are real-world examples where people are asked to leave comments under their real name – Airbnb guest reviews, for example, are published under the guests’ real names & profile pictures. This helps to increase the perceived legitimacy and authenticity of the reviews in the eyes of interested people checking out the property’s profile page.

Assuming that (a) hosts get to rate guests in return and (b) hosts get to see the guests’ ratings & comments, then one possible scenario may happen: a guest inflates the rating for his / her host out of fear that if he / she gives the host the low rating, the host would retaliate with a low (or even lower) rating in return. The problems is symmetrical, as in one could argue that the host also has an incentive to inflate his / her ratings of the guest for the exact same reasons.

Assuming the ratings are indeed inflated, would that break the whole rating system?

Before we dive into this question, let us first look at the bigger picture: why do ratings matter in the first place? How are ratings used by a platform like Airbnb? It is worth pointing out that what matters more is the relative ranking rather than the absolute score. It is the differential rather than the absolute value that holds the key. For example, Airbnb uses relative ranking of host property to decide the ranking of search results for properties that match a user’s search criteria; similarly, Uber uses driver ratings to prioritize ride assignment.

With that established, let’s come back to the inflated ratings problem. For simplicity, let us study one side of the problem, i.e., let us assume Airbnb guests inflate their ratings of their hosts. What happens then? (Note the other side of the problem, i.e., hosts inflating their ratings of the guests, should follow a similar thought process as below.)

Let’s break down the problem into two possible scenarios:

[Scenario A] Rating inflation is a generic problem, i.e., the majority of guests inflate their ratings of hosts, or what the defenders of fairness would call “the whole system is rigged”.

There are two sub-scenarios:

(A1) If the majority of guests inflate their ratings by a similar absolute amount, e.g., +1 star higher.
=> Verdict: In this sub-scenario, rating inflation does not impact the effectiveness of the search ranking algorithm. This is because if the score of every host gets bumped up by +1 star, then their ranking does not change, i.e., a potential guest searching for a property would still see a list of hosts ranked in the same order;

(A2) If the majority of guests inflate their ratings to a certain level, e.g., if everyone gives their hosts 4 stars (regardless of whether they think they only deserve 2 stars or 3 stars), then things get a bit tricky. You could say in this case, the really stellar hosts will still get their 5-star ratings and rise to the top of the competition – they would still be prioritized by Airbnb’s search ranking algorithm. However, in this case, one could no longer differentiate between the mediocre hosts (e.g., those who deserve 3 stars) from the really bad ones (e.g., those who deserve 2 stars), as their scores are all inflated to 4 stars across the board.
=> Verdict: In this sub-scenario, rating inflation does make the ranking algorithm less effective – it is still able to break down hosts into groups based on their ratings (stellar hosts vs. other hosts), and prioritize the groups in search results. However, the grouping becomes less granular. One could argue the practical results may not be too bad – as the super-stellar hosts that get 5 stars would still come up at the top of search results for hosts. If we assume that the top search results are also the most-clicked-on results by potential guests, then it is likely that the final choice of the guests are not distorted that much. This kind of reasoning reminds me of the Pareto principle (80/20 rule) – applied in this context, 20% of your search results (the top ones) may generate 80% of your revenue. If this holds, then as long as the top search results are not distorted, then the search ranking algorithm has served its purpose.

Image result for 80/20 rule

[Scenario B] Rating inflation is an isolated problem, i.e., only a very small % of the guests inflate their ratings of the hosts. The majority of the guests rate their hosts honestly.

The answer here is quite straightforward: this would have very limited impact on the search ranking results. Perhaps a small number of hosts would get their ratings bumped up a bit, but the majority of the hosts are ranked fairly. By definition of an “isolated problem” above, this is not a problem that causes massive headaches for the average user – and hence not worth losing your sleep over.

