Tuesday, July 31, 2007

Kling agrees that prediction markets outperform surveys

Suppose that instead of ratings, you asked consumers to vote with dollars. For any movie, a consumer who owns the movie can post an "ask" price and a consumer who does not own the movie can post a "bid" price. To ensure that these prices are real, every once in a while, you would fill all the orders for a particular customer--that is, you would buy the consumers' DVD's at her asking prices and sell her DVD's at her bid prices.
Welcome to the club, Arnold.

Remembering Bill Walsh

I've admired Walsh since the 80s. He changed the game with the precision passing strategy, which led to a bunch of rings. He made a lot of players look great, who never looked as good with other programs. He didn't talk trash, but worked with consistent class. And he stayed faithful to his wife, in her health and sickness. Here's Nick Carfado:
LOS ANGELES -- There were hundreds of people closer to Bill Walsh than this reporter, but in our many conversations over a four- or five-year stretch it was evident how much Walsh loved baseball.

"How are those Red Sox doing?" the legendary coach of the 49ers asked me a couple of years ago. "I like Terry Francona's style. Does a good job with the players doesn't he? They really respond to him. That's what coaching and managing is all about. Do your players listen to you? Do they respond to what you're trying to do? You can tell how a team responds to a leader even from afar."

So Walsh, who died yesterday at age 75 after a long battle with leukemia, would have loved today, and what it could mean for the sport.

In his later years, when he worked at Stanford and took care of his wife, Geri, who was ill, Walsh was interested in all sports.

He loved to watch great players in any sport and he admired excellent coaching or managing, though I remember being chastised for referring to him as a genius. "That's Einstein, not a football coach," he said. "A football coach isn't a genius. He's just a football coach."

Because there weren't often trades in football, Walsh was always fascinated by the art of the deal. He was a big Red Auerbach fan for that reason.

Walsh was a great coach. "The Genius" would have enjoyed this day in baseball.

UPDATE: Additional quotes:
"In the recent or modern history of the NFL," said Baltimore Ravens Coach Brian Billick, "no coach has been more influential and innovative than Bill Walsh."

"The offensive philosophy that he installed in those great 49er teams more than 25 years ago will remain his legacy," said another Hall of Fame coach, Don Shula.

"People use the word genius and we usually scoff at that," John Madden, the Hall of Fame coach with the Oakland Raiders and longtime NFL broadcaster and analyst, said yesterday. "In his case, I don't think you can scoff at it."
Allen Barra has more:
It was as a teacher, though, that Mr. Walsh had his greatest and most lasting influence on football. Unlike Lombardi, who left worshippers but no disciples, Mr. Walsh spawned an entire generation of acolytes. His defensive coordinator George Seifert won two Super Bowls with San Francisco; his offensive coordinator Mike Holmgren won one with Green Bay. Mr. Seifert's pupil Mike Shanahan, schooled in Mr. Walsh's methods, won two more with Denver.

Mr. Walsh's influence on football today is so pervasive that nearly 20 years after his final game, the Super Bowl has practically become an annual showcase for his adherents. This past February, Indianapolis coach Tony Dungy, a former player under Mr. Walsh, squared off against the Chicago Bears' Lovie Smith, who trained as an assistant to Dennis Green, once a Walsh receiver's coach.

That Messrs. Dungy and Smith were the first African-American coaches to reach the Super Bowl highlights perhaps Mr. Walsh's greatest legacy: In 1987, he helped create the Minority Coaching Fellowship Program. "I can tell you this," says Mr. Dungy, "his life was about much more than just X's and O's."

Wednesday, July 25, 2007

The Dark Matter of Minimum Wage earners

From the continually brilliant Steve Conover:
I went to the US Census Bureau's Statistical Abstract to check the numbers. I found table 634, "Workers Paid Hourly Rates" (see the last table on the list at this page), and could only find 479,000 workers who made the minimum wage in 2005. That's 12,500,000 fewer workers than the lefties' are saying will benefit from the minimum wage hike. (Note that 1.4 million workers were making less than minimum wage; because many jobs are exempted from the minimum, I'm presuming those workers would continue to be unaffected by a minimum wage increase.)
I never made the minimum wage. I was paid less than the minimum wage from ages 14-18, working landscaping, snow shoveling, babysitting, and dishwashing. When I started working for a gift importer after high school, I made almost 20% over minimum wage (but not really, because I often worked more than 8 hours a day, but only got paid for 8 hours per day).

All these jobs helped me make more than minimum wage for more than 2 decades now. I suspect most people who make minimum wage or less, do so for less than 20% of their time in the workforce.

Tuesday, July 24, 2007

Top 10 Reasons this Red Sox fan LIKES THE YANKEES

10. Javier Vazquez sucked, and the Yanks saved the Sox from getting him.

9. Like the ugly rock singer or awkward nerd who gets the girl, the 2004 season undid a lot of self-doubt. Without coming back from 0-3 against the prom king in the ALCS (let's call him Biff, in a tip to Back To The Future), it would not have been nearly as sweet.

8. El Duque sucked, and the Yanks saved the Sox from getting him.

7. George Steinbrenner's sunglasses remind me of Elton John's flaming accessories (based on an idea from my good friend Todd).

6. ARod, Jeter and Bucky Dent are as pretty as Gisele, Brady, and Bridget. DISCLAIMER: I'm getting old, so my standards are slipping.

5. Chen Ming Wang's pitching is scrubbing William Hung's singing off the D-List. Too bad my good friend Fazz throws all these chinese surnames around as if they were euphemisms for private parts. He and FDR would have gotten along great.

4. ARod doesn't suck, but he's overpaid, and the Yanks saved the Sox from getting him.

3. Because of the ARod signing, the Yanks missed out on Schilling. Swap those two, and 2004 ends differently.

2. Roger Clemens totally sucks, and the Yanks saved the Sox from getting him in his geriatric phase. (OK, he was one of the best ever to play the sport, like ...)

1. Mariano Rivera is one of the best ever to play the sport. To play any sport. Any Sox fan who wouldn't have wanted him in a Boston uniform doesn't know the game or a good man.

