I don’t think the criticism of post 2 here is on point at all. Elizabeth is making the claim that if everyone shifted from thinking dollars most reliable to thinking euros, that this would be self-fulfilling and have big impacts. This seems right, regardless of why this happened. The response seems wrong in four ways.
One, I don’t think that there needs to be an overarching reason. It’s not crazy that a propaganda campaign (someone ‘talking their book’ on a large enough level) combined with large bets could cause a cascade effect in worlds where that wouldn’t have otherwise happened.
Two, it’s the currency and not the stock market that matters here. Stock market is a different thing. Not central but worth noting.
Three, the currency markets are exactly the thing Elizabeth is talking about—anticipated future prices, which are a function of supply and demand. A lot of the demand for dollars is the expectation that people will demand dollars because business with others is done in dollars, etc. Hitting the tipping point would cause a cascade. The idea that markets are about some ‘fundamentals’ and causation is one-directional simply isn’t right. Expectations are huge.
Four, even if in this particular example we are not close to a switch, that would only mean it’s a bad example. The principle certainly holds. E.g. it is easy to imagine worlds in which there was a ‘flippening’ and ETH took over the BTC role as primary method of cryptocurrency payment some time in 2018, without anything fundamental changing. There’s no reason to think that would have become undone—likely the opposite, and if ETH had passed BTC it would have pulled further away over time.
To the contrary, I think the criticism of post 2 is very on point. But Zvi and I are looking at two different parts: Zvi’s looking at the logic/begging the question part, and I’m looking at the critique. In thought experiments, we can take imagined exogenous changes to be exogenous even though in the real world they’d be endogenous (i.e., we can take them as events rather than outcomes). Later, we can relax that assumption; the endogeneity problem is important for understanding whether the conclusions extend to the real world, but it is not important for understanding what the conclusions are within the thought experiment. So I agree with Zvi that the logic isn’t really an issue here.
However, I do believe this is a bad example (/weak post, Sorry Elizabeth) precisely for the reason AllAmericanBreakfast pointed out- it frames basic economics knowledge as a new insight. Admittedly, the EconLog post that was linked to doesn’t discuss comparative advantage either, but that’s because it’s really just about the “flight to safety” in 2008 where capital has to go somewhere, so it goes to the safest haven- even if that place is on fire, at least it’s not on fire next to a ticking time bomb. But, if you really want to talk about the “benefit not from absolute skill or value at a thing, but by being better at it than anyone else” then you can just consult microeconomics 101 (literally) and read up on absolute vs. comparative advantage. And then a better example of it is what you would find in the textbook (ha, probably Mankiw’s) of English cloth vs. Portuguese wine, which clearly illustrates the concepts.
Or, maybe Elizabeth really wasn’t referring to comparative advantage and more specifically to “when a superlative is applied in a context and the context is later lost.” This might seemingly apply better to the USD (we think of it as a safe haven because we used to think of it as a safe haven), but again the USD is not an apt example here because the context isn’t lost, it just changed (e.g., suppose the USD scores a 10⁄10 at being a currency and things change and now it’s a terrible 3⁄10 but it’s still better than all the rest). The Tallest Pygmy derives its tension from that fact that you think you’ve found someone “tall” but it’s just among the pygmies you’re sampling. The Tallest Pygmy, then, is best understood as getting stuck in a valley at a local, but not global, minimum (gradient descent). Or peaking at a local, but not global, maximum. Sometimes you are fine with local maxima, but if you are optimizing for global maxima, then obviously this creates a problem. May as well go with a classic example instead, which clearly illustrates sampling bias (statistics).
You see this in the academic literature as well where people refer to concepts as “effects.” I think it is a good idea to be skeptical of those findings- not that they are fake, just that more clarity could be gained from understanding the core concept that generates the effect. Elizabeth’s example is not great for comparative advantage, nor for gradient descent/sampling bias. The USD in 2008 is a “lesser of two evils effect,” or really not an effect at all- if you have a choice between 10%, 9%, and 8% returns at equal risk, you choose 10%; if a regime change occurs that makes you choose between 5%, 4.5%, and 4%, you choose 5%. It’s worse than before, but it’s the best around.
