Dec 23, 2009

Scroogenomics: Why you shouldn't buy presents for xmas

The guy behind the AER paper on the deadweight loss of Christmas, Joel Waldfogel, has decided to make a book about it. He "illustrates how our consumer spending generates vast amounts of economic waste--to the shocking tune of eighty-five billion dollars each winter and provides solid explanations to show us why it's time to stop the madness and think twice before buying gifts for the holidays".
Is he OK? I'm not's an audio interview where they discuss his measurements of the deadweight loss of Christmas over time and across countries, the motivations that people have for giving, and his ideas for encouraging charitable giving at the holidays. 

Dec 19, 2009

How much net for your gross or why marriage can have a return of up to 20%

Looking for a job is quite time consuming. Once you have singled out the jobs and places you are most interested in, you do your best to actually get an offer. And then you will be confronted with a number which is your annual gross salary. Apart from the exchange rate adjustment, and the adjustment for the respective price level an important difference is the gap between net and gross around the globe. The OECD collects data on taxes and social contributions which they use to calculate the tax wedge. While the exact difference between gross and net will depend on the wage and other things, the measure gives an indication about the potential difference across countries. It does not come as a surprise that Germany and Belgium perform much worse than say Switzerland or the US (things in Ireland might change...).
What is more striking is the respective change in the tax wedge once you marry and have children. Suddenly, Germany and Belgium do not seem to be that bad of a place anymore while things in France and Sweden change only marginally. Interestingly, most emerging markets do not discriminate that much and Greece confirms its rather odd ideas about how to design policies by favoring singles over couples with children. On the other hand the government of Luxembourg rewards your marriage with a salary increase of more than 20%! It would be interesting to see how many Belgian singles actually try to find a man/woman and a job in Luxembourg. The incentives are quite high since not only gross salaries are higher but you can increase your salary by over 30% even if your gross salary remains unchanged.

Dec 15, 2009

Trade vs Macro

"Most people who work in international trade tend to lose the thread when the discussion turns to exchange rates and the balance of payments; as I’ve sometimes put it, the real trade people regard international macro as voodoo, while the international macro people regard real trade as boring and irrelevant"

This is Krugman writing about the genious of Paul Samuelson.

Dec 14, 2009

Did drug money save banks in global crisis?

From the Guardian: Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn of drugs profits was absorbed into the economic system as a result…Some banks were rescued that way!

ht: Trebesch

The social value of (some) professions...

FYI it's calculated here in a report entitled "A bit Rich". The report is published by the New Economics Foundation, which is also famous for the work behind the Happy Planet Index.

Dec 13, 2009

RIP Samuelson

Paul Samuelson was once challenged by the mathematician Stanislaw Ulam to name a single proposition in all social science that was both true and nontrivial. Samuelson thought of a good answer: the principle of comparative advantage.

He died today, age 94. As Ricardo Caballero puts it, “We will miss him and his unmatched wit very much, but his intellectual legacy is enormous and perennial. The world is different today because he was with us for many years."

Dec 7, 2009

Southwest Airlines frames it right

Check out the discusion of this post for context!

An example to explain Purchasing Power Parity to students

Imagine 2 countries, symmetric in every respect. Each country has one restaurant and one consumer. In country A, meals are $10. In country B, $20. In country A, the consumer eats at the restaurant twice a year. In country B, once. Hence, both countries have a GDP of $20. At PPP exchange rates, countrty A is twice as rich. (And that doesn't even take into account the externalities of social interactions). I let you guess which countries I have in mind.

ht: Hozik

Dec 6, 2009

Free sex in Copenhagen

Prostitutes will offer free sex to delegates at the  UN climate summit in Copenhagen next week. It is not, as I first thought, an inititative of Denmark which cares so much about the success of the event that it wants to please the delegates as much as possible. No, it is not that prostitutes themselves care that much about climate change...Rather, they are protesting against the city hall distribution of postcards in Copenhagen's hotels that say "Be sustainable: Don't buy sex." The prostitutes will accept these postcards for payment. In your face city hall! Why such a move form city hall, when the service could have greased the wheels of negotiations, offering some pressure relief? I wonder what the penguins think.

