Tag Archives: economic theory

Pill testing, placebos and illegal market efficiency

Testing illegal drugs for the active ingredient differs from testing for poisonous adulterants. Both tests have opposite effects on drug use before and after buying. After the pill has been purchased, testing reduces use, because sometimes the drug fails the test, whether correctly or not, and is discarded. Before purchase, the option to test for and avoid adulterated or inactive drugs reduces the buyer’s risk, thus increases use.

In the longer term, testing benefits the dealers of purer, more predictable and less toxic drugs, putting some suppliers of fakes out of business. Pill predictability reduces overdoses – a health effect similar to lower toxicity. If old drugs can be tested, but new ones not, then buyers experiment less and the incentive to invent new narcotics decreases.

The avoidance of poisonous adulterants is good for public health, but purer pills not necessarily so. Inactive drugs undermine consumer confidence in the illegal market, reducing use, prices and casual purchases. Trust then requires a long-running relationship with the seller, which has multiple benefits. It motivates dealers to care about the health of their loyal customers, simplifies policing and gives researchers and social workers better long-term access to the at-risk population.

One claimed benefit of party drugs is that they reduce anxiety, increase the user’s confidence and social interaction, thus improving mental health. Evidence from psychiatric medicines suggests that many such benefits are due to the placebo effect. Users are quite inaccurate in estimating the purity of ingested drugs, and factors like price and place of purchase strongly influence their perception of purity. The price per pure gram is negatively related to purity in some markets, further supporting the placebo interpretation. If inactive pills boost confidence similarly to illegal drugs, then there is a clear case for flooding the market with harmless placebos. The availability of pill tests for the active ingredient reduces this opportunity to make the illegal market inefficient. Tests for toxic adulterants, however, actually favour harmless placebos.

Spam deterrence by boycotting

The obvious reason for spam of any kind (emails, texts, phone calls, unsolicited mail) is that it is profitable. Thus spam must raise the probability that its target buys or otherwise complies with the spammer’s wishes, e.g. leaves a review. To deter spam, the incentive for it must be reversed – the targeted people should not give in to spammers, but do the opposite (not buy, not leave a review when receiving a „reminder”). I try to follow this strategy. If I remember that a business spammed me, then I try to boycott it, unless it is by far the best option (usually not, spammers are typically shady businesses and bottom-feeders).

Incentives are created by the difference in payoffs, not their level. Thus to deter spam, the buying probability should be lower for a spamming business than for a non-spamming competitor. To create this payoff difference for non-monetary actions, e.g. reviewinig, I leave a review with positive probability when not asked to do so, but certainly avoid reviewing when spammed with reminders.

If the whole society followed the strategy of boycotting spammers, then one possible concern is that spammers would start to use reverse psychology. They would spam in the name of their competitors to make them look like spammers. If customers start boycotting the competitors as a result, then demand shifts to the spammer, which is profitable.

The reverse psychology is unlikely to become a serious problem, because there are typically many competitors and the spammer would have to make most of them look bad to increase its demand significantly. Also, the law usually punishes the use of a fake name more harshly than unsolicited contacting. The competitors whose reputation is tarnished by spam under their name have a stronger incentive to sue its source than consumers just annoyed by the spam.

Formal clothing is a bad equilibrium of a coordination game

What clothing happens to be considered formal is an equilibrium of a coordination game: if most others think that a given clothing item is formal, then a person who wants to be seen as formally dressed is better off choosing that garment. If enough people who aim to dress formally choose certain clothing items, then those garments will be interpreted as formal. Different cultures and eras have considered different clothes formal, e.g. tights for men were formal in Europe during Napoleonic times, but are not now.

Current formal clothing is a bad equilibrium because suits and shirts are difficult to clean, labour-intensive to iron or press, and restrict movement. A better equilibrium would be to interpret as formal some garments that are comfortable, environmentally friendly, easy to care for and cheap. It is unfortunately difficult to change equilibria in a society-wide coordination game, because a majority of people would have to change their beliefs in a short time.