Steven Pinker's list of dangerous ideas

Here (via Tyler Cowen). A few of them are really discomfiting. Here's a sample of some that might be relevant for prediction markets:
Do women, on average, have a different profile of aptitudes and emotions than men?

Has the state of the environment improved in the last 50 years?

Would the incidence of rape go down if prostitution were legalized?

Do African-American men have higher levels of testosterone, on average, than white men?

Is homosexuality the symptom of an infectious disease?

Do parents have any effect on the character or intelligence of their children?

Would lives be saved if we instituted a free market in organs for transplantation?

Why bears will have a hard time waking up from the dead

Today's WSJ:

Foreign governments, flush with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasurys, are becoming increasingly aggressive players on the equity front.

The new boldness of these government-controlled investors was on display Sunday night when entities controlled by the governments of China and Singapore agreed to invest as much as $18.5 billion in return for stakes in the big British bank Barclays PLC.

In doing so, Chinese lender China Development Bank and Temasek Holdings Pte. Ltd., the Singapore government's investment agency, could play a role in the outcome of the biggest bank-takeover battle ever. That increasingly bitter contest pits Barclays against a consortium of European banks led by Royal Bank of Scotland Group PLC in seeking to acquire Dutch banking giant ABN ABN Amro Holding NV.

While potentially boosting their investment returns, such deals expose the government-controlled funds and other entities involved to risks that range from simple investment losses to political backlash. If it continues, the trend could also reshape global financial markets, bidding up prices for more speculative assets like stocks, corporate bonds and real estate, while crimping demand for safer investments like Treasury bonds.

"There has been a fairly spectacular increase in financial assets under management by governments," said Dominic Wilson, director of global macro and markets research at Goldman Sachs Group. "The scale of the issues around such investment is different than anything the world has ever seen. Neither [governments] nor the markets know exactly what they should do with the assets."

If completed, the Barclays deal would provide further evidence of an important global shift in wealth. "This is basically a flow of capital from emerging markets to established markets," says John Studzinski, former chief of investment banking at HSBC Holdings PLC and now head of Blackstone Group's mergers-and-acquisitions advisory group, which advised China Development on the deal. The private-equity firm's role shows how private and public investors are joining together to create powerful forces.

Government bureaucrat shames economist

Here. (Usually, it's the other way around, or else some economists have become shills for bureaucracy).

Chris Masse gets me

He predicts:

Bob Cook nailed it: Making bets legal everywhere would create oversight, transparency. (two pages)

Caveat Bettor will appreciate, I’m sure.

Monday, July 23, 2007

More noteworthy career advice from Scott Adams

He blogs:

I’ve come to call this ego-driven behavior the “loser decision.” I don’t mean it as an insult. It’s an objective fact that life often presents us with choices where the comfortable decision leads nowhere and one that threatens your ego has all the potential in the world.

You need a healthy ego to endure the abuse that comes with any sort of success. The trick is to think of your ego as your goofy best friend who lends moral support but doesn’t know [squat].

I recently linked to another piece of advice, here.

Morgan Stanley predicts 14% correction next month

From the Telegraph (via DealBreaker):
A study by the bank found that credit spreads began to widen on average six months before every stock market correction of 10pc or more over the past 20 years.

The current widening began in February, picking up speed over the past three weeks. If history is any guide, this could point to a global stock market slide as soon as August. Morgan Stanley's model suggests a 14pc fall, or 2,000 points off the Dow.

"This is not the first time that equity markets take their time to react to bad news," said the bank's chief Europe strategist, Teun Draaisma. "The fundamentals have deteriorated. Equities have reached all-time highs despite higher rates, wider spreads, higher oil, Chinese tightening, and a stronger euro.

"There is a widespread belief in continuation of good global growth without inflation. While we are not expecting a recession for another two to three years, we believe chances are high that this belief will be seriously tested soon."

A 15% correction in the S&P 500 brings it down to September 2006 levels (not adjusting for inflation or dividend yield). Bad, but not that bad, and if earnings continue to grow, then it's a buying opportunity.

Some WSJ reasons for the Dem fundraising lead over GOP

Today's article:

With more than a year to go before the 2008 elections, Democratic candidates have raised $100 million more in campaign contributions than Republicans, putting them on track to win the money race for the White House and Congress for the first time since the government began detailed accounting of campaign fund raising three decades ago.

Democrats have taken the lead by exploiting widespread disapproval of President Bush and the Iraq war to develop a more robust online network of new, small donors, as well as to gain traction with deep-pocketed business contributors.

Democrats have also benefited because of their comparative strength with Internet activists. While Republican voters tend to gravitate toward traditional media like talk radio, Democratic voters with strong opinions are more likely to go online to read blogs. That, in turn, has led to an explosion in online giving to Democrats, who are building lists of thousands of small-dollar donors for a fraction of the cost of traditional direct mail.

Blackstone Group, Carlyle Group and other members of the Private Equity Council trade group gave 69% of their $3.4 million in campaign donations to Democrats last year, up from 51% of $2.7 million in 2000, data from the Center for Responsive Politics show. Separate data for large hedge funds show a similar pattern of giving.

Other sectors are following suit. The securities industry flipped its allegiance to Democrats in 2006, giving more to Democrats than Republicans for the first time in a decade, the Center for Responsive Politics said.

Some wealthy Republicans also are switching sides, including business executives who want access to the levers of power, or who simply don't mind crossing party lines to support candidates they like. Many say they are disturbed by the steep growth in government spending under President Bush, as well as the perceived erosion of America's standing in the world.

New York venture capitalist and former American Express Co. Chief Executive James D. Robinson III, a lifelong Republican, says he is backing Mrs. Clinton. "She's been very involved in business development and sensitive to our issues," Mr. Robinson says.

Other Republicans supporting the New York Democrat for president include Terrence A. Duffy, executive chairman of CME Group, the Chicago-based commodities market; John Mack, Morgan Stanley Chairman and Chief Executive Officer; and Jeffrey Volk, who heads Citigroup Inc.'s global agency and trust business.

