I think this post is just trying to be a set of examples of adverse selection, not really some kind of argument that there is tons of adverse selection everywhere. Lists of examples seem useful, even if they are about phenomena that are not universally present, or require specific environmental circumstances to come together in the right way.
I don’t think any of these examples are examples of adverse selection because they generate separating equilibria prior to the transaction without any types dropping out of the market, so there’s no social inefficiency.
Insurance markets are difficult (in the standard adverse selection telling) because insurers aren’t able to tell which customers are high risk vs low risk, and so offer prices for the average of the two, leading to the low-risk types dropping out because the price is more than they’re willing to pay. I think this formal explanation is good https://www.kellogg.northwestern.edu/faculty/georgiadis/Teaching/Ec515_Module14.pdf
I think this post makes an important point, that it’s important to take conditional expectations, where one is conditioned on being able to make a trade, but none of this is adverse selection, which is a specific type of dynamic Bayesian game that leads to socially inefficient outcomes which isn’t a property of dynamic bayesian games in general.
But OK, let’s leave aside the title and attempt to imply anything about 99% of trades out there, or the basically Marxist take on all exchanges being exploitation and obsession with showing how you are being tricked or ripped off.
The examples are still very bad and confused!
Like, these examples are not even all about adverse selection, and several of them are just wrong in portraying the hypothetical as a bad thing.
The first one about subways, isn’t even about adverse selection to begin with. A reminder of what “Adverse selection” is:
In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is the unequal distribution of benefits to both parties, with the party having the key information benefiting more.
In the subway example, there is no different information: it’s about how governments do rationing and make markets clear by letting the goods degrade until the utility is destroyed because of lack of appetite for setting clearing prices like surge prices or fare enforcement; that’s not ‘adverse selection’ at all, any more than freeways reaching an equilibrium of misery where they are so slow that people avoid them is ‘adverse selection’. (If you think it’s ‘adverse selection’, explain what “buyers and sellers have different information” means in the context of lack of congestion pricing in transport...?)
#3 and #4 are not adverse selection either (still no difference in information), and are fundamentally wrong in portraying it as a bad outcome: the outcomes are not bad, but neutral or good—OP gives no reason to think that the outcomes would have been better if ‘you’ had gotten the good room or to eat whichever dish. (In fact, presumptively, those are the desirable outcomes: if ‘you’ cared so much, why did you leave it up to Bob; and why did you not eat the dish yourself, but someone hungrier did?)
#6 doesn’t demonstrate anything because no trade happened, so it can’t show anything about your surplus from trades that do happen.
And the Wall Street efficient market examples are true (finally, an actual adverse selection example!), but relevant to vanishingly few people who are also extremely aware of it and spend a lot of effort dealing with it, generally successfully; and people who do auctions more than occasionally generally do not have any problem with winner’s curses, and auctions are widely & intensively used in many fields by experts. And so on.
But OK, let’s leave aside the title and attempt to imply anything about 99% of trades out there, or the basically Marxist take on all exchanges being exploitation and obsession with showing how you are being tricked or ripped off.
My guess is you are pattern-matching this post and author to something that I am like 99% confident doesn’t match. I am extremely confident the author does not think remotely anything like “all exchanges [are] exploitation” or has a particular obsession with being tricked or ripped off (besides a broad fascination with adverse selection in a broad sense).
I thought it an odd quote for Karl but didn’t give much thought after that. However, with this information I have to wonder if the choice to obscure the actual person being quoted was not intnetional to make some type of point related to the post.
Still, seems like the aobe reference to marxist views on market trades seems to illustrate another way information asymmetry/advers selection plays out. I was just wondering if that was the intent when the first name was placed in the footnote rather than in the attribute for the quote.
But I have been accused of being humor challenged before ;-) -- or perhaps I should say demonstrated my humor disability?
I think all of them follow a pattern of “there is a naive baseline expectation where you treat other people’s maps as a blackbox that suggest a deal is good, and a more sophisticated expectation that involves modeling the details of other people’s maps that suggests its bad” and highlights some heuristics that you could have used to figure this out in advance (in the subway example, a fully empty car does indeed seem a bit too good to be true, in the juggling example you do really need to think about who is going to sign up, in the bedroom example you want to avoid giving the other person a choice even if both options look equally good to you, in the Thanksgiving example you needed to model which foods get eaten first and how correlated your preferences are with the ones of other people, etc.).
This feels like a relatively natural category to me. It’s not like an earth-shattering unintuitive category, but I dispute that it doesn’t carve reality at an important joint.
They don’t. As I already explained, these examples are bad because the outcomes are not all bad, in addition to not reflecting the same causal patterns or being driven by adverse selection. The only consistent thing here is a Marxian paranoia that everyone else is naive and being ripped off in trades. Which is a common cognitive bias in denying gains to trade. The subway car is simply an equilibrium. You cannot tell if ‘you’ are better off or worse off in any car, so it is not the case that ‘the deal is bad’ The room and food examples actually imply the best outcome happened, as the room and food went to those who valued it more and so ate it sooner (it’s not about correlation of preferences, it’s about intensity); the deal was good there. And the Laffy Taffy example explicitly doesn’t involve anything like that but is pure chance (so it can’t involve “other people’s maps” or ‘adverse selection’).
I think you missed the point of the Laffy Taffy example. He got the flavor he didn’t like because he’d been systematically eating the ones he did like while leaving the flavor he didn’t like in the bowl. (Or his friend wasn’t actually picking at random.)
I think you might be slightly misunderstanding the intention of the subway example (1.) - the “market” described is one of commuters for seats, and the example is noting that if some subway seats appear underpriced—i.e. commuters are choosing to cram together in fewer cars rather than equalizing their density over all available subway cars—then those commuters likely know something about the unused seats that you don’t know.