LessWrong is a great community to be in, but AllAmericanBreakfast is correct that many posts stumble upon “new” insights that are really just symptomatic of not having done enough research, particularly when it comes to economics. And that’s okay in this forum, we’re all trying to figure this stuff out!
“Tallest Pygmy Effect” is when you benefit not from absolute skill or value at a thing, but by being better at it than anyone else.
This has two conditions:
1. The benefit must accrue only to the best option.
2. The difference between the best and second best option must be small.
You and Elizabeth are adding two further conditions, which produce mutability:
3. It is possible for the second-best option to overtake the best option (a ‘flippening’).
And fragility:
4. It is easy for a flippening to occur.
The general mutability of a TPE seems uncontroversial, as does the existence of fragile TPEs. But mutability does not imply fragility, and Elizabeth specifically says that it does.
Tallest pygmy effects are fragile, especially when they are reliant on self-fulfilling prophecies or network effects.
My mistake was in engaging with the concrete example of the US vs. EU currency, in an attempt to demonstrate that TPEs aren’t necessarily fragile. Decomposing the term and argument into atomic propositions to show where the transition from definition->empirical assertion occurs would have been a safer way to do it.
I think my underlying motivation for attacking the example is that I’m frequently exposed to people with excessive belief in economic fragility. For example, the idea that “if we all just stopped believing in the value of money, it would be just paper.” I saw this point of view behind terms like “fragile” and “self-fulfilling prophecy.”
I’m sure that for others, there’s an excessive perception of economic stability. Things change all the time, and sometimes it comes down to a pure change in public perception.
In the future, I’d like to employ the practice of decomposition before I start writing a critical response.
Elizabeth uses the word “fragile”, but doesn’t say that this is what it means. I’m not sure exactly what she means by it—and I’m not sure if the thing she means is true—but I don’t think this is a likely guess.
(My guess would be something like “unstable”, in the sense that once it goes away, there’s no particular reason to expect it to come back.)
But mutability does not imply fragility, and Elizabeth specifically says that it does.
Not specifically. She merely says that TPEs are fragile. This is somewhat a nitpick, but… I feel like you’re trying to take something informal and formalize it, and some of the features of your formalization don’t seem motivated by the informal version.
I’m frequently exposed to people with excessive belief in economic fragility. For example, the idea that “if we all just stopped believing in the value of money, it would be just paper.”
This seems basically true to me? I wouldn’t call the economy fragile, because I don’t expect this to happen. Sometimes people say things like this and I get the sense that they do think it means the economy is fragile in some way that I don’t think it is. I think they’re making a mistake, but not about this.
I feel like you’re trying to take something informal and formalize it, and some of the features of your formalization don’t seem motivated by the informal version.
If an informal claim about economics doesn’t translate readily to a formal claim, then it’s not even wrong. Informal language games are fine in many contexts, but Elizabeth’s posts tend to be about careful fact-gathering and scrutinizing sources for accuracy, so I think it’s OK to apply that standard to her work.
My guess would be something like “unstable”, in the sense that once it goes away, there’s no particular reason to expect it to come back.
This would only be true if
a) The TPE outweighs more fundamental factors, meaning that it’s hard for a lower-ranked choice to become the top choice, merely due to the TPE.
For example, Facebook is useful primarily because so many people are on it. It would be hard for a direct competitor to attract a user base no matter how much better the underlying software is. There is a clear way to rank all the alternatives in terms of quality, but there’s a huge cliff between 1st and 2nd place that exists merely due to the TPE.
b) Random noise outweighs more fundamental factors (or there’s no fundamental factors at all), meaning that the differences between lower-ranked choices is obscured by chance. There is no clear way to sort lower-ranked alternatives in terms of quality.