The reason why suits are seen as formal is historical: these were fashionable at the height of the British Empire, which was the richest and the most powerful country in the 19th century, thus a trendsetter in the first era of globalisation. British fashion was copied in North America and Europe, spreading to the colonies from there. Labour-intensive clothes were a way for Victorian nobility to signal wealth, because only the rich could afford to hire enough servants to make and care for their clothes. In many cultures, wearing impractical clothes (toga, long dress restricting leg movemen) has been a way to signal that one does not have to work. Similar signals of leisure were pale skin (because most work was outdoors), soft clean hands (because most work was manual and dirty), straight posture (because work often involved stooping). More extreme signals of leisure were physical changes that made most jobs of that era and region difficult or impossible: women’s foot-binding in East Asia, mandarins’ long fingernails in China.

Contrary to pale skin demonstrating leisure in Victorian Britain, in modern developed countries, a suntan is a signal of wealth, because most work is indoors and most trips to tropical places or simply outdoors are costly and time-consuming vacations. A similar reversal of the meaning of a signal is that a fat belly showed wealth when food was scarce, but in modern developed countries with an obesity epidemic, developing an athletic physique takes time and effort, so being fat is statistical evidence of poverty.

Signals of wealth have always invited cheaper imitations. For example, solariums provide suntanning cheaper than travel to the tropics. Slimness can be faked with liposuction, a corset or less drastically with a tailored waist and vertical stripes that are closer together or narrower at the waist area. The appearance of broad shoulders is achievable by wearing a suit jacket with padded shoulders.

One reason for why a business suit looks the way it does is to make the man wearing it appear taller, slimmer in the waist, and broader-shouldered, thus more masculine and attractive. The V-shape formed by the lapels uses the well-known visual perception error that an object at the open end of a V looks larger than an identical object at the tip of the V. The front of a suit jacket thus creates the appearance of a slim-bellied, muscular man. If the wearer’s belly allows, then a suit jacket usually also has a tailored waist, which further visually narrows the middle of the body. The vertical lines created by the tie and the creases of the pants make the wearer look taller and slimmer, which is often accentuated by vertical stripes on the suit. It is very rare to see a suit with horizontal stripes.

The visual illusion of attractiveness that a suit creates provides a extra incentive to stay in the equilibrium in which suits are considered formal clothing. To ease the transition to a new equilibrium in which the clothes perceived as formal are more practical, the new formal clothes should improve the wearer’s looks even more than a suit. This is not difficult, because many garments may have V-shaped patterns printed on the upper body, vertical stripes on the lower, have a tailored waist and shoulder pads. The patterns and cut may be designed based on psychology research to maximise the athletic appearance of the wearer. Anything achieved with a suit may be replicated and further optical enhancements added, for example printed outlines of muscles and puffed upper sleeves.

Avoiding an animal on the road

When a bike or car heads towards a squirrel, the squirrel first dodges to one side and then runs away in the other direction. Birds fly directly away from the oncoming vehicle, so stay in front of the vehicle for a few seconds. These behaviours are presumably evolutionary adaptations to avoid predators. For example, the squirrel’s dodge probably misleads a predator to alter course in the direction of the dodge. The larger predator then has more difficulty than a small agile squirrel in switching direction to the opposite side of the dodge.
In avoiding vehicles, these escape patterns are counterproductive. A predator tries to collide with the prey, but a vehicle tries to avoid collision. A squirrel’s dodge confuses the driver or cyclist, who then tries to pass the animal on the opposite side of the initial feint, which is exactly the direction the animal ends up running in. The best way to avoid collision may be to just keep going in a straight line and let the animal dodge out of the way. A constant direction and speed is easy to predict, which lets the animal avoid being in the same place at the same time as the vehicle. Keeping one’s course and speed also avoids accident-prone sharp turns and sudden stopping.
If a predator was smart and knew about the dodging behaviour, then it would go opposite the initial dodge. But then the squirrel would benefit from not switching direction. In response to the squirrel just running in one direction, the predator should run in the direction of the squirrel’s initial movement, etc. This game only has a mixed strategy equilibrium where the squirrel randomises its direction and whether it dodges or not, and the predator randomises its response to the squirrel’s initial movement direction. Dodging takes more energy than just running to one side, so the dodge must have a benefit that outweighs the energy cost, which means that the predator must be less successful when the squirrel dodges. Some factor must make it difficult for the predator to swerve opposite the squirrel’s initial direction. For example, if most prey keep running in one direction instead of feinting, then the predator may be on average more successful when following the initial movement of the prey. The cognitive cost of distinguishing squirrels from other prey must be too large to develop a different strategy for chasing squirrels.
The same game describes dribbling in soccer to avoid a defender. It would be interesting to look at data on what proportion of the time the attacker feints to one side and then moves to the other, as opposed to just trying to pass around the defender in the initial movement direction. It is more difficult for both players to switch than to keep moving in one direction, but presumably the player with the ball finds it relatively more complicated than the defender. In this case, to keep the other player indifferent, each player only has to switch direction less than half of the time, but the defender relatively less frequently. If the attacker feints and the defender does not switch direction, then the defender looks clumsy and the attacker a good dribbler. Reputation concerns of soccer players (who are after all entertainers) may make them switch direction more often than a pure winning motive would dictate.
Similarly, soccer players may use flashy moves like scissor kicks more often than is optimal for winning, because the flashiness makes the player popular with fans.

