How Do I Spend my Money if I Don’t Know What I Want?

How Markets make your life easier

Suppose you want something, and that you have money. How do you get what you want?

You buy it.

But how do you know you’re getting a good deal?

You shop around.

Specifically, if we assume:

  1. You know what you want to purchase
  2. There exist many vendors who sell it
  3. All of those vendors products are roughly the same quality
  4. No collusion exists between vendors

Then competitive markets will assure you can always get a fair price by comparing prices and choosing the vendor with the lowest price. If vendors are greedy and charge more than it costs to produce something, new vendors will enter the market and undercut their prices. If on the other hand vendors are foolish and charge less than it costs (on average) to produce something, then some vendors will go out of business, the supply of goods will decrease and prices will rise.

These kinds of markets are common and apply to most purchases you make every day: things like milk, eggs, gas and diapers.

Apples are an example of a commodity, for which free markets are generally successful

The Problem

But there exists another kind of market, one where:

  1. It is hard to know exactly what you need
  2. Few or no people offer to sell it
  3. The quality of products is difficult to tell until after the purchase (and even then may take a long time to find out or you may never know)
  4. People who sell the product have an information advantage and frequently collude with one another or government regulators to prevent competition from arising.

Unfortunately, these kinds of markets are common as well. They generally apply to things that people buy infrequently, or only once. And those purchase are often made under intense emotional or financial hardship. For example: planning a wedding, seeking medical treatment, buying a house, choosing a college education.

Used cars are a market notorious for lack of trustworthiness

It should come as no surprise, then, that due to the lack of competitive markets housing, education and healthcare make up an ever-growing portion of our GDP.

What’s worse, there is one part of our economy that deals almost exclusively in these kinds of purchases. One that makes up around a quarter of our economy. And one that is notoriously bad at making complex decisions rationally. That is, the government.

Almost everything that the government buys fits into this category, be it: an f-35 fighter plane, a website to sell health-care insurance, a high-speed rail line or education services for our children. Almost all government purchases have the property that they are:

  1. Ill-defined
  2. Not commonly available for sale
  3. Hard to tell if they’re working
  4. Subject to intense corruption
Costing trillions of dollars, the F-35 has been plagued by quality issues and delays

The current solution: experts

Almost all of us have had to make one of these purchases at some point. And we generally follow a common strategy: ask someone else for help. Perhaps you’ve asked your friend who is a “car guy” to tell you if the mechanic is ripping you off. Or perhaps you looked up a website of the top 10 colleges before making your decision. Or maybe you asked your friend who just planned her wedding what florist she used.

There are a couple obvious problems with this strategy:

  1. How do we know the person we’ve asked is really an expert?
  2. Even if they are an expert, how do we know they’re being honest with us?

Your “car guy” friend is probably not the world’s greatest expert on cars, he’s just the first person you could think of in your social circle. The website you looked up might be sponsored by one of those “top 10” colleges. Your friend might have just picked the first florist she found on Google and was too busy on her wedding day to tell a “good enough” job from a truly amazing one.

Wedding planners exist because many people only shop for a wedding once and there are many complicated factors involved in purchases

We can solve the problem of finding an expert by making it into a meta-problem. We could ask our friends “do you know anyone really good with cars?”. But this actually makes the problem worse, because we now need an “expert on experts” which is even harder than being an expert.

The government also hires experts to make purchasing decisions. Their process generally looks like this:

  1. Congress passes a law
  2. Someone (an expert) translates that law into a specific set of requirements.
  3. Different contractors bid to fulfill those requirements
  4. The lowest bidder wins.

This process can fail at literally every single step:

  1. How do we know congress has the best interests of us (the voters) in mind?
  2. How do we know the experts who created the requirements are neither incompetent nor dishonest?
  3. How do we know the bidders will actually fulfill the requirements?
  4. What happens if there are only 1 or 2 bidders?

This “failure at every step” is a hallmark of why government purchases are generally perceived as hotbeds of corruption and inefficiency.

Even the world’s least-corrupt governments often find their purchases “over priced and under delivered”

A Better Solution? Game Theory

Can we do better, or are weddings and f-35’s doomed to be overpriced?