The Verdict on Reciprocal Ratings

Having reciprocal ratings is probably a good idea – based on the very limited analysis thus far. Caveats: 1) I have (very lazily) only considered inflated ratings as a down side to reciprocal ratings, though there could be many more, and 2) the designs of the ratings could affect the incentives of players – for example, is one side asked to rate another side first? Are the ratings published in real time? Are the ratings published anonymously? Etc.,

All in all, I find reciprocal ratings design – and ratings in general – to be a fascinating real-world game-theory topic. The next time I take a Uber ride and rate a driver, I’ll certainly “think twice” before giving that 5 stars.

person holding black iphone 5

Come Out to Play for Fun – On “Finite and Infinite Games”

Context: This post is inspired by the book Finite and Infinite Games. As the subtitle reads, this book offers “a vision of life as play and possibility.” Perspective-changing. At time of writing, I have finished ~1/3 of the book.

Finite games play within boundaries.
Infinite games play with boundaries.

James P. Carse, “Finite and Infinite Games”

There Are Two Kinds of Games

Namely: finite games and infinite games. See quote above for what I think is the most important takeaway to remember on what sets the two apart.

But first, let’s talk about what all games have in common: whoever plays, plays freely (by free choice):

In one respect, but only one, an infinite game is identical to a finite game: if they play they play freely; if they must play, they cannot play.

James P. Carse, “Finite and Infinite Games”

Other than this similarity, finite and infinite games differ drastically. I summarize below the key takeaways for different types of readers:

A/ For efficiency-maximizing readers => here are your bullet points

P.S._version_fun: I am aware that “efficiency-maximizing” is sometimes used as an euphemism for “I don’t have time” and / or “I don’t care” and / or “I am too important for details”. Just joking. 🙂

How to read: trait_of_finite_games vs. trait_of_infinite_games (I give myself credit for clearly labeling my legend):

  • Goal: to win vs. to continue playing;
  • Is temporally bounded: yes (clear start and end) vs. no (unclear start and no end)
  • Is spatially bounded: yes (within a marked area) vs. no
  • Is numerically bounded: yes (fixed number of players, so that one could emerge as the clear winner and end the game) vs. no (players walk on and off the field as they wish)
  • Rules of the game: contractual terms by which the players can agree who has won, and do not change throughout the play vs. contractual terms by which the players agree to continue playing and are dynamic

B/ For word-lovers and creatives => here is your metaphor

And a bonus picture for the metaphor:

P.S._version_creepy: 23. This number is why I chose the picture above. The 23 enigma is, depending on your perspective, creepy and/or mysterious and/or inexplicable and/or irrational and/or nonsense and/or [insert adjective(s) of your choice].

I bet after you read up on “23” and its stories, you will start to see the number everywhere. Just like how I was able to immediately spot the 23 in this picture when I was searching for theatre-related pics. Don’t say I didn’t warn you. For those who want to go down the rabbit hole of more things that will surprise your brain (disclaimer: surprise could mean “mess up seriously” for some people) – check out the book Cosmic Trigger I: Final Secret of the Illuminati. My biggest takeaway from the book is: don’t read the book if you want to remain sane. You’ve been warned. This is the one time I am trying (and I think I am actually) being nice.

The metaphor itself (finally emerges after a super-long ad above which does not generate any additional income for me): finite games = theatre, infinite games = drama:

Finite games mirror theatre in –

  • Have a clear ending – finite games end when a clear winner emerges
  • Have scripted roles – all players in a finite game play the role that (they think) will help them win

Infinite games mirror drama in –

  • Avoid predictable outcomes – a game is an infinite game precisely because the outcome is not known
  • No scripted roles – players in an infinite game constantly change to continue the game playing with no ending, and to continue the surprise

Insert-rant: And I totally love I also used bullet points in this section. It is as plain as day that I am an efficiency-maximizing writer. I have deliberately chosen the color red to emphasize how unimportant this rant is. Oh, I meant the color red *and* the italics.

Some addendums on acting: in finite games, “self-veiling” is inevitable, as in all players act according to a scripted role (that they have assigned themselves, or think they ought to be playing). I find this part from the book to be very thoughtful:

What makes this an issue is not the morality of masking ourselves. It is rather that self-veiling is a contradictory act – a free suspension of our freedom. I cannot forget that I have forgotten. I may have used the veil so successfully that I have made my performance believable to myself. I may have convinced myself I am Ophelia. But credibility will never suffice to undo the contradictoriness of self-veiling.

