Individualism and Game Theory

Any student of economics would know that what Newton is to Physics, Adam Smith is to economics. In 1776, in his famous book titled ‘ The Wealth of Nations’ he argues that if everyone maximizes his own benefit, it would maximize the benefit of the society.

The problem I have is not with Adam Smith as inarguably his arguments are amazing and much ahead of his times. The issue arises when people after 250 years still swear by him and more than that give philosophical as well as social implications to his ideas (Yes, I am referring to Ayn Rand and all her ever increasing and assertive disciples!

What Adam Smith stated is almost correct in many of the scenarios but failing to see the apparent defects in his theory is equivalent to adamantly believing that all laws of nature can be explained by what Newton stated. It has been proved and seen (especially in the recent subprime crisis) that Free Markets have some inherent deficiencies. The remaining article would try to show that Laissez Faire is not the best policy in social domain also.

(All what I am going to state is a simple variant of ‘Prisoners Dilemma’ as described in Game Theory) so there is nothing special to read except realizing that Prisoners Dilemma is not an isolated problem but can be related to most of situations which arise in our normal lives)

Let us take a very trivial example which I have myself faced a lot of times. We all know that we should use ‘low beam’ headlight while driving in the night as ‘high beam’ headlight causes extreme inconvenience to the other cars. If we attempt this problem from the perspective of simply maximizing our own benefit. We would be reasoning like this.

There are two scenarios.

a) The other person would be using ‘low beam’.

b) The other person would be using ‘high beam’.

For Scenario A (other person using ‘low beam’), it is better for me to use the ‘high beam’rather than the ‘low beam’ as I would be able to see better with the ‘high beam’ and my action would not affect the decision of the passing car.

For Scenario B (other person using ‘high beam’), it is still better for me to use the ‘high beam’ as the other is not going to change to ‘low beam’, if I don’t and any ways ‘high beam’ would allow me to see slightly better.

This implies that come what may, I would be using the ‘high beam’. On similar lines, the other person would also use ‘high beam’ and as a consequence, we both would suffer.

The possible scenarios have been described in the following table, with the rows representing the headlight of your car and the columns of the passing car.

	‘Low Beam’	‘High Beam’
‘Low Beam’	J	LL
‘High Beam’	JJ	L

So when we all try to maximize our benefits, this does not lead to the benefit of the society and hence the benefit of the individual.

What has happened in the last 50 years is that due to the heavy dose of Gandhian morality, our society was in a ‘low beam’/‘low beam’ state (Call it as ‘J’). And then some people started following their own path and hence maximizing their own benefit. This led to those who switched becoming (‘JJ’) and those who didn’t becoming (‘LL’).

The next step (which is still in the process of happening) is that people who are still using ‘low beam’ and are in (‘LL’) state would switch to ‘low beam’ and hence the world is reaching to an equilibrium (famously known as Nash equilibrium) where everyone is unhappy.

The important thing to note is that in all such cases our interaction is minimal with the other person (collusion is not possible) and hence our decision is not going to change his decision.

The most apparent criticisms to the above analysis people may point out is that individualism does not state maximizing at the expense of others but simply pursuing own personal benefit. (called Pareto Improvement) The catch is that in the inherently dependent world (which individualists would always fail to accept) the latter implicitly imply the former, as an apparently independent decision we take may have an indirect negative consequences to other. (theoretically speaking, as in the above matrix, your choice and his choice define what you get and what he gets, so generically speaking there is nothing independent as such. In short, whether a decision leads to Pareto improvement can only be determined after knowing the decision of the other person, so your decision needs to be inherently dependent)

It can also be easily observed even in a weaker setting that a sub-optimal solution can be obtained. Consider a scenario which has a weaker condition than the classical Prisoner’s Dilemma problem i.e. here collusion is allowed. In our hostels it was a tradition that we used to help others in subjects the other was uncomfortable at despite the other not explicitly asking for the same. The individualistic extension of the scenario is that some people start studying and living on their own and avoiding a deliberate attempt to help others (though not causing any harm to others). The situation would ultimately lead to a Nash equilibrium where everyone remains almost at the same state where his capabilities are.

