When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants (15 page)

Some opponents became suspicious of how a certain player was playing. He seemed to know what the opponents’ hole cards were. The suspicious players provided examples
of these hands, which were so outrageous that virtually all serious poker players were convinced that cheating had occurred. One of the players who’d been cheated requested that Absolute Poker provide hand histories from the tournament (which is standard practice for online sites). In this case, Absolute Poker “accidentally” did not send the usual hand histories, but instead sent a file that contained all sorts of private information that the poker site would never release. The file contained every player’s hole cards, observations of the tables, and even the IP addresses of every person playing. (I put “accidentally” in quotes because the mistake seems like too great a coincidence when you learn what followed.) I suspect that someone at Absolute knew about the cheating and how it happened, and was acting as a whistle-blower by sending these data. If that is the case, I hope whoever “accidentally” sent the file gets their proper hero’s welcome in the end.

Then the poker players went to work analyzing the data—not the hand histories themselves, but other, more subtle information contained in the file. What these players-turned-detectives noticed was that, starting with the third hand of the tournament, there was an observer who watched every subsequent hand played by the cheater. (For those of you who don’t know much about online poker, anyone who wants can observe a particular table, although, of course, the observers can’t see any of the players’ hole cards.) Interestingly, the cheater folded the first two hands before this
observer showed up, then did not fold a single hand before the flop for the next twenty minutes, and then folded his hand pre-flop when another player had a pair of kings as hole cards! This sort of cheating went on throughout the tournament.

So the poker detectives turned their attention to this observer. They traced the observer’s IP address and account name to the same set of servers that host Absolute Poker, and also, apparently, to a particular individual who seems to be employed by Absolute Poker! If all of this is correct, it shows exactly how the cheating would have transpired: an insider at the website had real-time access to all of the hole cards (it is not hard to believe that this capability would exist) and was relaying this information to an outside accomplice.

Online poker is a game of trust—players send their money to a site believing that they will be playing a fair game, and trusting that the site will send them their winnings. If there is even a little bit of uncertainty about either one of those factors, there is no good reason for a player to choose that site over the many close substitutes that exist. If I ran Absolute Poker, I would take a lesson from past corporate attempts at cover-ups, sacrifice the cheaters, and institute safeguards to prevent this ever happening again.

The real lesson of this all, however, is probably the following: guys who aren’t that smart will figure out ways to cheat. And, with a little luck and the right data, folks who are a lot smarter will catch them doing it.

Update: According to
The Washington Post,
Absolute Poker ultimately acknowledged it “found a breach in its software and is investigating.” Shortly thereafter, the company “informs players that a high-ranking consultant in its Costa Rica office breached its software and spied on competitors’ hands . . . But in a move that angers players, it refuses to identify the cheater or turn him over to authorities.” Absolute Poker was later fined by a gaming commission but was allowed to keep its license. Meanwhile, according to the
Post,
“a new cheating scandal surfaces at sister site of Absolute Poker, UltimateBet.com.” UltimateBet would later acknowledge insider cheating and pay more than $6 million in refunds—but, again, it was allowed to pay a fine and keep its license.

Neither
Tom Daschle
nor
Nancy Killefer
will be joining the Obama administration. Their nominations were both undone by their failure to pay taxes. Tim Geithner, meanwhile, was recently confirmed at treasury secretary
despite his own tax failures
.

Good God: What does it say about the U.S. tax code that people like Geithner, Daschle, and Killefer haven’t properly paid their taxes?

(By “people like” them, I mean people who are smart and accomplished, have been through many application and vetting
processes in their careers, and above all have reason to comply with tax paying.)

Here, let’s make it a quiz:

        
a. If all three of them were intentionally cheating (and getting away with it until high-level scrutiny), then it’s much too easy to cheat on taxes.

        
b. If all of them made honest mistakes, then the tax code simply isn’t working.

        
c. If there’s some combination of cheating and mistakes, then it’s too easy to cheat and the tax code isn’t working.