For example, you have no knowledge of horse racing. But you happen to hear that the Mafia given Black Beauty a drug that makes her 5% faster (TPE), making her slightly more likely to win the Kentucky Derby, but not guaranteeing her victory. If the Mafia changes its mind and decides to drug Seabiscuit instead, there’s no clear reason to expect that they’ll change their mind a third time. Even if they do, there’s no reason to think they’ll change their mind back and drug Black Beauty, rather than doping Secretariat or Man ’O War. The Mafia is unlikely to change its mind, so you assume that Black Beauty has a small but durable edge.
These two examples illustrate that the TPE has several factors.
It can have a large or small importance relative to fundamental factors (large in the case of Facebook, small in the case of Black Beauty). A small difference implies fragility, large differences imply durability.
It can be endogenous (Facebook’s TPE is due to it having the most users, so the fact that it’s in 1st place helps anchor it in 1st place) or exogenous (Black Beauty’s TPE is due to outside intervention, and it’s not clear how capricious the Mafia will be in changing this choice). Exogenous factors are fragile, endogenous factors are durable.
And the non-TPE fundamentals of the options can be well-ordered (as in the case of Facebook’s software quality relative to its competitors) or unordered (as in the case of the horse racing neophyte at the Kentucky Derby). Unordered fundamentals mean that the choice selected for the top spot is arbitrary, so that having held the top spot confers no special advantage in regaining it if it is lost. Unordered fundamentals imply fragility, well-ordered fundamentals imply durability.
All of these factors vary empirically. No matter whether “fragility” referred to one, two or all three of these factors, it’s clear that fragility and durability exist on a spectrum and may vary widely on a case-by-case basis.
Indeed, Elizabeth says
Tallest pygmy effects are fragile, especially when they are reliant on self-fulfilling prophecies or network effects.
It’s not clear to me that “self-fulfilling prophecies or network effects” are inherently fragile. The advantage that Facebook gains due to the size of its user base is an example of a network effect that is durable in all three senses of the term as I’ve defined it.
This matters. If we cultivate “TPEs tend to be/are inherently fragile” as a heuristic, it will encourage people to look at problems like “how to make a social media company that’s bigger than Facebook” as a technical problem. “If you build it, they will come.” Well, no, not necessarily. Facebook’s TPE is a big moat. In fact, I’d offer an alternative heuristic:
The more obvious the TPE, the more likely it is to be durable.
I don’t think the criticism of post 2 here is on point at all. Elizabeth is making the claim that if everyone shifted from thinking dollars most reliable to thinking euros, that this would be self-fulfilling and have big impacts. This seems right, regardless of why this happened. The response seems wrong in four ways.
One, I don’t think that there needs to be an overarching reason. It’s not crazy that a propaganda campaign (someone ‘talking their book’ on a large enough level) combined with large bets could cause a cascade effect in worlds where that wouldn’t have otherwise happened.
Two, it’s the currency and not the stock market that matters here. Stock market is a different thing. Not central but worth noting.
Three, the currency markets are exactly the thing Elizabeth is talking about—anticipated future prices, which are a function of supply and demand. A lot of the demand for dollars is the expectation that people will demand dollars because business with others is done in dollars, etc. Hitting the tipping point would cause a cascade. The idea that markets are about some ‘fundamentals’ and causation is one-directional simply isn’t right. Expectations are huge.
Four, even if in this particular example we are not close to a switch, that would only mean it’s a bad example. The principle certainly holds. E.g. it is easy to imagine worlds in which there was a ‘flippening’ and ETH took over the BTC role as primary method of cryptocurrency payment some time in 2018, without anything fundamental changing. There’s no reason to think that would have become undone—likely the opposite, and if ETH had passed BTC it would have pulled further away over time.