I posted this a week ago:
With the uncertainty of "Fred Thompson: in or out" many potential GOP donors are keeping their powder dry. What is the point of donating to Giuliani or Romney now, if one of them is going to fall out of the race before the end of the state primary cycle? Once the GOP Top 2 candidates are revealed (the way Hilary and Barack have been all quarter), the GOP will start catching up in their aggregate fundraising.

This may also have an effect with polls and pundits, which is why I believe that the Dem pricing of 56% chance of presidential victory is well below what the pollsters are reporting.

Friday, July 20, 2007

Cool career advice

Scott Adams hypothesizes:

If you want an average successful life, it doesn’t take much planning. Just stay out of trouble, go to school, and apply for jobs you might like. But if you want something extraordinary, you have two paths:

1. Become the best at one specific thing.
2. Become very good (top 25%) at two or more things.

The first strategy is difficult to the point of near impossibility. Few people will ever play in the NBA or make a platinum album. I don’t recommend anyone even try.

The second strategy is fairly easy. Everyone has at least a few areas in which they could be in the top 25% with some effort. In my case, I can draw better than most people, but I’m hardly an artist. And I’m not any funnier than the average standup comedian who never makes it big, but I’m funnier than most people. The magic is that few people can draw well and write jokes. It’s the combination of the two that makes what I do so rare. And when you add in my business background, suddenly I had a topic that few cartoonists could hope to understand without living it.

Capitalism rewards things that are both rare and valuable. You make yourself rare by combining two or more “pretty goods” until no one else has your mix. I didn’t spend much time with the script supervisor, but it was obvious that her verbal/writing skills were in the top tier as well as her people skills. I’m guessing she also has a high attention to detail, and perhaps a few other skills in the mix. Probably none of those skills are best in the world, but together they make a strong package. Apparently she’s been in high demand for decades.

At least one of the skills in your mixture should involve communication, either written or verbal. And it could be as simple as learning how to sell more effectively than 75% of the world. That’s one. Now add to that whatever your passion is, and you have two, because that’s the thing you’ll easily put enough energy into to reach the top 25%. If you have an aptitude for a third skill, perhaps business or public speaking, develop that too.

It sounds like generic advice, but you’d be hard pressed to find any successful person who didn’t have about three skills in the top 25%.

What are your three?

This sounds right on, with a couple of caveats. Assuming that Adams can combine 3 top quartile abilities (drawing, humor, business experience), I calculate 25% ^ 3 to put him in the top 2% where those 3 dimensions intersect.

But often, it is difficult to combine 2 or more skills into 1 significant competitive advantage. Let's say I'm a good cook and I'm good at math. What could I do with that combination?

And skill combinations also have utilitarian limitations, such as physical capacities losing ground to intellectual skills.


Alex Forshaw on Edwards:
Edwards continues to fade. The Edwards and Obama campaigns released dueling New Hampshire ads; Gore lost steam, yet Edwards lost significant support as well. At the same time, Edwards has embarked on a strangely irrelevant "poverty tour" through some of the poorest parts of America. (Haircut... haircut...)

Unfortunately for Obama, many Edwards supporters have been driven to spluttering outrage at the relentless "narrative" of the "Edwards haircut," and how the "right-wing hate machine" is "manipulating" Edwards' public image. Edwards supporters fail to understand that, to 90% of the people pushing this narrative, it is not about highlighting Edwards' haircuts, $500,000 Fortress internship, and Chapel Hill palace because they are "out to get him" and stop his redistributionist agenda. It's about using simplistic data points to reveal -- not mischaracterize -- a profoundly hypocritical political opportunist who has portrayed his every repositioning as a spontaneous "Damascus moment," which coincidentally matched a concurrent tectonic shift in the political landscape. Iraq, bankruptcy reform, free trade, taxes, the larger anti-salafist war: you name it, and Edwards has had at least two positions on it.

Wednesday, July 18, 2007

Troy is back

From the Patriots website:

FOXBOROUGH, Mass. - The New England Patriots re-signed veteran wide receiver Troy Brown today.

In 2004, Brown earned accolades for his play on offense, defense and special teams, showing a level of versatility unmatched in recent NFL history. After injuries had taken a toll on the Patriots’ secondary, Brown pitched in as the team’s nickel back for the final nine games of the regular season and for all three of the Patriots’ postseason contests as New England won Super Bowl XXXIX. He finished second on the team with three interceptions in the 2004 regular season and matched his reception total with 17 tackles on defense.

The Blackville, S.C. native has been a key contributor to each of the Patriots’ three Super Bowl runs. In 2001, Brown led the team with 18 postseason receptions as New England won its first world championship in Super Bowl XXXVI. In that game against the St. Louis Rams, Brown led the team with six receptions and 89 yards, including a key 23-yard grab on the game-winning drive. Two years later, he tied for the team lead with 17 playoff receptions as the Patriots won Super Bowl XXXVIII over Carolina. He was again a key contributor in that game, finishing second on the team with eight receptions, including three grabs on the game-winning drive. In 2004, Brown played on offense, defense and special teams in all three playoff games, recording a total of five receptions and six tackles during New England’s Super Bowl XXXIX title run.

Living in the past is a dangerous thing. But respecting history is not.

Giuliani reaches out to constitutional conservatives

Giuliani writes a column on his judicial philosophy (via Instapundit).

The greatest living american?

Via Instapundit:
GREGG EASTERBROOK: Ignoring the greatest living American.
I think the candidate is worthy of consideration, but not because he along with Carter is the recipient of the Nobel Peace Prize. I mean, they gave that thing to this guy!

Hey this blog is a year old, this past July 10th!

Much too busy to remember these things. Hopefully I can remember my wedding anniversary better than this.

Thanks to all you readers and traders for your interest and support over the past year.

Iraq war costs

Menzie Chinn summarizes Iraq costs, quite nicely, over at Econbrowser.

