Thursday, December 18, 2014

medical testing, economics, and the placebo effect

One of the central lessons of introductory microeconomics is that in evaluating an option, there isn't really a relevant absolute standard of "good" or "bad", or (depending on how you want to think about it) that the only baseline for that standard is the best or most likely alternative.  If you have a chance to spend the afternoon bowling or going to the zoo, these might, in a colloquial sense, both seem like "good" options, and if you're trying to decide whether to spend a lot of money getting a car fixed or having it junked, these might seem like "bad" options, but from the standpoint of rational decision-making you're only concerned with whether bowling is better than going to the zoo or going to the zoo is better than bowling — the term "cost", in its most complete sense as economists understand it, is about what opportunities you give up by making the choice you're making, such that, by construction, only one of a mutually exclusive set of actions can be "worth more than it costs".

The FDA requires, at least for certain kinds of drugs and medical devices and procedures, that it be established that they are better than previous standards of care, at least for some patients in some circumstances, and that seems to be consistent with this principle, but that kind of testing tends to come later in the human subject trials than a better known and even more common kind of medical trial, which is testing for bare "efficacy".  Some subjects are given the treatment, and typically others are given a "placebo" treatment, and the results are compared; if there is no difference, the new treatment is deemed not to be efficacious.  This is wrong for a couple related reasons[1]: it may, indeed, be efficacious because of the placebo effect. On a more practical level, and drawing from the economic principle, the resulting information only provides information about whether the treatment should be given to patients if (and to the extent that) they would otherwise be likely to be given the placebo.

I want to emphasize — this seems to me to be the sort of objection someone might raise to what I'm proposing — that anyone lie to a patient here. "This treatment is the standard of care, has been shown to have some effect, and is at least as effective as anything else we know of [with given side effects, or whatever qualifiers are appropriate]," if it is true, is all true, and is all that is relevant to the patient. Indeed, if the patient is not self-sabotaging, you can say "this seems to work, to the extent we can tell, because of the placebo effect." Indeed, I drink orange juice and consume large amounts of vitamin C when I have a cold for this reason; my understanding of the state of scientific knowledge is that 1) vitamin C, for almost all populations,[2] has no more (or less!) effect on the common cold than placebo, and that 2) the common cold is unusually susceptible to the placebo effect.[3] People with whom I have discussed this seem to, at least initially, think I am somehow "fooling" myself, but consider it from a neutral standpoint:
  • If you believe it will work, it will work.
  • If you believe it will not work, it will not work.
My belief is not "foolish"; it is vindicated. Whether the mechanism involves direct action on the immune system or some convoluted, poorly understood neural pathways is only relevant if I'm likely to sabotage the neural-pathway mechanism should someone tell me that it is heavily involved.[4]

What I am proposing, then, is that testing from the beginning be done against the best standard of care; if there is no treatment, then perhaps include three groups in your testing, with a true control group (which receives no treatment) in addition to the placebo group and the test group. If your placebo group ends up having the best balance of effects, side effects, and costs, though, you should also consider making that placebo the standard of care.[5]


[1] Even leaving aside the statistical power of the test, which is surely relevant to medical decision-making but is not the focus of my interest for this post.

[2] One of the populations for which it seems to have some effect is long-distance runners, a group that used to include me. I don't know whether a mechanism has been determined; some scientifically-informed people I know think it's a bit amazing that the idea that vitamin C boosts your immune system ever got off the ground — it mostly helps maintain connective tissue — and so my not-terribly-well justified hypothesis is that long-distance running puts enough strain on your connective tissue that it diverts resources from your immune system to heal your connective tissue, and that higher doses than are usually of use to people may help free up the immune resources of long-distance runners. As I say, the mechanism I propose here is basically something I made up, but the fact of its having an effect is not.

[3] This latter point has been offered as an explanation for the prevalence of folk remedies for the common cold; they all work for the people who believe they work.

