Currency and Conflict

According to Lebanon’s Daily Star:

Traders across Syria reported widely fluctuating rates and two currency dealers in Damascus, where the pound appeared to be hit hardest, said it fell below 200 to the dollar for the first time in what one described as panic buying of the U.S. currency.

On Monday evening the pound traded at 205 to the dollar, down 20 percent in four days and 77 percent down since the start of the anti-Assad uprising in March 2011 when it was at 47.

The idea of examining currency prices over the course of a conflict is interesting. There are a number of confounders of course. For instance, the regime can often intervene in certain ways to affect the value of currency. Other incidents besides the conflict itself can also drive currency fluctuations, especially when the conflict is relatively minor.

One nice case (from strictly a research perspective) is the US Civil War, when both the Union and Confederacy issued their own notes. Jeffrey Arnold‘s project, “Pricing the Costly Lottery: Financial Market Reactions to Battlefield Events in the American Civil War,” leverages this fact to see how markets responded to successes and failures of either side. We discussed this project before when it was presented as a poster at PolMeth 2012, and Jeffrey’s website now has his MPSA 2013 slides.

Here’s his abstract, and one of my favorite graphs:

What role does combat play in resolving the disagreement that initiated war? Bargaining theories of war propose two mechanisms, the destruction of capabilities and the revelation of private information. These mechanisms are difficult to analyze quantitatively because the mechanisms are observationally equivalent, the participants’ expectations are unobservable, and there is a lack of data on battles. With new methods and new data on the American Civil War, I address these challenges. I estimate the information revealed by combat with a model of Bayesian learning. I use prices of Union and Cnnnonfederate currencies to measure public expectations of war duration and outcome. Data on battlefield events come from detailed data on the outcomes and casualties of the battles of the American Civil War. The results suggest that battle outcomes rather than casualties or information revelation had the largest influence on the expected duration of the American Civil War.

confederate-union-prices

The Political Economy of Scrabble: Currency, Innovation, and Norms

Scrabble ornaments made by Jennifer Bormann, 2011

Scrabble Christmas ornaments made by Jennifer Bormann, 2011

In Scrabble, there is a finite amount of resources (letter tiles) that players use to create value (points) for themselves. Similarly, in the real world matter cannot be created so much of human effort is rearranging the particles that exist into more optimal combinations. The way that we keep track of how desirable those new combinations are in the economy is with money. Fiat currency has no intrinsic value–it is just said to be worth a certain amount. Sometimes this value changes in response to other currencies. Other times, governments try to hold it fixed. The “law of Scrabble” has remained unchanged since 1938 when it was introduced–but that may be about to change.

Like any well-intentioned dictator, Scrabble inventor Alfred Butts tried to base the value of his fiat money–er, tiles–on a reasonable system:  the frequency of their appearance on the front page of the New York Times. As the English language and the paper of record have evolved over the years, though, the tiles’ stated value has remained static. This has opened the door for arbitrage opportunities, although some players try to enforce norms to discourage this type of play:

What has changed in the intervening years is the set of acceptable words, the corpus, for competitive play. As an enthusiastic amateur player I’ve annoyed several relatives with words like QI and ZA, and I think the annoyance is justified: the values for Scrabble tiles were set when such words weren’t acceptable, and they make challenging letters much easier to play.

That is a quote from Joshua Lewis, who has proposed updating Scrabble scoring using his open source software package Valett. He goes on to say:

For Scrabble, Valett provides three advantages over Butts’ original methodology. First, it bases letter frequency on the exact frequency in the corpus, rather than on an estimate. Second, it allows one to selectively weight frequency based on word length. This is desirable because in a game like Scrabble, the presence of a letter in two- or three-letter words is valuable for playability (one can more easily play alongside tiles on the board), and the presence of a letter in seven- or eight-letter words is valuable for bingos. Finally, by calculating the transition probabilities into and out of letters it quantifies the likelihood of a letter fitting well with other tiles in a rack. So, for example, the probability distribution out of Q is steeply peaked at U, and thus the entropy of Q’s outgoing distribution is quite low.

