Potternomics part one: how do wizards get rich?

Thinking about economic aspects of the Harry Potter universe made me wonder, why are there poor people in the wizard community? The Weasleys are perhaps not very poor by the standards of muggles. But the ability to do magic could certainly be very lucrative if you lived in the muggle society, so in theory it wouldn’t be difficult for a wizard living among muggles to become very wealthy. Why then doesn’t all poor wizards migrate from the wizard community to the muggle one in order to increase their standard of living? If that were the case, then the poorest wizard in the magical community should be at least as wealthy as he would be living as a wizard in the muggle world. This of course assumes it’s easy to migrate to muggle britain from magical britain as a wizard, which might not be true due to guvernment regulations but the policies of the ministry in magical Britain will be discussed in a later post.

Even if we might be able to think of a range of creative ways to make money using magic, it’s not necessarily the case that an actual wizard could execute or even come up with any of those ideas. Wizards don’t have the same educational background that we muggles have. Almost all subjects in the Hogwarts corriculum are practical ones, for example charms, potions and defence against dark magic (full list here). And most of the time in class, they’re doing exercises to practice performing different magical skills. The students are teached how to do magic, but not to understand how or why magic actually works. For them, magic seems to be just as mysterious as it is for readers of the novels. No student, not even the star scholar Hermione is encouraged to pursue a scientific career or even to study further after graduating from hogwarts. Snir and Levy (2014) discuss the educational system in Harry Potter in more detail for the interested.

From this it’s reasonable to think that someone who grew up in the wizard society would struggle in the technically advanced muggle society. In other words, the claim that any wizard should be at least as wealthy living in the wizard community as they would have been living in the muggle one might be a correct one. Since wizards don’t reveal their magic to muggles we can’t actually know for sure whether there are wizards living among us in secret or not. But, lets imagine that there are, where then would we expect to find them? What kind of jobs would they occupy?

Magic can be very helpfull doing a lot of things. It can be used to change the shape or properties of an object, heal wounds and transport humans to give just a few examples. We can understand magic as a technology from the function it serves in society (more on this in a later blogpost). For many of the things wizards use magic for, the muggles have their own solutions.

In addition to their lack of knowledge on muggle technology and science being a limitation for them when choosing occupation, they also cunduct their business in secrecy as mentioned before. So even if wizarding healing practices could potentially complement muggle medical science in improving the quality of healthcare, wizards probably doesn’t work at hospitals since the risk of being exposed is too high. The same is true for all occupations where it would be difficult keeping magic hidden from the muggles.

It’s less likely that wizards will work in service occupations, especcially those that recuire technical knowledge. Perhaps farming, mining, fishing and forestry are sectors where wizards and witches could practise magic without risking detection. The problem with these sectors (collectively called the primary sector of the economy) perhaps is that muggles already are very productive in these areas thanks to technological avancements such as fertilizing and pest controls, genetic manipulation of breeding animals and advanced harvest and mining machinery. manufacturing (the second sector of the economy) is another possibly lucrative area for those with the ability to do magic.

In the end, things come down to what economists call comparative advantage. Which says bluntly that you should focus on producing goods or services that you are best at relative to what others are good at. And then trade with others. This is somewhat common sense, if you’re good att cooking but hate making the dishes, while your partner is a terrible cook but enjoy cleaning, then both of you would be better of if you split up the chores at home instead of both doing half of each, wich would mean you would do something you hate, and your partner would do something he or she is terrible at.

However the theory of comparative advantages makes a counter-intuitive claim. Even if a wizard is better at doing everything compared to a muggle, they would both benfit from trading with each other. Just think of a wizard healer and a muggle doctor at a hospital. The wizard healer might be able to preform twice the amount of surgeries a day compared to the muggle doctor. But working with emergency care, the wizard might be ten or twenty times more efficient at saving lifes since speed is crucial and the wizard healer is much faster getting to emergency situations by flying or teleporting compared to the muggle doctor who loses valueble time traveling in an ambulance. Even if the wizard is better than the muggle doctor in preforming surgery, to save as many lifes as possible we want the wixard to spend all his time out in field.

The claim is true of countries too, so even if a country say magical britain, is better at producing every product or service (as in producing at a lower cost) than a second country say muggle britain. They would both benefit from focusing on producing goods where they have a comparative advantage and trading with each other. This is the key to understanding how the market economy works and why the division of jobs, specialization and trade has lead to such amazing economic progress and wealth increases in the world.

Wizard might not know the norms and institutions of muggle society. But imagine you getting the magical abilities that wizards have, how would you use them to get rich? I’m assuming that you have moral values that prevents you from using magic to hurt of enslave people. And don’t forget that the statute of secrecy forbids you from revealing magic to muggles. The answer to the question is perhaps not that interesting, but trying to answer it makes us think about how the market economy works, so if you have any fun ideas, please leave a comment or send me a message.

