Coordination Schemes Are Capital Investments

Second post in the Coordination Frontier sequence. Intro is here.

Once upon a time, we didn’t have money, or auctions, or markets. We didn’t have the concept of voting (let alone distinctions between first-past-the-post, or approval voting). We didn’t have banks or stock trading. We didn’t have Kickstarter.

We had to haggle over everything, which cost time. And it fundamentally limited the scale at which we could accomplish things. If a transaction cost exceeds the value of a trade, that trade can’t happen. [edit: arguably false, see discussion in comments, but fortunately not that cruxy for the rest of the post]

Once upon a time, someone had to be the first person to invent each of these concepts. The people around them were probably vaguely annoyed at having to learn a new thing. Many of the concepts required multiple building blocks and took thousands of years to reach saturation.

If you are happen to be around a lot of people around who:

  1. geek out about coordination schemes, and

  2. have an entrepreneurial bent

Then a really valuable thing you can do is explore new coordination schemes, while making an effort to distill them down into something the general population might actually be able to use.

This is hard. There are lots of failure modes. But, coordination schemes are a key thing that makes humanity powerful. Pushing the state-of-the-art forward is valuable.

With that in mind, let’s explore some examples and concepts.

Examples: Negotiation Technology

Second Price Auctions

I remember the first time I got the results of a second-price auction. It felt like magic. Instead of arguing for hours about who got which room in a new apartment, I just wrote down my true preference for how much I was willing to pay for each room. Then I automagically got assigned a room that was cheaper than I had been willing to pay for it. (In a second price auction, each participant submits a sealed bid, and then person who bid highest pays the second-highest bid)

At previous apartments, we had just eyeballed the size of each room, and then came up with rent-allocations for each room that had vaguely round, fair-sounding numbers, and then picked rooms. It was chaotic, and didn’t have a good way to account for some people valuing particular rooms for subtle, personal reasons.

Second price auction was an important, conceptual advance. But it’s not very popular in broader society. Why?

At my first second-price auction, someone had to patiently explain it to me before I trusted it. I’m not sure I actually did trust it until after everything had been resolved. Beforehand, it felt overcomplicated and I was sort of annoyed that we weren’t just eyeballing the rooms and winging it with nice round numbers. The explanation process took awhile, and I’m not 100% sure the marginal improvements in fairness/​efficiency were worth it.

Thinking about how much I valued each room was actually pretty hard. “How much do I value something” is a skill that I had never really used – I never needed to. I just needed to eyeball a price and think “Worth it? or not worth it.”

Still, I think this was clearly worthwhile. Because later, I got to use second price auctions in other situations. I went in having a clear understanding of how it worked. I had developed some skill of evaluating how much things were worth to me. I got all of the magical “it just works” feeling and none of the stress.

Other Formats

More recently, I was having a different sort of negotiation (over how much to sell someone some used exercise equipment for). They proposed a negotiation scheme intended to sidestep the haggling.

The premise was: we each privately note down our true value for the object, then reveal simultaneously. If their value was higher than mine, we’d make the trade for the midpoint between those two values. Otherwise, there is no deal.

At the time, I didn’t quite understand the principles that were underlying this. I was somewhat stressed out about unrelated things. I wasn’t sure what my true value was, or how to figure it out. I had a vague expectation that I was supposed to do something strategic but I wasn’t sure what. (It turns out this was in fact false)

I felt slightly annoyed at the proposed system, and thought to myself “Well, I’ll just try this out and if it doesn’t work we can haggle normally afterwards.” I didn’t put much effort into figuring out my true value of the item.

I ended up choosing a number that was too high.

I tried to haggle more, and then my partner said “no, sorry the whole point was to replace the haggling process.”

So, the deal didn’t go through.

Shortly afterwards I realized that the whole scheme depended on precommitment not to make further deals, to incentivize us to give reasonable numbers. Alas, it was too late for realizing it to matter.

I later sold the item on craigslist, costing me a bit of time I might not have needed to spend.


Once, I moved into a house with three friends. We were all veterans of second-price auctions. But, in this case, it was overdetermined who would need each room:

  • One room was huge, and it only made sense for me and my girlfriend to live there.

  • One room was teeny, and it only made sense for the poorest roommate to live there.

  • One room was medium, and obviously made sense for our fourth roommate to live there.

I’m not sure if there was an ideal, mathematical solution here. But we spent a couple hours talking about what to do. It seemed to be a zero-sum-negotiation where everything was predetermined except exactly how much rent we could extract from each other, and we didn’t know how to do that fairly. We each cared about not screwing over each other, but didn’t know how.

After an hour of arguing, I proposed “Wait, can we each just write down on a napkin how much we think each room should cost, and then reveal simultaneously? Maybe we all just secretly agree on the obvious distribution of rent and we don’t have to debate”.