To the contrary, I think the criticism of post 2 is very on point. But Zvi and I are looking at two different parts: Zvi’s looking at the logic/begging the question part, and I’m looking at the critique. In thought experiments, we can take imagined exogenous changes to be exogenous even though in the real world they’d be endogenous (i.e., we can take them as events rather than outcomes). Later, we can relax that assumption; the endogeneity problem is important for understanding whether the conclusions extend to the real world, but it is not important for understanding what the conclusions are within the thought experiment. So I agree with Zvi that the logic isn’t really an issue here.
However, I do believe this is a bad example (/weak post, Sorry Elizabeth) precisely for the reason AllAmericanBreakfast pointed out- it frames basic economics knowledge as a new insight. Admittedly, the EconLog post that was linked to doesn’t discuss comparative advantage either, but that’s because it’s really just about the “flight to safety” in 2008 where capital has to go somewhere, so it goes to the safest haven- even if that place is on fire, at least it’s not on fire next to a ticking time bomb. But, if you really want to talk about the “benefit not from absolute skill or value at a thing, but by being better at it than anyone else” then you can just consult microeconomics 101 (literally) and read up on absolute vs. comparative advantage. And then a better example of it is what you would find in the textbook (ha, probably Mankiw’s) of English cloth vs. Portuguese wine, which clearly illustrates the concepts.
Or, maybe Elizabeth really wasn’t referring to comparative advantage and more specifically to “when a superlative is applied in a context and the context is later lost.” This might seemingly apply better to the USD (we think of it as a safe haven because we used to think of it as a safe haven), but again the USD is not an apt example here because the context isn’t lost, it just changed (e.g., suppose the USD scores a 10⁄10 at being a currency and things change and now it’s a terrible 3⁄10 but it’s still better than all the rest). The Tallest Pygmy derives its tension from that fact that you think you’ve found someone “tall” but it’s just among the pygmies you’re sampling. The Tallest Pygmy, then, is best understood as getting stuck in a valley at a local, but not global, minimum (gradient descent). Or peaking at a local, but not global, maximum. Sometimes you are fine with local maxima, but if you are optimizing for global maxima, then obviously this creates a problem. May as well go with a classic example instead, which clearly illustrates sampling bias (statistics).
You see this in the academic literature as well where people refer to concepts as “effects.” I think it is a good idea to be skeptical of those findings- not that they are fake, just that more clarity could be gained from understanding the core concept that generates the effect. Elizabeth’s example is not great for comparative advantage, nor for gradient descent/sampling bias. The USD in 2008 is a “lesser of two evils effect,” or really not an effect at all- if you have a choice between 10%, 9%, and 8% returns at equal risk, you choose 10%; if a regime change occurs that makes you choose between 5%, 4.5%, and 4%, you choose 5%. It’s worse than before, but it’s the best around.
LessWrong is a great community to be in, but AllAmericanBreakfast is correct that many posts stumble upon “new” insights that are really just symptomatic of not having done enough research, particularly when it comes to economics. And that’s okay in this forum, we’re all trying to figure this stuff out!
The TPE as defined is
This has two conditions:
1. The benefit must accrue only to the best option.
2. The difference between the best and second best option must be small.
You and Elizabeth are adding two further conditions, which produce mutability:
3. It is possible for the second-best option to overtake the best option (a ‘flippening’).
And fragility:
4. It is easy for a flippening to occur.
The general mutability of a TPE seems uncontroversial, as does the existence of fragile TPEs. But mutability does not imply fragility, and Elizabeth specifically says that it does.
My mistake was in engaging with the concrete example of the US vs. EU currency, in an attempt to demonstrate that TPEs aren’t necessarily fragile. Decomposing the term and argument into atomic propositions to show where the transition from definition->empirical assertion occurs would have been a safer way to do it.
I think my underlying motivation for attacking the example is that I’m frequently exposed to people with excessive belief in economic fragility. For example, the idea that “if we all just stopped believing in the value of money, it would be just paper.” I saw this point of view behind terms like “fragile” and “self-fulfilling prophecy.”
I’m sure that for others, there’s an excessive perception of economic stability. Things change all the time, and sometimes it comes down to a pure change in public perception.
In the future, I’d like to employ the practice of decomposition before I start writing a critical response.