Poaching reduction using lab-grown ivory

Poachers kill elephants for tusks and rhinos for horns because these can be sold for a high price on the black market. The killing has occurred both in the wild and in zoos, and thieves have broken into nature museums to steal rhino horns from exhibits. Sometimes news reports describe how police crush or burn seized illegal ivory, which seems counterproductive, because it reduces supply and thus drives up the price. A higher price increases future poaching. Perhaps the police are in the pay of some illegal ivory dealers and are deliberately helping drive up the price by destroying competing dealers’ products.
Instead, the price of ivory and rhino horn should be reduced so that poaching becomes unprofitable. Many organs have been grown in the lab using a collagen scaffold seeded with stem cells from the appropriate tissue (bladder, skin, heart). Growing elephant tusks or rhino horns in the lab should be feasible using similar techniques. Flooding the market with cheap lab-grown horns and tusks would eliminate the incentive to poach.
The demand for ivory and rhino horn is mostly due to silly beliefs about their medicinal properties, so the buyers may not want lab-grown substitutes, believing these to be ineffectual (which these are, just like wild-type horns and tusks). In this case, the lab-grown horns and tusks should be made indistinguishable from animal-derived ones and inserted into the illegal supply chain covertly. The dealers on the black market are not too honest people and would probably be happy to lie to their customers that lab-grown products are from wild animals.

Self-balancing computer game

In both tabletop role-playing and computer games where players choose between different characters, some characters may be stronger than others when played optimally. This is undesirable in multiplayer games, because either most players will choose the stronger characters or some players will be handicapped by their weak character, which tends to reduce the enjoyment. Game designers spend time and resources “balancing” the game, i.e. changing aspects of the characters to give them all approximately equal strength. It is difficult to predict all possible ways a character may be played, so players may discover tricks that make a character significantly stronger than others. To counteract this, the game can be made self-balancing: the more players choose a given character, the weaker that character becomes. Then the discovery of ways to play a character better (giving additional strength) initially benefits the discoverer, but is neutralised with widespread imitation, analogously to innovative firms reaping monopoly profits initially from their patents, but eventually losing their competitive advantage to imitators.
The simplest way to self-balance is to subtract some measure of strength, e.g. health points, armor, attack points from the most frequently chosen characters. One in-game interpretation of this loss of strength to crowding is that each character channels power from some source (magic item, god, nature) and if more people channel a given source, then each of them gets less power. There are other ways to impose a negative congestion externality to achieve self-balancing.
One source of congestion-induced weakening is that in-game enemies (NPCs) fight better against characters they frequently encounter. This can be interpreted as learning (if the enemies flee before dying and later come back) or evolution (if the longer-surviving enemies multiply relatively more). In an evolutionary arms race, players pick characters that are strong against frequently encountered NPCs. NPCs vary in their resistance to different attacks and relatively more copies are spawned of those who last the longest under player attack.
Another congestion externality is a shortage of some resource that strengthens a particular class of characters. For example, equipment usable by that class may be in limited supply, in which case if many players choose that class, then they will find themselves under-equipped and weak. There could also be a shortage of materials for manufacturing the equipment, or a shortage of class-specific quests for gaining experience.
To make players (as opposed to NPCs or the game mechanics) the source of disadvantage to a frequently chosen class, the classes should have advantages over each other in a cycle, for example archers defeat riders, riders defeat swordfighters, swords defeat archers. In this case, if a class is frequently chosen, then this invites other players to choose another class that has an advantage over the frequent class, e.g. if many have chosen riders, then this creates an incentive to choose archers. Such a cyclical evolutionary dynamic has been observed in lizards (Rapid Temporal Reversal in Predator-Driven Natural Selection, Science 17 Nov 2006 Vol. 314, Issue 5802, pp. 1111).

