Posted on my other website: The implications of the theory behind the recent Nobel prize in economics on how we post students in the pose-PsLE Secondary One Posting Exercise.
Thursday, October 18, 2012
Wednesday, October 17, 2012
Gaming the System? When You Have a Policy Based What You Think is an Ingenious Quantitative Formula, Please Think it Through
Remarks on policy making with quantitative metrics and real incentives on my new website. A lot of analysis is needed on the behavioural incentives at work before committing to a policy. Examples include a gamed public tender in the Netherlands, housing grants and subsidized rental rates.
Learning Business from Games: Inventory Management, and Competing on Price and Quality
A post on learning business from games in class at my new website.
Snippet:
Today we played another game in the class I am assisting with. We have played games in the past. The first one we played was a "fair" bargaining game which was rather successful. The second was a cost estimation (plus negotiation) game which, in contrast, failed horribly due to my underestimation of the required background for the successful conduct of the game (linear regression was required), so in giving a crash course on applying linear regression and helping the students, we ran out of time. Today's game, though very hastily put together, I'd rate as successful and pedagogically meaningful. The game's broad objectives are to expose students to the strategic considerations when there is a coupling of investment, price competition, quality competition and inventory management. That is quite a number of dynamics at work in a game that you will find is really very simple. In what follows, I will describe the game and also provide a copy of the game's Excel spreadsheet (for recording the proceedings and doing the requisite accounting).
Snippet:
Today we played another game in the class I am assisting with. We have played games in the past. The first one we played was a "fair" bargaining game which was rather successful. The second was a cost estimation (plus negotiation) game which, in contrast, failed horribly due to my underestimation of the required background for the successful conduct of the game (linear regression was required), so in giving a crash course on applying linear regression and helping the students, we ran out of time. Today's game, though very hastily put together, I'd rate as successful and pedagogically meaningful. The game's broad objectives are to expose students to the strategic considerations when there is a coupling of investment, price competition, quality competition and inventory management. That is quite a number of dynamics at work in a game that you will find is really very simple. In what follows, I will describe the game and also provide a copy of the game's Excel spreadsheet (for recording the proceedings and doing the requisite accounting).
Wednesday, October 10, 2012
A Touchy Matter: PhD Students and Stipends
Here's a touchy matter. How much do you pay a PhD student? I've had work experience before embarking on my program, so I do think the "pay" is peanuts. What else could a reasonable person think? Naturally, as I was applying to a department called "Department of Decision Sciences", it would have been expected that I thought it through. And I did and I do not regret it (much). The money issue still hurts though. I'd like to address this issue briefly in the context of some good research on an analogous matter.
So how much should a PhD student be paid? I write with the assumption that PhD students are not cheap labour. I also write with the assumption that it is highly desirable, from the perspective of the institution PhD students are enrolled in, that PhD students "perform well" to boost the reputation of their school.
Clearly (to me at least) stipends should start low and increase with performance. It certainly should not start high or there will be many who would like to be eternal students (or punt "real work") will come swarming. So how might things increase? Research in contracting informs us that "first-best" outcomes in a "principal-agent R&D" scenario can be implemented using milestone payments. (And if I recall correctly, in one of the articles on the topic, the right thing happens "with probability 1" so we do not need to worry about issues of things being "implemented in Nash Equilibrium".)
So let us work with milestones. I will not talk about issues of risk aversion and paying (the students) a risk premium, and will instead be very concrete. The problem associated with paying PhD students is that their quality is observable only approximately and one cannot contract on effort, both of which combine to generate research outcomes. The intuition behind the claimed effectiveness of milestone payments is that at the achievement of each one, the level of uncertainty goes down, meaning schools need not be so hesitant about handing out rewards as they are more closely approximating "contracting on success".
The obvious milestone is passing the Qualifying Examination (and in big pharma there is FDA approval). At NUS, there is a $500 top-up to the stipend after that stage. Good. But there is nothing after that here. What about other milestones? For instance: first publication assessed by faculty to be of suitable quality, first publication in a "Tier 1" journal, thesis proposal defended, won student paper competition, etc. Prizes are something of "milestones", but with fuzzy requirements. My sense is that the right milestone-top-up structure would support good outcomes for PhD students and their host institutions.
Tuesday, October 9, 2012
Snippets of John Rawl's Theory of Justice
The goal of social justice is to obtain a fair division of rights, liberties, opportunities, power, income and wealth, holding clearly that an even division is neither possible nor is it likely to be fair. I hope to talk about social justice in the context of the major ideas of John Rawls in mind.
"Justice is the first virtue of social institutions, as truth is of systems of thought."
— John Rawls (A Theory of Justice)
Sadly, in a blog post, I will have no choice but to sell Rawl's methodology short. One unfairly short summary would be to ask what is fair given that one is unaware one's position in life, one's inclinations and one's talents. This is Rawl's famed "veil of ignorance". The principle that is that even if one is keen on maximizing one's welfare, one will agree on a "fair system" given that one is unaware of almost anything that might be descriptive of one's person. This is a refinement of Kant's categorical imperative which has been the subject of many a smart alecky "paradox". Rawl's method directed at building, from scratch, a social contract that is "fair". The assertion is that fair principles arise from a social contract cut in the context of a fair "initial state".
Rawls arrives at two principles for the kind of system that would arise from such an agreement: (i) "each person is to have an equal right to the most extensive basic liberty compatible with a similar liberty for others", and (ii) "social and economic inequalities are to satisfy two conditions: first, they are to be attached to offices and positions open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least-advantaged members of society".
(On the first point, he later clarified, in a revised version of his Theory of Justice, that "liberty" itself was not the end of the scheme. This makes a lot of sense as the socially optimal system depends on the possible outcomes are realized on exiting the veil of ignorance. Thus, this theory is not a disguised attempt to justify the claim that "western" "liberal" "democracy" is the best system.)
I'd like to emphasize, once more, that Rawls posits that all the participants of the congress to determine this social contract are "rational" individuals fully aware of the possible outcomes and their relative likelihood, it is just that they do not know which outcome will occur. It might seem to some that my interpretation has hints of $(\Omega,\mathcal{F},\mathbb{P})$ and maximin. Furthermore, there is a sense in which Rawl's principles might be proven to be necessary conditions arising from some axioms on human decision making (in particular, risk aversion). After all, utility theory tells us that the payout of an asset is most beneficial if the payout occurs when one is down, like insurance. From a fair starting point, rational and well-informed negotiators who behave in the way most people are observed to behave in (risk adverse) will arrive at principles that might include: fairness of opportunity, leveling institutions (such as subsidized education, public libraries, the open source movement and Wikipedia), true meritocracy and a social safety net. If we also postulate ambiguity aversion (which is also well confirmed empirically) we end up with a large and strong middle class.
Having talked about the individual, what about relationships between people, between organizations and between people and organizations? One thing that we can assume a priori is that we are all connected. To put things in other terms, we are all elements of the huge set of input-output relationships that is the networked economy. In fact, the economies of the world have been large networks for centuries, and only over the last century have regional components come to become increasingly interrelated. Indeed, today the economy is pervasively networked and only one who is spiritually and intellectually blind will fail to recognize that all along we have been connected. Thus, our actions affect others and that in turn affect us. A greedy business class might impoverish the next generation of workers which will lead to competency gaps and eventual failures in business. In contrast, when business leaders act with appropriate noblesse oblige, wealth for everyone grows in the long run and there is greater overall happiness (which follows from the assumption on risk averse preferences). Rawls himself writes that cooperation and fair dealing is the essence of the two principles he proposes:
"The intuitive idea is that since everyone's well-being depends upon a scheme of cooperation without which no one could have a satisfactory life, the division of advantages should be such as to draw forth the willing cooperation of everyone taking part in it, including those less well situated. Yet this can be expected only if reasonable terms are proposed."
Wise words. Cooperation and fair dealing is very much antithetical to the traditional non-cooperative zero sum war of all against all conception of business. Indeed, in cooperative game theory, it is crucial not to short change others. In non-cooperative game theory, in contrast, it is often the case that agents with low power are forced into a state where their participation constraint binds (they obtain the lowest possible benefit that keeps them in "cooperation" with the stronger agents). These statements may not be identically true, but they do capture a lot of the essence of the two paradigms of multi-agent interaction both in academic journals and the real world.
Rawl's ideas are a call for us to move towards a paradigm of cooperation and fair dealing as opposed to a world of myopic selfish individualism. Let me end by, once again, borrowing the words of Rawls:
"Justice is the first virtue of social institutions, as truth is of systems of thought. A theory however elegant and economical must be rejected or revised if it is untrue; likewise laws and institutions no matter how efficient and well-arranged must be reformed or abolished if they are unjust. Each person possesses an inviolability founded on justice that even the welfare of society as a whole cannot override. For this reason justice denies that the loss of freedom for some is made right by a greater good shared by others. It does not allow that the sacrifices imposed on a few are outweighed by the larger sum of advantages enjoyed by many. Therefore in a just society the liberties of equal citizenship are taken as settled; the rights secured by justice are not subject to political bargaining or to the calculus of social interests. The only thing that permits us to acquiesce in an erroneous theory is the lack of a better one; analogously, an injustice is tolerable only when it is necessary to avoid an even greater injustice. Being first virtues of human activities, truth and justice are uncompromising."