James P. Carse, “Finite and Infinite Games”

This reminds me of this quote of Irene Adler in BBC’s Sherlock TV series: “Do you know the big problem with a disguise, Mr. Holmes? However hard you try, it’s always a self-portrait.”

Image result for irene adler self portrait"

Why so serious? (And how to be playful?)

Seriousness is too boring to the playful human condition.

Michael Bassey Johnson

Here is some serious chain-of-thinking delivered in playful tones:

Seriousness is too boring yet all too common, because boredom is the default tone of life, which may not be a bad thing if you believe the existence of “boredom” is what makes the “NOT-boredom” possible, similar to how Taoism tells us that concepts exist in opposites just as brightness cannot exist without darkness, just as the “is” defines the “is not” and vice versa.

I appreciate you moving on to read this line, as the above paragraph has not scared you off. 🙂 Smiley emoji here because: why so serious?

And seriously: why are we so serious?

And the serious answer: “Seriousness always has to do with an established script, an ordering of affairs completed somewhere outside the range of our influence.

Think about it, seriousness always implies there is a script, which implies there are scripted roles. We are more serious than usual when we interact with a uniformed policeman or doctor, compared with interacting them in their off-uniform casual clothes.

In contrast: “We are playful when we engage others at the level of choice, when there is no telling in advance where our relationship with them will come out – when, in fact, no one has an outcome to be imposed on the relationship, apart from the decision to continue it.”

As you may have guessed, being serious is the tone of finite games, while being playful is the game that the infinites play. Importantly, to be playful should not be confused with to be “trivial or frivolous, or to act as though nothing of consequence will happen”. To be playful means acknowledging that any consequence could happen, and welcoming this unbounded realm of possibilities:

To be serious is to press for a specified conclusion. To be playful is to allow for possibility whatever the cost to oneself.

James P. Carse, “Finite and Infinite Games”

Linking back to the common purpose of all finite games – play to win. Yet how can you be truly playing playfully, if you take winning seriously? Thus, being playful is the luxury reserved for the infinite game players – who play playfully with the goal to continue playing.

And I must conclude this section with a playful picture:

Image result for to be playful and serious at the same time"

Pick your poison: Power or Strength?

Of course I am obliged to be playful and “not-so-serious” by this point. So the playful answer is: why not both? Get a personal trainer if you want some help with fitness.

Back to the serious topic: Finite games play for power. Infinite games play for strength.

Power is embedded in the emergence of a winner at the end of the game. Power is passive, it is “never one’s own,” as it requires the voluntary acceptance of the power by others.

Strength is paradoxical. “I am not strong because I can force others to do what I wish as a result of my play with them, but because I can allow them to do what they wish in the course of my play with them.” Strength is mocking power in the face and having no thoughts of it whatsoever.

Power concentrates only in a small hand of victors – because winning is not something you could opt into, but something that is decided for you according to the rules of the game.

Strength benefits potentially anyone – because strength is something we could all choose to have, something we decide for ourselves according to the will of our mind.

So my friends – decide how you want to play. Pick your script – or no script. Recite seriously or explore playfully. Fight for your power or defend your strength.

The night is getting dark…

…and time to come out to play.

Does meritocracy lack merit? A critique from “The Meritocracy Trap”

Context: The Meritocracy Trap: How America’s Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite is a book by Professor Daniel Markovits of Yale Law School, “attacking the false promise of meritocracy”. An insightful read – packed with elaborate arguments backed up by research & case studies. For those who are short on time, you could get the big ideas from Daniel’s sharing on the Erza Klein Show podcast, or from this article in The Atlantic.

The bold claim: merit is a counterfeit value

Merit itself has become a counterfeit value, a false idol…what it was invented to combat. A mechanism for the concentration and dynastic transmission of wealth and privilege across generations. A caste order that breeds rancor and division. A new aristocracy, even.