I’d vote for C. We
once wrote a column about tax cheating
which included this passage:

The first thing to remember is that the IRS doesn’t write the tax code. The agency is quick to point its finger at the true villain: “In the United States, the Congress passes tax laws and requires taxpayers to comply,” its mission statement says. “The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.”

So the IRS is like a street cop or, more precisely, the biggest fleet of street cops in the world, who are asked to enforce laws written by a few hundred people on behalf of a few hundred million people, a great
many of whom find these laws too complex, too expensive and unfair.

Maybe the gross embarrassment over these high-profile tax failures will at least spur some tax-code sanity—like
the Simple Return
, promoted by the economist Austan Goolsbee, who
has Obama’s ear
.

People like Daschle wouldn’t fill out the Simple Return, but it might free up the IRS to catch tax violations before the Senate confirmation hearings flush them out.

A
USA Today
investigation found what appears to be
compelling evidence
of teacher cheating in Washington, D.C., schools that were heralded as major successes due to test-score increases. The smoking gun: too many erasures resulting in answers being changed from wrong to right. The numbers are so extreme that they do seem to indicate that massive cheating occurred. Not surprisingly, the school district is none too eager to investigate—especially because teachers at the schools were given big bonuses as rewards for the test-score improvement. Though on Tuesday, acting D.C. schools chancellor Kaya Henderson did
request a review
.

When Brian Jacob and I investigated teacher cheating in Chicago schools, which we described in
Freakonomics,
we
didn’t use erasure analysis. Rather, we developed new tools for identifying strings of unlikely answers.

You might ask why we didn’t use erasures, when it is such an obvious approach. The answer: unlike the D.C. schools, the Chicago schools did not farm out grading of the test exams to a third party. What got the D.C. schools in trouble is that the third party routinely analyzed erasure patterns. The internal group that scored the exams in Chicago did not routinely look for erasures; that was only done when there were suspicions about particular classrooms.

Conveniently, there was an acute shortage of storage space in the Chicago warehouse where the test forms were graded. This, of course, necessitated that all the actual test forms be destroyed and disposed of shortly after the test was administered.

Some teachers in D.C. are surely wishing there had been a similar lack of storage space in our nation’s capital.

I hardly ever drive anymore since I moved close to where I work. So whenever I do, the incivility on the roads leaps out at me. People do things in cars they would never do in other settings. Honking. Swearing. Cutting to the front of the line. And that is just my sister. The other drivers are far meaner.

One obvious reason is that you don’t have to live with the
consequences for any length of time. If you cut in line at airport security, you will be in close proximity for quite some time to the people you insulted. With a car, you make a quick getaway. Making that getaway also means you are unlikely to be physically beaten, whereas giving someone the finger as you walk down the sidewalk has no such safety.

When I used to commute, there was one particular interchange where incivility ruled. (For those who know Chicago, it is where the Dan Ryan feeds into the Eisenhower.) There are two lanes when you exit the highway. One lane goes to another highway, the other goes to a surface street. Hardly anyone ever wants to go to that surface street. There can be a half-mile backup of cars waiting patiently to get on the highway, and about 20 percent of the drivers rudely and illegally cut in at the last second after pretending they are heading toward the surface street. Every honest person that waits in line is delayed fifteen minutes or more because of the cheaters.

Social scientists sometimes talk about the concept of “identity.” It is the idea that you have a particular vision of the kind of person you are, and you feel awful when you do things that are out of line with that vision. That leads you to take actions that are seemingly not in your short-run best interest. In economics, George Akerlof and Rachel Kranton popularized the idea. I had read their papers, but in general have such a weak sense of identity that I never really understood what they were talking about. The first time I really got what they meant was when I realized that a key part of
my identity was that I was not the kind of person who would cut in line to shorten my commute, even though it would be easy to do so, and seemed crazy to wait for fifteen minutes in this long line. But if I were to cut in line, I would have to fundamentally rethink the kind of person I was.

The fact that I don’t mind when my taxi driver cuts in these lines (actually, I kind of enjoy it) probably shows that I have a long ways to go in my moral development.

