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Math Science

What Computer Science Can Teach Economics 421

eldavojohn writes "A new award-winning thesis from an MIT computer science assistant professor showed that the Nash equilibrium of complex games (like the economy or poker) belong to problems with non-deterministic polynomial (NP) complexity (more specifically PPAD complexity, a subset of TFNP problems which is a subset of FNP problems which is a subset of NP problems). More importantly there should be a single solution for one problem that can be adapted to fit all the other problems. Meaning if you can generalize the solution to poker, you have the ability to discover the Nash equilibrium of the economy. Some computer scientists are calling this the biggest development in game theory in a decade."
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What Computer Science Can Teach Economics

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  • by iamacat ( 583406 ) on Monday November 09, 2009 @05:18PM (#30039216)

    Polynomial time approximate, probabilistic or special case solutions to NP problems are wide spread. The problem is that real human being in economics can not be easily described by an equation - and when they can be, they quickly change their behavior based on that knowledge. What both computer scientists and economists need to learn is stop being geeks addicted to a single theory and start dealing with people.

  • by WhiteDragon ( 4556 ) on Monday November 09, 2009 @05:23PM (#30039300) Homepage Journal

    Here's a proof that detecting "toxic assets" is impossible [] (or at least NP)

  • by gerddie ( 173963 ) on Monday November 09, 2009 @05:41PM (#30039514)

    Well, I'm not surprised there is such school. My impression is, that economists in general don't have a good grasp of math, specifically, they don't seem to understand the exponential function, otherwise they would not speak of "growth" all the time.
    I'm not saying one should not take human behavior into account, but at least they should get the boundary conditions right, and one of those is that our resources are limited.

  • by NeutronCowboy ( 896098 ) on Monday November 09, 2009 @05:46PM (#30039562)

    I'd say it goes beyond that: humans can't react to those factors either. Where do you think the current credit meltdown came from? Humans were not able to model the credit market behavior, just as much as the mathematical models were unable to do so.

    It is not even subjective - I'd argue it's almost quantum mechanical: the mere act of looking at a market changes its behavior. The advantage of modeling quantum mechanical systems though is that they don't change their rules just to spite you. The certainty for the momentum of a particle changes in a particular fashion when its location is analyzed, no matter how many times you perform that measurement. The particle doesn't change its behavior to screw over the investigator.

  • by cananian ( 73735 ) on Monday November 09, 2009 @06:08PM (#30039762) Homepage
    Interesting link -- but CS does provide mechanisms for creating "trust worthy" bundles securities, in the form of one-way functions. If the seller says, "I distributed the asset types among these securities using a random number generator built on a cryptographically secure one-way function with the following seed", it is possible to have a high degree of confidence that the distribution really is random. The seller can rejigger the seed but the one-way function (statistically) prevents more than a certain amount of tampering. (Of course, you can still try to tamper with the ordering or identity of the input securities -- discuss!)
  • by yali ( 209015 ) on Monday November 09, 2009 @06:36PM (#30040118)

    My impression is, that economists in general don't have a good grasp of math

    I don't think the biggest problem is economists' grasp of math. Rather, it's that (a) the people implementing the economists' mathematical theories don't have a good grasp of the math [], and (b) economists don't have a good grasp of the people their math is supposed to model [].

  • by betterunixthanunix ( 980855 ) on Monday November 09, 2009 @06:37PM (#30040130)
    Except that investors routinely bet more than they have, and in fact, this is a fundamental tenet of a modern economy. This is how banks manage to make money; they loan out money they do not technically have, with the understanding that in most cases they will get it back with a profit. Many businesses operate in this way, taking out loans for periodically required large investments (like fertilizer and fuel for a farm), making enough of a profit to repay the loan, with interest, and pay their employees, but not enough of a profit to stop the loan cycle. In general, it is OK to take these risks...

    The real issue is determining what level of risk is too high. If a bank issues too many loans, and there is a difficult economic year, the bank may find itself short of money to issue when you make a withdrawal; usually this means the bank will take a loan to cover its position, but if all the banks are in the same position, there is a financial crisis. The recent crisis happened, in part, because of the issuing of derivatives on loans -- contracts that amount to an insurance policy on loans -- which substantially magnified the impact of declining housing prices (because the insurance policies were being paid out too quickly, and the companies that issued them found themselves unable to cover their positions). If you are wondering how such a thing could happen in a country where the government decides the maximum amount of money banks can loan out, the answer is that the derivatives (credit default swaps) were not being regulated in any meaningful way.