Dec 5, 2009

Transatlantic baggage allowance

Airlines are all of a sudden (since September)  coming together in limiting their free baggage allowance in economy on transatlantic flights to one bag of 23kg! And they are charging $50 for a second bag! What is this conspiracy against the public? When I first started flying we could take 2 bags of 32 kg each. Then it went down to 2 of 23kg, and now just one! What is this decrease of quality of life??? It doesn't sound right to me, it should go the other way around.

Dec 3, 2009

Pirate stock exchange

Piracy is a lucrative business that has drawn financiers from the Somali diaspora and other nations -- and now the gangs in Haradheere have set up an exchange to manage their investments. (reuters)

One wealthy former pirate named Mohammed explains it best:  "Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 'maritime companies' and now we are hosting 72. Ten of them have so far been successful at hijacking...The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials ... we've made piracy a community activity...Ransoms have even increased in recent months from between $2-3 million to $4 million because of the increased number of shareholders and the risks"
ht: freaknonomics

Nov 21, 2009

Islamophobia on the labor market in Switzerland

Last spring when I heard that we (the Swiss) would have to vote over the anti-minaret, I was surprised by such an initiative, because I believed that such a stupid proposal would not even be supported by all members of the Swiss People’s Party (UDC/SVP). Obviously, I was wrong. Although the latest polls still predict a stable majority of 53% will reject the initiative, the proportion of respondents in favor of a constitutional ban of minaret construction has grown to more than a third (35%).

Anyway, as I was working with Swiss data last spring, I made a little exercise that is not really original. I computed the probability to be employed in Switzerland with usual controls (age, number of years of education, civil status, type of permit, number of children, dummies for the linguistic region, type of communes and employment region) and dummies for region of origin for migrants of the first and second generation. Then I did the same thing, but with the additional distinction between Muslims and non-Muslims… the marginal effects of the dummies are plotted in the graphs below (sorry if they are in French, but that should not be a problem in our interdisciplinary and multikulti Institute :). Of course, the marginal effects are not equivalent to discrimination, but I don’t see a plausible alternative explanation for why all points are below the 45 degrees line. Any idea? Can Swiss employers have the benefit of the doubt?

The data used is from the census 2000. There is no issue of sample selection. The data is a little old, but after 9/11, it would be doubtful to claim that Muslims are enjoying specific sympathy in the Western countries…

Pierre Kohler

Nov 20, 2009

A common market in East Africa

"The presidents of Kenya, Tanzania, Rwanda, Uganda and Burundi have agreed to the free movement of people and goods across the region. The common market is due to come into effect by July 2010." (BBC)

No more visas, no more tariffs! Pretty incredible no? Let's see.

Definition of Fair Play

Microdocumentary exhibition: « Las Caras de la Exclusión »

Tuesday 24, November 2009. 6:00PM
Salon Bungener (rue Rothschild 20, Geneva)

This project is part of a research program on social exclusion of the Inter‐American Development Bank (IADB). Producers of all countries in Latin‐America were invited to express their views about the main social issues in the region. In this event, a selection of the films received will be presented, with the comments of experts in each issue.


Topic 1 : Alternative organization to the established order
« Prestes Maia » (Brazil) - « Espejos» (Argentina)

Topic 2 : Informal work in Latin-America
« Circo Urbano » (Mexico) - « Gaspar » (Brazil)

Topic 3: The poverty trap (children outside the system)
« La Bajadita» (Peru) - « El Patron » (Colombia)

Topic 4: Forced displacement for civil conflicts
« El pequeño Sergio » (Colombia) - «Ori » (Suriname)

For more information:

Nov 18, 2009

What a FAO summit on food security is all about

Mugabe visiting Europe with 60 people and blasting his "neo-colonialists enemies ", Gadhafi spending his evenings in Rome accompanied by hundreds of young women, the wife of Tunisian President creating a traffic jam to go shopping on Via Condotti. This is what a FAO summit on food security is all about. No doubt about it, it lasts too long, is too expensive and serves no purpose. No G8 leader is attending, except the greatest, Berlusconi. (Source)

Ban Ki Moon says "we must craft a single global vision ... to produce real results for people in real need". He makes it even vaguer: "There can be no food security without climate security," adding: "We must help the most vulnerable to adapt". Great! And how do we do that? What is better than a bunch of vague unachieavable goals no one can be held accountable for? We just need more money so we can do more summits and more shopping. And humanitarian NGOs blame rich governments for not showing up instead of focusing on solutions...all they want is more money. Isn't this ridiculous? Time to tick that box.