Daniel Markovits

The meritocratic ideal, i.e., “social and economic rewards should track achievement rather than breeding,” is a mainstream ideal that is often taken for granted and rarely even questioned. In his book, Daniel not only questions meritocracy, but goes one step further to challenge and critique it.

Image result for the meritocracy trap

His central, unconventional claim is meritocracy is a form of aristocracy in disguise – just like the aristocratic system it aims to replace, “merit is not a natural or universal value, but rather the upshot of prior inequalities“.

The setup: meritocracy constructs the “elite class” via meritocratic competition

Daniel argues that meritocracy constructs what is commonly referred to as “the elite class” via two ways:

“First, meritocracy transforms education into a rigorous and intense contest to join the elite.
* * *
Second, meritocracy transforms work to create the immensely demanding and enormously lucrative jobs that sustain the elite.”

(1) The education race: the meritocratic inheritance

“Although meritocracy once opened up the elite to outsiders, the meritocratic inheritance now drives a wedge between meritocracy and opportunity.

Inheritance under the old aristocratic system is largely viewed as “unjust” – the (relatively cost-free) inheritance of capital, such as passing down money or real estate, is widely viewed as unfair birth lottery. In layman terms, it is unfair that some are born with a silver spoon in their mouth.

Proponents of meritocracy believe that “merit” is the right answer to encouraging social mobility – build an education system that selects based on merits of the students, they say, and let the truly talented make their way up the ladder.

Daniel argues the reverse:

“Education assumes the role in meritocracy that breeding played in the aristocratic regime.”

Today, Harvard, Princeton, Stanford & Yale accept more students from households in the top 1% of the income bucket than from households in the bottom 60% combined. Students with parents whose annual income exceed $200K score ~250 points higher on the SAT compared with students whose parents make $40K-$60K.

The statistics on social mobility do not show a more optimistic picture. As The Atlantic reports:

“Absolute economic mobility is also declining—the odds that a middle-class child will outearn his parents have fallen by more than half since mid-century—and the drop is greater among the middle class than among the poor.”

In the meritocracy system, parents in the elite class pass on “inheritance” in forms other than direct capital transfer – these parents invest capital heavily into the education of their kids, at orders of magnitude that middle-class parents cannot expect to match.

When we hear educators advertise “equal opportunities to education” for children, we should pause and ask ourselves: what does the word “equal” mean here? It is not sufficient to apply the same (equal) screening criteria to applicants. The pre-requisite to equal opportunities comes from equal access to opportunities. This means the resources that a child has access to should not be constrained by the wealth of the family he or she is born into.

(2) The jobs race: “compulsive overwork” of the elites vs. “enforced idleness” of the middle class

The meritocratic competition “pervades elite life” and extends far beyond school into the professional lives of those who want to sustain their position at the top:

“Evaluations that were once quarantined to exceptional moments like college admissions season or promotion to partner or managing director now infect every step of a meritocrat’s career. Every year, from preschool through retirement, includes some contest or assessment that filters, tracks, or otherwise influences his opportunities.”

Daniel points out an interesting shift in the work paterns of the elites: the “once-leisured rich” work harder than ever before today. Along with a change in work behavior comes a change in values:

“Elite values and customs have adapted to suit these new facts (of compulsive overwork). High society has reversed course. Now it valorizes industry and despises leisure. As every rich person knows, when an acquaintance asks ‘How are you?’ the correct answer is ‘So busy.’
* * *
Meritocracy makes effortful and industrious work – busyness – into a sign of being valued and needed, the badge of honor.

Daniel shares a “standard disciplinary joke” amongst investment bankers that “they will be lucky to get any day off besides their wedding day. Nor do the hours necessarily improve with seniority.” In a similar humorous fashion, the Wall Street Journal puts up an advertisement that reads, “People who don’t have time make time to read the Wall Street Journal.”

On the flip side, just as much as the elite class today take pride in being busy, they also look down on idleness & leisure. Daniel notes bankers often compain about the “outside (non-elite) world,” where “people leave work at five, six p.m.” and “take one hour lunch breaks”. These people are perceived as “just are not motivated in the same way” as they are.