Marginal utility theory for traders, from Freakonomics

Steve Levitt channels Daniel Bernoulli, in addressing utility, in an easy-to-read way:
At least for me, there are not too many questions that would lead me to respond, “For $25 million, no way, but for $50 million I’ll think about it.” Twenty-five million dollars is so much money that it’s hard to think about what you would do with it. It sure would be nice to have the first $25 million. I’m not sure what I would need the second $25 million for.
The high-turnover (read high-extinction) traders in these prediction markets most likely have not familiarized themselves with expected utility. This is why they do not follow my recommendation of risking only 4% maximum of account total on any single contract. Or maybe there are some other reasons of which I know not--please send me a comment of enlightenment!

Tuesday, July 17, 2007

A little skepticism on the huge fundraising advantage of Hillary and Barack

Awhile back, I posted an update on the strong fund raising and cash positions of the Democratic front runners.

I've been thinking more about it since then, and suspect that the large Dem lead will diminish within the next 12 months. Having a little more exposure to campaign donations myself and more conversations with other donors, I've learned that donors HATE donating to a sure loser. But it happens, as some of my friends who have "had" to donate to Biden and Dodd have shared with me.

A lemma to the above principle: donors LIKE donating to a winner; I mean, that's the quid pro quo point, isn't it?

With the uncertainty of "Fred Thompson: in or out" many potential GOP donors are keeping their powder dry. What is the point of donating to Giuliani or Romney now, if one of them is going to fall out of the race before the end of the state primary cycle? Once the GOP Top 2 candidates are revealed (the way Hilary and Barack have been all quarter), the GOP will start catching up in their aggregate fundraising.

This may also have an effect with polls and pundits, which is why I believe that the Dem pricing of 56% chance of presidential victory is well below what the pollsters are reporting.

Giuliani contracts trading crazy

Apparently, there is a rumor flying around that Fred Thompson will not run, and Rudy is the largest beneficiary.

An inconvenient truth. For Al Gore.

From the Daily Mail:

The much-hyped bid to save the world is being masterminded by former U.S. vice president Al Gore - who helped focus attention on the environmental movement with his Oscar-winning film, An Inconvenient Truth - and features artists including The Police, Red Hot Chili Peppers, UB40 and Metallica.

No doubt to rapturous applause, Madonna will call for mass global change to reduce carbon emissions and to tackle 'climate crisis'.

Watching the veteran star lap up the adoration, her entourage could, however, be forgiven for exchanging slightly jaded glances - having witnessed her jet in for the concert from New York.

For her 2006 World Tour, she flew by private jet, transporting a team of up to 100 technicians and dancers around the globe. Waiting in the garage at home, she has a Mercedes Maybach, two Range Rovers, an Audi A8 and a Mini Cooper S.

Dr Collins estimates that the global audience for Live Earth will generate some 1,025 tonnes of waste. An extraordinary one million people are expected at the free concert at Rio de Janeiro's Copacabana beach, featuring Lenny Kravitz, Macy Gray and Pharrell Williams.

Live Earth say that they will recycle much of the waste generated. Fine talk, but in fact some of the concert venues are struggling to keep up with their commitments.

A spokesman for Wembley says they only have the capacity to recycle around a third of waste produced - the rest will go into landfill sites.

Travel forms the vast majority of the 'carbon footprint' talked of by ecological campaigners - contributing up to 90 per cent of the environmental 'cost'.

Collins says: "It is patently absurd to claim that travel of this nature doesn't have an impact. Each person attending the event will have to make a return journey to the venue, be it by air, rail, bus or car. This burns fossil fuel - precisely what we are trying to reduce.

"There is also the environmental cost of these artists flying around the world - that is absolutely huge."

Indeed, an audit of the lifestyles of the A-list performers appearing at Live Earth, reveals that they are among the worst individual polluters in the world, as their world tours and private jets billow thousands of tons of carbon dioxide into the atmosphere every year. One hour in a Gulfstream jet burns as much fuel as driving a family car for a year.

The Daily Mail has found that five of the top performing acts together have an annual output of almost 2,000 carbon tonnes. Madonna alone has an annual carbon footprint of 1,018 tonnes, according to John Buckley.

Remember, the average Briton produces just ten tonnes.

Mankiw's integrity a surprise to Dubner?

Greg Mankiw self-discloses:
Over at the Freakonomics blog, Stephen Dubner says my recent NY Times piece is "super-compelling" (thank you) and then adds:
I applaud Mankiw, the Times, and Romney for having the courage to produce what is essentially a position paper on taxation in the pages of the Times. As long as everyone’s cards are on the table, which they are here, I see no harm. But I sure would have liked to see the e-mails back and forth between the Mankiw and the Romney camp as the Times piece was being edited.
Okay, since he asked, here are all the emails between me and the Romney camp about the Times piece:

Yes, that's it. No emails. No phone calls. No smoke signals.

I am not an employee of the campaign. I am a Harvard professor, expressing my own views, sometimes publicly, sometimes privately to a candidate for President. After listening to a variety of advisers with various perspectives, Romney decides on his own what positions to take. Not surprisingly, sometimes we disagree. But I do not vet what I write with the Romney campaign, and my opinion pieces should most definitely not be construed as position papers for the campaign.
I don't blame Steve Dubner, though. As a fellow New Yorker, it's hard not to operate out of a default cynicism.

Alex Tabarrok on China's economic growth

Without denying Deng's importance, I would say that China's great leap forward came with the death of Mao Zedong. Once Mao - quite possibly the greatest human killer of the twentieth century - was dead, China could almost not help but improve.

Second, the Chinese people, especially the peasant farmers, deserve a huge amount of credit. Here's a couple of paragraphs I wrote recently:

The Great Leap Forward was a great leap backward - agricultural land was less productive in 1978 than it had been in 1949 when the communists took over. In 1978, however, farmers in the village of Xiaogang held a secret meeting. The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep. The agreement violated government policy and as a result the farmers also pledged that if any of them were to be jailed the others would raise their children.

The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased. “You can’t be lazy when you work for your family and yourself,” said one of the farmers.

Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides. But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property.