Thankfully the same scenario did not occur in our hostel and most all of us would go an extra mile to share all the things which we had understood and the result was that our group was best in almost all aspects of studies. (though to confess the poor author was pathetic in applied math courses despite the genuine help offered by others!)

So in a scenario where collusion is not possible, we would definitely reach a sub-optimal solution. In case collusion is possible, it has been observed that we still foolishly seek for the second best state. In fact there are lot of psychological factors which impede the effectiveness of individualism.(More on that later) Still our mindless fascination for an individualistic (selfish) world is stopping ourselves from realizing that whole can be more than the sum of its parts!

I don’t think when Christ said “Do unto others as you would have them do unto you.”

he had Game theory in his mind. Nor I believe that we should be that selfish as to expect something out of unselfishness. But surely if we follow the teachings of that great soul, this world would be a better place. In the same vein as Adam Smith, it is because of God’s hand! ;-)

People can reckon the famous line which Russel Crowe (as John Nash) says in the Oscar winning movie ‘A Beautiful Mind’. “Adam Smith said the best result comes from everyone in the group doing what's best for himself, right? Adam Smith was wrong! The message: Sometimes it is better to cooperate!”

And that is what I want to say that Laissez Faire (individualism) does not lead to the optimal scenario (both economically as well as socially) and all the proponents of it (most famously and vocally Ayn Rand) fail to understand and accept that Individualism has some theoretical as well as implementation shortfalls (Great Depression and the later work of Keynes on that being a perfect example of it)

As an individual who grew up in a socialistic society and in an irrationally conservative neighborhood fully recognize that individual freedom cleanses most of the horrific nuances of the society but this should not and is not imply that it is is the best world order.

World may not be as bad as we are made to believe...

This article of mine dates back to 2004 (when I was in second year at IITD). I was given an assignment in HU481N to express my comments on the Darwin's Theory. As always I started with googling and as always it meandered to our beloved DC++ (file sharing system which had loads of time consuming videos). It was only at 4 in the morning that I realized that I have not even started my assignment and as always I wanted to hit my head and my computer hard. I still remember that in this feeling of utmost repentance, I started thinking and then most of the thoughts expressed in this article just flowed. I would be lying if I say that it is completely original and there are many ideas which I have taken from some conservative articles on the Net. (Catholics also hate Darwin!) Still it is some honest thinking which was involved in writing it and I still stand by most of the things which I have written. I do not and cannot claim that it is some ingenious piece of philosophy and like all my thoughts it is thinking on things from a simple and plain way.

And like most of my earlier writings, I find it hard to read as some of the things I wrote look extremely childish (see I don't rebuke evolution!)

I accept it is heights of overconfidence to write against something which is widely accepted by so intelligent people and which came from one of the most brilliant thinkers of all times. Still I would request people to read it, as there may be some small probability that my foolishness may not that foolish at the end of day.

http://m.1asphost.com/shivalikhouse/files/Drishti/article1.htm

Survival of the Fittest

Charles Darwin (1809-1882) was a British naturalist, who revolutionized the science of biology

by

his demonstration of evolution by natural selection. Darwin was born in Shrewsbury on 12 February

1809, exactly the same day on which another revolutionary stalwart Abraham Lincoln was born. In

his youth Darwin took a voyage from 1831 to 1836. Darwin returned with observations he had

made in Tenerife, the Cape Verde Islands, Brazil, the Galapagos Islands, and elsewhere. By 1846

Darwin had published several works based on the discoveries of the voyage giving a new face to

modern science.

Darwin basically proposed two points:

1. There is a continuous process of evolution which occurs universally in every species (Theory of Evolution)

2. Only the fittest survives in the nature (Natural Selection)
Darwin's great work, “The Origin of Species by Means of Natural Selection” was heavily attacked because it did not support the depiction of creation given in the book of Genesis. Darwin's argument that natural selection - the mechanism of evolution - worked automatically, leaving little or no room for divine guidance or design. All species, he reasoned, produce far too many offspring for them all to survive, and therefore those with favorable variations - owing to chance - are selected. At Darwin's hands evolution matured into a well-developed scientific theory.