 

Snir, A. and Levy, D., 2014. Economic Growth in the Potterian Economy. The Law and Harry Potter, edited by Franklin Snyder and Jeffrey Thomas, Forthcoming.

Why even rational participants might distort prices in betting markets

The other day I read an interesting paper that gave me a thought on why betting markets might become biased even if participants act rationally to maximize their utility. In the paper suspense and surprise (J Ely, A Frankel, E Kamenica, 2015), the authors create an economic model for suspense and surprise (sounds cool right?!) with which they examine different sports, plots in novels and races for political offices. From this I started reading some more on the literature and this quote from A Caplin and J Leahy (2001) caught my eye:

[w]e define suspense as the pleasure experienced immediately prior to the anticipated resolution of uncertainty, and posit that it is positively related (up to a point) to the amount that is at stake on the outcome of an event. This provides a simple reason for agents to bet that their emotional favorite will win in a sporting event. By betting on their favorite, agents increase their stake in the outcome, thereby heightening feelings of suspense

 

This makes intuitive sense of course, when people bet on their favorite team the game becomes more exciting and thereby increasing their utility. From the public choice literature on rational ignorance we know that since any individual voter has a very low probability of changing the outcome of an election, people don’t have the incentive to consume political news in order to make a good decision on election day. The reason instead to why people inform themselves on political issues is non-instrumental – it’s entertainment such as watching sports or reading novels. And therefore they don’t have any strong reason not to be biased in choosing what party to cheer on.

The answer to the question why people vote is probably similar to why people participate in doing a wave or cheer in a football stadium to show support to their favorite team. It’s not that sport supporters think that their participation in some way will affect the athletes to perform better. But we are social beings and like doing things in group.

This gives an explanation to why prediction markets might be biased when people with strong partisanship bet on political events. But I say might because even if it’s the case that some people act this way, it will not affect the price on the prediction market as long as the marginal trade in the market is motivated by rational actors. As J Wolfers and E Zitzewitz (2004) writes this about why irrational betting participants won’t distort the signals on a betting market, but so is true for the people betting for suspense. So even if a lot of democrats and a lot of republicans bet in order to enhance their feelings of suspense, if there are some people in the middle that act in order to win money (and there is high liquidity on the market), the predictions that derive from betting markets will be good forecasts.

references:

Caplin, Andrew, and John Leahy. ”Psychological expected utility theory and anticipatory feelings.” Quarterly Journal of economics (2001): 55-79.

Ely, Jeffrey, Alexander Frankel, and Emir Kamenica. ”Suspense and surprise.” Journal of Political Economy 123, no. 1 (2015): 215-260.

Wolfers, Justin, and Eric Zitzewitz. ”Prediction markets.” The Journal of Economic Perspectives 18, no. 2 (2004): 107-126.

Trump och brexit är inte bevis för att bettingmarknader har fel

Det är mågna som påstått att det faktum att bettingmarknaderna bedömde det som osannolikt att Trump skulle vinna presidentvalet och att resultatet av folkomröstningen i Storbrittanien skulle bli ett brexit visar att bettingmarknaderna hade fel. Det är möjligt att de hade fel, det går dock inte att avgöra utifrån ett eller två enskilda fall.

Bettingmarknader gör förutsägelser för hur stor sannolikhet det är att en viss händelse inträffar, och såvida bettingmarknaden inte ger en sannolikhet på 0% för en händelse som inträffar eller 100% för en händelse som inte inträffar så är det inte tillräckligt för att bedöma exaktheten hos förutsägelserna. För att avgöra hur väl en bettingmarknad fungerar för att ta fram information behöver man observera statistik över många händelser och över många tidsperioder.

Om jag påstår att sannolikheten att du slår en sexa när du kastar en tärning är en på sex (~17%) så skulle det faktum att när du slår tärningen och en sexa kommer upp inte betyda att mitt påstående var fel. Du skulle behöva göra om testet flera gånger för att kunna avgöra om det är något skumt med tärningen eller inte.

Det är såklart möjligt att bettingmarknaderna hade fel angående brexit och Trump, det vet jag inte. Hur det kommer sig att så många inte förstår vad som menas med sannolikhet vet jag inte heller.

För att låna ett exempel från Eliezer Yudkowsky. Ibland säger karaktären Spock i Star Strek något i stil med att ”Captain, if you steer the Enterprise directly into a black hole, our probability of survival is only 2.837%.” Ändå så lyckas de nio av tio gånger. Spock är helt enkelt värdelös på att uppskatta sannolikheter. Serieförfattarna tror att 2.837% uttrycker utmaningen i att styra rymdskeppet genom ett svart hål, ungefär som fem stjärnor på ett tv-spel.

Så om en bettingmarknad bedömer sannolikheten som 51% för tio oberoende händelser så bör vi vänta oss att hälften av händelserna infaller, varken fler eller färre. Om istället nio av händelserna infaller så kan vi dra slutsatsen att bettingmarknaden ifråga är bristfällig i sina förutsägelser.