Deng and others in the central leadership are to be credited with recognizing a good thing when they saw it but it was the farmers in villages like Xiaogang that began China's second revolution.

Addendum: For the story of Xiaogang I draw on John McMillan's very good book, Reinventing the Bazaar.

Monday, July 16, 2007

USS Harry Truman and the Chinese

Bret Stephens, in OpinionJournal:

The Navy operates 11 carriers like the Truman. No other navy in the world comes close. The Chinese, who would love to have one or more carriers of their own, recently sent their top admiral for a tour of the Truman. Adm. Gortney recalls that the Chinese were mainly interested in two things. The first was the ship's arresting gear, the heavy cables that trap landing planes. The second was the way the Navy recruits, trains, organizes and motivates its sailors.

No doubt the Chinese will one day figure out the mechanics of landing planes at sea -- and of catapulting them off the deck. I wonder if they'll ever get the human element right. The men and women of the Truman are here as a matter of their own free will in order to defend our collective right to live freely. That's more than a matter of mechanics. It's a matter of spirit: the true source of the Truman's awesome power, and of its beauty, too.

Sunday, July 15, 2007

Robert Solow on Joseph Schumpeter

Solow, mostly a follower of Schumpeter's rival Keynes, concludes:

It is possible to see Keynesian and Schumpeterian ideas as complementary. Keynes is about short-run economic fluctuations brought about by erratic variations in the willingness of investors and governments to spend; Schumpeter is about the long-run trajectory driven by the erratic march of technological progress. This complementarity only became clear later, after both men had died, when economic growth became an explicit objective of public policy and topic of systematic analysis. Schumpeter was left frustrated by the younger generation's affinity for his rival. In any case, the "preliminary volume" never materialized.

The world turns. Today, some sixty years after their deaths, Schumpeter's star probably outshines Keynes's. The business cycle has receded in importance, partly because the large industrial economies have sprouted a more stable structure, and partly because the lessons that Keynes taught have been learned by central banks and finance ministries. Instead, long-term economic growth has moved to the top of the political and intellectual agenda, and that was Schumpeter's topic. As Robert Lucas memorably put it, once you have begun to think about economic growth, it is hard to think about anything else. It is a pity that troubled old Schumpeter did not live to see the triumph of his obsession.

Even with several digs at him, the grudging respect sounds volumes. And the world is a better place because of old Schumpeter. (Via Eddy Elfenbein).

Friday, July 13, 2007

The intelligent solution can sometimes be more damaging than the problem

We really need those global warming contracts for trading (via Don Luskin):
Think of the greatest environmental disaster in recent history. For many people, the Exxon Valdez spill in Prince William Sound comes to mind.

Three hundred seals, 2,800 sea otters, 250,000 sea birds and a host of other wildlife were killed by that spill, acknowledged Corrie Pitzer, an industrial psychologist from SAFEmap International in Vancouver. However, he added, 250,000 birds are killed by flying into windows every year.

"The cleanup cost was $2.1 billion, with a 50 percent reach," Pitzer told an audience at a June 25 session of the American Society of Safety Engineers' (ASSE) 2007 Professional Development Conference in Orlando, Fla. "That means that only 50 percent of Prince William Sound was cleaned."

Six years after the cleanup, a study was conducted to determine ecological recovery in the sound. What researchers found was that the areas that were not cleaned were in better shape – with more wildlife and cleaner water and soil – than the areas that had been cleaned. The chemicals and high-pressure washing used to "clean" the area had destroyed the ecosystem in some parts of Prince William Sound.

"The environmental disaster was the cleanup," said Pitzer.

Corn-based ethanol is another good example:
Cornell University professor of agriculture David Pimental calculates some very disturbing figures. According to Dr. Pimental, it takes more energy to produce a given amount of ethanol than there is energy available in that ethanol. According to his calculations, producing corn and processing it into 1 gallon of ethanol requires 131,000 BTUs of energy; but 1 gallon of ethanol contains only 77,000 BTUs. So producing ethanol actually creates a net energy loss. And since farmers are using fossil-fuel-powered equipment to plant, maintain and harvest the corn and are using fossil-fuel-powered machinery to process that corn into ethanol and then transport that ethanol to collection points (ethanol can't run in underground pipelines because it picks up damaging impurities), the ethanol industry is actually burning large amounts of gasoline to produce ethanol, and that ethanol contains far less energy than the gasoline they consumed to produce it.

But not all scientists agree with Pimental's analysis regarding energy efficiency. Dr. Michael Wang of the Argonne National Laboratory finds that it requires 0.74 million BTUs of fossil fuels to get 1 million BTUs of ethanol to market. That would mean a net gain in energy, not a net loss.

Energy efficiency aside, those in Pimento's camp actually don't see corn as a truly renewable energy source. Pimento estimates that powering a car for a single year using ethanol would require 11 acres of corn. Since corn fields in the United States take a while to replenish themselves due to both soil erosion and irrigation issues, those acres would be out of commission for a period of time, meaning no corn for ethanol and no usable land for other food crops. To sustain an ethanol-based fuel industry, more and more farm land would have to be set aside for corn alone. The ultimate result could be a shortage of domestically grown food and higher prices at the supermarket for all sorts of produce.

A great article on the Tradesports fee structure change

Jay Graziani:

Tradesports could have avoided this confusion quite easily by explaining their position more clearly well before the new fee structure took effect. This would have allowed those who wanted to hold onto their positions to know that they would not be charged higher fees than they expected going into the trade. It would also allow those who did not want to hold their contracts to completion to exit the market prior to the new fee structure. Ideally, Tradesports would have offered traders a few days grace period where they could close existing positions without incurring the new fees, or even offer to buy back or sell outstanding shares to traders at a preset baseline price, to allow them to exit the market.

While hardly a travesty, the transition could have been carried out better. Existing contracts have not lost any value, as long as the current holder holds them until the end. Yes, traders have lost the liquidity that exchange betting brings, but this is a minor glitch in a long-established operation. But to maintain the goodwill of their customers, Tradesports needs to avoid such glitches in the future.