— John Rawls, A Theory of Justice
Some Thoughts on Breadth in Education
I'd say that an education is a bundle of experiences (organically encountered or engineered) with an accompanying bundle of inferences. By "experience", I mean something sufficiently general to cover all of: contemplating social constructs, building a model aircraft, recreating the proof of a theorem and even doing unspeakable things to white mice.
What the university and school system offers in terms of the bundle of imparted data, models and frameworks seems to be, anecdotally speaking, failing to meet the needs of employers. The ones who become the best employees or have the confidence to strike out on their own turn out to be those who seek out the relevant experiences.
But students are overloaded (or so they claim). There is some need to identify what is truly "core" in each "discipline" and shave down curricula to that "core", freeing up capacity for both students and instructors for more extensive education. There will be those who insist that the elementary course on their pet sub-discipline is snugly in the core and everything within should be taught in full. There is merit in that assertion, but a little less given the growing mismatch between what the university offers and what the workplace desires. Toes will smart, but it is all for the best.
What the university and school system offers in terms of the bundle of imparted data, models and frameworks seems to be, anecdotally speaking, failing to meet the needs of employers. The ones who become the best employees or have the confidence to strike out on their own turn out to be those who seek out the relevant experiences.
But students are overloaded (or so they claim). There is some need to identify what is truly "core" in each "discipline" and shave down curricula to that "core", freeing up capacity for both students and instructors for more extensive education. There will be those who insist that the elementary course on their pet sub-discipline is snugly in the core and everything within should be taught in full. There is merit in that assertion, but a little less given the growing mismatch between what the university offers and what the workplace desires. Toes will smart, but it is all for the best.
Friday, September 21, 2012
Surveillance is Expensive...
Much has been said on the Function 8-ISD-Archbishop affair. Little of which I want to repeat.
The sequence of events, however, strongly suggests the use of state surveillance on either the Catholic Church or on Function 8. The use of such an apparatus is costly. Is there a national security case for this application of state surveillance resources? This should be made clear. Do we have a reason to fear Function 8 or the Catholic Church? Either contention sounds absurd. Or are we just overcapacity in the surveillance department and are disguising unemployment? Or is there an overcapacity that appears to be temporary, and we're allowing some ISD officers to practice?
The whole affair is highly suspicious.
The sequence of events, however, strongly suggests the use of state surveillance on either the Catholic Church or on Function 8. The use of such an apparatus is costly. Is there a national security case for this application of state surveillance resources? This should be made clear. Do we have a reason to fear Function 8 or the Catholic Church? Either contention sounds absurd. Or are we just overcapacity in the surveillance department and are disguising unemployment? Or is there an overcapacity that appears to be temporary, and we're allowing some ISD officers to practice?
The whole affair is highly suspicious.
Thursday, September 13, 2012
Goh Keng Swee on the Kind of Armed Forces Needed to Defend Singapore
"You are a Prime Minister but you have no army. How are you going to defend yourself?"
Goh Keng Swee understood that such a tiny force would be useless as a defence force. Thinking in terms of multi-period dynamics, he conceptualized a system where, each year, men of a certain age group would undergo full-time training and thereafter be part of a reserve force which would have their skills periodically refreshed. Should the need arise, an additional force perhaps more than five times the size of the full-time force might be called upon in the defence of Singapore.
— Goh Keng Swee to Lee Kuan Yew, who had wanted a small part-time, low-cost militia
Goh Keng Swee understood that such a tiny force would be useless as a defence force. Thinking in terms of multi-period dynamics, he conceptualized a system where, each year, men of a certain age group would undergo full-time training and thereafter be part of a reserve force which would have their skills periodically refreshed. Should the need arise, an additional force perhaps more than five times the size of the full-time force might be called upon in the defence of Singapore.
Attribution: The above quote was lifted from The New Paper's Founding Fathers series.
Tuesday, September 11, 2012
Goh Keng Swee on Class Conflict
Goh Keng Swee believed that class conflict was an outmoded 19th century concept. He believed that
However, Goh Keng Swee also believed that employers had to treat worker's fairly given the implied concession from labour. On one occasion, he warned employers at the Singapore Manufacturer's Association that the "unthinking and unenlightened employer who pushes his labour force around" would be dealt with severely by the government.
- "When organized labour believes that it can improve its position only by downing the other side, disaster soon overtakes the economy."
- Goh Keng Swee (1968 address to NTUC trainees)
However, Goh Keng Swee also believed that employers had to treat worker's fairly given the implied concession from labour. On one occasion, he warned employers at the Singapore Manufacturer's Association that the "unthinking and unenlightened employer who pushes his labour force around" would be dealt with severely by the government.
Attribution: This content has been largely lifted from The New Paper's Founding Fathers series.
Sunday, September 9, 2012
Lim Kim San and Goh Keng Swee on the Separation from Malaysia
"In a way, it (the separation) was a bit of a relief. In fact, all around town, people were letting off firecrackers! Dr Goh said to me, 'Here I am so worried about our future. But look, the people are celebrating.'"
In fact, neither Lee Kuan Yew, Toh Chin Chye nor S. Rajaratnam wanted the separation. Goh Keng Swee understood that differences between Singapore's values and those of Peninsular Malaysia were unreconcilable and prolonged union might lead to further bloodshed. Goh played a key role in convincing the Malaysians that the only was out was for Singapore to secede completely.
- Lim Kim San, recollecting events of the separation
In fact, neither Lee Kuan Yew, Toh Chin Chye nor S. Rajaratnam wanted the separation. Goh Keng Swee understood that differences between Singapore's values and those of Peninsular Malaysia were unreconcilable and prolonged union might lead to further bloodshed. Goh played a key role in convincing the Malaysians that the only was out was for Singapore to secede completely.
Attribution: This content has been largely lifted from The New Paper's Founding Fathers series.
Friday, September 7, 2012
Lim Kim San, Without Fear or Favour (Political Anecdotes)
Even before Lim Kim San became a minster, he volunteered to be the unpaid chairman of the fledgling Housing and Development Board (HDB). Under his charge, the HDB built 26,168 housing units in its first two years. In fact, the forerunning Singapore Improvement Trust (SIT), with many more architects and years of experience, built about the same number in its 32 years.
At that time, the Minister of National Development was Ong Eng Guan who Lim Kim San reported made things difficult for him. The non-cabinet member also had to deal with PAP politicians who demanded special treatment.
When Lim Kim San declined to give special treatment to the Queenstown constituents of Parliamentary Secretary for Home Affairs Lee Siew Choh, Lee reportedly asked: "What are you here for, if not to give priority to party supporters?" Lim Kim San replied, "I am here exactly to prevent misuse of position."
At that time, the Minister of National Development was Ong Eng Guan who Lim Kim San reported made things difficult for him. The non-cabinet member also had to deal with PAP politicians who demanded special treatment.
When Lim Kim San declined to give special treatment to the Queenstown constituents of Parliamentary Secretary for Home Affairs Lee Siew Choh, Lee reportedly asked: "What are you here for, if not to give priority to party supporters?" Lim Kim San replied, "I am here exactly to prevent misuse of position."
Attribution: This content has been largely lifted from The New Paper's Founding Fathers series.
Sunday, August 26, 2012
On "Incentive Compatibility" in High-Frequency Trading
Today, I was reading a survey paper on convex optimization in risk management (naturally, the applications were financial), when I started thinking about high-frequency trading and how to rationally design the exchange. From the game theoretic perspective, designing such an exchange becomes less than straightforward when the interaction of rational, self-interested buyers and sellers is taken into consideration. I decided to just do this "exercise" on the bus, on my way to Maju camp for RT. (Like many, I was unaware of the 3 month shift in the deadline for doing my IPPT. Still, the exercise would be good for me. My running has deteriorated to a sad state.)
High frequency trading entails computers making lightning-fast trades, and trading agents (such as brokerages) holding positions for as little as a few seconds. As of the end of last year, it accounted for about two-thirds of trades in the US and about half of those in Europe. Last year, the Singapore Exchange (SGX) launched a new trading engine called Reach, advertising it as the world's fastest. It is unfortunate that details on how trades are cleared are not readily available for scrutiny. While the potential harm of poorly designed exchange mechanisms is not huge, inefficiencies commensurate with the frequency of trading can arise.