All this is actually just a rambling prelude to my main point. I was in New York City the other day and my taxi driver bypassed a long line of cars exiting the freeway to cut in at the last second. As usual, I enjoyed being an innocent bystander/beneficiary to this little crime. But what happened next was even more gratifying to the economist in me. A police officer was standing in the middle of the road, waving over to the shoulder every car that cut in line, where a second officer was handing out tickets like an assembly line. By my rough estimate, these two officers were giving out thirty tickets an hour at $115 a pop. At over $1,500 per officer per hour (assuming the tickets get paid), this was a fantastic moneymaking proposition for the city. And it nails just the right people. Speeding doesn’t really hurt other people very much, except indirectly. So to my mind it makes much more sense to go directly after the mean-spirited behavior like cutting in line. This is very much in the spirit of New York police commissioner Bill Bratton’s “broken windows” policing philosophy. I’m not sure it cuts down the number of cheaters on the roads in any fundamental way since the
probability of getting caught remains vanishingly small. Still, the beauty of it is that 1) every driver that follows the rules feels a rush of glee over the rude drivers getting nailed; and 2) it is a very efficient way of taxing bad behavior.

So my policy recommendation to police departments across the country is to find the spots on the roads that lend themselves to this sort of policing and let the fun begin.

©iStock.com/ottoflick

Raise your hand if you are in favor of wasting natural resources, wiping out wildlife, and killing off the best planet ever. Just as we thought—not a lot of hands in the air. Therefore, just about any idea to protect the environment is considered a good idea. But the numbers often tell a different story.

My colleague and co-author
John List
is one of the most prolific and influential economists around.

He’s got
a new working paper
with Michael Margolis and Daniel Osgood that makes the surprising claim that the
Endangered Species Act—which is designed to help endangered species—may actually harm them.

Why? The key intuition is that after a species is designated as endangered, a decision has to be made about the geographic areas that will be considered critical habitats for that species. An initial set of boundaries is made, after which there are public hearings, and eventually a final decision on what land will be protected. In the meantime, while this debate is ongoing, there are strong incentives for private parties to try to develop land that they fear they may in the future be prevented from developing by the endangered species status. So in the short run, destruction of habitat is likely to actually increase.

Based on this theory, List et al. analyze the
data for the cactus ferruginous pygmy owl
near Tucson, Arizona. Indeed, they find that land development speeds up substantially in the areas that are going to be designated critical habitats.

This result, combined with the economist Sam Peltzman’s observation that
only 39 of the 1,300 species
put on the endangered species list have ever been removed, do not paint a very optimistic picture of the efficacy of the Endangered Species Act.

When it comes to saving the environment, things are often not as simple as they seem at first blush.

Take, for instance, the debate about
paper bags versus plastic bags
. For a number of years, anyone who opted for plastic bags at the grocery store risked the scorn of environmentalists. Now it seems that the consensus has swung the other direction, once a more careful cost accounting is done.

The same sort of uncertainty hangs over the choice of
disposable diapers vs. cloth diapers
.

At least some choices are beyond reproach environmentally. It is clearly better for the environment if someone walks to the corner store instead of drives, right?

Now even this seemingly obvious conclusion is being called into question by Chris Goodall, via John Tierney’s
New York Times
blog
. And Goodall is no right-wing nut; he is an environmentalist and author of the book
How to Live a Low-Carbon Life.

Tierney writes:

If you walk 1.5 miles, Mr. Goodall calculates, and replace those calories by drinking about a cup of milk, the greenhouse emissions connected with that milk (like methane from the dairy farm and carbon dioxide from the delivery truck) are just about equal to the emissions from a typical car making the same trip. And if there were two of you making the trip, then the car would definitely be the more planet-friendly way to go.