Signs with strong language are not enforced

Various prohibiting signs are posted in many places, saying for example “No smoking”, “No trespassing”, “No skateboarding”, etc. The language of a sign with the same message can be stronger or weaker, e.g. “Smoking prohibited” vs “No smoking. Strictly enforced” or “Trespassing forbidden” vs “Strictly no trespassing. Violators will be prosecuted to the fullest extent of the law.” It seems that there is a negative correlation between the strength of the language and the strength of enforcement. The rules stated on signs threatening strict enforcement or prosecution seem not enforced at all. Non-enforcement is certainly the case for the “Smoke-free campus. Strictly no smoking” signs around the Australian National University and for similar signs around other universities that I have visited.
Why might stronger language of the sign indicate non-enforcement? Stronger language is also longer, requiring a larger sign and more paint, which makes signs with stronger language slightly more expensive to put up. So why pay more for signs that suggest non-enforcement?
Local people learn the rules and their actual level of enforcement over time. For them, signs are not really necessary. Therefore, signs are put up only for first-time visitors or for legal reasons. Legalities usually just require some legible sign, not a long and strongly worded one, so to satisfy the law, the optimal choice is a shorter and simpler text that fits on a smaller, cheaper sign.
First-time visitors are either uncertain about the enforcement level or know it. If they know, then they are effectively locals – for them, there is no need for a long sign. If the visitors are uncertain, then they might infer the enforcement level from the strength of the language. This can go two ways. If the visitors are rational and the strength of the language is negatively correlated with the level of enforcement, then a shorter sign signals stronger enforcement and deters rule-breaking better. Then all signs would optimally be short. If the visitors are irrational and interpret the signs literally, then more strongly worded signs deter rule-breaking more. The negative correlation between strong language and enforcement suggests that people are irrational and take threats literally. Or that those putting up signs are irrational and for some reason choose the less effective strongly worded signs.
An alternative explanation is countersignalling (Feltovich, Harbaugh and To 2002). In this model, there are three types of sign-posters. The first type does not care much about whether the text of the sign is obeyed (may post the sign only for legal reasons). The second type cares a little bit, but not enough to pay for much enforcement. Still, the second type slightly enforces, so there is a small positive probability of some kind of punishment when breaking the rules. The third type really wants the rules to be followed and invests in enforcement correspondingly. The potential rule-breakers quickly learn from punishments whether they are dealing with the third type. So the third type does not need any particular kind of signs to distinguish himself from the first two.
The first two types are harder to tell apart. The first type is not interested in distinguishing himself from the others – in fact, being confused with the others is beneficial, because it is more likely to make people obey the rules. The second type would like to distinguish himself from the first type and be confused with the third type, but this desire is not strong enough to pay the same enforcement cost as the third. So the second type will settle for distinguishing himself from the first type. This is done by paying for slightly larger signs with stronger, longer language on them. In this case, in the absence of experienced enforcement, the potential rule-breakers respond more to strongly worded signs than to short ones.
For an external observer, it is difficult to distinguish a small amount of enforcement from none, so the perception arises that enforcement goes together with short signs, but non-enforcement sometimes with long, strongly worded signs and sometimes with short signs. So there is a negative correlation between the strength of enforcement and the strength of the language. This correlation is stronger if the fraction of the first type in the population of sign-posters is small, for example because some first types do not post signs at all. People posting signs are a selected sample from the population of those who want some rule obeyed. The selection oversamples those who care more.