[4] Sort of. Certainly improvements on treatments are likely to be triggered by an understanding of the mechanisms; there is also a suite of issues, in the real world, related to the finite power of statistical testing. The mechanisms may give hints to likely drug interactions or long-term effects for which testing is difficult (because there are so many things to test for or because it would risk withholding an effective drug from a generation of potential beneficiaries, respectively). There is also an issue that computer scientists in machine learning call "regularization"; it is related to things like publication bias, and in this case boils down to the idea that understanding the mechanism might help us shade the experimental results, providing a bit more of a hint as to whether a 2σ effect is more likely or less likely than usual to just be noise. This is also related to the base rate problem; essentially, if the mechanism is such that we strongly expect not to see an effect, then a 2σ effect is probably noise (though a 6σ effect perhaps still means we were wrong). These factors all run parallel to my main point, as understanding the mechanism is also useful for a drug that outperforms a placebo than one that, by all indications, is a placebo.

[5] It seems, further, that even two "drugs" that only give their desired effect through the placebo effect are not necessarily ipso facto interchangeable. I have heard that the color of a pill can have an effect on how effective the patient expects it to be; this may be a problem if you're trying to decide which placebo to test against to decide "efficacy", but if you aren't prejudiced against "placebos", the rule that you go with whatever works regardless of mechanism carries over directly: use the best placebo if that beats everything else on effectiveness/cost/side-effects etc., and use something else if it does. (If the color of the pill affects its effectiveness, that is of course something the drug designers should exploit, but red drug, blue drug, red placebo, blue placebo, and no treatment should start on the same footing.)

Tuesday, December 16, 2014

Repugnance and Money

In late September and early October, my son was with his grandmother, and I had more of a chance to spend evenings reading books that I didn't think were related to my dissertation. In particular, I read books on human evolution, and to various extents related prehistoric anthropology and the like, and gain a new appreciation of the importance of in-group/out-group distinctions.

I have been aware for some time of an idea among monetary theorists that money is in some ways a substitute for what game-theorists call "monitoring" — in particular, a 1998 JET article by Kocherlakota (who is now president of the Minneapolis Fed) shows that a particular class of models has the same sets of equilibrium outcomes if you put money into the models, but agents are essentially ignorant of the history of play, as if there is no money in the models, but agents are perfectly informed at each stage as to what everyone did at every previous stage. More recently Randall Wright at Penn State (though I have no academic publications to cite here) has emphasized this substitutability, and in particular has emphasized that tight groups (a fortiori families) tend not to use money to intermediate favor exchange, but with some informal sense of whether members are shirking or being especially pro-social and various social sanctions to respond to them.  In fact, it seems likely that, in richer environments than Kocherlakota's, perfect monitoring is likely to work better than money, and it seems plausible that monitoring works well-enough in tight groups (but poorly enough outside of them) that money is less useful than monitoring in those groups (but better than (almost) nothing outside of them).

My synthesis and slight extension of these ideas is to suggest that we use money with our outgroup; further just-so stories follow.  For example, there is a social psychology a literature about money triggering an anti-social mindset, which I can tie to the idea that we associate "money" with "out-group".  Perhaps more interesting for purposes closer to my dissertation, though, is "repugnance", the only major threat to market function in the list that Roth (2008) provides that my dissertation proposal did not discuss.  While I would certainly not claim to explain all repugnances — as Roth notes, they vary too much in space and time for one to expect a particularly simple universal deep theory — at least some of them can be explained as situations in which in-group and out-group constructs are being conflated or boundaries are being breached. It has been customary, for example, for gifts of cash to be viewed as at least somewhat uncouth in contexts that call for gifts; perhaps giving cash signifies that you consider the recipient to be out-group. Similarly, this goes to one of Roth's examples, that it is okay to bring wine to a dinner party but not to offer the hosts an equivalent amount of cash. Prostitution may constitute an exchange of something that should be in-group for something that should be out-group, and indeed if one accepts for the moment that there is or was an accepted practice of men paying for a woman's dinner and expecting sex in return in a "dating" situation, one may be able to draw the line between this and prostitution in the same way — that it is okay for me to acquire a bottle of wine or a meal from someone in our out-group, and then give that to a member of my in-group (with the expectation that, at some point in some context, I will be the recipient of a gift, and the recipient will be a giver), but that giving money, whether explicitly or implicitly in "exchange" for something, is inappropriate.