CRITICAL ANALYSIS:

Before going any further, we will have to firstly discuss on the actual meaning of ‘fittest’. If we take the crude meaning (or rather more accepted) version of ‘fittest’ i.e. one who is physically stronger than we are stuck up with innumerable counter examples .The biggest being extinction of dinosaurs because if physical strength be the measure of fitness then dinosaurs will always top the list. If we include intelligence and other such traits then too we cannot conclude survival of cockroaches and extinction of dinosaurs. By survival of fittest ,Darwin 'hopefully' not says survival of toughest or fastest, biggest, smartest, what he said probably meant who is more fit in that environment. Darwin probably said that the organism that best fits the environment will dominate .The plant and animal 'fittest' to its natural environment ,according to Darwin would be the most likely to survive and thrive.

According to me the philosophy which suggests that the stronger species survives, despite being popular, is fallacious .At first instance we may think in affirmative but this only indicates our deeply rooted reductionist attitude. Each and every individual on this earth is interdependent .Biologists recognize symbiosis in some cases but actually we are symbiotic to each other irrespective of the quality of species. For example between man and plants either man is fitter or the reverse .But if a struggle between the two takes place ,as it is the case, no one will be the winner. Because the existence of man is dependent upon plants and so does dependence of plants on man. Similarly any two species cannot live without each other and if a struggle has ever taken place then nothing but entire ecology has been affected.

There is one more catch in 'SOTF'. It's a phrase that describes the outcome of a competition where there is no possibility of predicting the outcome in advance. Because of complexity of the conditions of the competition .For example, if it were used to describe the outcome of an auto race, using the term, ‘It will be the survival of the fittest’ would indicate that the victor would be unknown until the end of the race. Infact for nature, where number of parameters is more, the determination of fitter becomes nearly impossible. This indicates a basic logical flaw in our theory because there is no means to predict the outcome and so our prediction comes after the experiment has completed.

SOTF basically depends upon the nature of the struggle. If for example, a famine comes then the survivors would be deep-rooted trees .on the other hand in a wind or flood short grasses or small herbs may survive. If we trace the evolution of the world then such antagonistic circumstances would have come time and again. And because of the randomness of such incidents the implication goes that nature favors no one. In every changed context, SOTF would favor a different being. Every calamity would have its own preferences. Looking at the issue of the survival in relation to varying threats and challenges to life as it hazards its journey through a billion years of evolution, it is hard to visualize any survival at all .little chances, if any, can be envisaged for the survival of all forms of life, because different crisis has its own favorite targets which most often will not be same.

INFERENCE:

The above assertions and inferences do not take us to deep dire straits but indicate a beautiful method in nature .The nature is not a boxing ring where the one who is stronger and adapts to the rules of the game well, wins. Infact nature can never see a total WIN LOSE situation. WIN LOSE situation is always a transient stage and the equilibrium always shifts to LOSE LOSE situation. Nature possesses an excellent equilibrium which preserves the sanctity of each and every being and destroys all those who attempt to make change in it. You may call it God or deny saying so but the eternal fact remains that there is an inherent method of arrangement around us. We are interdependent on each other and our existence depends on every single entity out of the billion organisms in this universe. My existence to some extent depends upon a George Bush living in Washington and so on a chimpanzee thriving in the African jungles. The problem is that we have been so accustomed to 'reductionist ' attitude that we fail to appreciate the role of others (which may be our worst enemy) in our existence.

SOTF is fallacious on the account of non predictability of the outcome .Even in the mot simple of situations like a cricket match; we cannot for sure say that Sachin will be the man of the match. There will only be a probability of him being so. I am not suggesting whether God plays dice or not. But for sure the outcome is non deterministic in nature. The reason behind it may be the randomness of the experiment or an inherent incapability of human brain.