For future rules changes, Tradesports should consider shutting down active markets permanently, with at least a few weeks advance notice. This would allow traders to decide whether they were willing to hold their positions until the end, or whether to get out before the new rule change. For instance, the existing World Series future market could have been closed to further trading as of June 27th. Anyone still holding shares as of a set date would be stuck with them for the duration, when they would be paid out under the old structure. A new World Series market could have been opened immediately, now trading under the new rules. This scenario allows all traders in a given market to participate under the same set of rules, and eliminates the ambiguity that caused trader confusion in the present case. Having both the new and old markets open simultaneously would allow further liquidity, as traders hedged their risk on long-term versus short-term holdings.

Greg Mankiw's Blog: The Big Test

I'm pretty cynical about schools, standardized tests, grades, and degrees. None of those things seem to signal very clearly if someone is competent, trustworthy, or potentially successful. So even though I scored over 99 percentile in my SAT & GMAT, graduated from an Ivy League school, and come from an immediate family of five where 60% earned PhDs (2 in hard sciences) and another 20% earned 2 Masters degrees--I just don't believe in it. I'm just an average dysfunctional guy from an average dysfunctional family.

I've seen jock and frat goofballs from state schools with tremendous analytical and leadership ability go really far in my 2 decades on Wall Street, much farther than I have. They know how to create value and jobs--so much more than the Ivy Leaguers who ended up working for them.

Via Greg Mankiw, Charles Murray now takes down one of the sacred cows of the academy; the SAT:

How are we to get rid of the SAT when it is such an established American institution and will be ferociously defended by the College Board and a large test-preparation industry?

Actually, it could happen quite easily. Admissions officers at elite schools are already familiar with the statistical story I have presented. They know that dropping the SAT would not hinder their selection decisions. Many of them continue to accept the SAT out of inertia—as long as the student has taken the test anyway, it costs nothing to add the scores to the student’s folder.

In that context, the arguments for not accepting the SAT can easily find a receptive audience, especially since the SAT is already under such severe criticism for the wrong reasons. Nor is it necessary to convince everyone to take action at the same time. A few high-profile colleges could have a domino effect. Suppose, for example, that this fall Harvard and Stanford were jointly to announce that SAT scores will no longer be accepted. Instead, all applicants to Harvard and Stanford will be required to take four of the College Board’s achievement tests, including a math test and excluding any test for a language used at home. If just those two schools took such a step, many other schools would follow suit immediately, and the rest within a few years.

It could happen, and it should happen. There is poignance in calling for an end to a test conceived for such a noble purpose. But the SAT score, intended as a signal flare for those on the bottom, has become a badge flaunted by those on top. We pay a steep educational and cultural price for a test that no one really needs.

The SAT is a lot like government economic statistics. Most of them can contain a lot of noise and error, and people who don't like what they are indicating tend to dismiss them out of hand when trying to make a case, with some convenient conspiracy theory sprinkled liberally with SAT vocabulary words.

But unless better measures become available, we should keep the ones we have for the moment. Murray's suggestion of 4 achievement tests, including a math test, could be more predictive of academic success. (But the language tests probably need to be excluded--who knows what some student's grandparent taught them while they were still in diapers?)

In a sense, degrees, schools, SAT scores ... are all (poor) predictors for a person's future success. The signal about one's ability the marketplace, in charity, and the in family (my preferred arenas of success measurement) has about a ~0.1 correlation.

Wednesday, July 11, 2007

My thoughts on the NCAA ruling on OU's 2005 season


Fox Business News Channel Beginning Oct. 15th

Via Drudge

This isn't exactly new news but really makes sense with Murdoch trying to buy the WSJ. I like CNBC quite a bit but it never hurts to have a little competition. I have heard speculation that the Maria "Money Honey" Bartiromo could jump ship and would not be surprised to see Kudlow jump (though he seems to have a rather good setup at CNBC with "On the Money").

Tuesday, July 10, 2007

Interesting game theory on the Supreme Court

Linda Greenhouse, via Mike Rappaport:

It takes four votes to accept a case, and three members of the liberal bloc — Justices Stephen G. Breyer, David H. Souter and Ruth Bader Ginsburg — said at the time that they wanted to hear these cases. Notably absent from that group was Justice John Paul Stevens, who wrote the majority opinions for the court in 2004 and 2006 that upheld the detainees’ claims to a modicum of judicial process.

Instead of giving his vote to the three, Justice Stevens joined Justice Kennedy in a one-paragraph statement “respecting the denial.” It was “appropriate” to deny the appeals at this point, they said, because the detainees had not yet availed themselves of the appeal procedure provided by the Detainee Treatment Act of 2005. The court’s door remained open for the future, they hinted.

Since Justice Stevens had the power at that moment to cast a fourth vote for immediate review, he clearly had something else in mind by joining Justice Kennedy instead. The most plausible explanation is that this canny tactician and strategist, who had managed to win Justice Kennedy’s vote for his two earlier Guantánamo opinions, knew better than to risk losing that support by pushing his colleague too far, too fast. There was no point in granting a case to which Justice Kennedy was not yet ready to give favorable consideration.

So Justice Stevens waited, and events played into his hands. On June 22, days before the justices were to consider the “petition for rehearing” filed by the detainees’ lawyers, those lawyers filed a final brief that included a remarkable document, a description of how the “combatant status review tribunals” worked written by an Army officer, Lt. Col. Stephen Abraham, who had been a member of one. The statement, the detainees’ lawyers said in their brief, made it clear that the process was “an irremediable sham.”

What the justices made of the document is, of course, not publicly known. What is known is that granting a petition for rehearing takes not four votes, but five. Justice Stevens’s patience, it appears, was rewarded.

Another prediction market bites the dust

Betcha.com update at Midas Oracle.

This sucks.

What kind of American are you?

Apparently, I'm not dumb.

You Are a Smart American

You know a lot about US history, and you're opinions are probably well informed.

Congratulations on bucking stereotypes. Now go show some foreigners how smart Americans can be.

Via Steve Bainbridge.