There are some caveats to note.  In a modern large society, the in-groups and out-groups are blurred in a way that they largely are not in bands of 50 people in the savannah.  There are people who are somewhat in-between, but there is also a non-transitivity; my good friend might have a good friend whom I don't particularly know, such that it might be reasonably clear that my friend conceptualizes each of us as clearly "in-group" and we consider him the same, but consider each other clearly "out-group".  Also, to clarify, my mental model of in-group "gift-exchange" involves less obvious direct quid-pro-quo than the buy-a-meal-for-sex transaction noted above; I imagine contributions being less bi-lateral and more multi-lateral, but also that when a contribution is made, even if a single recipient receives most or all of the benefit, that it is not known when or in what form any anticipated reciprocity would be made, even if it did come back directly to me.  It may even be that direct quid-pro-quo transactions themselves have a bit of an out-group feel to them, even if they don't involve abstract money.

Human and Group Reason

There's an article from a few years ago theorizing that humans evolved "reasoning" as a way to argue [pdf link], and — I haven't yet read all of that article, but I haven't seen it note this yet — if you were to adopt the naive, non-cynical position that we reason [only] to figure out the correct answers and not [at all] to justify actions and positions taken for irrational reasons, there are some older split-brain experiments to contend with*.  Mercier and Sperber in particular note that the sorts of cognitive biases we see tend to be those that facilitate justification rather than impede it; we pick a wrong answer that is easier to verbally justify rather than an answer that is right for sophisticated or nebulous reasons.

I note a recent article at the Harvard Business Review (with Cass Sunstein as one of the two authors) about group decision-making, and one of the passages that sticks out to me

The psychologists Roger Buehler, Dale Griffin, and Johanna Peetz have found, for example, that the planning fallacy is aggravated in groups. That is, groups are even more optimistic than individuals when estimating the time and resources necessary to complete a task; they focus on simple, trouble-free scenarios for their future endeavors. Similarly, Hal R. Arkes and Catherine Blumer have shown that groups are even more likely than individuals to escalate their commitment to a course of action that is failing—particularly if members identify strongly with the group. There is a clue here about why companies, states, and even nations often continue with doomed projects and plans. Groups have also been found to increase, rather than to lessen, reliance on the representativeness heuristic; to be more prone to overconfidence than individual members; and to be more influenced by framing effects.
With agents whose cognitive biases were not skewed toward wrong choices that are easy to justify to others, one might expect groups of such agents to have biases that are — for example, if you have a good "representative" to buttress your argument, you can explain your argument to others in a more effective way than if you could not, such that the group is more likely to reach a consensus around a decision supported by over-reliance on a representative than one that isn't.  This is to say that one should naturally expect group decisions to be biased toward decisions that are easier to justify after the fact, and that this appears to involve an intensifying of the cognitive biases of individuals is evidence in favor of Mercier and Sperber's hypothesis.



* Human speech is primarily located in one hemisphere of the brain, though the other hemisphere can read and understand writing; human subjects whose hemispheres had been separated for medical reasons had, for the purposes of the experiment, written instructions shown to the non-speech hemisphere, whereupon they performed an action, whereupon the subject was asked why s/he had performed the action, and a perfectly confident and absolutely false answer was given.