Lewis’s idea seems to fit with a recent finding by Peter Norvig of Google. Norvig was contacted last month by Mark Mayzner, who studied the same kind of information as the Valett package but did it back in the early 1960s. Mayzner asked Norvig whether his group at Google would be interested in updating those results from five decades ago using the Google Corpus Data. Here’s what Norvig has to say about the process:

The answer is: yes indeed, I (Norvig) am interested! And it will be a lot easier for me than it was for Mayzner. Working 60s-style, Mayzner had to gather his collection of text sources, then go through them and select individual words, punch them on Hollerith cards, and use a card-sorting machine.

Here’s what we can do with today’s computing power (using publicly available data and the processing power of my own personal computer; I’m not not relying on access to corporate computing power):

1. I consulted the Google books Ngrams raw data set, which gives word counts of the number of times each word is mentioned (broken down by year of publication) in the books that have been scanned by Google.

2. I downloaded the English Version 20120701 “1-grams” (that is, word counts) from that data set given as the files “a” to “z” (that is, http://storage.googleapis.com/books/ngrams/books/googlebooks-eng-all-1gram-20120701-a.gz to http://storage.googleapis.com/books/ngrams/books/googlebooks-eng-all-1gram-20120701-z.gz). I unzipped each file; the result is 23 GB of text (so don’t try to download them on your phone).

3. I then condensed these entries, combining the counts for all years, and for different capitalizations: “word”, “Word” and “WORD” were all recorded under “WORD”. I discarded any entry that used a character other than the 26 letters A-Z. I also discarded any word with fewer than 100,000 mentions. (If you want you can download the word count file; note that it is 1.5 MB.)

4. I generated tables of counts, first for words, then for letters and letter sequences, keyed off of the positions and word lengths.

Here is the breakdown of word lengths that resulted (average=4.79):

norvig-word-lengths

Sam Eifling then took Norvig’s results and translated them into updated Scrabble values:

While ETAOINSR are all, appropriately, 1-point letters, the rest of Norvig’s list doesn’t align with Scrabble’s point values….

This potentially opens a whole new system of weighing the value of your letters….  H, which appeared as 5.1 percent of the letters used in Norvig’s survey, is worth 4 points in Scrabble, quadruple what the game assigns to the R (6.3 percent) and the L (4.1 percent) even though they’re all used with similar frequency. And U, which is worth a single point, was 2.7 percent of the uses—about one-fifth of E, at 12.5 percent, but worth the same score. This confirms what every Scrabble player intuitively knows: unless you need it to unload a Q, your U is a bore and a dullard and should be shunned.

However, Norving included repeats like “THE”–not much fun to play in Scrabble, and certainly not with the same frequency it appears in the text corpus (1 out of 14 turns). With the help of his friend Kyle Rimkus, Eifling conducted a letter-frequency survey of words from the Scrabble dictionary and came up with these revisions to the scoring system:

Image from Slate

Image from Slate

Eifling points out that Q and J seem quite undervalued in the present scoring system. So what is an entrepreneurial player to do? “Get rid of your J and your Q as quickly as possible, because they’re just damn hard to play and will clog your rack. The Q, in fact, is the worst offender,” he says.

Now as with any proposed policy update that challenges long-standing norms, there has been some pushback against these recent developments.  at Slate quotes the old guard of Scrabble saying that the new values “take the fun out” of the game. Fatsis seems to hope that the imbalance between stated and practical values will persist:

Quackle co-writer John O’Laughlin, a software engineer at Google, said the existing inequities also confer advantages on better players, who understand the “equity value” of each tile—that is, its “worth” in points compared with the average tile. That gives them an edge in balancing scoring versus saving letters for future turns, and in knowing which letters play well with others. “If we tried to equalize the letters, this part of the game wouldn’t be eliminated, but it would definitely be muted,” O’Laughlin said. “Simply playing the highest score available every turn would be a much more fruitful strategy than it currently is.”

In political economy this is known as rent-seeking behavior. John Chew, doctoral student in mathematics at the University of Toronto and co-president of the North American Scrabble Players Association, went so far as to call Valett a “catastrophic outrage.”