My objective, here, is to design an exchange so buyers and sellers have incentives to truthfully declare the maximum they are willing to buy at and the minimum they are willing to sell at. This is because given a trading mechanism that is not "truthful", outcomes can be highly inefficient (and possibly ill-defined). Here, inefficiency means that trades that might benefit some buyer and some seller might not happen. With a truthful mechanism, efficient allocations can be made that "maximize social welfare". It was thus my objective to design a good trading mechanism without paying an untenable "price of truthfulness".
Now, on to the topic at hand. In a sense, a stock exchange is not very much different from a traders’ wet market. In fact, the technical difficulties of achieving efficiency in the wet market are more severe than in the high-frequency trading market place. This is a surprising plus of the latter over the former. (This will become clear later.)
In both cases, buy and sell quotes have to be matched and cleared. (And much faster in the electronic market place.) This is when game theory seems to rear its ugly ugly head. A theorem due to Roger Myerson and Mark Satterthwaite tells us that there is no "efficient" way to trade a good between two individuals unless the lowest amount the seller is willing to sell the good at exactly matches the highest amount the buyer is willing to pay for it (i.e.: there is no buyer or seller surplus and that trade leaves no one better off, a pointless trade). This means that there are incentives to posture, pretend and hide the maximum value that one is willing to pay or the minimum value that one is willing to sell at. Anyone who has been to a market in Bangkok or Bali sees this first hand. (My girlfriend loves bargaining. I however, do not have the taste for it, perhaps making me manifestly unsuitable for wheeling and dealing.)
This unfortunate fact has correspondingly unfortunate effects on clearing trades. Let us say that a trade is matched for 1 share and the buy bid is at B (say 10) and the sell bid is at S (say 5). It is clear that the buyer must pay at most B (10) and the seller must be paid at least S (5). If the exchange stipulates that the trade clears at the any number between B and S (say the mid-point), then incentives exist for buyers to shave down (and for sellers to inflate) their bids in order to get a better deal. This is unfortunate as we need true valuations to make good allocation decisions. (In this context, "allocation" refers to clearing trades and "welfare maximization" is desirable. Also, we are not concerned about buyers inflating their bids and for sellers to shave theirs down as more trades are encouraged, and possible real losses lead to a natural restriction of this.)
Let us take a step back and consider how we might obtain matching buy-sell bids to clear. For simplicity, we consider 1 share blocks. (Though it is trivial to execute with blocks of varying sizes.) From the perspective of economics, we would like to incentivize people to truthfully inform the exchange of the lowest price one is willing to sell at (for buyers) and highest price one is willing to pay (for sellers). This allows efficient allocations. This incentive can be built into the exchange by making it possible for buyers and sellers to capture more trade surplus (the difference between transacted price and one's valuation) by bidding truthfully.
Consider the following matching procedure: pick the highest buy bid and match it with the lowest sell bid and pass that match on to clearing. This means that matches, from the pool of unsatisfied bids, are made so as to maximize the total trade surplus of that match. So "potential trade surplus reaped" will be used as an incentive for all to bid truthfully. Tentatively we will leave this at that, noting that a payment rule (to determine the clearing price) is needed to make this precise. Before getting to that, we return to the apparently ugly problem mentioned above.
I made a number of mistakes on that bus. I've thought asymmetric buyer-seller rules would work (noting that agents would buy essentially as often as they sell); I thought randomization would save the day. All those would not work. It turns out that there is a direct cost to economic efficiency that has to be paid to ensure truthfulness. What would please the board of any exchange implementing this mechanism is that the exchange can pick up what is left on the table. Let me explain.
The key requirement for truthfulness is that, all other bids being fixed, a buyer and seller pair should not be able to affect their gains by changing their bids. Changing their bids should only affect whether their trade is cleared first, and it should be clear that trades cleared first generate more "potential trade surplus". Thus, given a top buy bid B1 and second highest buy bid B2, and lowest sell bid S1 and second lowest sell bid S2, the buy price and the sell price should be functions of B2 and S2, (B2+S2)/2 being the obvious choice. If these differ (albeit slightly), the exchange pockets the difference as a "facilitation" commission.
Now moving back to the matching rule, we see that the leading buyer has no incentive to bid anything other than the maximum he is willing to pay as that would not increase his expected trade surplus (and possibly decrease it). A similar case is true for leading sellers. Ostensibly, we have achieved incentive compatibility in high-frequency exchanges.
Unfortunately, it still is not clear cut as (1) "non-leading" buyers may raise their bids and "non-leading" sellers may lower their bids to get a better match, and (2) there may be a timing issue. Due to these limitations, quotes were added to the title and "incentive compatible" was used as opposed to "truthful". Yet, these issues are far from fatally damaging to the mechanism outlined above.
On (1), the problem is ameliorated by the fact that for approximately evenly spaced buy bids and similarly spaced sell bids, non-leading bidders stand to lose if they manipulate. In fact, it can be shown that if buy bids are evenly spaced and sell bids are evenly spaced with a different spacing, if a non-leading buyer raises his bid, he only stands to gain if the "sell-side spacing" is more than twice that on the "buy-side", which is highly unlikely to persist in sustained trading by the "symmetry" of buying and selling (i.e.: the use of similar models for asset valuation) and the price mechanics led by supply and demand. A similar argument holds for sellers hoping to gain by pretending to be willing to sell for less. On (2), An agent might wonder what if a lower sell bid comes in over the next second and by posting a buy bid now, it is missed? However, in so far as things are uncertain, and one expects to lose money by holding back, this problem is not so severe. (Woo! Hand-waving. Doesn't this take you back to your school days.)
This has been a fun exercise in mechanism design. (Writing this up took longer than thinking about it.) It is quite amusing that the incentive problems in a simple setting like a traders’ wet market are more intractable than in a high-frequency exchange. Hopefully, it has demonstrated the value of the marriage of economics and computer science in our world.
Postscript 1: I feel that mechanism design has an important role to play in the evolution of the public and private spheres in Singapore. As I am embarking on a PhD in Decision Sciences at NUS Business School, I hope that I’ll be able to make some contributions in this arena. It would be appropriate to thank David Parkes for introducing me to this wonderful field. The commute up north to take his class (and missing another class I wanted to take that was back-to-back with it) was well worth it.
Postscript 2: The aforementioned matching can be done efficiently using priority queues. Certain specialized implementations are blazingly fast.
Postscript 3: An electronic marketplace may become even more interesting if a combinatorial element is introduced. That is, if bundles of different stocks in some proportions have a synergistic value. This adds horrid computational issues, and may be of dubious value. One question might be: given that in general, trades like this cannot be cleared fast, is there a non-trivial restricted class of trades that can?
Afternote 1: If the exchange would like to obtain additional revenue from each transaction or a government would like to tax transactions, it should be done as a fixed proportion of the buyer-seller trade surplus. This will preserve incentive compatibility.
Afternote 2: One of thoughts that went through my mind on that bus ride was how to sensibly do short selling in high-frequency trades. Now that this post has evolved into what it has become, this is a little off-topic. While I do not see the grave dangers of naked short selling (selling shares one does not own without first having actual shares borrowed), I feel it distorts supply/demand signals in markets and can have ill-defined effects. I was thinking of an auction for loaning shares for shorting, where the price would be the interest rate or a rental rate. A simple sequential VCG auction might be used for this.
Afternote 3: Note that this does not maximize trading volumes. To maximize trading volumes, the lowest sell bid might be matched with the lowest feasible buy bid, but this destroys incentive compatibility. This loss of potential volume, might be an additional price of incentive compatibility. It is unclear which is more costly: the price of untruthfully higher sell bids and untruthfully lower buy bids, or the price of incentive compatibility. Yet, these are hypotheticals. What is certain is, the mechanism outlined above has nice revenue properties.
Afternote 4: In view of Postscript 1, it would be interesting to compare (in simulation) this mechanism and, supposing this is not how it is done now, existing trading mechanisms. The main thing to look out for would be the total (exchange-measured) trade surplus. To do this, asset prices might generated using a (possibly very) noisy factor model, and agent valuations might be generated using (possibly bad) estimates of the aforementioned factor model. Trading strategies may then be simulated given these synthetic pieces of information.
Afternote 5: In a purely symmetric buy-sell environment, this reduces to the median price mechanism, which is nice. It is also trivially efficient since whoever values the goods the most gets them first (and whoever values them the least get rid of them soonest).
Afternote 6: Obtaining full incentive compatibility may be a matter of selecting different prices for buyer and seller using distributions on the "enclosed" bidders. This becomes a matter of using the empirical distribution to compute adaptive probabilities of setting the buy price at B2 and the sell price at S2. In these cases, the "exchange" pockets the difference to enforce incentive compatibility.