My argument also suggested that the fittest may vary from experiment to experiment and this implied that every species should have become extinct by now. Our present status completely rejects this fact. The truth is that co-existence and not struggle, is the essence of the universe. Symbiosis, peace and co-existence are not concepts but are reflected by even most damned of organisms. Recalling our previous example, in times of famine it is the bigger tree which prevents grass from direct sunlight and when a storm

comes small herbs hold the soil. Darwin was right in noticing the 'urge of existence’ but that urge results in co-existence and not struggle. It is our obsession with the materialistic world view which makes us to see selfish measures in everything. It’s same as seeing half glass empty rather than half glass full.

CONCLUSION:

Darwin's theory was based on innumerable experiments with exhaustive observations. Theory of evolution has been successful in reasoning innumerable things of nature. Though they have some 'missing links' but they can be ignored. The problem is not in 'Theory of Evolution' but reasons (SOTF) which are given to it. SOTF is on the first place non real because survival is always of a universal concept and success can not be attributed to one of the interdependent entities. Even if it is real, SOTF is non deterministic in nature so it never becomes important. Even logically there is a huge paradox in the entire theory. Lastly co-existence and not struggle is the essence of nature. We all are interdependent of the huge nature (Some may call it 'God') and cannot live without each other. Our existence depends upon the success of the other and not in their extinction. We belong to huge family and success (happiness) of that lot is contributed by every single element. We must realize this and harmonize with others.

After all it is universal peace which only can ensure our existence.

- Akshat Shankar

Warren Buffett Quotes

Some great quotes of Warren Buffett especially the last one! I have read considerable number of economists, but have always bewildered that rarely they differentiate between meaningful labour (say agriculture) and less meaningful labour (say fashion designing). Even though both add to the GDP of the economy. Buffett, in the quotation, hits the nail on its head.

[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Only when the tide goes out do you discover who's been swimming naked.

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

[The perfect amount of money to leave children is] enough money so that they would feel they could do anything, but not so much that they could do nothing.

"I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die."

Estimation Theory

As a part of sharing my notes with everyone else, I am attaching the link on Estimation Theory.

Given I didn't understand an iota of it when it was taught in IITD. (I honestly doubt if any of my batch-mate did!)

And as I had the honours of scoring the second lowest (47/100) in that course (MA401N), I made a point to revisit everything.

http://rs519.rapidshare.com/files/420617328/Estimation_Theory.pdf

Attaching the first page for some quick reference

My Sister

Article that appeared in the hindi daily 'Hindustan' about my sister on 9th September 2010.

Why I am a Conservative?

For that I firstly need to define Conservatism. As opposed to what people generally think (especially in India), it is not about religious chauvinism, obstinacy of traditions, male superiority, opposition to science, advocacy of war and violence etc...

To clarify my stand, my idol and ideal is Mahatma Gandhi and you can read him to find my viewpoints about most of the things. Still I would keep updating you about my thoughts in my posts in this blog. And why I call them Conservative (any liberal would know that Gandhi differed from them on almost every point!)

To begin, I would quote Republic presidential candidate of 1964, Barry Goldwater.

"The root difference between the Conservatives and the Liberals of today is that Conservatives take account of the whole man, while the Liberals tend to look only at the material side of man’s nature. The Conservative believes that man is, in part, an economic, an animal creature; but that he is also a spiritual creature with spiritual needs and spiritual desires. What is more, these needs and desires reflect the superior side of man’s nature, and thus take precedence over his economic wants. Conservatism therefore looks upon the enhancement of man’s spiritual nature as the primary concern of political philosophy. Liberals, on the other hand, - in the name of “concern for “human beings” — regard the satisfaction of economic wants as the dominant mission of society."