Suppose we have the following:

  1. A fixed budget
  2. A hard-to evaluate objective function (that can only be measured after the purchase)
  3. A weak objective function that can be measured easily and frequently
  4. A trustworthy executor capable of following simple instructions

I propose the following game a solution.

Choose at random 2 sets of people: measurers and planners. On each turn:

  1. The planners will propose a set of actions and vote on which action to take

2. The measurers will predict how the winning actions will affect the weak measurement.

3. The executor will carry out the winning action and measure the results

Afterwards, the measurers will be awarded points based on the accuracy of their prediction, and the planners who voted for the winning proposal will be rewarded points based on the performance of their action. A person’s voting power is proportional to their score (using quadratic voting).

In addition, the measurers may vote to change to the weak objective function to make it more accurately reflect the strong objective function.

After a certain number of rounds, the purchase is completed, the strong objective function is evaluated and the proposers and measurers are both paid in proportion to their number of points and the score of the objective function.

A well-designed game ensures that competitors are encouraged to behave rationally and fairly

This is designed so people have the following incentives:

The planners are incentivized to choose proposals that will enhance both the weak and strong objective functions.

The measurers are incentivized to accurately predict the outcome of actions, and to make the weak objective function fairly reflect the strong objective function.

An example

I wish to host a movie night with my friends, but I need to buy a new video projector for my home theater. Video projectors have a lot of options and I don’t know which one is the best, I just want my friends to have a good time.

My strong objective function: I will host a movie night and ask my friends to rate on a scale of 1–10 how much fun it was.

My weak objective function: I will rate video projectors based off of number of lumens/cost and I will spend the remaining money on popcorn.

My budget: I found a video projector I think is good for $4000 so that is how much I plan to spend.

What kinds of suggestions might the planners make:

I could look at a different brand of projector than I had considered, or try shopping on a different market.

What kinds of suggestions might the measurers make:

I should only buy projectors that have an HDMI input, or I should consider the reviews for projectors on Amazon.com

They might even make radical suggestions like: video projectors are all the same, what you really need to invest in are surround-sound equipment. Or: we don’t really know that much about home-theaters, but JoesHomeTheaters.com will send someone out to your house for a free estimate.

Notice how the planners try to optimize for the weak objective function, while the measurers try to change it to be more like the strong objective function.

Buying a home theater system involves choosing between a myriad of different options that may not have an obvious right or wrong answer

How can this go wrong?

Like all systems, this one is vulnerable to attacks.

One of the planners could try to influence the measurers to increase his score unfairly. For example the new weak objective function could be: “If your name is Real Badguy, you get 1000 bonus points”.

Or the planners could try and make a suggestion that results in them getting paid: They could propose “Only buy projectors from: notsketchyatallwebsite.com” which is secretly owed by them and have no intention of sending the projector after getting paid.

Any system in the real world should plan for people to attempt to cheat

Isolating the measurers from the planners should provide some protection against these kinds of attacks. The planners and measurers can’t collaborate if they don’t know who eachother are. And the measurers can change the weak objective function. If they suspect “notsketchyatallwebsite.com” isn’t legit, they could require only shopping on marketplaces with a BBB rating of A+.

It’s probably also necessary to guard against radical changes in the weak objective function, by only accepting functions that at least correlate by previous objective functions or using a weighting of old and new objective functions.

Over time, we can also establish a reputational system for measurers and planners. Those who have performed well in the past should be more likely to be chosen for future pools of measurers and planners.

Finally the executor should have a veto over the whole process if they suspect they are blatantly being cheated. However, if we design the system right, the incentives should be such that this veto is rarely if ever used.

What can be improved?

Obviously this system is not perfect. For one thing, details have been completely left out about how the voting system, points and rewards will be paid out. What is an appropriate amount of money to spend on advisors vs the final purchase? 1% 10%? 30%.

Probably this depends on what is being purchased. In the worst case, the cost of deciding may even be higher than the cost of the actual purchase. Think about the story of the mechanic who fixes a machine by identifying the broken part and putting a chalk X on it. He charges $1 for the chalk X and $999 for “knowing where to put it”.

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