TS Fees changeover continues to generate heat

I haven't been posting much on this, but have been following it regularly over at Midas Oracle. The forum link is here.

My simple thoughts:
1) Any change in fee structure that affects the value of contract position is a terrible thing that will reduce market liquidity and/or drive away to competitors, due to the uncertainty that it represents. Liquidity is drawn to stability, and fleeing from instability.

2) The U.S. government does this all the time. Recently, the threat of legislative changes to energy "price gouging" and private equity tax treatment come to mind. And here is an oldie-but-goodie.

The problem for we traders and US-based taxpayers is, it is hard to trade up to another exchange or country. But it still sucks. For now.

Monday, July 09, 2007

Like I've been saying about global warming contracts

There's a lotta interest out there!

I started posting about this back in January.

Liquidity increases almost fivefold, in the last 4 years

... in the 2008 presidential candidate contracts, according to Eric Zitzewitz.

Sex is economics

So says the excellent Tim Harford.

Fuel efficiency demand increases

From Swivel

From Intrade

Gold vs. US Stocks

Eddy Elfenbein's nice chart of Gold vs. Wilshire Total Return. Surprising to me how correlated they are.

Income vs. Human Capital

Brink Lindsey in the WSJ, who counters the mainstream media and political candidates' pandering to the lower 3 quintiles of wage earners (I mean, why sell your product to the job creators, because they are a small voting minority):
Rising demand for analytical and interpersonal skills has been driving the change, and surely it is good news that economic signals now so strongly encourage the development of human talent. Yet -- and here is the cause for concern -- the supply of skilled people is responding sluggishly to the increased demand.

Something is plainly hindering the effectiveness of the market's carrots and sticks. And that something is culture.

Before explaining what I mean, let me go back to the squid ink and clarify what's not worrisome about the inequality statistics. For those who grind their ideological axes on these numbers, the increase in measured inequality since the 1970s is proof that the new, more competitive, more entrepreneurial economy of recent decades (which also happens to be less taxed and less unionized) has somehow failed to provide widespread prosperity. According to left-wing doom-and-gloomers, only an "oligarchy" at the very top is benefiting from the current system.

Hogwash. This argument can be disposed of with a simple thought experiment. First, picture the material standard of living you could have afforded back in 1979 with the median household income then of $16,461. Now picture the mix of goods and services you could buy in 2004 with the median income of $44,389. Which is the better deal? Only the most blinkered ideologue could fail to see the dramatic expansion of comforts, conveniences and opportunities that the contemporary family enjoys.

Much of the increase in measured inequality has nothing to do with the economic system at all. Rather, it is a product of demographic changes. Rising numbers of both single-parent households and affluent dual-earner couples have stretched the income distribution; so, too, has the big influx of low-skilled Hispanic immigrants. Meanwhile, in a 2006 paper published in the American Economic Review, economist Thomas Lemieux calculated that roughly three-quarters of the rise in wage inequality among workers with similar skills is due simply to the fact that the population is both older and better educated today than it was in the 1970s.

It is true that superstars in sports, entertainment and business now earn stratospheric incomes. But what is that to you and me? If the egalitarian left has been reduced to complaining that people in the 99th income percentile in a given year (and they're not the same people from year to year) are leaving behind those in the 90th percentile, it has truly arrived at the most farcical of intellectual dead ends.

Which brings us back to the real issue: the human capital gap, and the culture gap that impedes its closure. The most obvious and heartrending cultural deficits are those that produce and perpetuate the inner-city underclass. Consider this arresting fact: While the poverty rate nationwide is 13%, only 3% of adults with full-time, year-round jobs fall below the poverty line. Poverty in America today is thus largely about failing to get and hold a job, any job.

The problem is not lack of opportunity. If it were, the country wouldn't be a magnet for illegal immigrants. The problem is a lack of elementary self-discipline: failing to stay in school, failing to live within the law, failing to get and stay married to the mother or father of your children. The prevalence of all these pathologies reflects a dysfunctional culture that fails to invest in human capital.

Other, less acute deficits distinguish working-class culture from that of the middle and upper classes. According to sociologist Annette Lareau, working-class parents continue to follow the traditional, laissez-faire child-rearing philosophy that she calls "the accomplishment of natural growth." But at the upper end of the socioeconomic scale, parents now engage in what she refers to as "concerted cultivation" -- intensively overseeing kids' schoolwork and stuffing their after-school hours and weekends with organized enrichment activities.

This new kind of family life is often hectic and stressful, but it inculcates in children the intellectual, organizational and networking skills needed to thrive in today's knowledge-based economy. In other words, it makes unprecedented, heavy investments in developing children's human capital.

Alas, there is no silver bullet for closing the culture gap. But the public institutions most directly responsible for human capital formation are the nation's schools, and it seems beyond serious dispute that in many cases they are failing to discharge their responsibilities adequately. Those interested in reducing meaningful economic inequality would thus be well advised to focus on education reform. And forget about adding new layers of bureaucracy and top-down controls. Real improvements will come from challenging the moribund state-school monopoly with greater competition.
Milton Friedman's school vouchers, anyone?

Friday, July 06, 2007

Economist tongue-in-cheek ... on presidential candidates

From the Economist:

Democratic candidates are out-raising Republicans by a factor of three to two, which suggests that Democratic voters are more fired up than Republicans, at least for now. Mr Obama is generating the most heat. An actress recently starred in a saucy video called “I got a crush on Obama”. (Sample lyrics: “You can Barack me tonight” and “Universal health-care reform, it makes me warm”.) It is hard to envisage any other candidate inspiring anything similar. McCain me harder?

Meanwhile, Al Gore's daughter Kristin has just released a novel about life in the White House with a noble vice-president, a dissolute president and a ghastly first lady whose “paranoia was legendary”. Where does she get her material?