High frequency trading entails computers making lightning-fast trades, and trading agents (such as brokerages) holding positions for as little as a few seconds. As of the end of last year, it accounted for about two-thirds of trades in the US and about half of those in Europe. Last year, the Singapore Exchange (SGX) launched a new trading engine called Reach, advertising it as the world's fastest. It is unfortunate that details on how trades are cleared are not readily available for scrutiny. While the potential harm of poorly designed exchange mechanisms is not huge, inefficiencies commensurate with the frequency of trading can arise.
My objective, here, is to design an exchange so buyers and sellers have incentives to truthfully declare the maximum they are willing to buy at and the minimum they are willing to sell at. This is because given a trading mechanism that is not "truthful", outcomes can be highly inefficient (and possibly ill-defined). Here, inefficiency means that trades that might benefit some buyer and some seller might not happen. With a truthful mechanism, efficient allocations can be made that "maximize social welfare". It was thus my objective to design a good trading mechanism without paying an untenable "price of truthfulness".
Now, on to the topic at hand. In a sense, a stock exchange is not very much different from a traders’ wet market. In fact, the technical difficulties of achieving efficiency in the wet market are more severe than in the high-frequency trading market place. This is a surprising plus of the latter over the former. (This will become clear later.)
In both cases, buy and sell quotes have to be matched and cleared. (And much faster in the electronic market place.) This is when game theory seems to rear its ugly ugly head. A theorem due to Roger Myerson and Mark Satterthwaite tells us that there is no "efficient" way to trade a good between two individuals unless the lowest amount the seller is willing to sell the good at exactly matches the highest amount the buyer is willing to pay for it (i.e.: there is no buyer or seller surplus and that trade leaves no one better off, a pointless trade). This means that there are incentives to posture, pretend and hide the maximum value that one is willing to pay or the minimum value that one is willing to sell at. Anyone who has been to a market in Bangkok or Bali sees this first hand. (My girlfriend loves bargaining. I however, do not have the taste for it, perhaps making me manifestly unsuitable for wheeling and dealing.)
This unfortunate fact has correspondingly unfortunate effects on clearing trades. Let us say that a trade is matched for 1 share and the buy bid is at B (say 10) and the sell bid is at S (say 5). It is clear that the buyer must pay at most B (10) and the seller must be paid at least S (5). If the exchange stipulates that the trade clears at the any number between B and S (say the mid-point), then incentives exist for buyers to shave down (and for sellers to inflate) their bids in order to get a better deal. This is unfortunate as we need true valuations to make good allocation decisions. (In this context, "allocation" refers to clearing trades and "welfare maximization" is desirable. Also, we are not concerned about buyers inflating their bids and for sellers to shave theirs down as more trades are encouraged, and possible real losses lead to a natural restriction of this.)
Let us take a step back and consider how we might obtain matching buy-sell bids to clear. For simplicity, we consider 1 share blocks. (Though it is trivial to execute with blocks of varying sizes.) From the perspective of economics, we would like to incentivize people to truthfully inform the exchange of the lowest price one is willing to sell at (for buyers) and highest price one is willing to pay (for sellers). This allows efficient allocations. This incentive can be built into the exchange by making it possible for buyers and sellers to capture more trade surplus (the difference between transacted price and one's valuation) by bidding truthfully.
Consider the following matching procedure: pick the highest buy bid and match it with the lowest sell bid and pass that match on to clearing. This means that matches, from the pool of unsatisfied bids, are made so as to maximize the total trade surplus of that match. So "potential trade surplus reaped" will be used as an incentive for all to bid truthfully. Tentatively we will leave this at that, noting that a payment rule (to determine the clearing price) is needed to make this precise. Before getting to that, we return to the apparently ugly problem mentioned above.
I made a number of mistakes on that bus. I've thought asymmetric buyer-seller rules would work (noting that agents would buy essentially as often as they sell); I thought randomization would save the day. All those would not work. It turns out that there is a direct cost to economic efficiency that has to be paid to ensure truthfulness. What would please the board of any exchange implementing this mechanism is that the exchange can pick up what is left on the table. Let me explain.
The key requirement for truthfulness is that, all other bids being fixed, a buyer and seller pair should not be able to affect their gains by changing their bids. Changing their bids should only affect whether their trade is cleared first, and it should be clear that trades cleared first generate more "potential trade surplus". Thus, given a top buy bid B1 and second highest buy bid B2, and lowest sell bid S1 and second lowest sell bid S2, the buy price and the sell price should be functions of B2 and S2, (B2+S2)/2 being the obvious choice. If these differ (albeit slightly), the exchange pockets the difference as a "facilitation" commission.
Now moving back to the matching rule, we see that the leading buyer has no incentive to bid anything other than the maximum he is willing to pay as that would not increase his expected trade surplus (and possibly decrease it). A similar case is true for leading sellers. Ostensibly, we have achieved incentive compatibility in high-frequency exchanges.
Unfortunately, it still is not clear cut as (1) "non-leading" buyers may raise their bids and "non-leading" sellers may lower their bids to get a better match, and (2) there may be a timing issue. Due to these limitations, quotes were added to the title and "incentive compatible" was used as opposed to "truthful". Yet, these issues are far from fatally damaging to the mechanism outlined above.
On (1), the problem is ameliorated by the fact that for approximately evenly spaced buy bids and similarly spaced sell bids, non-leading bidders stand to lose if they manipulate. In fact, it can be shown that if buy bids are evenly spaced and sell bids are evenly spaced with a different spacing, if a non-leading buyer raises his bid, he only stands to gain if the "sell-side spacing" is more than twice that on the "buy-side", which is highly unlikely to persist in sustained trading by the "symmetry" of buying and selling (i.e.: the use of similar models for asset valuation) and the price mechanics led by supply and demand. A similar argument holds for sellers hoping to gain by pretending to be willing to sell for less. On (2), An agent might wonder what if a lower sell bid comes in over the next second and by posting a buy bid now, it is missed? However, in so far as things are uncertain, and one expects to lose money by holding back, this problem is not so severe. (Woo! Hand-waving. Doesn't this take you back to your school days.)
This has been a fun exercise in mechanism design. (Writing this up took longer than thinking about it.) It is quite amusing that the incentive problems in a simple setting like a traders’ wet market are more intractable than in a high-frequency exchange. Hopefully, it has demonstrated the value of the marriage of economics and computer science in our world.
Postscript 1: I feel that mechanism design has an important role to play in the evolution of the public and private spheres in Singapore. As I am embarking on a PhD in Decision Sciences at NUS Business School, I hope that I’ll be able to make some contributions in this arena. It would be appropriate to thank David Parkes for introducing me to this wonderful field. The commute up north to take his class (and missing another class I wanted to take that was back-to-back with it) was well worth it.
Postscript 2: The aforementioned matching can be done efficiently using priority queues. Certain specialized implementations are blazingly fast.
Postscript 3: An electronic marketplace may become even more interesting if a combinatorial element is introduced. That is, if bundles of different stocks in some proportions have a synergistic value. This adds horrid computational issues, and may be of dubious value. One question might be: given that in general, trades like this cannot be cleared fast, is there a non-trivial restricted class of trades that can?
Afternote 1: If the exchange would like to obtain additional revenue from each transaction or a government would like to tax transactions, it should be done as a fixed proportion of the buyer-seller trade surplus. This will preserve incentive compatibility.
Afternote 2: One of thoughts that went through my mind on that bus ride was how to sensibly do short selling in high-frequency trades. Now that this post has evolved into what it has become, this is a little off-topic. While I do not see the grave dangers of naked short selling (selling shares one does not own without first having actual shares borrowed), I feel it distorts supply/demand signals in markets and can have ill-defined effects. I was thinking of an auction for loaning shares for shorting, where the price would be the interest rate or a rental rate. A simple sequential VCG auction might be used for this.
Afternote 3: Note that this does not maximize trading volumes. To maximize trading volumes, the lowest sell bid might be matched with the lowest feasible buy bid, but this destroys incentive compatibility. This loss of potential volume, might be an additional price of incentive compatibility. It is unclear which is more costly: the price of untruthfully higher sell bids and untruthfully lower buy bids, or the price of incentive compatibility. Yet, these are hypotheticals. What is certain is, the mechanism outlined above has nice revenue properties.
Afternote 4: In view of Postscript 1, it would be interesting to compare (in simulation) this mechanism and, supposing this is not how it is done now, existing trading mechanisms. The main thing to look out for would be the total (exchange-measured) trade surplus. To do this, asset prices might generated using a (possibly very) noisy factor model, and agent valuations might be generated using (possibly bad) estimates of the aforementioned factor model. Trading strategies may then be simulated given these synthetic pieces of information.
Afternote 5: In a purely symmetric buy-sell environment, this reduces to the median price mechanism, which is nice. It is also trivially efficient since whoever values the goods the most gets them first (and whoever values them the least get rid of them soonest).
