Monday, August 14, 2006

Bonehead Plays

When I was a brand new assistant professor, 1980-81, a bunch of my colleagues played bridge together at lunch. While this was mostly a social thing, it was also moderately competitive. One of the folks was an expert tournament player and he had made up some sheets that encapsulated the essentials of the “Standard American” bidding system. I haven’t played in almost 20 years so much of that is a dim memory to me now. But a couple of items stand out. This expert critiqued us while we played, mostly about how we should infer from the bidding and the play of the cards what was in everyone’s hand. He was able to do this without looking at our hands, which was all the more impressive. When we were about to play the wrong card he would say, “the error light is lit,” an expression I had not heard before but one that was to become our mantra. And if a particular egregious play was made, that person would immediately win “the bonehead play of the day award.”

This was all in good fun, though one colleague who is now at Rutgers used to get a little bit worked up about it. It was also a regular reminder that in bridge, as in other games of skill, mostly outcomes are determined by errors when the players themselves are definitely not experts, especially when measured from an expert level. Errors of this sort are common. In contrast, coming up with the novel good play happens only rarely. And I must say that while this was only contract bridge, since some of the others did play duplicate bridge on occasion this notion of competing with outside determined norms of performance in mind had a certain logic for the group.

I wouldn’t have thought about this at all except for reading James Fallows article, Declaring Victory, in the most recent Atlantic Monthly. In essence he argues that Osama Bin Laden’s strategy all these years has been to be a visible irritant to the U.S. interests, goading the U.S. wherever possible, and hoping that the real damage will be done by the U.S. to itself, as it makes big bonehead plays that perhaps give visceral appeal in light of a terrorist threat but don’t otherwise stand the scrutiny of a careful analysis. Without even mentioning the word “Iraq” ask the simpler question --- what fraction of national income should be spent on security? Does the Al Qaeda threat suggest a big or little change in your answer to that question? Let’s remember that “they win” if their efforts can fundamentally slow down the U.S. economic engine. Fallows’ analysis, and I have to say he argues just as I would on this point, is that we’re way over doing it on Homeland security mostly to give the appearance that we’re doing something, when in fact the best response we could give is to pay little heed to the threat, given that we can’t take them out entirely. If they can’t get our goat, they have to really escalate the terrorism to make their point, and then they’ll alienate their own people in the process.

But that is not how we’re arguing it at home. Again, forget Iraq (it only makes this argument stronger). Instead focus on cost-benefit in thinking through the security issues. How much should we spend? The thing is, nobody is talking about the spending issue. Certainly not this way. At best it comes up in a discussion of the federal deficit. It’s perhaps triply ironic that this particular White House came into power on rhetoric to reduce federal spending (tax cuts were going to be the path to that) but now we’ve essentially go no discipline on the spending side at all when it comes to security. Does that make sense?

It’s almost too easy nowadays to make the case that government frequently makes bonehead plays. What about the private sector? And specifically, what about the Blackboard Patent and the D2L suit. Here’s a post by Albert Essa asking the question of whether Blackboard’s action is rational, and then citing a paper by Julio Robledo that I have yet to read on how patents can act as a strategic entry deterrent.

It turns out that in my former life as an applied theory economist I wrote papers on, among other topics, strategic entry deterrence. Here is one example of my bona fides on that. So on the econ modeling part, I know what I’m saying and while there are some differences in flavor from one model to the next, the general conclusion for this entire class of models is that there are some parameter values governing demand and cost under which entry deterrence is the rational strategy for the incumbent, but there are other parameter values under which entry accommodation makes sense. Rationality means that one recognizes in reality which is the appropriate regime and plays the correct strategy accordingly. A bonehead play results when the regime is incorrectly identified and so the strategy is incorrect for the actual circumstance and moreover identifying the correct regime could have happened with the right forethought, but that forethought didn’t happen because the player was looking elsewhere.

I don’t read the blogs as much some others, so I may have missed something, but to date I have not seen a single post from outside the Blackboard company but inside higher ed that argues the D2L law suit is a sensible business action; while on the other hand I have read numerous posts from many different authors about the potential harm for the industry because of the indirect effect via stifling innovation, and I have now talked with several people on campus (for example, people running Moodle servers, though this is not the full group) who have expressed concern because they are now uncertain of their own future running this type of software. That there is substantial concern would be an understatement.

That said, I’m not nearly as skilled in this circumstance as my colleague who tutored us in bridge was, so I’m not confident either way whether what we’re seeing now is rational or a bonehead play by Blackboard. But I do know enough about economics to understand that goodwill is a non-tangible asset with real market value and it is not hard for me to see that under certain assumptions that Blackboard could take a hit in the goodwill department beyond what it ever might recover in royalties and deterrence benefits. I really do hope somebody is working through those cost-benefit calculations.

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