I think this post is just trying to be a set of examples of adverse selection, not really some kind of argument that there is tons of adverse selection everywhere. Lists of examples seem useful, even if they are about phenomena that are not universally present, or require specific environmental circumstances to come together in the right way.
I don’t think any of these examples are examples of adverse selection because they generate separating equilibria prior to the transaction without any types dropping out of the market, so there’s no social inefficiency.
Insurance markets are difficult (in the standard adverse selection telling) because insurers aren’t able to tell which customers are high risk vs low risk, and so offer prices for the average of the two, leading to the low-risk types dropping out because the price is more than they’re willing to pay. I think this formal explanation is good https://www.kellogg.northwestern.edu/faculty/georgiadis/Teaching/Ec515_Module14.pdf
I think this post makes an important point, that it’s important to take conditional expectations, where one is conditioned on being able to make a trade, but none of this is adverse selection, which is a specific type of dynamic Bayesian game that leads to socially inefficient outcomes which isn’t a property of dynamic bayesian games in general.
But the framing here is completely wrong...
But OK, let’s leave aside the title and attempt to imply anything about 99% of trades out there, or the basically Marxist take on all exchanges being exploitation and obsession with showing how you are being tricked or ripped off. The examples are still very bad and confused! Like, these examples are not even all about adverse selection, and several of them are just wrong in portraying the hypothetical as a bad thing.
The first one about subways, isn’t even about adverse selection to begin with. A reminder of what “Adverse selection” is:
In the subway example, there is no different information: it’s about how governments do rationing and make markets clear by letting the goods degrade until the utility is destroyed because of lack of appetite for setting clearing prices like surge prices or fare enforcement; that’s not ‘adverse selection’ at all, any more than freeways reaching an equilibrium of misery where they are so slow that people avoid them is ‘adverse selection’. (If you think it’s ‘adverse selection’, explain what “buyers and sellers have different information” means in the context of lack of congestion pricing in transport...?)
#3 and #4 are not adverse selection either (still no difference in information), and are fundamentally wrong in portraying it as a bad outcome: the outcomes are not bad, but neutral or good—OP gives no reason to think that the outcomes would have been better if ‘you’ had gotten the good room or to eat whichever dish. (In fact, presumptively, those are the desirable outcomes: if ‘you’ cared so much, why did you leave it up to Bob; and why did you not eat the dish yourself, but someone hungrier did?)
#6 doesn’t demonstrate anything because no trade happened, so it can’t show anything about your surplus from trades that do happen.
And the Wall Street efficient market examples are true (finally, an actual adverse selection example!), but relevant to vanishingly few people who are also extremely aware of it and spend a lot of effort dealing with it, generally successfully; and people who do auctions more than occasionally generally do not have any problem with winner’s curses, and auctions are widely & intensively used in many fields by experts. And so on.
My guess is you are pattern-matching this post and author to something that I am like 99% confident doesn’t match. I am extremely confident the author does not think remotely anything like “all exchanges [are] exploitation” or has a particular obsession with being tricked or ripped off (besides a broad fascination with adverse selection in a broad sense).
(And in case anyone was led astray: the Marx quote at the start is from Groucho, not Karl.)
I thought it an odd quote for Karl but didn’t give much thought after that. However, with this information I have to wonder if the choice to obscure the actual person being quoted was not intnetional to make some type of point related to the post.
I think it is pretty obviously a joke :P
Equally obvious that it went right over my head.
Still, seems like the aobe reference to marxist views on market trades seems to illustrate another way information asymmetry/advers selection plays out. I was just wondering if that was the intent when the first name was placed in the footnote rather than in the attribute for the quote.
But I have been accused of being humor challenged before ;-) -- or perhaps I should say demonstrated my humor disability?
I think all of them follow a pattern of “there is a naive baseline expectation where you treat other people’s maps as a blackbox that suggest a deal is good, and a more sophisticated expectation that involves modeling the details of other people’s maps that suggests its bad” and highlights some heuristics that you could have used to figure this out in advance (in the subway example, a fully empty car does indeed seem a bit too good to be true, in the juggling example you do really need to think about who is going to sign up, in the bedroom example you want to avoid giving the other person a choice even if both options look equally good to you, in the Thanksgiving example you needed to model which foods get eaten first and how correlated your preferences are with the ones of other people, etc.).
This feels like a relatively natural category to me. It’s not like an earth-shattering unintuitive category, but I dispute that it doesn’t carve reality at an important joint.
They don’t. As I already explained, these examples are bad because the outcomes are not all bad, in addition to not reflecting the same causal patterns or being driven by adverse selection. The only consistent thing here is a Marxian paranoia that everyone else is naive and being ripped off in trades. Which is a common cognitive bias in denying gains to trade. The subway car is simply an equilibrium. You cannot tell if ‘you’ are better off or worse off in any car, so it is not the case that ‘the deal is bad’ The room and food examples actually imply the best outcome happened, as the room and food went to those who valued it more and so ate it sooner (it’s not about correlation of preferences, it’s about intensity); the deal was good there. And the Laffy Taffy example explicitly doesn’t involve anything like that but is pure chance (so it can’t involve “other people’s maps” or ‘adverse selection’).
I think you missed the point of the Laffy Taffy example. He got the flavor he didn’t like because he’d been systematically eating the ones he did like while leaving the flavor he didn’t like in the bowl. (Or his friend wasn’t actually picking at random.)
I think you might be slightly misunderstanding the intention of the subway example (1.) - the “market” described is one of commuters for seats, and the example is noting that if some subway seats appear underpriced—i.e. commuters are choosing to cram together in fewer cars rather than equalizing their density over all available subway cars—then those commuters likely know something about the unused seats that you don’t know.