Who knew that the much beloved board game could provoke such strong feelings? With a fifth edition of the Scrabble dictionary due in 2014 it seems possible but highly unlikely that there could be a response to these new findings. A more probable outcome is that we begin to see “black market” Scrabble valuations that incorporate the new data, much like underground economies emerge in states with strict official control over the value of their money. Yet again, evidence for politics in everyday life.

For more fun with letter games, data, and coding, check out Jeff Knups’ guide to “Creating and Optimizing a Letterpress Cheating Program in Python.”

Wednesday Nerd Fun: Where Things Come From

Sourcemap for a Laptop Computer, by Leo Bonanni

Where did your shoes come from? Your coffee? Your laptop? One of the beautiful things about the modern world is that you can hold a piece of technology in your hands–or wear it on your feet–without having to know the answer to this question.

As anyone who has read or heard “I, Pencil” knows, the genealogies of even the most banal products are immensely complicated. The punch line of that story is that pencils have too many components for one person to make or even fully understand, but through innovations like the price system they can be produced without central planning. In the author’s words, the moral is to “Leave all creative energies uninhibited.”

On today’s nerd fun site, Sourcemap, you can see cool visualizations of where all kinds of things come from. The maps for pencils are probably a little oversimplified, but some others are really neat, like the ones at the beginning of the post. My favorite are the food sourcemaps–check out Tropicana, Chicken of the Sea tuna, and Nutella. Now you knowl.

What’s the big deal about corporations?

I had the pleasure yesterday of attending a lecture by Timur Kuran that discussed how the adoption of laws allowing corporations fostered the economic success of Europe. The only form of commercial organization allowed in the Ottoman Empire until the 1850’s was a partnership. This led to two difficulties. First, in a partnership it only takes one member to veto a proposed move. Second, since a partnership is legally an organization made up of a certain set of people, it automatically dissolves when any one of them dies.

That issue of corporate personhood has come up during the Republican primary campaign with Mitt Romney’s comment, and as one of the litany of issues mentioned by the Occupy ___ groups. Mike Munger asked Dr. Kuran about this at the end of his talk. What would happen if we did away with corporate personhood? My recollection of the response, along with some elaboration, is below.

1. Doing away with corporate personhood would be an obstacle to pooling resources. Right now–even despite the economic downturn–it is extremely easy (historically speaking) in modern, developed economies to match capital up with labor. We can even match up enough capital to produce things like iPads, ATM’s, and airplanes. This kind of resource pooling did not happen in the Ottoman Empire because of the constraints mentioned above. Because of the minority veto, you wanted to know and trust the people that you were forming a partnership with. (Dr. Kuran showed evidence that in the 17th century about 80 percent of partnerships had only two members, while fewer than 5 percent had more than 5.) I personally don’t care who’s running the companies I invest in as long as they’re doing their job.

2. Doing away with corporate personhood would prevent perpetual ventures. When all you have is a partnership and one of the members dies, game over. Right now, the health of key individuals like Steve Jobs does play some role in speculation about the company’s future prospects. But it would be absolutely ludicrous for me to have to know the health of 500 CEO’s and other board members simply to have confidence in my investment in an S&P index fund. Ottoman law further complicated this because of their inheritance laws and the fact that more prosperous business owners were likely to have multiple wives and many children. When they died, their business assets were split up in many small pieces. Now, if any of the other stockholders in a corporation dies, the other stockholders are unaffected and the shares pass intact to the deceased’s estate.

3. Doing away with corporate personhood would hurt laborers. To me this was the most illuminating part of the answer that Dr. Kuran provided. As a laborer–whether you serve food at McDonald’s, make cars at GM, or develop software at IBM–you benefit from the fact that a corporation is purchasing your service. You benefit from the two factors mentioned above, in that you can put capital from strangers to productive use and don’t have to worry about the corporation dissolving without warning. But these two seem somewhat weak nowadays–we have Kickstarter and corporations do sometimes fall apart overnight. The most important benefit to the worker is that you have the corporation as a form of protection should anything go wrong. It limits your personal liability, meaning that the McDonald’s worker who sold the woman coffee that was too hot was not personally responsible for the $600,000 lawsuit.

It can be funny to talk about whether or not corporations are people, but a world without corporations is no joke. Just ask the citizens of the Middle East, who are still suffering from nearly a millennium of slow economic growth.