Correlation and Causality

When I was small, I had a strange feeling which surprisingly I also observed in my 3 years old nephew yesterday. Just wanted to share my foolishness, as I feel that I am not alone in this.
When I was a small kid, I used to believe that for running a car fast, you need to rotate the steering wheel fast! Sadly Yes :-(
And when I think deeply, it seems to be arising from the fundamental problem in statistics relating to correlation and causality. Let us try to understand what is meant by it.
So normally when I use to watch people driving a fast car (especially in movies…like some hero chasing the villain) the driver of the car used to rotate the steering wheel very quickly. And the reason was that as the chase used to happen usually on busy roads, the driver used to take many turns which accompanied by fast speed resulted in fast movement of steering wheel. In statistical terms, there was a significant correlation between movement of the steering wheel and the speed of the car.
And the error I (and now my three years old nephew) was doing is mistaking correlation for causality. To my rescue, some of the Physicists, many of the statisticians and almost all the economist, do the same. And a good test of Causality (Granger Causality) was found very recently and which was awarded Noble only in 2003. We generally tend to believe that if two things are moving in tandem then one is causing the other. And generally and mistakenly, the cause is attributed to the thing which is more conspicuous (like the moving of the steering wheel rather than pressing of the accelerator which hardly is observable to a young kid)
In some cases, neither A implies neither B nor B implies A. There is a third factor which implies both. For example, consider two spinners playing for the same team with similar style. If it is a turning pitch then both of them would spin the ball and if the pitch is flat then both of them would bowl badly. So definitely they are correlated. But does one imply the second or second imply the first? No because both are caused by a third factor which is roughness of the pitch.
And most of the times a Physicist, a Financial Modeler or an Economist main job is to observe different variable, finding whether they are correlated and if a causation exists between each other or there is a third factor which is causing the two. It is easier said than done. Needless to say, they almost always fail to do so and we pay them for doing postmortem rather than the surgery.

(Positive Correlation implies if one thing outperforms the other outperforms also while if one underperforms the other underperforms. Also to note that rather than it being a rule, it is simply an empirical observation which may not always hold
Mathematically if X and Y are random variables, Correlation(X,Y) = E[(X-E(X))(Y-E(Y))]

Should we give away Kashmir?

For all those advocates of freedom of choice and who believe that if Kashmiris don’t want to live with India, we have no moral right to prevent them from doing so. My simple question to them is that if tomorrow some other state also wishes the same secessionist feeling, would that also be respected. And going too far in that logic, if me and my family decide that we do not like India and need to create a nation of our own, and want to become a Prime Minister (like Mr. Geelani)should I be allowed to do so. In fundamental terms, does blind usage of freedom of choice lead to anarchy and is it not undesirable?
And if people’s choice is the criteria for coming to conclusions, then would Arundhati Roy object if Hindus of Gujarat declare that they want to secede from India creating a Hindu theocratic state with unequal (if any) rights to the Muslims of Gujarat. If they accept it, there is no bigger fool than them and if they don’t, how is Kashmir different except with respect to the color and greater extent of extremism. Forget about giving rights to minority, people like Geelani who are asking children to throw stones are the same people who 20 years back used to announce from the mosques that every Kashmiri Pandit and Sikh would be killed if he does not leave the valley.
And after removing all the dissenting voices, by attacking on the very secularism Kashmir was famous for, they have created an atmosphere where almost everyone hates India. Of course India could have managed things better but still I can’t digest rhetorical statements of the so called liberalists who are favoring the creation of state and helping a leader like Geelani which would even leave behind Taliban in banning civil liberties. Anyways this creed of so called liberals is famous for mindless, senseless application of some half witted principles. I honestly don’t know what would happen with respect to Kashmir in near or distant Kashmir, but I am very sure that if it does happen, humanity, India and to the greatest extent these Kashmiris would suffer.

PS:
1. I may sound like Churchill shouting in Westminster before India’s independence but I am sorry to say I cannot find any Gandhi in Kashmir, not even his shadow!
2. To all those who believe that Kashmir is a different case and there is a historical, constitutional and international baggage attached, then the debate should be hinged on that rather than the principles of freedom of choice. More on that later.
3. As almost all the Kashmiri Pandits don’t want to live in an Islamic Kashmir, should Kashmir be partitioned on the similar basis of freedom of choice?