We made some ice cream at home last weekend. Someone had given one of the kids an ice cream maker a while ago and we finally got around to using it. We decided to make orange sherbet. It took a pretty long time and it didn’t taste very good but the worst part was how expensive it was. We spent about twelve dollars on heavy cream, half-and-half, orange juice, and food coloring—the only ingredient we already had was sugar—to make a quart of ice cream. For the same price, we could have bought at least a gallon (four times the amount) of much better orange sherbet. In the end, we wound up throwing away about three-quarters of what we made. Which means we spent twelve dollars, not counting labor or electricity or capital costs (somebody bought the machine, even if we didn’t) for roughly three scoops of lousy ice cream.

As
we have written before
, it is a curious fact of modern life that one person’s labor is another’s leisure. Every day there are millions of people who cook and sew and farm for a living—and there are millions more who cook (probably in nicer kitchens) and sew (or knit or crochet) and farm (or garden) because they love to do so. Is this sensible? If people are satisfying their preferences, who cares if it costs them twenty dollars to produce a single cherry tomato (or twelve dollars for a few scoops of ice cream)?

This is the question that came to mind the other day
when we received an e-mail from a reader named Amy Kormendy:

I e-mailed Michael Pollan recently to ask him this question, and nice guy that he is, he promptly answered “Good question, I don’t really know” and suggested I pose it to you good folks:

Wouldn’t it be more resource-intensive for us all to raise our own food than if we paid an expert to raise lots of food that s/he could sell to us? Couldn’t it therefore be more sustainable to purchase food from large professional producers?

Some of Professor Pollan’s advice seems to be that we would be better off as a society if we did more for ourselves (especially growing our own food). But I can’t help but think that the economies of scale and division of labor inherent in modern industrial agriculture would still render the greatest efficiencies in resource investment. The extra benefit of growing your own food only works out if you count the unquantifiables such as the sense of accomplishment, learning, exercise, suntan, etc.

I very much understand the
locavore
instinct. To eat locally grown food or, even better, food that you’ve grown yourself, seems as if it should be 1) more delicious; 2) more nutritious; 3) cheaper; and 4) better for the environment. But is it?

1.    “Deliciousness” is subjective. But one obvious point is that no one person can grow or produce all the things she would like to eat. As a kid who grew up on a small farm, I can tell you that after I had my fill of corn and asparagus and raspberries, all I really wanted was a Big Mac.

2.    There’s a lot to be said for the nutritional value of homegrown food. But again, since one person can grow only so much variety, there are bound to be big nutritional gaps in her diet that will need to be filled in.

3.    Is it cheaper to grow your own food? It’s not impossible but, as my little ice cream story above illustrates, there are huge inefficiencies at work here. Pretend that instead of just me making ice cream last weekend, it was all one hundred people who live in my building. Now we’ve collectively spent $1,200 to each have a few scoops of ice cream. Let’s say you decide to plant a big vegetable garden this year to save money. Now factor in everything you need to buy to make it happen—the seeds, fertilizer, sprout cups, twine, tools, etc.—along with the transportation costs and the opportunity cost. Are you sure you really saved money by growing your own zucchini and corn? And what if a thousand of your neighbors did the same? Or here’s another, non-food example: building your own home from scratch versus buying a prefab home. With a site-built home, you need to invest in all the tools, material, labor, and transportation costs to make it happen, and the myriad inefficiencies of having dozens of workmen’s
pickup trucks retrace the same route hundreds of times all for the sake of erecting one family’s home—whereas factory-built homes create the opportunity for huge efficiencies by bundling labor, materials, transportation, etc.

4.    But growing your own food has to be good for the environment, right? Well, keeping in mind the transportation inefficiencies mentioned above, consider the “food miles” argument and a recent article in
Environmental Science and Technology
by Christopher L. Weber and H. Scott Matthews of Carnegie Mellon
:

We find that although food is transported long distances in general (1640 km delivery and 6760 km life-cycle supply chain on average) the GHG [greenhouse gas] emissions associated with food are dominated by the production phase, contributing 83% of the average U.S. household’s 8.1 t CO2e/yr footprint for food consumption. Transportation as a whole represents only 11% of life-cycle GHG emissions, and final delivery from producer to retail contributes only 4%. Different food groups exhibit a large range in GHG-intensity; on average, red meat is around 150% more GHG-intensive than chicken or fish. Thus, we suggest that dietary shift can be a more effective means of lowering an average household’s food-related climate footprint than “buying local.” Shifting less than one day per week’s worth of calories from red meat and dairy products to chicken, fish, eggs, or a vegetable-based
diet achieves more GHG reduction than buying all locally sourced food.