Afternote 6: Obtaining full incentive compatibility may be a matter of selecting different prices for buyer and seller using distributions on the "enclosed" bidders. This becomes a matter of using the empirical distribution to compute adaptive probabilities of setting the buy price at B2 and the sell price at S2. In these cases, the "exchange" pockets the difference to enforce incentive compatibility.
Friday, August 3, 2012
Badminton and Incentive Compatibility
I was doing my In-Camp Training this week when I read about the fiasco in Olympic badminton. I wanted to write a post about how the rules are such that they encourage bad behavior, but on coming back I found that Robert Kleinberg had already written something about the matter, titled Olympic Badminton is Not Incentive Compatible. Rather than re-work the same argument (and do so with a considerably poorer literature review), I'd like to point to his article.
At the end of his post, he wonders why shenanigans like that do not happen more in sports. I'd conjecture that advertising revenue has something to do with it. "Side payments" such as ad revenue provide subsidiary incentives to exhibit some "honor on the field". Which is probably why top teams are incentivised to be at the top of their game almost all the time. Picture perfect sporting moments bring in ad money. So it is all about payments. In sports like badminton, these payments are not substantial enough to detract from strategic skiving.
Disrepute aside, this is a wonderful example of how poor non-incentive compatible institutions generate bad outcomes for society.
At the end of his post, he wonders why shenanigans like that do not happen more in sports. I'd conjecture that advertising revenue has something to do with it. "Side payments" such as ad revenue provide subsidiary incentives to exhibit some "honor on the field". Which is probably why top teams are incentivised to be at the top of their game almost all the time. Picture perfect sporting moments bring in ad money. So it is all about payments. In sports like badminton, these payments are not substantial enough to detract from strategic skiving.
Disrepute aside, this is a wonderful example of how poor non-incentive compatible institutions generate bad outcomes for society.
Sunday, July 15, 2012
Handling the Defence of Singapore in the 21st Century
(Note: Post backdated to date of original writing.)
Two articles were published on TOC in June, Conscription: Necessary Or Outdated? (Bryan Cheang, 20 June 2012) and Rethinking Singapore’s Defence Needs (Rajiv Chaudhry, 25 June 2012), which I found to be rather off the mark. Thankfully, soon after, another article which had, I feel, a more realistic perspective on things, Conscription: The Missing Perspective (Benjamin Cheah, 3 July 2012), was posted. I would like to comment on what has been said and add, what I hope is, a little more to the discussion.
A "New Normal"??
It is naive to think that "in this age of moderation" a "new normal" has emerged characterized by all manner of warm and fuzzy sounding buzz words. Rajiv Chaudhry and, to a lesser extent, Bryan Cheang seem to think that everyone else is good and just today. But look at the way children act when unsupervised, how often do you see bigger kids taking things away from the smaller ones. Similarly, big dogs steal food from smaller dogs. In fact, for most living X's, big X's steal food from small X's unless the small X's are able to secure protection for themselves. Similarly, defence solutions have to give tangible security guarantees.
It is notable that the United States has been rather consistent in offering assistance to victims of aggression only when its interests are at stake. Certainly, Singapore has substantial strategic value as a friend to the United States, however this value to the USA is positional and is the same even is Singapore becomes an island of bombed out ruins. In the grand scheme of things, our economy is of little value to the USA, and we should remember that. More generally, military alliances and pacts to offer assistance can be breached if they are not in the counter-party's interests to honour the terms. We have to be aware that military intervention involves real costs that have to be justified from the point of view of others.
Lee Kuan Yew has one thing right: the truth about inter-country relations is that we can be friends only if we respect each others' strength. If friendships between sentimental human beings can be ephemeral, how much more fleeting can "friendships" between unfeeling nations be? Presently, deterrence is the only real way to be sure that military capabilities that can otherwise be used as a means to expropriate our property and sovereignty are not.
The Need to Intelligently Provision for Defence
I am no big fan of the SAF and its (often sycophantic) "high potentials", but let us not kid ourselves. The SAF must be sufficiently provisioned to, at least, give the semblance of being a credible force with considerable sting. The sting must be sufficiently strong to skew the cost-benefit analysis of whether or not to infringe on our sovereignty towards a "no". However, this sting comes at a cost, and we have to obtain and sustain military capabilities cost effectively. Thus, it is important that senior officers in the SAF do not adopt a "don't ask me about money, I only train" attitude or a "I only need to manage my multi-year acquisition over my tenure of two years and look good before I post out" attitude. This is not a casual swipe at career soldiers, these attitudes are not uncommon and are highly costly to Singapore. Management of those managing the acquisition and operation of military systems needs to account for the prevailing incentives and structure remuneration and advancement in a manner that promotes military strength and cost effectiveness.
On the matter of manpower, I would argue that cutting the NS and reservist liabilities based on "what others are doing", as Rajiv Chaudhry suggests, is unthinking and silly. There are ways to do so intelligently but incrementally. Let me provide a simple example:
In the longer term, force structuring is the way forward to reducing ("right-sizing") the defence foot print. The ORBAT (Order of Battle) must be fluid, allowing reductions in some areas and increases in others. Capabilities will have to match the threat landscape, and capabilities that are less relevant have to be phased. Opposition to any reduction in command positions would reflect ego problems and rather than any substantive defence issue.
The Ability to Use Capabilities
The ability to effectively use equipment is crucial. The best soccer boots on an amateur team will not help them beat a barefoot Germany (because to use Brazil would simply be unfair). The man is more important than the machine.
During periods of tension, the best that can be done is to call men back for re-orientation with their equipment. How can it be expected that we will be able to use our equipment well. If technology is a force-multiplier, the lack of expertise in the use of that equipment is a force-divider. The natural question that arises is whether that number resolves to something greater or lesser than unity. Having this as the best option available to us seems to reflect a lack of foresight on the part of senior MINDEF/SAF officials/officers.
As equipment requires increasing amounts of practice and knowledge of its workings to use properly, the dictum that we do not want to have too many Singaporeans of working age tied up in the regular force has to be called into question. Economic output may suffer somewhat, but more soldiers will have the time required to build up their ability in the use of our high-tech equipment. This old assumption will have to be re-examined.
Conclusion
As Benjamin Cheah notes, the geography of the region puts us at a distinct strategic and tactical disadvantage. We have to be smart about how we handle defence. We must provision intelligently and ensure that our men have the ability to leverage our expensively obtained capabilities.
If we were to return to the issue of NS which started all this, in my mind, it would be appropriate to have a larger regular force for skill-development along with variable length NSF and reservist periods (based on demonstrated effectiveness). It might well turn out, that increased economic participation and longer economic life of Singapore males due to effective reductions in their NS liabilities more than pays for the increase in the size of the regular force.
Two articles were published on TOC in June, Conscription: Necessary Or Outdated? (Bryan Cheang, 20 June 2012) and Rethinking Singapore’s Defence Needs (Rajiv Chaudhry, 25 June 2012), which I found to be rather off the mark. Thankfully, soon after, another article which had, I feel, a more realistic perspective on things, Conscription: The Missing Perspective (Benjamin Cheah, 3 July 2012), was posted. I would like to comment on what has been said and add, what I hope is, a little more to the discussion.
A "New Normal"??
It is naive to think that "in this age of moderation" a "new normal" has emerged characterized by all manner of warm and fuzzy sounding buzz words. Rajiv Chaudhry and, to a lesser extent, Bryan Cheang seem to think that everyone else is good and just today. But look at the way children act when unsupervised, how often do you see bigger kids taking things away from the smaller ones. Similarly, big dogs steal food from smaller dogs. In fact, for most living X's, big X's steal food from small X's unless the small X's are able to secure protection for themselves. Similarly, defence solutions have to give tangible security guarantees.
It is notable that the United States has been rather consistent in offering assistance to victims of aggression only when its interests are at stake. Certainly, Singapore has substantial strategic value as a friend to the United States, however this value to the USA is positional and is the same even is Singapore becomes an island of bombed out ruins. In the grand scheme of things, our economy is of little value to the USA, and we should remember that. More generally, military alliances and pacts to offer assistance can be breached if they are not in the counter-party's interests to honour the terms. We have to be aware that military intervention involves real costs that have to be justified from the point of view of others.
Lee Kuan Yew has one thing right: the truth about inter-country relations is that we can be friends only if we respect each others' strength. If friendships between sentimental human beings can be ephemeral, how much more fleeting can "friendships" between unfeeling nations be? Presently, deterrence is the only real way to be sure that military capabilities that can otherwise be used as a means to expropriate our property and sovereignty are not.