    The moral of the story? Relying on high risk investments as a major source of income is a stupid idea. High risk investments should constitute a small fraction of revenue, and should be backed up by lower risk investments.
  • by Paul Fernhout ( 109597 ) on Monday November 09, 2009 @06:55PM (#30040332) Homepage

    The biggest problem we face is post-scarcity technologies of abundance wielded by scarcity-obsessed people, because things like biotech, robotech, infotech, nanotech, nucleartech, and so on make terrible, if ironic, weapons. It is ironic to use military robots to fight over economic issues the robots make obsolete. It is ironic to use nuclear missiles built with advanced materials to fight over oil supplies that nuclear power or solar energy make unimportant. It even takes more electricity to produce a gallon of gasoline than an electric car takes to go the same distance, if you really want some deep irony -- we'd use less electricity if we switched to electric cars. So, as an example of post-scarcity thinking, considering that and safety issues, our society would save money and have lower taxes if everyone got a free-to-the user safe luxury electric car. []

    From Post-scarcity Princeton: []
    * Some comments on the PU Economics department and related research directions from a post-scarcity perspective

    The PU economics department, of course, should be abolished as part of this transition. :-)

    OK, that will never happen, so it should be at least "strongly admonished" for past misbehavior. :-(

    What misbehavior? Essentially, the PU Economics department has taken part in a global effort to build an economic "psychofrakulator". How does a psychofrakulator work? Consider a paraphrase of something Doc Heller says in the movie Mystery Men: []

    Dr. Heller: It's a psychofrakulator. They used to say it couldn't be built. The equations were so complex that most of the scientists that worked on it wound up in the insane asylum [in Chicago]. ... It creates a cloud of [dollar denomiated] radically-fluctuating free-deviant chaotrons which penetrate the synaptic relays [via television]. It's concatenated with a synchronous transport switch [of values from long term seven generation life-affirming love of caring to short-term immediate profit and immediate gratification suicidal death-affirming love of money] that creates a virtual tributary [back to large corporations]. It's focused onto a biobolic reflector [of the elite controlled mass media] and what happens is that [economic] hallucinations become reality and the [global] brain [and global ecosystem] is literally fried from within.

    Or in other words:
    "Screwed: What 30 Years of Conservative Economics Feels Like" []
    Or: []
    "Obituary: Conservative Economic Policy" []

    Conservative economic policy is dead. It committed suicide. Its allegiance to market solutions, tax cuts and spending cuts, supply-side nonsense, manipulative and corrosive ties to industry and the rich, have left it wholly unable to cope with the challenges we face. Its terribly limited toolbox simply cannot address the economic insecurities and opportunities generated by today's global, interconnected, polluted, insecure, dyna

  • by Anonymous Coward on Monday November 09, 2009 @07:12PM (#30040518)

    Do you have a source for the assertion that Austrians view monopolies as being non-evil?

    or perhaps more importantly, is there any source for the assertion that anti-trust action restores a competitive marketplace?

    I am not an expert in economics, nor do I hold a strong opinion on whether anti-trust action is good or not, but I've seen comments that breaking up Standard Oil was good for them rather than the market. I haven't tried to verify whether this is true. I've seen anti-trust be completely ineffective at stopping MS bundling IE with windows but competition, especially from firefox very effectively counter that problem, by which I mean that I can access my bank and all necessary websites without using IE.

    The government as a buyer in the market can do a lot against monopolies by not supporting them. Requiring open standards and protocols when acquiring products, for example, would do far more against software monopolies than regulatory action as far as I can tell. Is the government really more efficient than the market at destroying monopolies? They seem to do more creation of monopolies than destruction of them.

  • Re:Not quite... (Score:3, Interesting)

    by MechaStreisand ( 585905 ) on Monday November 09, 2009 @08:27PM (#30041196)
    That experiment where people are asked to split $100 and the other person sometimes wants none of it is shown as example of irrational behavior, but I don't think it is. If someone chooses to split it $80/$20 and the other person says no, knowing they will then get nothing, that isn't necessarily irrational: they might just value punishing the other person more than getting $20 themselves. So it's perfectly rational. Perhaps you considered this and that's why you put irrational in quote marks.

    I agree with you otherwise.
  • Psychonomics (Score:3, Interesting)

    by woolio ( 927141 ) on Monday November 09, 2009 @11:26PM (#30042266) Journal

    But economics is not a zero-sum game. I give you $150 and you give me an hour of labor. We've both benefited by the trade.

