Relationships and the Prisoner’s Dilemma Part Deux

Those of you who either follow me on twitter or are my friends on GTalk will know that my earlier post on relationships and the prisoner’s dilemma got linked to from Cheap Talk, the only good Game Theory blog that I’m aware of. After I wrote that post, I had written to Jeffrey Ely and Sandeep Baliga of Cheap Talk, and Jeff decided to respond to my post.

It was an extremely proud moment for me and I spent about half a day just basking in the glory of having been linked from a blog that I follow and like. What made me prouder was the last line in Jeff’s post where he mentioned that my blog post had been part of his dinner conversation. I’m humbled.

So coming to the point of this post. Jeff, in his post, writes:

Some dimensions are easier to contract on.  It’s easy to commit to go out only on Tuesday nights.  However, text messages are impossible to count and the distortions due to overcompensation on these slippery-slope dimensions may turn out even worse than the original state of affairs.

I argue that it is precisely this kind of agreements that leads to too much engagement. The key, I argue, is to keep things loosely coupled and uncertain; and this, I say, doesn’t apply to only romantic relationships. I argue in favour of principles, as opposed to rules. Wherever the human mind is concerned, it is always better to leave room for uncertainty. Short term volatility decreases the chances of long-term shocks.

So if you contract to date only on Tuesday nights, and on a certain Thursday both of you get a sudden craving for each other. In a rule-based system, you’d have to wait till Tuesday to meet, and that would mean that you’d typically spend the next five days in high engagement, since you wouldn’t want to let go given the craving. There is also the chance that when you finally meet, there has been so much build-up that it leaves you unsettled.

The way to go about this is to not make rules and just make do with some simple principles regarding the engagement, and more importantly to keep things flexible. If you have a “I won’t call you when you’re at work” rule, and there is something you really need to say, this leads to wasted mind space since you’ll be holding this thought in the head till the other person is out of office, and thus give less for other things you need to do in that time.

You might ask me what principles one can use. I don’t know, and there are no rules governing principles. It is entirely to do with the parties involved and what they can agree upon. A simple principle might be “if I don’t reply to your text message it doesn’t mean I don’t love you”. You get the drift, I suppose. And the volatility, too. (ok I’m sorry about that one)

The mechanism design problem for scaling down that Jeff talks about is indeed interesting. His solution makes sense but it assumes the presence of a Trusted Third Party. Even if one were to find one such, and that person understands Binary Search techniques, it might take too much effort to find the level of interaction. I wonder if the solution to scaling down also is the Bilateral Nudge (will talk about this in another post).

Betting as a hedge

Today’s Business Standard reports that ESPNStar and their advertisers stand to lose significantly following India’s early exit from the T20 World Cup. However, the situation now is significantly better off than in the 2007 World Cup where India didn’t even enter the super8. Back then, India had played a grand total of 3 matches out of a maximum possible 11 before they got knocked out. And thanks to India’s exit, interest in the rest of the tournament had also waned, leading to significant losses for SETMax, etc.

The situation this time round is significantly better than the last time – since India has gone out only after the second stage. Given that after today’s games the only games are the semis and the finals, I don’t expect the channel and the advertisers to lose as much.

Nevertheless, my mind goes back to a post that I had written back when India went out of the 2007 World Cup following its loss to Bangladesh. I had suggested the following as an “immoral solution”.

It is clear that Ireland is in the super eight, so nothing can be done about that. However, there is still a ray of hope in group B (india?s group). I know it is illegal, but wouldn?t it make sense for a consortium of say SET, Tata SKY, LG and maybe tourism departments of West Indian governments to offer money to Bangladesh and ask them to lose to Bermuda? ?you have done a fantastic job so far in the world cup. You?ve beaten India. Must be a very proud moment for your country. Can you please take this money now and leave, so that the rest of the world cup can go on? We would be better off without you!?

However, the chance to implement the immoral solution is past us this time around. So let me come to the “one legal solution” that I’d suggested:

By buying broadcast rights for a major tournament such as a world cup, you are unwittingly betting on the results of a few matches. Betting that the country where you’ll broadcast will do well. Betting that there aren’t too many major upsets. Betting that results will follow a certain pattern. You know you can’t affect the results, so the next best thing is to hedge!

Go to Ladbrokes, and take the opposite position. Bet, and bet well so as to limit your losses in case some results don’t go according to plan. Maybe you’re not very good at betting, and after all it?s not your core competence. Not to worry. I’m sure some good investment banker would come up with a product with returns linked to the results of a few matches. He will provide you a product with which all the implicit bets you’ve taken will be hedged. And he will go to Ladbrokes and hedge his position by taking positions there. And charge you a small premium for it. Beautiful, isn’t it?

Betting on sport is not a purely speculative activity. Of course there are a lot of people who speculate on sports, but these people also speculate by buying and selling stocks and bonds. Betting can also be an extremely useful hedging tool. If only it were to be made legal in India, I’m sure a lot of our corporates will end up being better off. And typically taxes on betting are high, and so the government will also have its share.

Can someone please convince the people in the finance ministry, or whatever is the concerned ministry, about this, and to legalize betting? I’m sure there is significant value to be unlocked.