The Need to Intelligently Provision for Defence
I am no big fan of the SAF and its (often sycophantic) "high potentials", but let us not kid ourselves. The SAF must be sufficiently provisioned to, at least, give the semblance of being a credible force with considerable sting. The sting must be sufficiently strong to skew the cost-benefit analysis of whether or not to infringe on our sovereignty towards a "no". However, this sting comes at a cost, and we have to obtain and sustain military capabilities cost effectively. Thus, it is important that senior officers in the SAF do not adopt a "don't ask me about money, I only train" attitude or a "I only need to manage my multi-year acquisition over my tenure of two years and look good before I post out" attitude. This is not a casual swipe at career soldiers, these attitudes are not uncommon and are highly costly to Singapore. Management of those managing the acquisition and operation of military systems needs to account for the prevailing incentives and structure remuneration and advancement in a manner that promotes military strength and cost effectiveness.
On the matter of manpower, I would argue that cutting the NS and reservist liabilities based on "what others are doing", as Rajiv Chaudhry suggests, is unthinking and silly. There are ways to do so intelligently but incrementally. Let me provide a simple example:
- Consider having only 7 compulsory ICTs, the last of which is an ATEC assessment. If the reservist battalion passes, they are done with their reservist liability and will transition into the MINDEF Reserve. Otherwise they will come back for the 8th, 9th and perhaps 10th re-test sessions. This gives the incentive to build competence and also cuts the effective liability.
In the longer term, force structuring is the way forward to reducing ("right-sizing") the defence foot print. The ORBAT (Order of Battle) must be fluid, allowing reductions in some areas and increases in others. Capabilities will have to match the threat landscape, and capabilities that are less relevant have to be phased. Opposition to any reduction in command positions would reflect ego problems and rather than any substantive defence issue.
The Ability to Use Capabilities
The ability to effectively use equipment is crucial. The best soccer boots on an amateur team will not help them beat a barefoot Germany (because to use Brazil would simply be unfair). The man is more important than the machine.
During periods of tension, the best that can be done is to call men back for re-orientation with their equipment. How can it be expected that we will be able to use our equipment well. If technology is a force-multiplier, the lack of expertise in the use of that equipment is a force-divider. The natural question that arises is whether that number resolves to something greater or lesser than unity. Having this as the best option available to us seems to reflect a lack of foresight on the part of senior MINDEF/SAF officials/officers.
As equipment requires increasing amounts of practice and knowledge of its workings to use properly, the dictum that we do not want to have too many Singaporeans of working age tied up in the regular force has to be called into question. Economic output may suffer somewhat, but more soldiers will have the time required to build up their ability in the use of our high-tech equipment. This old assumption will have to be re-examined.
Conclusion
As Benjamin Cheah notes, the geography of the region puts us at a distinct strategic and tactical disadvantage. We have to be smart about how we handle defence. We must provision intelligently and ensure that our men have the ability to leverage our expensively obtained capabilities.
If we were to return to the issue of NS which started all this, in my mind, it would be appropriate to have a larger regular force for skill-development along with variable length NSF and reservist periods (based on demonstrated effectiveness). It might well turn out, that increased economic participation and longer economic life of Singapore males due to effective reductions in their NS liabilities more than pays for the increase in the size of the regular force.
On Casino Entry: Lessons from Credit Card Approval Requirements
Earlier this month, Minister of State for Finance Josephine Teo revealed to Parliament that casino entry levy fees collected by the government in the past 18 months reached S$288 million. (A daily entry levy of S$100 and annual entry levy of S$2,000 is imposed on Singaporeans and permanent residents seeking to enter the casinos.)
It strikes me that while the casinos were advertised to be an additional draw in our tourism portfolio, with an "effective" barrier to locals frittering away their hard-earned (and low by international standards) salaries in the form of levies, they have nevertheless "been very effective at drawing locals".
I believe that this is undesirable and it is important that more effective barriers to entry be put up to prevent gambling-led destitution. One way to do this is hinted at by another, albeit more pleasant, route to ruinous debt: the credit card.
Under the Monetary Authority of Singapore (MAS) guidelines, to be eligible to apply for a credit card, one needs to be (i) at least 21 years old and (ii) earn an annual declared income of at least S$30,000 for citizens and S$45,000 for PRs. In addition to the minimum requirements set by the MAS, individual banks may impose additional requirements for card holding.
This regulation makes it more likely that card holders have the capacity to afford the easy spending that credit cards facilitate. Furthermore, ones monthly salary also goes into determining one's credit limit. Similar income based requirements would be more suitable than a flat S$100 daily levy.
Singapore Citizens and PRs who wish to gamble should first become "members" of the casino, with membership being granted on the basis of a minimum annual salary which should be checked on an annual basis (e.g. via CPF contributions). Furthermore, a "member's" annual salary should determine a monthly chip exchange limit.
This might let those between jobs slip through the cracks somewhat, but the regular CPF contribution checks should close the gap quickly enough.
At this point, I have no good answer for how to handle retirees. It may be too intrusive to look at entire CPF balances to determine chip exchange limits. However, annuity sizes might provide a guide for doing this.
I think we have to be smarter about dealing with the gambling problem. What we have is grossly insufficient.
It strikes me that while the casinos were advertised to be an additional draw in our tourism portfolio, with an "effective" barrier to locals frittering away their hard-earned (and low by international standards) salaries in the form of levies, they have nevertheless "been very effective at drawing locals".
I believe that this is undesirable and it is important that more effective barriers to entry be put up to prevent gambling-led destitution. One way to do this is hinted at by another, albeit more pleasant, route to ruinous debt: the credit card.
Under the Monetary Authority of Singapore (MAS) guidelines, to be eligible to apply for a credit card, one needs to be (i) at least 21 years old and (ii) earn an annual declared income of at least S$30,000 for citizens and S$45,000 for PRs. In addition to the minimum requirements set by the MAS, individual banks may impose additional requirements for card holding.
This regulation makes it more likely that card holders have the capacity to afford the easy spending that credit cards facilitate. Furthermore, ones monthly salary also goes into determining one's credit limit. Similar income based requirements would be more suitable than a flat S$100 daily levy.
Singapore Citizens and PRs who wish to gamble should first become "members" of the casino, with membership being granted on the basis of a minimum annual salary which should be checked on an annual basis (e.g. via CPF contributions). Furthermore, a "member's" annual salary should determine a monthly chip exchange limit.
This might let those between jobs slip through the cracks somewhat, but the regular CPF contribution checks should close the gap quickly enough.
At this point, I have no good answer for how to handle retirees. It may be too intrusive to look at entire CPF balances to determine chip exchange limits. However, annuity sizes might provide a guide for doing this.
I think we have to be smarter about dealing with the gambling problem. What we have is grossly insufficient.
Monday, July 9, 2012
Universal Healthcare: Its Importance to the Economy and Incentivising the Proper Uses of Funds
(Note: Post backdated to date of original writing.)
Those that feel that universal healthcare is a bad idea typically point to the high utilizations in some jurisdictions as "proof" that it would increase the incentive to go to the doctor unnecessarily and for doctors to overcharge. Their arguments typically end there.
It is unfortunate that those naysayers who oppose universal healthcare appear to be unable to or seem to not be bothered to think of a way to reduce healthcare finance risk for Singaporeans while ensuring that funds are not drained unnecessarily. This is why I am a fan of The SDP's Healthcare Plan. They have made an effort to create a comprehensive scheme for healthcare finance which precisely reduces the healthcare finance risk for Singaporeans. It can be improved a little though (which is the subject of the second part of this note).
Healthcare Risk and the Larger Economy
It is certainly good to reduce one's the healthcare finance risk. But to see how it is important and not simply a "good to have", compare the following two lotteries (which are equal in expectation):
Supporting stability is one of the justifications that the Singapore government has given for all manner of political abuses. Yet while they wax lyrical about human resources being our most important resource, they hypocritically deny that resource the stability on which to build their lives. How then can a vibrant economy, based on enterprising Singaporeans, grow from the absence of personal stability?
Incentivising the Proper Use of Funds
Economic commentary aside, I would like to describe a simple framework for thinking about the usage of funds. I will acknowledge that uncontrolled availability of funds provides incentives to go the doctor unnecessarily and for doctors to overcharge. A fixed ratio co-payment scheme does not provide a complete answer as the co-payment is so small in some cases that unnecessary visits still occur (say, for the purposes of getting "medical leave"). The same fixed ratio may also result in an onerous payment should a necessary medical expense have a high base cost.
Now what is onerous and what is trivial depend on the size of the expense, its necessity and the income level of the one paying. If one earns less than $1000 a month, one would be careful not to waste $5 on an unnecessary medical co-payment (but would probably be willing to pay it out if actually sick). On the other hand, someone earning $5000 a month would gladly shell out the same $5 for a day of "medical leave". For the individual earning $1000 a month, a $2000 medical co-payment for a major procedure is extremely onerous. For the individual earning $5000 a month, it means forgoing a spa package: just a pinch. It is thus useful for co-payments to vary with (i) income levels and (ii) the size of the expense. I would add on to that set of criteria, (iii) the type of ailment being treated.