Here is their chart of second quarter fund raising:

Josh Beckett prices risk close to fair value than Asante Samuel

Here's Rob Bradford on Beckett's contract extension:
After earning his 12th win of the season last night, Beckett offered some insight into why he took the Red Sox’ three-year, $30 million extension.
Along with having the peace of mind that went with knowing he would be earning $47 million by the time he was 30, and playing in a place he was confident would continue to be a winning environment, there was the issue of an insurance policy.
After missing his final start of the 2005 season with shoulder stiffness, Beckett’s insurance company informed him that it would insure every part of his body but his right shoulder. It was a problem that played a factor in approaching his future.
“I think if I had that insurance policy it would have been a little easier to go to (the Red Sox) with a hard number,” said Beckett, whose shoulder still isn’t insured but can be if he pitches approximately 600 innings (from the time he started with the Red Sox) without report of any shoulder ailment. “The way it happened was that we both sat down and hammered out something that made us both happy. I got that insurance with the contract.”
At the time of the back-and-forth in St. Petersburg, Beckett was carrying a 4.59 ERA to go with 10 wins. By the time the deal was inked, his ERA had risen to 5.12.
“Given the circumstances, yeah,” said Beckett when asked if he was surprised Francona approached him with the idea. “Their job is to try and save money by getting guys when they aren’t on the pinnacle part of their performance. To me, it was all about getting that security and playing somewhere I wanted to play.”
Contrast Beckett's wisdom--negotiating a win-win with his club--to Samuel's questionable testing of the market, as reported by John Tomase:
[Deion] Branch can’t help but view from afar the deteriorating negotiations between his friend Samuel and the Patriots.
“We’ve spoken,” Branch said yesterday from Seattle after spending the majority of his offseason in Boston. “Our situations are the same as far as holding out, but they’re two different examples. I was due about $1 million. He’s due $7.8 million. The most important thing I tell him is to do what’s in his heart. If he feels holding out is the right thing, then that’s what he should do.”
While stressing he was merely speaking for himself, Branch admitted he’d have had a hard time leaving almost $8 million on the table.
“It would be different if you were in his shoes,” Branch said. “If Zant goes out there, plays one down and gets hurt, he’ll get that $7.79 million and then when his contract’s up, what’s going to happen? ‘We don’t want to sign you.’ That would be the case throughout the league.
I've already debunked some other Branch mythology here, here and here.

Thursday, July 05, 2007

Some bearish signals are near irrelevant

One is the price of gold--people need to dial back their charts to the time of Bretton Woods (which was disbanded during the Nixon administration). Another is bilateral trade deficits, as Greg Mankiw (and Robert Solow) eloquently tell us:
The overall trade balance is, as we have seen, inextricably linked to a nation’s saving and investment. That is not true of a bilateral trade balance. Indeed, a nation can have large trade deficits and surpluses with specific trading partners, while having balanced trade overall.

Bilateral trade deficits receive more attention in the political arena than they deserve. This is in part because international relations are conducted country to country, so politicians and diplomats are naturally drawn to statistics measuring county-to-country economic transactions. Most economists, however, believe that bilateral trade balances are not very meaningful. From a macroeconomic standpoint, it is a nation’s trade balance with all foreign nations put together that matters.

The same lesson applies to individuals as it does to nations. Your own personal trade balance is the difference between your income and your spending, and you may be concerned if these two variables are out of line. But you should not be concerned with the difference between your income and spending with a particular person or firm. Economist Robert Solow once explained the irrelevance of bilateral trade balances as follows: "I have a chronic deficit with my barber, who doesn't buy a darned thing from me.” But that doesn’t stop Mr. Solow from living within his means, or getting a haircut when he needs it.

I'm still long US equities, and short the Intrade recession contracts. Both positions have continued to do well, the latter for the last several months and the former for the last couple of decades.

TS announces fee refunds

Just posted a few minutes ago on the forum:
Members who held positions in a Market when our new fee structure was introduced on July 27th, 2007, will have their expiry fees reviewed once the Market has been fully expired.

If the fee due under the new 4% commission fee structure exceeds the fee that would have been charged under the old system of trading and expiry fees then a refund of the difference will be provided.

This applies only to positions held at the time the new fee structure was introduced.

A refund will be provided only for fees levied on the expiry profit from a position. If you trade in and out of a position for a profit before expiry you will be charged the 4% commission on that profit and will not be eligible for a refund.

The fees will be reviewed once all contracts in the Market have been expired. For example, fees charged on positions for the winner of the Super Bowl will be reviewed once the final two contracts in this group have been expired after the Super Bowl has been played.

More Forshaw astuteness on candidates for 2008

Obama seems to be the front runner.

Historic presidential pardon data & Scooter Libby outlook

From Swivel

From Intrade

I'm selling some Al Gore for the first time

He's getting a lot of press for his enormous wealth, which will weaken his populist support. He's got some dirt on his hands with the Apple options backdating that he personally approved, which will alienate the same demographic who didn't own Enron but hated them, too. And now this:

LOS ANGELES (Reuters) - The 24-year-old son of former Vice President Al Gore was arrested for drug possession on Wednesday after he was stopped for speeding in his hybrid Toyota Prius, a sheriff's official said.

Al Gore III -- whose father is a leading advocate of policies to fight global warming -- was driving his environmentally friendly car at about 100 miles per hour on a freeway south of Los Angeles when he was pulled over by an Orange County sheriff's deputy at about 2:15 a.m.

The deputy smelled marijuana and searched the car, said sheriff's spokesman Jim Amormino. The search turned up a small amount of marijuana, along with prescription drugs including Valium, Xanax, Vicodin, Adderall and Soma. There were no prescriptions found, he said.

Gore was arrested on suspicion of drug possession and booked into the Inmate Reception Center in Santa Ana, about 34 miles south of Los Angeles, on $20,000 bail. Although he quickly identified himself as the son of the former vice president, Amormino said Gore received no special privileges.

The youngest child and only son of the former vice president, Gore has had previous brushes with the law. He was arrested in 2003 for marijuana possession and in 2002 for suspected drunken-driving.

President Reagan had some problems with his namesake, too. But I'm not sure Ron Jr. ever got busted like this.

Tuesday, July 03, 2007

Joyous Independence Day

Been swamped with work, family, ministry, neighborly stuff. Hope to get back up to speed soon.