    In all but the world's oldest profession, I'm inclined to disagree.

    Here's one:

    Person A runs a tavern. Person B (after a few beers) drives his car into that of Person A. Person B pays $150 to Person C to fix the scratches on Person A's car. Person C uses his $150 income at Person A's tavern.

    Who profited by the exchange of $150? Are all three people better off?

    Here's another: Person B drinks at Person A's bar. Person A runs a farm to grow barley. The farm uses water that slightly increases (~1%) water prices for 100k other persons. Are person A and B both economically better off for their trade? (Yes). Are persons A,B, and the 100k others all better off? (They might or might not all agree, but what if their generation's children do not!). Even more interestingly, the 1% cost will manifest as slight increases in other goods. Eventually someone will be holding the hot potato...

    In examples with larger populations, the zero-sum exists but is more blurry. Fundamentally, most economists seem to think that the optimal solution for a 2-person economy is optimal for an n-person economy. Well, logical induction doesn't work way! (The implication from "n" to "n+1" doesn't exist!) It is well known in Mathematics that optimizing a function with multiple variables not the same as finding the set of variables where each individually optimize the function.

    I'm not saying that there isn't value to distributing tasks across people that are specialized at them. I just don't buy the argument that economics is never a zero-sum game. I think in all but the most ideal circumstances, it is indeed zero-sum game. Often the case, the true cost is hidden in the form of time. If the costs do not happen at the same time as the benefits, people only see the benefits for a long time and then lament the cost later.

    I realize I may sound like the reincarnation of Marx. Well, I don't like Communism either.

  • Open Source (Score:3, Interesting)

    by jandersen ( 462034 ) on Tuesday November 10, 2009 @01:33AM (#30042828)

    Well, one thing they could learn from open source is that it can be rewarding to forgo profits altogether. Now that WOULD be a revolution.

  • by justinlee37 ( 993373 ) on Tuesday November 10, 2009 @02:19AM (#30043024)

    Just because it can't make perfect predictions all of the time doesn't mean that it is useless. You're right, people aren't rational and random chance plays into most things. If you ever take an Econometrics class, you'll learn that predictive Econometric equations always include a random error variable.

    Furthermore, in your example, I don't think that showing that people don't take the most selfish path is a "useless" finding. What they did was generate data about how people usually behave. Concepts from Psychology such as empathy and the norm of reciprocity may help to explain this behavior (and the data is capable of reinforcing these theories). The data can be used to predict how people will behave in the future. THAT is invaluable.

    Despite what you say, game theory is very intriguing and Econometrics is incredibly useful. You just have to be aware of the limitations, and know how to use the tools in your toolbox effectively.

  • WOW (Score:3, Interesting)

    by DarthVain ( 724186 ) on Tuesday November 10, 2009 @10:40AM (#30046152)

    That is what the World of Warcraft should do:

    A) Allow players to go into debt
    B) Allow players to have credit
    C) Create things like derivatives that players can trade around.

    Would be interesting to see what happens and how they manage it. They could also try to have one AH across all the servers (likely technically problematic). They all ready have the numbers for a pretty grand experimental in virtual economics, the closer they model reality, the more interesting it would be to see how things react.

  • Re:WOW (Score:3, Interesting)

    by blueg3 ( 192743 ) on Tuesday November 10, 2009 @02:28PM (#30050006)

    WoW players have all the tools necessary to do this now, except one -- there are no effective tools to enforce player-created rules. You of course can't do anything to the players themselves, and there's almost nothing you can do to the characters. As such, people will simply borrow money and not pay it back. In the real world, this is fixable (though ugly).

  • by astar ( 203020 ) <> on Tuesday November 10, 2009 @06:39PM (#30053452) Homepage

    Hah, I did not think of that. Perhaps they could put them in their retail stores and sell them to the tourists as souveniers. But it sort of illustrates the problem. If you view wealth as related to something having to do with actual production, they are worthless in a modern economy. Sure they might be collectors items, maybe high priced items, but having a lot of money does not guarantee you are rich. The last banknote Weimar printed was a 100 trillion mark banknote. And if you are a gold bug, Spain was such a successful merchantilist that they had so much gold, that domestically gold was not worth much. Inflation.

    Anyway, the buggy whips are on my books at what I paid for them, so my balance sheet still looks good. I figure they have a long depreciation schedule so they are not hurting my income statement. My books look so good, maybe I can get a bank loan and expand.

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