The African cocaine route

West Africa has become a major transit point for Latin American cocaine on its way to Europe. Guinea-Bissau is now Africa's first narco-state, a nation controlled and corrupted by drug cartels. It is indeed a country of dreams, with everything criminals need: "a strategic location, weak governance, and an endless source of foot soldiers who see few viable alternatives to a life of crime". What else, it has the "Bijagos Archipelago, 70 beautiful islands that were once a stopping point for seafaring traders. Only about 20 of the islands are inhabited, but many have natural ports and abandoned airstrips built by Portugal during the war for independence."  And, there is virtually no radar coverage in West Africa.

And now the UN is investigating the crash in the Sahara desert of a cargo plane, which is thought to have been carrying 10 tonnes of cocaine from Venezuela! Airplanes geeks are very impressed: "Trans-Atlantic ghostflying drugs-loaded plane bound for West-Africa! Very impressive. That takes cowboy 727 flying to a whole new level. Cowboy trans-oceaninc cargo jets! Wow. These people are living on the edge..."

Nov 12, 2009


At a Melitz seminar this afternoon, I was amazed at the frequency at which the word “basically” was coming out of his mouth. Maybe 2.9 times per sentence? It’s really crazy how much all economists use that term all the time. Are they really “basicalizing” every thought that goes through their mind? Why don’t they use “on the whole”, “essentially”, “fundamentally” or “mainly” instead? Maybe it’s becuz economics is the science of models that simplify, or “basicalize”, complicated phenomena.

But it doesn’t seem like the practice is only an economist’ problem. It is among Wikipedia’s words to avoid, and there is even a National Committee to Stamp-out the Word “Basically.”, whose Chairman wrote that the word “has turned into one of the most predominant, albeit useless, words of the last decade. Emulating a fast-spreading cancer, it has infiltrated the speech of the majority of the English-speaking world. In an attempt to sound erudite, and “groping toward imagined elegance” everyone from produce clerks to our leaders in Congress misuses and abuses the word.” There is also a facebook group devoted to deleting the word from the dictionary. But according to Google trends, its usage has not increased that much in the last 5 years. Personally, I have decided to replace it with “to put it bluntly”…

Nov 9, 2009

Opinions over free-market capitalism

The link to the report is here.
Note: the whites indicate the percentage of people answering either "no answer" or "Depends".

Nov 6, 2009

Negative "externality": Public Urination

Suppose you go to a pub, drink a couple of beers. Suppose you drunk a beer too much, you don't want to take the car, so you take the bus. If you happen to hang out too late, and the bus stop circulating, you walk home. If you happen to live far away from the bar, on the way home you might feel the pressing need to relieve yourself somewhere, and then you might decide to stop at a corner in the city: the effect of your beer consumption is going to badly affect the citizens who have to bear the horrible smell of your, ehm, former beers. Imagine the corner is just next to a shop where people buy fresh food: the owner of the shop is certainly going to suffer from your decision.
So what can the owner do? In this irish town, a guy had the brilliant idea to put an electric device: in front of his shop, people are warned with a sign like "electric current in operation, urinate at your own peril". Some people were so drunk that got their electric shock (ouch!). Maybe the device is the most brutal/efficient solution, but the city mayor is thinking about an alternative. One that I like is "name-and-shame": take pictures of public urinators and upload them on a website. These could be done by people, or by installing cameras outside places where people tend to urinate... a modern pillory.

Nov 5, 2009


Superfreakonomics is pure candy form A to Z. While Levitt's research was the core of the first book, this one is all about crazy stories and "freaky" papers by a bunch a economists. The chapter on global cooling is an ode to freaky scientists, and so is the last chapter on monkey economics. Books like this make life more interesting.

Jungle Economics

Can economics be used to explain social behaviour in monkeys? Apparently so!

Primatologists have uncovered a mating market amonsgt monkeys where long-tail macaques trade "grooming" for sex. Male macaques groom the females in exchange for more frequent mating and increased loyalty. As the number of potential male companions rises and females become relatively scarce, the price for sex rises and the amount of time spent grooming the females increases, the so-called "biological market theory".

But sex isn't the only commodity that grooming is traded for, females macaques will groom new mothers for the chance to hold her offspring, and rare skills can improve a monkey's pattern of grooming. In South Africa, a low-ranking vervet monkey in the wild was trained to open a box of apples, this rare skill landed her a pattern of grooming similar to a dominant animal. And when the reseracher increased the competition by training another low-ranking money to perform the same skill, a duoploy emerged with an equal (but lower than in monopoly) distribution of grooms being received by the two.

