19 Aug 2010

Does a Bad Bet Become Good, When the Stakes Are Raised?

Economics, Financial Economics 8 Comments

Suppose you were at the casino and you were playing the minimum $10 bet at a Blackjack table. You get a 6 and your heart sinks. The dealer gives himself an Queen and you feel particularly devastated. But then your next card is a 4. You are so giddy you’re about to double down.

The guy to your left is a sharp whiz kid who knows all the right people and goes to all the cool parties. He tells you authoritatively, “Dude, you don’t want to double that against a dealer 10, at least if you’re playing Basic Strategy. You haven’t been counting cards I take it?”

You sheepishly agree and pull back your $10 chip.

But then you are stunned to see that the whiz kid slides forward another $500 chip to double his own bet. He has a 7 and a 3.

You ask him what he’s doing, and he explains, “Oh, I just lost my job. So it’s really important for me to walk out of here with a lot of money today.”

If you enjoyed that story, you might like this analysis of occupational licensing from Matt Yglesias (HT2 Alex Tabarrok):

A number of people, including many commenters here and even alleged conservative James Joyner think you should need a professional license to become a barber because you might hurt someone with a straight razor. Uh huh. At best this would be an argument for regulating people who do shaves with a straight razor, which would be considerably narrower than current comprehensive regulation of hair stylists.

Meanwhile, though “torts and the free market will take care of it” isn’t the answer to everything, it’s surely the answer to some things. Getting some kind of training before you shave a dude with a straight razor is obviously desirable in terms of strict self-interest. If you screw it up in a serious way, you’ll face serious personal consequences and the only way to make money doing it—and we’re talking about a very modest sum of money—is to do it properly. People also ought to try to think twice about whether their views are being driven by pure status quo bias. Barbers are totally unregulated in the United Kingdom, is there some social crisis resulting from this? Barber regulations differ from state to state, are the stricter states experiencing some kind of important public health gains?

Last you really do need to look at how these things play out in practice. If you just assume optimal implementation of regulation, then regulation always looks good. But as I noted in the initial post the way this works in practice is the boards are dominated by incumbent practitioners looking to limit supply. One result is that in Michigan (and perhaps elsewhere) it’s hard for ex-convicts to get barber licenses which harms the public interest not only by raising the cost of haircuts, but by preventing people from making a legitimate living. States generally don’t grant reciprocity to other states’ licensing boards, which limits supply even though no rational person worries about state-to-state variance in barber licensing when they move to a New Place. In New Jersey, you need to take the straight razor shaving test to cut women’s hair because they’re thinking up arbitrary ways to incrementally raise the barrier to entry.

In principle, you could deal with all these problems piecemeal. But realistically this sort of problem is inevitably going to arise when you pit the concentrated interest of incumbent haircutters against the diffuse interest of consumers. It’s hard enough to make sure that really important regulatory functions related to environmental protection, public safety, and financial stability are done properly.

8 Responses to “Does a Bad Bet Become Good, When the Stakes Are Raised?”

  1. Daniel Hewitt says:

    I read this last night at MR. What’s really incredible is the fact that Matt Yglesias wrote it. Maybe there is hope for him after all.

    I’m sure his fellow progressives are disgusted with him.

  2. English Bob says:

    Oh God. I made the mistake of reading the comments on Matt’s blog.

    Apparently he’s completely wrong because you can pick up the yellow pages and easily find a barber. Oh, and you can get a haircut x dollars, which is obviously a fair price.

    Where to begin… where to begin….

    • English Bob says:

      …get a haircut for x dollars

  3. Matt Flipago says:

    The opposite is true a good bet can become bad when the stakes are raised. And so is the original question, given the option of bankruptcy.

  4. Gene Callahan says:

    Of course a bad bet can become good by raising the stakes — let’s say you somehow know that you DO have a winning hand, but you’d have to drive to the casino to play it — then if your bet will be too smal, it’s bad to place, but once you recoup the cost of the drive, you win.

    And this, of course, is the way Yglesias is looking at it. He obviously thinks government regulation can make us (somewhat) safer — if you’re going to do internal critique, you must grant him his premises! — but that it has significan costs as well. So, per Yglesias, it makes sense to incur those costs when the danger is a slit throat, but not when the danger is an uneven crewcut. It’s a lot like doing a thorough background check when you hire a new nanny, but not when you hire a new guy to trim the hedges.

    (And I’m not arguing the regulations DO work, OK, you commentators who are about to start arguing that point. I’m just saying Yglesias’s argument is internally consistent, and he’s not committing the blunder in rationality that Bob implies he is.)


    • bobmurphy says:

      I’m sure that’s what he thinks he’s doing, Gene, but look at his arguments. To adapt it to your background check example, suppose Yglesias said, “Don’t bother with background checks on hedge trimmers, because in practice the services you would call, get more in kickbacks from the hedge trimmers than they earn from giving good advice.”

      So it’s an open question why that same pitfall doesn’t apply to nannies.

      Same thing with financial regulation etc. Why does Yglesias’ argument not scale up? Don’t guys on Wall Street have a big advantage against “the public” when it comes to influencing the SEC etc.?

      I think Yglesias imagines that he and Ezra Klein keep the bureaucrats honest, but they only have 24 hours a day in which to blog. So they can save us from Wall Street and oil spills, but not from Sweeney Todd.

      (I’m not kidding, btw. I really think a crucial plank in Yglesias’ argument is that “the system” can make regulation work for a few big-ticket items where people really care, but it’s too exhausting to do it for every little thing.)

    • Daniel Hewitt says:

      He does more than acknowledge costs. He acknowledges the reality of regulatory capture, ie. having the whole thing backfire.

      In addition to making a great argument against regulating barbers, Yglesias punches a giant hole in his argument to regulate banks.

  5. Matt Flipago says:

    Ohh and don’t get me started on the amount of terrible things could happen if the government doesn’t start regulating the coffee industry. Numerous personal injuries from drinks being to hot, chemical poisoning for improperly clean espresso machines, rancid milk, some one could literally die if given caffeinated coffee and not decaf, risk to fetuses and children, numerous food regulation that goes unchecked, plus coffee affects half of Americans numerous times a day, all well we need to make sure that people can have a decent level of coffee quality in this tens of billions of dollar industry. Ask any coffee lover their coffee is EXTRAORDINARILY important, and all people must be drink quality coffee, poor people who don’t care about coffee as well need to as well. THAT IS A NATIONAL PUBLIC SAFETY ISSUE FAR MORE IMPORTANT THE BARBER LICENSING. If you disagree it’s probably because you’ve never talked to a coffee producer expect in a business transaction.