“Relative to opportunity” evaluation and anti-discrimination laws

Most countries have some anti-discrimination laws, requiring employers to pay people with different productivities equally, or to give someone who took parental leave their job back after they return. One reason why unequally productive people are paid equally is evaluation “relative to opportunity”, i.e. the bar for a promotion or a raise is lower for someone from a historically disadvantaged group or who has family responsibilities. Suppose that there is a consensus in society for supporting certain groups. Why might the cost of this support be placed only on specific employers, namely those who employ the target group? Why doesn’t the support take the form of direct subsidies from the government to the target group, financed by taxing all employers equally?
An explanation from political economy is as follows. Clever people in society or government want to pay a larger subsidy to high-income members of the target group, perhaps because the clever people are themselves high-income and belong to the target group. However, the majority of voters would not like high-income people getting a bigger subsidy. So the clever people disguise the subsidy as something that looks equal, namely every member of the target group gets the same duration of parental leave, the same guarantee of their job back at the end of leave, the same privileges and special treatment for promotions and raises. The value of these guarantees and privileges is greater for higher-paying jobs. For example, a promotion from a high-paying job usually gives a bigger salary increase than from a low-paying job. A guarantee of getting a high-paying job back after parental leave is worth more than a guaranteed low-paid job. Thus the support provided to the high-income members of the target group is more valuable.
Further, productivity at a high-income job is typically more responsive to the employee’s human capital, and the skills deteriorate faster. A truck driver who has not driven for some years retains a greater fraction of driving ability than a surgeon retains from surgical technique after not operating for the same number of years. The productivity difference between an employee returning from parental leave and someone continuously employed is on average greater for higher-paying jobs. So the cost to an employer of keeping a job for a returning employee instead of hiring a new person is greater if the job is higher-paid. The subsidy to the high-income members of the target group thus costs more per person.
Income is positively correlated with intelligence, so the smart members of the target group are likely the wealthy members who benefit from this kind of unequal subsidy. They are likely to vote and campaign in favour of the unequal support, instead of an equal cash subsidy for everyone. The less smart members of the target group who lose from an unequal subsidy (compared to an equal one) are less likely to understand that they lose. This makes them abstain from opposing the unequal subsidy.
In effect, the smart members of the target group redistribute a baseline-equal subsidy from the less smart (and less wealthy) to themselves, at the social cost of losing some efficiency in the economy. Keeping a job for someone when a more productive potential hire is available means losing the difference in the productivities of the two people. Such efficiency losses are typical of re-distributive policies that are not cash transfers.
In principle, the cost of the current policies could still be equally distributed between employers by taxing them all and subsidising those who employ the target group. Or equivalently, taxing only those who don’t employ the target group. However, to equalise the cost to employers, the firms employing highly-paid members of the target group must be compensated more than the ones employing low-paid members. The differential compensation to firms would call attention to the unequal support that people with different incomes are receiving, thus weakening the disguise of the subsidy. The clever people want to avoid that, so do not campaign for equalising the costs of anti-discrimination laws across employers.

Defence against bullying

Humans are social animals. For evolutionary reasons, they feel bad when their social group excludes, bullies or opposes them. Physical bullying and theft or vandalism of possessions have real consequences and cannot be countered purely in the mind. However, the real consequences are usually provable to the authorities, which makes it easier to punish the bullies and demand compensation. Psychological reasons may prevent the victim from asking the authorities to help. Verbal bullying has an effect only via psychology, because vibrations of air from the larynx or written symbols cannot hurt a human physically.

One psychological defense is diversification of group memberships. The goal is to prevent exclusion from most of one’s social network. If a person belongs to only one group in society, then losing the support of its members feels very significant. Being part of many circles means that exclusion from one group can be immediately compensated by spending more time in others.

Bullies instinctively understand that their victims can strengthen themselves by diversifying their connections, so bullies try to cut a victim’s other social ties. The beaters of family members forbid their family from having other friends or going to social events. School bullies mock a victim’s friends to drive them away and weaken the victim’s connection to them. Dictators create paranoia against foreigners, accusing them of spying and sabotage.