This is a pretty strong argument against the perceived environmental and economic benefits of locavore behavior—mostly because Weber and Matthews identify the fact that is nearly always overlooked in such arguments: specialization is ruthlessly efficient. Which means less transportation, lower prices—and, in most cases, far more variety, which in my book means more deliciousness and more nutrition. The same store where I blew twelve dollars on ice cream ingredients will happily sell me ice cream in many flavors, dietetic options, and price points.

Whereas I am now stuck with about 99 percent of the food coloring I bought, which will probably sit in the cupboard until I die (hopefully not soon).

One of the hottest topics among businesspeople is how to increase profits by being environmentally friendly. There are many ways to achieve this. At hotels, for instance, by not automatically washing towels during a guest’s stay, the hotel saves both money and the environment. Green innovations can be featured in advertising campaigns to attract customers. Another potential benefit of “going green” is
that it makes environmentally minded employees happy, increasing their loyalty to the firm.

A Berlin brothel has hit on another way to use environmental arguments to its benefit: price discrimination. As Mary MacPherson Lane
writes in an AP article
:

The bordellos in the capital of Germany, where prostitution is legal, have seen business suffer with the global financial crisis. Patrons have become more frugal and there are fewer potential customers coming to the city for business trips and conferences.

But Maison d’Envie has seen its business begin to return since it began offering the euro 5 ($7.50) discount in July . . .

To qualify, customers must show the receptionist either a bicycle padlock key or proof they used public transit to get to the neighborhood. That knocks the price for 45 minutes in a room, for example, to euro 65 from euro 70.

Although the brothel says the reason for the price discount is that it wants to be environmentally conscious, it sure looks to me like the brothel is dressing up some good old-fashioned price discrimination arguments in a green disguise.

Customers who come by bus or bicycle are likely to have lower incomes and be more price-sensitive than those who arrive by car. If that is the case, the brothel would like to
charge such customers lower prices than the richer ones. The difficulty is that, without a justifiable rationale, the rich customers would be angry if the brothel tried to charge them more (and indeed, how in general, would the brothel know who is rich?). The environmental argument gives the brothel cover for doing what it always wanted to do anyway.

I was drinking Tropicana orange juice this morning. The company has a clever marketing campaign. If you go to its website and type in the code on the Tropicana carton, they will set aside one hundred square feet of rain forest to preserve on your behalf.

What’s clever about this?

I think corporations do not exploit the opportunities to bundle consumption of their products with contributions to charity as much as they probably should. I have no quantitative evidence on this; it is just a hunch. Typically, though, these sorts of corporate offers come in the form of “We will donate 3 percent of profits to X.” The share of profits is usually small, which doesn’t make the corporation seem generous.

The beauty of the rain forest offer is that one hundred square feet seems like a lot. Once you think about it, it isn’t really much at all, but it sounds big. And if you are used to
thinking about prices of land in cities, one hundred square feet could be expensive.

By my rough calculations, where I live it would cost about $130 to buy one hundred square feet of land you could build on. Land is cheap in the Amazon, however. Some online sites say that for $100, they will set aside an acre of land in the Amazon for you.

So probably, the true cost to Tropicana of an acre of Amazon land is half of that, or fifty dollars. Given the number of square feet in an acre, I calculate that the land my daughter saved in the Amazon this morning was worth about eleven cents. When I asked my daughter how much she thought the land was worth, she said twenty dollars. When I asked a friend, he guessed five dollars. Whenever a company can give away something worth eleven cents that people think is worth five or twenty dollars, they are doing something right.