Tuesday, October 28, 2014

substitution, liquidity, and elasticity of demand

One of my formative (insofar as one can use that term for something that happens when one is 35) experiences was trying to explain to an introductory microeconomics student that the elasticity of demand for eggs is somewhat low, but the elasticity of demand for Farmer Jones's eggs is very high; his eggs are (presumably) very good substitutes for the eggs of a lot of other farmers.  If a single person could set the price of all eggs, the price they choose would have a small effect on the quantity that would sell at that price, but if Farmer Jones tried to unilaterally change only the price of his eggs, the quantity of his eggs that would sell would change a lot.

Yesterday Matt Levine wrote that it doesn't matter whether an individual owns most of the copper in London-Metals-Exchange-approved warehouses because that's a very small fraction of global copper, and Professor Pirrong said that, to a reasonable extent for a moderate period of time, it does, and while the clear theoretical economic categories aren't always clear in practice, in this case it seems more clear and correct to say that global copper can't substitute for LME warehouse copper, but with some time and expense can be converted into it. So if you're looking at a 5-year time horizon, it's probably not worth trying to distinguish the two, but the shorter the relevant time period, the larger the gap that could reasonably open up between the prices of the two.

A lot of what I think of as "demand for liquidity", which isn't quite what other people (e.g. Shin, Tirole, etc.) would mean by that phrase, is time-sensitivity; in a certain language, what I'm thinking about is more of a demand for market liquidity and what they mean is funding liquidity, but to some extent these are both closely tied to "how quickly can I convert one asset into another asset?" or "at what terms of trade can I quickly convert one asset into another asset?", especially as distinct from "at what terms of trade could I convert one asset into another asset if I had a lot of time to try to get a good price?" "Liquidity" then is related to convenience yields, but also to elasticity of intertemporal substitution — whether cash tomorrow (or even this afternoon) is equivalent to cash at some point in the next five years. If you're interested in the price of copper in deciding whether to build a new factory, you can probably use the LME price for delivery over the next couple years as a proxy for global copper prices, but if you need to deliver into an LME futures contract next week, you have a demand for LME copper that doesn't admit the same kind of substitution, and you're going to find that the market is a lot less elastic.

Friday, October 10, 2014

a game theory example

Recording here as much as anything for my further reference an example by Viossat (2008), who credits it to Eilon Solan, who adapted it from Flesch et al (1997):

W
LR
T1,1,10,1,1
B1,1,01,0,1
E
LR
T1,0,1-x1,1,0
B0,1,10,0,0


I have not verified this for myself, but allegedly (for x≥0)
  • If x=0, TLW is the only Nash equilibrium; it is not quasi-strict.
  • Any strategy profile in which players 2 and 3 play L and W and and player 1 plays T with probability of at least 1/(1+x) is a Nash equilibrium.
For x=0, aside from action profile TLW, player 1 gets payoff 0 for matching player 3 and 1 otherwise; similarly 2 wants not to match 1 and 3 wants not to match 2.

Wednesday, October 8, 2014

dispersed information, intermediation, and communication

Intermediation is crucial to a modern economy, but it also creates a lot of principal-agent problems. Some of these are well modeled and studied, but some that, to my knowledge, are not are related to the ease with which some kinds of information can be conveyed relative to other kinds of information; where relevant information is predominantly quantifiable, at least some of the problems that are created and/or solved by intermediation are comparatively minor, whereas when relevant information is effectively tacit, it will often become a large friction in making things work.

To be more concrete, there is a recent story about Ben Bernanke's being unable to refinance his mortgage, and the LA Times says he probably could if went to a lender who meant to keep the loan, as opposed to a lender who wanted to pass it along to other investors in a security.  If you're trying to make a lot of loans on a small capital base, you have to keep selling off old loans in order to get the money to lend to new borrowers, but the people buying the loans may not fully trust your underwriting; on the other hand, the purpose of the intermediation is that the people with the money don't have to go to all of the expense associated with doing a full underwriting themselves.  What's left is to look at a set of easily communicated information about the loan, preferably something that can be turned into a small set of meaningful statistics about a pool of loans.  This means that, even more than in a market where all underwriters were holding their loans until maturity, your ability to get a loan will depend on the information that can be easily gathered and communicated, and less on qualitative and less concrete information.