The compulsive overwork of elites is “the same alienation that Karl Marx diagnosed in exploited proletarian labor” with “an added twist”, in the words of Daniel: “The elite, acting now as rentiers of their own human capital, exploit themselves, becoming not just victims but also agents of their own alienation.” Daniel believes the “busy” elite who takes pride in never creating time for one’s true self “places himself, quite literally, at the disposal of others – he uses himself up”.

An analogy is made with Chekhov’s The Cherry Orchard:

“The ancient orchard that gives the play its name yields its greatest rents by being cut down to make way for holiday villas – which is to say through its own absolute destruction and the destruction of the way of life that it once sustained.”

It is hard for elites to break out of this cycle of overwork, as long hours often is one of the reasons used to justify the (extremely) high pay of those at the top:

“As a dean of Stanford Law School recently observed in a letter to graduates, elite lawyers are caught in an intensifying ratchet: higher salaries require more billable hours to support them, longer hours require higher yet salaries to justify them, and each increase generates another in a seemingly endless cycle. Whose interests does this serve? He lamented. Does anyone actually want it?”

Goldman Sachs has renamed its personnal department “Human Capital Management” – the irony is not lost that the human labor itself today is one of the most exploited forms of capital:

“Unlike land or factories, human capital can produce income – at least using current technologies – only by being mixed with its owners’ own contemporaneous labor.”

While elites are stuck in compulsive overwork, the middle class are idled. Note that the middle class are not idle by active choice, as in “reluctant to work”. Rather, they are idled as a passive outcome, as in “denied opportunities to work.” Daniel attributes this to “technological transformation” that “shift(s) the center of production away from mid-skilled and toward super-skilled labor”.

As an example, Daniel says the middle-tier manager has gradually faded out from the labor market, replaced by a much smaller number of top executives (the overworked elite class with higher pay) and a large number of lower-end workers (the squeezed middle class with lower pay):

“The managerial control stripped away from production workers and middle managers has been concentrated in a narrow cadre of elite executives, who are separated from production workers by differences of kind rather than degree. The technologies that underwrite such concentrated managerial power – not just the information systems that monitor organizations and gather & manipulate data, but also the ideas and analytic frameworks employed to make sense of the data – are enormously complex. Only intensively trained managers can possibly acquire the sophistication needed.”

The result is the labor market is divided into “glossy jobs” of the elites vs. “gloomy jobs” of the middle class. Glossy refers to jobs whose ” outer shine masks inner distress”, whereas gloomy refers to jobs that “offer neither immediate reward nor hope for promotion.”

The product of meritocracy: Nativism & Populism in the middle class

Daniel argues meritocracy is the culprit behind nativism. Take white privilege as an example, he thinks the mere idea of white privilege itself irritates whites out of the elite class, because “they’ve never experienced it on a level that they understand. You hear privilege and you think money and opportunity and they don’t have it.”

“The meritocratic suggestion that a white man who cannot get ahead must be in some way deficient (i.e., lack of merit) stokes this anger…and the meritocratic fixation on diversity and inclusion channels the anger into nativist, sexist identity politics.”

Nativism allows the “native” group to blame all their problems on the “foreign” group. This finger-pointing on “aliens” is a mask for the insecurity of “natives” – sense of guilt even – that they themselves are the reason to blame: they are not good enough, they do not have enough merits, and hence they are behind where they would like to be in this (supposedly) “meritocratic” system. The “natives” seem to be on guard against the “aliens”, but what they are really pushing back against is their own sense of inferiority.

Daniel goes on to argue meritocracy is also at the root of populism: “a deep and pervasive mistrust of expertise and institutions.”

“Class resentments in America aim at the professional classes rather than at the entrepreneurial or even hereditary super-rich: not at oligarchs but rather at the doctors, bankers, lawyers, and scientists that working and middle-class Americans feel…’are more educated’ and ‘are often looking down on them.'”