Nov 4, 2009

Beckham's law repealed?

What does Beckham have to do with economics?As reported here, the Spanish parliament is about to repeal the famous "Beckham's law. What is it? It was a law passed in Spain in 2005 aimed at attracting "wealthy" foreigners to the "peninsula iberica". In practice, by moving to Spain, you could choose to pay a flat 25% tax rate on your income, for a period up to five years. A good deal if your salary happens to be close to that of a football star like Beckham, who in fact had moved to Real Madrid in 2003, and was among the very first to adopt this new friendly tax regime. Now the proposal to repeal it is being discussed in the parliament, a decision which is not so strange if you look at the latest number for the spanish budget deficit (6% of GDP). Of course, this is making the spanish teams angry, and a protest is under do you call it in spanish?

Nov 2, 2009

Transit countries in cigarette smuggling

Cigarettes are the world’s most smuggled legal consumer good. To organize their illicit trade, tobacco giants and gangsters need "transit countries". Imperial tobacco “chose Afghanistan, the source of 98% of the world’s heroin; Moldova, the largest source of human prostitution in terms of women being smuggled into Western Europe; Kaliningrad, which is notorious as a crime-ridden enclave of the former Soviet Union and is notorious as being run by criminal gangsters". Find out what these countries are here.

Yet Another "Mother of all Crisis" - Roubini II

Roubini is predicting another crisis: here on FT

Oct 29, 2009

Cheap, fresh crack and sport events

Where and when will be the best place and time to get fresh cheap crack and enjoy watching the sporting event of the year?

Rio 2016 of course!

While the decision who gets to host the Olympics is dirty politics (I'm sorry Barack!), the supply of "fresh, cheap, quality" drugs can be attributed to the miracle of competition!

As the Economist article on Rio "The bottom line " says, there are three large competing drug fractions in Rio. Fierce competition among the gangs is bringing the prices (and I presume quantities) close to the perfect competition outcome.

Is this the way to go? It definitely is, if you believe that humans are truly rational and that drug addiction is in fact utility maximizing.
It might not be, if you think the drug addicts are not fully rational. Monopolistic drug dealer would increase prices and slash quantities sold, so decreasing the number of drug addicts (being drug addict is more expensive => the outside option gets more attractive). On the other hand it would create extra revenues for the drug cartel, these would likely be used in ways not consistent with the "best interest" of the majority society.

Anyway, if watching sporting events and doing crack is your thing, start shopping for a ticket!

Oct 28, 2009

Levitt On The Daily Show

Jon Stewart interviews Steve Levitt about his new book, 'Superfreakonomics'.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Steven Levitt
Daily Show
Full Episodes
Political HumorHealth Care Crisis

What about the book review PL?

Improving the rules of football

“The first-move advantage in chess is the inherent advantage of the player (called White) who makes the first move.” Chess’ flesh and blood version, “American” football, suffers from the same problem. When it comes to overtime, the team that gets the ball first by winning a coin toss wins more than 60% of the time. Obviously, letting luck decide the outcome of a game based on the rule-of-law is problematic.

Tim Harford explains how Chris Quanbeck, a Green Bay Packers fan, came up with the idea to auction off possession of the ball in the natural currency of the game: field position. The team willing to begin furthest from its scoring line would receive the privilege of possession. Yeon-Koo Che of Columbia University and Terrence Hendershott of Berkeley formalized  the idea. As they explain with the figure below, the auction outcome should end up around the 18 yard line, where the chance of winning is counterbalanced by the risk of a dangerous fumble or interception.

But doesn’t adding luck, in the form of a (random?) coin toss, make the game even more exciting and “human”? I would think that, quite contrary, the auction would add another layer of strategic decisions based on game theory and psychology…in other words, what football fans, such as David Romer and Steve Levitt, really want.

As Quanbeck puts it, “Imagine the excitement of live bidding!  Two head coaches meet face-to-face at center-field in a test of guts and strategy.  The home crowd goes crazy as the bidding proceeds, imploring their coach to take the ball and drive to victory.  However, the hometown coach must stay cool to ensure he doesn’t end up pinned against his own goal-line on fourth down.   Either way, the coach has nobody to blame but himself.  If you want the ball, take it.  But be careful what you ask for”.