People were skeptical. But then we did that. And then it turned out, everyone wrote a higher number for their room than the other three people had written. Meaning everyone got to pay a lower price for their room than they thought was fair. (And meanwhile, our numbers for each room were indeed pretty similar to each other)

I’m not 100% sure what happened next – probably we eyeballed the numbers and then picked some round numbers that were cheaper than everyone had been expecting to pay.

But it felt magical. It depended on a lot of trust in the group. I think it might also have somehow been subtly informed by our previous experience with second-price-auctions.

Life Lessons

There’s not a single-definitive-moral here. But, possible morals include:

  • Coordination schemes are capital investments. It’s more work to use a new one, but once everyone in your ingroup has paid the upfront cost of understanding it, you get to use it over and over again.

  • Being able to use a scheme, explain a scheme, and convince people of a scheme, are separate skills.

  • The Skill-Of-Understanding-New-Coordination Schemes is also a capital investment. If you get good at understanding new systems when they’re presented to you, you can reap the efficiency and fairness benefits immediately. (Corollary: gears-level understanding of coordination schemes are particularly valuable capital investments because they help you understand other nearby concepts)

  • Coordination is cognition-constrained. It’s often bottlenecked on the least sophisticated person. If one person doesn’t get it, and needs to have it patiently explained to them, the increased efficiency might not be worth it in that instance. (But it might be worth it for future iterations, if you expect to negotiate with those people again in the future).

  • Some skills generalize across coordination schemes. In particular, the skill of “figure out how much you actually value something so you can make intelligent choices about how to bid for it” is going to come up in lots of different negotiation systems.

  • If you’re a game theory nerd, you may continuously find yourself on the coordination frontier. You may be forever having to patiently explain to people why they are leaving value on the table (for them, and/​or for you). Or, sadly watching that value disappear. Alas. I recommend learning to grieve for it and accept it to some degree. But, also:

  • The skill of Explaining and Leading new coordination schemes is a very valuable capital investment. If you constantly are noticing that there are more efficient ways people could be doing things, you should probably invest in communication skills and leadership skills to actually help enact those schemes. (Related: Coordination as a Scarce Resource)

  • Sometimes, you can get most of the value just by eyeballing it and going with your gut. Shrug. Knowing when to do that is one of the relevant coordination skills. If you’re trying to learn coordination-leadership, make sure not to lose sight of this. I’ve known many a nerd who was too attached to the dream of perfect efficiency and didn’t notice it was coming at the expense of actually being more efficient in the current case.

High Level Takeaways

I think this all distills into two high level lessons, for two different target audiences:

For people vaguely annoyed at new complicated-seeming coordination plans:

Even if a scheme seems more complex-than-it’s-worth right now, consider whether you’ll get to keep using it again in the future. See if you can get excited about that future value, and channel that into willingness to learn.

The engineers pitching complicated schemes at you may not be very good at explaining them. Try to ask questions that help you understand the underlying principles, so you can learn similar systems in the future.

Perhaps also: try to ask questions that help the engineers get better at explaining things. (Especially if the engineer is your friend or colleague that you expect to work with for awhile)

For people who love designing coordination systems:

Be aware: you are not your audience.

The curse of many-an-engineer is to have poor insight into what their users actually want. Engineers overestimate how much complexity they can handle. If you spend a lot of time thinking about coordination theory, you may take a lot of skills and concepts for granted that others barely understand.

Your brilliant system might easily take more time to explain than it saves in generating value (in any given instance). So, if you want to actually be adding value to the world, it either needs to be the case that…

  1. You’re actually going to use it multiple times with a given group, and therefore it’s worth the upfront cost of everyone learning it.

  2. The current use-case is a pretty big deal. i.e. if thousands of dollars are at stake, it’s worth a few hours to optimize them. If a hundred dollars are at stake, it may not be.

  3. You’re going to use similar schemes with the same group, such that teaching people the underlying principles/​skills is a worthwhile investment. (In this case, it’s maybe worth more time to distill out those key skills, or reflect on what the future situations might be like so you can optimize for something more generalizable)

  4. You personally (or, the broader world) will benefit from implementing similar schemes in the future. Or, you expect to learn from the process which results in better schemes in the future, even if this particular group isn’t going to use them. In this case, recognize that you’re expecting to gain value from other people’s efforts, and it might be worth thinking of it more as a trade (where you offer them something in return for them putting extra time into learning the system)

A particular failure mode to avoid is when a system is easier for you, but not actually easier for others, and to not mistake “it’s easier for me” with “actually net valuable for people who don’t have my background knowledge.”

A particular success mode to be in is to use novel coordination schemes as a way to build up the skills of people around you and make them better off longterm. But I think this requires a particular outlook, which doesn’t come automatically.