Daniel makes the interesting comparison of Obama vs. Trump: Obama (and also Hillary Clinton) as “a superordinate product of elite production”, i.e., someone who rose and triumphed in meritocracy, and Trump as “a ‘blue-collar billionaire'” who rejects the meritocratic elites – the group that Obama & Clinton are both members of.

Trumpism – and Trump’s own rise – exposes the incumbent elite’s meritocratic contempt for ordinary citizens and its own disenchanted weakness…When Hillary Clinton called half of Trump’s supporters a ‘basket of deplorables,’ she said aloud what the broad elite, regardless of party, had long thought in private. Indeed, Trump’s rise not only reconfirmed but redoubled the condescension that elites feel toward the Americans whom meritocracy excludes.

The philosopher’s angle: Meritocracy and individual rights

According to philosopher Ayn Rand, the fundamental right of the individual, which is the pre-requisite & root of all other rights, is one’s right to his own life:

“There is only one fundamental right (all the others are its consequences or corollaries): a man’s right to his own life…which means: the freedom to take all the actions required by the nature of a rational being for the support, the furtherance, the fulfillment and the enjoyment of his own life. Such is the meaning of the right to life, liberty and the pursuit of happiness.”

By Rand’s definition, in the meritocratic system we live in today, neither the middle class nor the elite class have fully realized the fundamental right to one’s own life – neither is free to pursue their happiness. The curse of the meritocratic competition – starting from education all the way throughout one’s professional life – enslaves the poor & the rich alike: the former locked in their class with little hope of upward social mobility, the latter willingly enslaving themselves in work with brutal hours that they derive little pleasure from.

“A worker can quit his job. A slave cannot.” This is the curse fallen on the elites, who deceive themselves into believing they owe it to their expensive education to hold high-paying jobs with long hours, even those that they have little interest in.

“Man cannot be forced to devote his life to the happiness of another man nor of any number of other men.” This is the curse fallen on the middle class, who see themselves as producing for the consumption of the elites, whereas not moving up the social ladder themselves.

The collective illusion: Why it’s hard to critique meritocracy

Although the middle class and the elite class alike are harmed by meritocracy, both groups blame each other rather than critiquing the meritocratic system itself:

Fragile elites disdain middle-class habits and values as a defense mechanism to ward off self-doubt. Meritocrats lionize achievement, or even just distinction, and disparage ordinariness as a bulwark against rising insecurity. They cling to any attitudes and practices – ranging from the absurd (food snobbery) to the callous (corporate rightsizing) – that might confirm their merit and validate their advantage, to others and, above all, to themselves.”

It leads one to wonder: why have we heard so little critique of the meritocratic system itself? Here is Daniel’s explanation:

“Mankiw sums this up when he observes, ‘When people can see with their own eyes that a talented person made a great fortune fair and square, they tend not to resent it.‘”
* * *
“The meritocratic transformation entails, bluntly put, that equality’s champions must justify redistribution that takes from a more industrious elite in order to give to a less industrious middle class. This makes meritocratic inequality difficult to resist.”

The success of a few in the meritocratic system has been used as the poster child to justify the merit of the system itself. The real danger of meritocracy lies not in it being unequal, but in it being justly unequal. It is white-washed to such an extent that those enslaved by meritocracy believe the way out is via the meritocratic system itself – the middle class believe in realizing the “American dream” via “meritocratic education” despite not even competing in the same arena as the elites; the elites cling to their high-paying jobs attained via “meritocratic job selection” despite physical fatigue and emotional voidness for work they feel little attachment to.

We are blindfolded, and yet we believe the way to see is to put more blinds over our eyes. Such is the irony. Such is the power of the meritocratic illusion – it not only makes us not see, it makes us refuse to see. This has to be the most ingenious form of slavery.

The way out: How should we fix the problems?

Daniel suggests we should go back to tackle meritocracy at its two major forms of manifestation, i.e., education & jobs.

For education, he suggests: ” Private schools and universities should lose their tax-exempt status unless at least half of their students come from families in the bottom two-thirds of the income distribution. And public subsidies should encourage schools to meet this requirement by expanding enrollment.”