The why of (i) and (ii) should be clear. Small payments are not huge downsides that people have to be protected against. (And unnecessary trivialities are what the healthcare system should not be loaded with.) In contrast, large downsides have to be smoothed out.
On (iii), using the type of ailment as a criterion for determining the percentage of the co-payment can be explained based on the undesirability of various ailments. While NSFs have been known to eat toothpaste in the hope of contracting a "fever" to skive out of a 3-day outfield training exercise, I know of no one who willingly contracts diabetes or cancer. Co-payments should be lower for ailments which are "less likely to be abused". Notably, (iii) is far less important as a consideration than (i) and (ii), but it is included for "completeness".
An economist might call a scheme built using the above framework a "progressive incentive compatible co-payment scheme". These are nice sounding words: "progressive" refers to lower income individuals paying less for the same treatment and "incentive compatible" refers to the incentives to use the system only with necessary/the disincentives to use the system when unnecessary.
I will stop short of proposing co-payment percentages as it demands knowledge of how individuals at various income levels use their earnings, how serious various ailments are, as well as a number of other matters that I do not possess the relevant domain knowledge to comment on.
Summary
The level of healthcare finance risk is an important element determining individual economic stability. It is thus important to broadly reduce healthcare finance risk, as its reduction will give individuals more capacity to pursue ventures as opposed to locking money down to protect themselves against financial downsides associated with healthcare.
While cutting healthcare finance risk for individuals is important. It is important that state resources are used prudently. I have proposed a framework for developing co-payments that are progressive and "incentive compatible" to address this question. Comments on the framework are very much welcome.
Those that feel that universal healthcare is a bad idea typically point to the high utilizations in some jurisdictions as "proof" that it would increase the incentive to go to the doctor unnecessarily and for doctors to overcharge. Their arguments typically end there.
It is unfortunate that those naysayers who oppose universal healthcare appear to be unable to or seem to not be bothered to think of a way to reduce healthcare finance risk for Singaporeans while ensuring that funds are not drained unnecessarily. This is why I am a fan of The SDP's Healthcare Plan. They have made an effort to create a comprehensive scheme for healthcare finance which precisely reduces the healthcare finance risk for Singaporeans. It can be improved a little though (which is the subject of the second part of this note).
Healthcare Risk and the Larger Economy
It is certainly good to reduce one's the healthcare finance risk. But to see how it is important and not simply a "good to have", compare the following two lotteries (which are equal in expectation):
- 99% of the time you pay out $100, 1% of the time you pay out $100000
- 99% of the time you pay out $1000, 1% of the time you pay out $10900
Supporting stability is one of the justifications that the Singapore government has given for all manner of political abuses. Yet while they wax lyrical about human resources being our most important resource, they hypocritically deny that resource the stability on which to build their lives. How then can a vibrant economy, based on enterprising Singaporeans, grow from the absence of personal stability?
Incentivising the Proper Use of Funds
Economic commentary aside, I would like to describe a simple framework for thinking about the usage of funds. I will acknowledge that uncontrolled availability of funds provides incentives to go the doctor unnecessarily and for doctors to overcharge. A fixed ratio co-payment scheme does not provide a complete answer as the co-payment is so small in some cases that unnecessary visits still occur (say, for the purposes of getting "medical leave"). The same fixed ratio may also result in an onerous payment should a necessary medical expense have a high base cost.
Now what is onerous and what is trivial depend on the size of the expense, its necessity and the income level of the one paying. If one earns less than $1000 a month, one would be careful not to waste $5 on an unnecessary medical co-payment (but would probably be willing to pay it out if actually sick). On the other hand, someone earning $5000 a month would gladly shell out the same $5 for a day of "medical leave". For the individual earning $1000 a month, a $2000 medical co-payment for a major procedure is extremely onerous. For the individual earning $5000 a month, it means forgoing a spa package: just a pinch. It is thus useful for co-payments to vary with (i) income levels and (ii) the size of the expense. I would add on to that set of criteria, (iii) the type of ailment being treated.
The why of (i) and (ii) should be clear. Small payments are not huge downsides that people have to be protected against. (And unnecessary trivialities are what the healthcare system should not be loaded with.) In contrast, large downsides have to be smoothed out.
On (iii), using the type of ailment as a criterion for determining the percentage of the co-payment can be explained based on the undesirability of various ailments. While NSFs have been known to eat toothpaste in the hope of contracting a "fever" to skive out of a 3-day outfield training exercise, I know of no one who willingly contracts diabetes or cancer. Co-payments should be lower for ailments which are "less likely to be abused". Notably, (iii) is far less important as a consideration than (i) and (ii), but it is included for "completeness".
An economist might call a scheme built using the above framework a "progressive incentive compatible co-payment scheme". These are nice sounding words: "progressive" refers to lower income individuals paying less for the same treatment and "incentive compatible" refers to the incentives to use the system only with necessary/the disincentives to use the system when unnecessary.
I will stop short of proposing co-payment percentages as it demands knowledge of how individuals at various income levels use their earnings, how serious various ailments are, as well as a number of other matters that I do not possess the relevant domain knowledge to comment on.
Summary
The level of healthcare finance risk is an important element determining individual economic stability. It is thus important to broadly reduce healthcare finance risk, as its reduction will give individuals more capacity to pursue ventures as opposed to locking money down to protect themselves against financial downsides associated with healthcare.
While cutting healthcare finance risk for individuals is important. It is important that state resources are used prudently. I have proposed a framework for developing co-payments that are progressive and "incentive compatible" to address this question. Comments on the framework are very much welcome.
Sunday, July 8, 2012
Decent Procurement Processes are not Complicated
It bewilders me when I hear that Government procurement officers are not familiar with Government procurement rules. From para. 16 of this report to parliament in April this year:
Long story short, all procurement officers have to understand is that they have to get the best value for money in a manner that is fair and uncorrupt. The latter, procurement officers are quite familiar with. The former, probably not so. Value for money means knowing what one's budget can buy and trying to stretch the public dollar. It is that simple.
Finally, a simple guideline. If a typical member of the public can get a better deal on a smaller or similar sized purchase, something is wrong.
- ... MOF attributed most of the procurement irregularities reported by the Auditor-General in the past five years to procurement officers' poor understanding of procurement principles and/or their lack of familiarity with procurement rules...
- Establish business requirements.
- Do a market survey to establish if requirements are achievable within budget or cost effectively. Go to (1), and iterate until satisfied.
- Whether one holds a public tender or asks for quotations from a few sources, it is important to clarify offers and negotiate. In the process of negotiation, it is important not to reveal other offers, but to get the best offer the bidder has to give. In this process, it is important to understand market norms such as typical bulk discounts.
- Award to the bidder that meets the business requirements and promises the best value for money.
Long story short, all procurement officers have to understand is that they have to get the best value for money in a manner that is fair and uncorrupt. The latter, procurement officers are quite familiar with. The former, probably not so. Value for money means knowing what one's budget can buy and trying to stretch the public dollar. It is that simple.
Finally, a simple guideline. If a typical member of the public can get a better deal on a smaller or similar sized purchase, something is wrong.
Friday, July 6, 2012
Conceptual Learning vs Skills
I am convinced of the need for comprehensive conceptual learning in schools as a pre-requisite for skill acquisition of good quality. Conceptual learning opens up the mind to possibilities and is more mentally intensive due to the need to tear-down and re-build internalized conceptions of how the world works or should work.
It is typically very difficult to successfully facilitate conceptual learning in a 5 day course unless it is particularly intensive or students are particularly open intellectually. Thus, in order for students to eventually develop updated skills, it appears that current and cutting edge thought should be imparted to them at schools. In that way, by the time cutting edge transits from "experimental prototype" to "advanced technology", students would have the proper intellectual structures to grasp the skills needed to use the said technology. Given today's rapid transition from research to industry, this is not entirely unreasonable as students will not be taught skills they cannot for the next 10 years.
There is a clear tension between the long term and the short term. Focusing on skills and neglecting newer paradigms leads to structural problems in the economy in the long term. Focusing on concepts and neglecting skills leads to workers that have a longer lead time to doing useful work.
Naturally, conceptual learning and skills are complements that reinforce each other. Concepts present an intellectual frame which helps in the understanding of skills. Skills can be inductively mined for concepts. However the relationship is not symmetric. The former is far easier and more comprehensive than the latter.
Thus, I believe that the balance should tilt towards the conceptual and the skills imparted should be those that best facilitate the learning of advanced concepts. A lead time reduction in one's early career of a few months is not sufficient to outweigh a decade or so of facility in picking up new skills.
It is typically very difficult to successfully facilitate conceptual learning in a 5 day course unless it is particularly intensive or students are particularly open intellectually. Thus, in order for students to eventually develop updated skills, it appears that current and cutting edge thought should be imparted to them at schools. In that way, by the time cutting edge transits from "experimental prototype" to "advanced technology", students would have the proper intellectual structures to grasp the skills needed to use the said technology. Given today's rapid transition from research to industry, this is not entirely unreasonable as students will not be taught skills they cannot for the next 10 years.