Elizabeth uses the word “fragile”, but doesn’t say that this is what it means. I’m not sure exactly what she means by it—and I’m not sure if the thing she means is true—but I don’t think this is a likely guess.
(My guess would be something like “unstable”, in the sense that once it goes away, there’s no particular reason to expect it to come back.)
Not specifically. She merely says that TPEs are fragile. This is somewhat a nitpick, but… I feel like you’re trying to take something informal and formalize it, and some of the features of your formalization don’t seem motivated by the informal version.
This seems basically true to me? I wouldn’t call the economy fragile, because I don’t expect this to happen. Sometimes people say things like this and I get the sense that they do think it means the economy is fragile in some way that I don’t think it is. I think they’re making a mistake, but not about this.
If an informal claim about economics doesn’t translate readily to a formal claim, then it’s not even wrong. Informal language games are fine in many contexts, but Elizabeth’s posts tend to be about careful fact-gathering and scrutinizing sources for accuracy, so I think it’s OK to apply that standard to her work.
This would only be true if
a) The TPE outweighs more fundamental factors, meaning that it’s hard for a lower-ranked choice to become the top choice, merely due to the TPE.
For example, Facebook is useful primarily because so many people are on it. It would be hard for a direct competitor to attract a user base no matter how much better the underlying software is. There is a clear way to rank all the alternatives in terms of quality, but there’s a huge cliff between 1st and 2nd place that exists merely due to the TPE.
b) Random noise outweighs more fundamental factors (or there’s no fundamental factors at all), meaning that the differences between lower-ranked choices is obscured by chance. There is no clear way to sort lower-ranked alternatives in terms of quality.
For example, you have no knowledge of horse racing. But you happen to hear that the Mafia given Black Beauty a drug that makes her 5% faster (TPE), making her slightly more likely to win the Kentucky Derby, but not guaranteeing her victory. If the Mafia changes its mind and decides to drug Seabiscuit instead, there’s no clear reason to expect that they’ll change their mind a third time. Even if they do, there’s no reason to think they’ll change their mind back and drug Black Beauty, rather than doping Secretariat or Man ’O War. The Mafia is unlikely to change its mind, so you assume that Black Beauty has a small but durable edge.
These two examples illustrate that the TPE has several factors.
It can have a large or small importance relative to fundamental factors (large in the case of Facebook, small in the case of Black Beauty). A small difference implies fragility, large differences imply durability.
It can be endogenous (Facebook’s TPE is due to it having the most users, so the fact that it’s in 1st place helps anchor it in 1st place) or exogenous (Black Beauty’s TPE is due to outside intervention, and it’s not clear how capricious the Mafia will be in changing this choice). Exogenous factors are fragile, endogenous factors are durable.
And the non-TPE fundamentals of the options can be well-ordered (as in the case of Facebook’s software quality relative to its competitors) or unordered (as in the case of the horse racing neophyte at the Kentucky Derby). Unordered fundamentals mean that the choice selected for the top spot is arbitrary, so that having held the top spot confers no special advantage in regaining it if it is lost. Unordered fundamentals imply fragility, well-ordered fundamentals imply durability.
All of these factors vary empirically. No matter whether “fragility” referred to one, two or all three of these factors, it’s clear that fragility and durability exist on a spectrum and may vary widely on a case-by-case basis.
Indeed, Elizabeth says
It’s not clear to me that “self-fulfilling prophecies or network effects” are inherently fragile. The advantage that Facebook gains due to the size of its user base is an example of a network effect that is durable in all three senses of the term as I’ve defined it.
This matters. If we cultivate “TPEs tend to be/are inherently fragile” as a heuristic, it will encourage people to look at problems like “how to make a social media company that’s bigger than Facebook” as a technical problem. “If you build it, they will come.” Well, no, not necessarily. Facebook’s TPE is a big moat. In fact, I’d offer an alternative heuristic:
The more obvious the TPE, the more likely it is to be durable.