For the job market, he suggests: “favoring goods and services produced by workers who do not have elaborate training or fancy degrees. For example, the health-care system should emphasize public health, preventive care, and other measures that can be overseen primarily by nurse practitioners, rather than high-tech treatments that require specialist doctors.”

As Daniel admits, change will not come easy: “Any victory will be long-fought and hard-won.” The key first step is acknowledging the problems of meritocracy, and the need of a united force to tackle them. I leave you with the last sentence from the book:

To update an old slogan: the workers of the world—now both middle-class and superordinate—should unite. They have nothing to lose but their chains, and a whole world to win.

Daniel Markovits

[Big Ideas – Special] Understanding Markets via “Narrative Economics”

The secret of effective market game-playing is to recognize that the market game hinges on the Narrative, on the strength of the public statements that create Common Knowledge.

Epsilon Theory Manifesto

Nobel-winning economist Robert Shiller recently published Narrative Economics, a book on “How Stories Go Viral and Drive Major Economic Events“. Shiller gave a talk at LSE on the big ideas (video, audio, related 2017 paper).

Context: This article is part of the Big Ideas series, where I synthesize takeaways from the world’s best experts in multiple disciplines. This article is a special in the series, because unlike other articles that are synthesized from Discover magazine expert interviews, this piece is largely inspired by a public lecture.

What is a Narrative?

Let’s start with definitions. According to Shiller:

  • Narrative = a telling of a story that attaches significance, meaning or emotions to it;
  • Story = a chronology of events.

What is Narrative Economics?

Shiller makes a key distinction between narrative economics as defined in the dictionary vs. defined by himself. The textbook definition of narrative economics is “economics research that takes the form of telling a narrative about economic events”.

For Shiller, narrative economics should have a narrower focus, i.e., only investigating popular economics narratives that “went viral”, “changed things” and “became contagious”.

Shiller thinks economics narratives are powerful in affecting (& shaping) economic decisions. He identifies 9 perennial economics narratives:

  1. Panic vs. confidence narratives – e.g., the Big Depression is a panic narrative;
  2. Frugality vs. conspicuous consumption – e.g., Trump’s book “Think Like a Billionaire”;
  3. Monetary standards – e.g., the Gold Standard vs. Bimetallism debate;
  4. Technical unemployment, i.e., labor-saving machines replace many jobs;
  5. Automation & AI replace most jobs;
  6. Real estate booms & busts;
  7. Stock market bubbles;
  8. Boycotts, profiteers & evil business;
  9. The wage-price spiral & evil labor unions.

Broadly speaking, the 9 narratives above focus on the macro economics momentum / “culture” (1-3), employment (4-5), investment (6-7) or actors in power (8-9).

Shiller argues that data sources are at the root of economics evolutions. He believes the recent “digitization of search” is and will bring shifts to narratives. Moreover, Shiller claims that big events occur often not because of a single narrative, but because of a “confluence of narratives“, i.e., as a result of the chemical reaction of multiple narratives.

With an interesting twist, the word “narrative” appears less frequently academic articles in economics & finance compared with other subjects – see this analysis of JSTOR articles below:

Studying Narrative Economics via the Virality Model of Epidemics

If we think of a narrative as a disease, then we could study its spread by borrowing patterns from research on epidemics. In other words, we could leverage research on how viruses “go viral”, and try to figure out how narratives get popular.

The Kermack-McKendrick (1927) mathematical theory of disease epidemics is a breakthrough in medicine, because it “gave a realistic framework for understanding the all-important dynamics of infectious diseases” in the words of Shiller.

The Kermack-McKendrick model divides the population into three groups: susceptibles, infectives, and recovered. Importantly, the model suggests the curve of the number of infectives to take a “humpback” shape, i.e., rising sharply before declining at a similarly fast speed:

We could see similar “humpback” shaped curves in data that could serve as proxy measurements for how popular an economics narrative is.