There is a clear tension between the long term and the short term. Focusing on skills and neglecting newer paradigms leads to structural problems in the economy in the long term. Focusing on concepts and neglecting skills leads to workers that have a longer lead time to doing useful work.
Naturally, conceptual learning and skills are complements that reinforce each other. Concepts present an intellectual frame which helps in the understanding of skills. Skills can be inductively mined for concepts. However the relationship is not symmetric. The former is far easier and more comprehensive than the latter.
Thus, I believe that the balance should tilt towards the conceptual and the skills imparted should be those that best facilitate the learning of advanced concepts. A lead time reduction in one's early career of a few months is not sufficient to outweigh a decade or so of facility in picking up new skills.
Monday, July 2, 2012
Adverse Incentives in Universities and the Impact on our National Competency Build Up
Today, I was at lunch with an older gentleman. Older in the sense of, was-sent-off-to-NS-in-a-3-tonner and ate-food-cooked-by-fellow-NSFs. He mentioned that he took an AI course at NUS Computer Science and had an extremely negative experience where lecturers did not care about students and were unable to express ideas well. He contrasted this with the good treatment he received at NUS's Institute of Systems Science (a centre for professional learning) where the instructors "want you to succeed".
He surmised that the failings of the former were due to the overriding importance placed on publishing, and that teaching was seen as a chore to be quickly finished so one might get back to doing things that affect their KPIs.
Now, in the course of that interaction, he came across as a knowledgeable and experienced IT professional with a very balanced personality, so I am inclined towards the view that he arrived at his position on his AI lecturer(s) at NUS Computer Science in a fair and balanced manner.
It is thus disturbing that professionals seeking to extend their skill sets can come away with little or nothing after a few days away from work and having their employers pay a pretty penny (a neat double whammy). This is not to say that all university instructors for professional development courses are unable to help their students extend their knowledge and skills. The point is that we should be seeking guarantees for a minimum service level for professional development. Otherwise, any initiatives with the objective of "raising productivity" through professional education will inherit the lack of a "minimum service level".
The incentives in universities that place little value on teaching are well known. Unfortunately, they are tremendously damaging. The question that tax payers should be asking themselves is what exactly they are funding. If the role of Singapore's universities is to break new ground in the physical sciences, medicine, technology and social sciences, can we say we are succeeding? If the role of Singapore's universities is to impart knowledge and skills to students prior to their entry to the workforce, are we succeeding? On both counts, we are not very successful.
One of the most cynical views I have come across is that a small number of exceptional individuals around the world appear to be justifying the contemplative life for many others. There is some truth to it. Some people do love to learn, but are not as keen on the grind of breaking new ground. These people tend to love to teach, but there is no suitable incentive scheme that enables them to build a rewarding career (those few new "teaching schemes" considered).
The trouble with adjusting the incentive framework for university faculty is that it will put us out of joint with international practice, possibly making Singapore an unattractive place to be a faculty member unless one does not want to ever work at a university outside of Singapore.
However, without effective incentives, we have to rely on the "milk of human goodness: to generate good professional development results, and history has shown us that said milk is not exactly reliable.
It is necessary to take a "calibrated" approach to incentives in university faculty. Ground breaking research is great to have, but unless we are in a technological arms race, it has the lowest priority among the three major roles of university faculty which are, highest priority first, (i) imparting knowledge and skills effectively, (ii) inspiring students, and (iii) doing high quality research.
He surmised that the failings of the former were due to the overriding importance placed on publishing, and that teaching was seen as a chore to be quickly finished so one might get back to doing things that affect their KPIs.
Now, in the course of that interaction, he came across as a knowledgeable and experienced IT professional with a very balanced personality, so I am inclined towards the view that he arrived at his position on his AI lecturer(s) at NUS Computer Science in a fair and balanced manner.
It is thus disturbing that professionals seeking to extend their skill sets can come away with little or nothing after a few days away from work and having their employers pay a pretty penny (a neat double whammy). This is not to say that all university instructors for professional development courses are unable to help their students extend their knowledge and skills. The point is that we should be seeking guarantees for a minimum service level for professional development. Otherwise, any initiatives with the objective of "raising productivity" through professional education will inherit the lack of a "minimum service level".
The incentives in universities that place little value on teaching are well known. Unfortunately, they are tremendously damaging. The question that tax payers should be asking themselves is what exactly they are funding. If the role of Singapore's universities is to break new ground in the physical sciences, medicine, technology and social sciences, can we say we are succeeding? If the role of Singapore's universities is to impart knowledge and skills to students prior to their entry to the workforce, are we succeeding? On both counts, we are not very successful.
One of the most cynical views I have come across is that a small number of exceptional individuals around the world appear to be justifying the contemplative life for many others. There is some truth to it. Some people do love to learn, but are not as keen on the grind of breaking new ground. These people tend to love to teach, but there is no suitable incentive scheme that enables them to build a rewarding career (those few new "teaching schemes" considered).
The trouble with adjusting the incentive framework for university faculty is that it will put us out of joint with international practice, possibly making Singapore an unattractive place to be a faculty member unless one does not want to ever work at a university outside of Singapore.
However, without effective incentives, we have to rely on the "milk of human goodness: to generate good professional development results, and history has shown us that said milk is not exactly reliable.
It is necessary to take a "calibrated" approach to incentives in university faculty. Ground breaking research is great to have, but unless we are in a technological arms race, it has the lowest priority among the three major roles of university faculty which are, highest priority first, (i) imparting knowledge and skills effectively, (ii) inspiring students, and (iii) doing high quality research.
Sunday, July 1, 2012
Lies and the Lying Liars ("Pastors") that Tell Them
In one of Alex Au's recent posts, he wrote about City Harvest Church. In that post, he featured one of Kong Hee's sermons which explained that "Jesus was rich" but He had deliberately become poor (and submitted to death on the cross) to save the souls of man.
The crux of the first part of that (second part of a) sermon was this semi-summary statement by Kong Hee that:
From John 19 (New International Version):
So it is clear to see that based on this account, Kong Hee omitted the crucial information on the provenance of said expensive robe that was "so good".
(Interestingly, Matthew 27 and Mark 15 contains a different account where the Romans take back the purple robe and put Jesus own clothes back on and there is no mention of the division of clothing. We can say what we may about John and whether he massaged events to match one of the inspired poems of King David in Psalm 22. In particular, Psalm 22:18.)
I have no doubt that Jesus was relatively well off. He had an education. His "father", Joseph, was a carpenter, which would have been the equivalent of an engineer in the days where only good students earn engineering degrees. That would have been a far more honest argument. But not as clever.
To deceive in order to sound clever. Horrid, horrid, horrid.
The crux of the first part of that (second part of a) sermon was this semi-summary statement by Kong Hee that:
- Even on his way to the cross, Jesus wore good clothes. So good, His enemies were fighting over it.
- In fact, it was a pain sitting through its entire length. It was logically flawed and empty of meaning. Most crucially, for something in a religious setting, it addressed nothing about the human condition or the peace of spirituality.
- But it was a wee bit interesting nonetheless in his clever use of argument. He first began by asserting that Jesus was a rich man, but who gave up his riches when he died on the cross, so that the riches might be bestowed onto his believers. Thus, the argument goes, if one believed in this now much-embellished character and what he represented, one would have one’s own riches multiplied.
From John 19 (New International Version):
- 1 Then Pilate took Jesus and had him flogged. 2 The soldiers twisted together a crown of thorns and put it on his head. They clothed him in a purple robe 3 and went up to him again and again, saying, “Hail, king of the Jews!” And they slapped him in the face.4 Once more Pilate came out and said to the Jews gathered there, “Look, I am bringing him out to you to let you know that I find no basis for a charge against him.” 5 When Jesus came out wearing the crown of thorns and the purple robe, Pilate said to them, “Here is the man!” 6 As soon as the chief priests and their officials saw him, they shouted, “Crucify! Crucify!” But Pilate answered, “You take him and crucify him. As for me, I find no basis for a charge against him.”
So it is clear to see that based on this account, Kong Hee omitted the crucial information on the provenance of said expensive robe that was "so good".
(Interestingly, Matthew 27 and Mark 15 contains a different account where the Romans take back the purple robe and put Jesus own clothes back on and there is no mention of the division of clothing. We can say what we may about John and whether he massaged events to match one of the inspired poems of King David in Psalm 22. In particular, Psalm 22:18.)
I have no doubt that Jesus was relatively well off. He had an education. His "father", Joseph, was a carpenter, which would have been the equivalent of an engineer in the days where only good students earn engineering degrees. That would have been a far more honest argument. But not as clever.
To deceive in order to sound clever. Horrid, horrid, horrid.
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