In an economy in which some agents are good at doing underwriting and other agents have capital to invest, it seems like a good equilibrium would be one in which the underwriters can develop and maintain a reputation such that "This security was underwritten by Jens Corp, which gives it a rating of BB+" or some such; the rating provided by the underwriter incorporates the unquantifiable information and makes it (in some sense) quantitative.*  Note here that I'm asking the issuing agent itself to provide a rating; if an outside credit agency is to provide a rating accounting for all of the information that was put into underwriting the loans, that agency would have to either do all of the underwriting work over again, rely on the issuer's reputation in the same way I'm proposing investors could, or rely again on quantitative metrics.  Ten years ago credit agencies had chosen the last of these three options, and issuers gradually figured out to sell off loans with bad qualitative characteristics and good metrics that fit the credit agencies' bills.  This ultimately is the bias I'm trying to avoid.

There might be some value to having a rating agency that knows the reputation of a number of small shops and can, in some manner, pass that along to investors, but that, too, will depend on an equilibrium in which the issuing financial company is issuing a credible indicator of the quality of the loans.  Even if a financial company could get to that equilibrium, somehow developing this reputation through a history of responsible issuing and pronouncements, maintaining the reputation may depend on outside observers' believing that the company's management and culture and future interests promote its maintaining that reputation, i.e. that the company and its agents will at every stage find it less valuable to sell a set of bad loans for a high price than to maintain its ability in the future to sell a set of good but hard-to-verify loans for a high price; this requires that a disciplined underwriter would expect to maintain a certain amount of business by being able to find a sufficient stream of people who are hard-to-identify good credit risks.  I like to think this could happen, but I'm not sure it's the case.

* It may well be that the most plausible world in which this could come about would be one in which the information conveyed would be effectively multi-dimensional; rather than just "these loans have approximately this likelihood of default", you might convey "the loans have approximately this likelihood of default under each of the following macroeconomic scenarios:", etc. In an age of computers, it might even be acceptable to have something that seems, to humans, fairly complex, as long as it can be readily processed by computers in the right ways; it is worth noting, though, that higher complexity may make it harder to verify, even after the fact, which might hurt reputation building. If I sell off 100 loans and say that each has a 5% chance of default, and maybe 3–7 of them default, that seems about right, and I manage to do it several more times, and it can be noted that my assertions seem to be borne out by experience, but if I say 10 of them are in this bucket, and another 10 are in a different bucket, and so on, then, while overall levels of default can still be verified, it becomes harder to verify that each separate bucket is right, and I think that the opportunity to lie about one tenth of my portfolio, while still (perhaps?) keeping my reputation fairly intact on certain kinds of loans, give me more incentives to attempt to liquidate parts of my reputation and make it more likely for an equilibrium to collapse. The extent to which this is a concern is going to come down to how credible "I guess I'm just not good at underwriting X kind of loan anymore, but we're still doing great at everything else!" is, and how many times I can do it before nobody takes me seriously anymore.

Monday, September 29, 2014

interactions and evolution

I've been thinking for a while that it might be possible for a gene that never has a (narrowly construed) positive effect on evolutionary fitness might be (in the long run) beneficial if it imposed a larger evolutionary load on phenotypes that were, in the long-run, kind of in trouble anyway, by hastening to get them out of the way. I still haven't actually put together a solid model that would make this compelling, but I've just discovered Wynne-Edwards, who at least suggested that individual organisms might sacrifice their own survival to benefit a group, especially a kin group; he was building off of work by a guy named Kalela who wrote about voles or shrews suppressing their own fertility when the group was running against the local ecosystem's carrying capacity. At least as I understand it from a second-hand telling by E.O. Wilson.