Here’s an example on how frequent the phrase “stock market crash” appears in news & newspapers:

Here’s another example on how frequent the phrase “Great Depression” appears in news & newspapers:

The Future of Narrative Economics

Shiller is hopeful that ” the advent of big data and of better algorithms of semantic search might bring more credibility to the field”.

Meanwhile, narrative economics faces challenges, including:

  • On data collection, we need to move beyond “passive collection of others’ words, towards experiments that reveal meaning and psychological significance”, e.g., via focus groups or social media – though the proper design & implementation of such experiments is not easy;
  • Dealing with the overlap & “chemical reactions” of multiple overlapping narratives is difficult;
  • Causality is tricky. As Shiller says, one challenge is in “distinguishing between narratives that are associated with economic behavior just because they are reporting on the behavior, and narratives that create changes in economic behavior.”

Nevertheless, the challenges make the field more interesting. I am particularly interested in predicting which narratives will gain momentum. Perhaps the narrative machine will serve, to some extend, as a crystal ball that offers a narrow glimpse into the future.

The Tastiest Pizza is often the Messiest One

Splitting a city into residential, commercial and business zones is like throwing dough, cheese and pepperoni into the different compartments of a bento box and calling it a pizza.” In this article, Uber product manager Florent Crivello write about what he calls the “efficiency-destroying magic of tidying up”.

Florent shares this picture that he calls “an urban planner’s dream pizza” – I bet it’s not what you have in mind as your perfect pizza:

The word chaos has a negative connotation in most contexts. In fact, the Oxford dictionary defines chaotic as “in a state of complete confusion and disorder“. Chaos tends to stir up emotions of being lost, not knowing what to do.

When we are at a loss of what to do, more often than not it is because we do not truly understand. The flip side of that is, in the words of Austrian philosopher Ludwig Wittgenstein: “To understand is to know what to do.”

This was echoed in Florent’s article:

If outsiders complain, but people living inside the system seem happy with it, it probably means that the chaos is serving them right, and that it’s just foreign eyes who are unable to perceive its underlying order.

The Efficiency-Destroying Magic of Tidying Up, by Florent Crivello

It is tempting to equate a lack of order (or at least lack of what we perceive to be order) with a lack of value or quality, which justifies a need for intervention. This is not ill-advised in some cases, with the emergency of rule of law as a case in point. A complete lack of any legal order in a community threatens the safety of its members.

In contrast, some corrections of chaos could produce outcomes that go against our wishes instead of in their favor. Apart from the pizza example above (I assume 99.9999% of the population prefers a ‘messy’ pizza where the ingredients are mixed instead of separated), another example is the free market vs. central planning: a “chaotic” free market is magically more efficient than central planning, in terms of the total sum of outputs produced. Of course, free market is not without its limitations – which is a separate topic.

The point here is: the presence of chaos does not automatically equate a need for correction. If chaos should warrant anything, it should warrant a drive to understand the underlying order, the “invisible hand”, the hidden structure that are yet elusive to our foreign eyes.

Resisting the urge to “correct” chaos may not be that easy. As Brian Arthur, pioneer of complexity theory & complexity science, mentioned in an interview, subjects such as economics seek “equilibrium, a place of statis (stability) and simplicity”. In a sense, equilibrium is (perceived to be) at the opposite side of chaos.

Brian Arthur points out what seems to be in equilibrium could be different from what is actually in equilibrium – this depends on how macroscopic vs. microscopic our view is. For example, the sun seems to be in equilibrium when we look up at it in the sky – it is a beautiful sphere held in place by gravitational forces. Yet, the sun close up is full of plasma bursts – what you could call “chaotic” reactions.

Instead of viewing chaos & equilibrium as opposing concepts, we could view them as relative concepts instead. Instead of being either chaotic or in equilibrium, an object could be both – depending on the context & our level of understanding.

So give chaos some credit – just as the tastiest pizza is not the orderliest one, the best scenario may not necessarily be the most organized one. The next time you find yourself anxious about a chaotic environment? Think about how delicious that bite of pizza littered with messy toppings is – then sit back & relax.

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