When a person has already been excluded from most of their social network, joining new groups or lobbying for readmission to old ones may be hard. People prefer to interact with those who display positive emotions. The negative emotions caused by a feeling of abandonment make it difficult to present a happy and fun image to others. Also, if the „admission committee” knows that a candidate to join their group has no other options, then they are likely to be more demanding, in terms of requiring favours or conformity to the group norms. Bargaining power depends on what each side gets when the negotiations break down – the better the outside option, the stronger the bargaining position. It is thus helpful to prepare for potential future exclusion in advance by joining many groups. Diversifying one’s memberships before the alternative groups become necessary is insurance. One should keep one’s options open, which argues for living in a bigger city, exploring different cultures both online and the real world, and not burning bridges with people who at some point excluded or otherwise acted against one.

There may be a case for forgiving bullies if they take enough nice actions to compensate. Apologetic words alone do not cancel actions, as discussed elsewhere (http://sanderheinsalu.com/ajaveeb/?p=556). Forgiving does not mean forgetting, because past behaviour is informative about future actions, and social interactions are a dynamic game. The entire sharing economy (carsharing, home-renting) is made possible by having people’s reputations follow them even if they try to escape the consequences of their past deeds. The difficulty of evading consequences motivates better behaviour. The same holds in social interactions. In the long run, it is better for everyone, except perhaps the worst people, if past deeds are rewarded or punished as they deserve. If bullying is not punished, then the perpetrators learn this and intensify their oppression in the future.

Of course, the bullies may try to punish those who reported them to the authorities. The threat to retaliate against whistleblowers shows fear of punishment, because people who do not care about the consequences would not bother threatening. The whistleblower can in turn threaten the bullies with reporting to the authorities if the bullies punish the original whistleblowing. The bullies can threaten to punish this second report, and the whistleblower threaten to punish the bullies’ second retaliation, etc. The bullying and reporting is a repeated interaction and has multiple equilibria. One equilibrium is that the bullies rule, therefore nobody dares to report them, and due to not being reported, they continue to rule. Another equilibrium is that any bullying is swiftly reported and punished, so the bullies do not even dare to start the bullying-reporting-retaliation cycle. The bullies rationally try to push the interaction towards the equilibrium where they rule. Victims and goodhearted bystanders should realise this and work towards the other equilibrium by immediately reporting any bullying against anyone, not just oneself.

To prevent insults from creating negative emotions, one should remember that the opinion of only a few other people at one point in time contains little information. Feedback is useful for improving oneself, and insults are a kind of feedback, but a more accurate measure of one’s capabilities is usually available. This takes the form of numerical performance indicators at work, studies, sports and various other tests in life. If people’s opinions are taken as feedback, then one should endeavour to survey a statistically meaningful sample of these opinions. The sample should be large and representative of society – the people surveyed should belong to many different groups.

If some people repeatedly insult one, then one should remember that the meaning of sounds or symbols that people produce (called language) is a social norm. If the society agrees on a different meaning for a given sound, then that sound starts to mean what the people agreed. Meaning is endogenous – it depends on how people choose to use language. On an individual level, if a person consistently mispronounces a word, then others learn what that unusual sound from that person means. Small groups can form their own slang, using words to denote meanings differently from the rest of society. Applying this insight to bullying, if others frequently use an insulting word to refer to a person, then that word starts to mean that person, not the negative thing that it originally meant. So one should not interpret an insulting word in a way that makes one feel bad. The actual meaning is neutral, just the „name” of a particular individual in the subgroup of bullies. Of course, in future interactions one should not forget the insulters’ attempt to make one feel bad.

To learn the real meaning of a word, as used by a specific person, one should Bayes update based on the connection of that person’s words and actions. This also helps in understanding politics. If transfers from the rich to the poor are called „help to the needy” by one party and „welfare” by another, then these phrases by the respective parties should be interpreted as „transfers from the rich to the poor”. If a politician frequently says the opposite of the truth, then his or her statements should be flipped (negation inserted) to derive their real meaning. Bayesian updating also explains why verbal apologies are usually nothing compared to actions.

Practicing acting in a drama club helps to understand that words often do not have content. Their effect is just in people’s minds. Mock confrontations in a play will train a person to handle real disputes.

Learning takes time and practice, including learning how to defend against bullying and ignore insults. Successfully resisting will train one to resist better. Dealing with adversity is sometimes called „building character”. To deliberately train oneself to ignore insults, one may organise an insult competition – if the insulted person reacts emotionally, then the insulter wins, otherwise the insulter loses. As with any training and competition, the difficulty level should be adjusted for ability and experience.

The current trend towards protecting children from even verbal bullying, and preventing undergraduate students from hearing statements that may distress them could backfire. If they are not trained to resist bullying and experience it at some point in their life, which seems likely, then they may be depressed for a long time or overreact to trivial insults. The analogy is living in an environment with too few microbes, which does not build immunity and causes allergy. „Safe spaces” and using only mild words are like disinfecting everything.

The bullies themselves are human, thus social animals, and feel negative emotions when excluded or ignored. If there are many victims and few bullies, then the victims should band together and exclude the bullies in turn. One force preventing this is that the victims see the bullies as the „cool kids” (attractive, rich, strong) and want their approval. The victims see other victims as „losers” or „outsiders” and help victimise them, and the other victims respond in kind. The outsiders do not understand that what counts as „cool” is often a social norm. If the majority thinks behaviour, clothing or slang A cool, then A is cool, but if the majority agrees on B, then B is preferred. The outsiders face a coordination game: if they could agree on a new social norm, then their number being larger than the number of insiders would spread the new norm. The outsiders would become the „cool kids” themselves, and the previously cool insiders would become the excluded outsiders.

Finding new friends helps increase the number who spread one’s preferred norms, as well as insuring against future exclusion by any subset of one’s acquaintances.

If there are many people to choose from when forming new connections, then the links should be chosen strategically. People imitate their peers, so choosing those with good habits as one’s friends helps one acquire these habits oneself. Having friends who exercise, study and have a good work ethic increases one’s future fitness, education and professional success. Criminal, smoking, racist friends nudge one towards similar behaviours and values. Choosing friends is thus a game with one’s future self. The goal is to direct the future self to a path preferred by the current self. The future self in turn directs its future selves. It takes time and effort to replace one’s friends, so there is a switching cost in one’s social network choice. A bad decision in the past may have an impact for a long time.

It may be difficult to determine who is a good person and who is not. Forming a social connection and subtly testing a person may be the only way to find out their true face. For example, telling them a fake secret and asking them not to tell anyone, then observing whether the information leaks. One should watch how one’s friends behave towards others, not just oneself. There is a tradeoff between learning about more people and interacting with only good people. The more connections one forms, the greater the likelihood that some are with bad people, but the more one learns. This is strategic experimentation in a dynamic environment.

On backpackers and low-spending tourists

Countries encourage tourism to make money. The same goes for local governments, tourism industry associations and tour firms. Some places provide options for low-spending tourists like backpackers, despite not making much money from them. These options may be cheap campsites, backpacker hostels, allowing hitchhiking and work-travel visas. At first sight, any positive revenue from poorer tourists would justify welcoming them. This simple revenue calculation, however, neglects the substitution effect and dynamic demand.

Substitution means that if cheaper travel options are available, then some tourists who would have spent more in the absence of these options now spend less. For example, a person who would stay in a hotel if there was no other accommodation, stays in a backpacker hostel instead. On the other hand, if all options are expensive, then the poorest tourists do not come at all. There is a tradeoff between the number of tourists and the average tourist’s spending. If introducing cheaper options leads to many tourists switching to these, but does not attract many additional low-spending people, then creating these cheaper options reduces total profit.

Dynamic demand means that a person who has toured a particular location once changes his or her likelihood of going there in the future. For example, having seen a tourist site, a person does not visit it again. Or someone going on vacation and liking the location starts going there year after year. If a region encourages young, low-income people to visit as backpackers, then it may increase or decrease future visits by these people when they are older and wealthier. In particular, if people do not tour the same location again (and spend more when older), then encouraging them to visit when young reduces the total profit from them over their lifetime.

The fact that some regions welcome backpackers has several possible explanations. There may not be much substitution, or a visit may increase future visits. The tourism industry may not have thought this through and may be reducing their own profit inadvertently. Or the government may have other objectives than taxes from the tourism industry. For example, allowing people from other countries to visit cheaply may make these people friendly to the host country, which may yield some nonmonetary benefit in international relations.