Oct 26, 2009

Foreign volunteer busy writing a blog and smoking pot

"How to keep the bed net project going when the nets were first impounded and delayed at customs, the truck driver transporting the nets got drunk and didn’t make the trip, the clinic workers are off at a funeral for one of their coworkers, the foreign volunteer is too busy writing a blog and smoking pot, and the local village head is insulted that he was not consulted on the bed net distribution."

Source: Easterly

Mr. Volcker's plan to reform banks

In this article from the NYT, a description of the struggle Mr. Volcker is facing in advancing his reform plan for the banking sector. In a nutshell, this would be a "modern" version of the Glass-Steagall act, separating investment banks from commercial banks.
Mr. Volcker is literally and figuratively a "giant", because of his reputation built during his chairmanship of the Fed. The period in which he defeated the high inflation mounting in the US at the beginning of the 1980s is known as Volcker's disinflation. He now and then hired as an external advisor whenever important reforms are needed, and now he is the head the president’s Economic Recovery Advisory Board. While the Obama team is thinking at maintaining the current setup with heavier regulation (changing capital requirements, highlighting guidelines in payment structure for managers), Mr. Volcker is advocating a simpler system where "no bank would be too big too fail", because in his view: “no form of economic organization can fully contain bouts of destructive speculative euphoria”.

Oct 24, 2009

30% to 40% of World Bank lending is stolen

"Embezzlement and theft of World Bank funds may be the rule rather than the exception... 30% to 40% of World Bank lending is stolen (not lost to inefficiency but actually stolen)...
Workshops, conferences and projects aimed at “reducing vulnerabilities” or “reforming governance” are so much more palatable to the organization’s managers than digging up evidence of wrongdoing and pressuring governments to prosecute and recover funds. ....all our workshops and technical assistance may simply provide diversions that allow criminals to get away with their loot."

This is from this CGD post about this book.

Oct 23, 2009

Viva Competition!

"Prof. Anspach played his first game of Monopoly as a child in the mid-1930s in Czechoslovakia. In 1938, his family fled Europe to America on the cusp of the Holocaust. Years later, he earned a Ph.D. in economics from Berkeley. One day in the 1970s, he tried to explain oil cartels and the downside of monopolies to his 8-year-old son, William. The economist searched toy stores for a more philosophically pleasing alternative to Monopoly, but found nothing. He then set out to create a game that would be a sort of "Monopoly backwards," in which players compete to break up existing monopolies rather than create them. He called it "Anti-Monopoly.""

What's more, he even uncovered the drak secrets behind the Monopoly board game and fought to break thier monopoly! More in the WSJ.

ht: Bridge

Oct 22, 2009

How easily can ones brain be fooled?

How easily can ones brain be fooled? It turns out that pretty easily (at least when it comes to recognizing colors, distances etc...). Look at the two squares marked A and B and compare their color.

Square A seems significantly darker, doesn't it? It turns out, both are the same color... I think the perceived color difference is even bigger in the second case: Compare the color of the little squares that are in the middle of sides of the cube. (I marked these squares with a little tick).

The one on the upper side is dark brown, the other one is orange! There seems to be no question about that. Again, both have the exact same dark brown color. Here are the relevant squares (everything around them was deleted).

The question is, can our brain be fooled so easily in different situations? For instance when one assesses probabilities and uncertainty. I think so (I would recommend the Kahneman, Tversky:Judgement Under Uncertainty: Heuristics and Biases).
The real question is whether the "enlighten" policy maker can do anything about it (maybe he suffers from the same bias-VS comment about casinos banning Martingale strategy players on prev. post) and whether he should do anything about it (maybe people are perfectly happy thinking that the little square is orange rather than brown)...

Oct 21, 2009

Rodrik on rising protectionism

While Dani Rodrik has been silent on his blog, he is still producing commentaries on Project Syndicate. Here there is his last sceptical view on the argument made by many scholars that Protectionism is on the rise because of the crisis. While questioning the numbers per se (does anyone know of a comparison between pre-crisis and post crisis protectionist measures??), the further point he raises, is that the difference between the Great Depression and today's crisis, is the presence of safety nets in modern economies. These, in his views, have succesfully reduced the workers' demand for protection by means of tariffs.

Oct 20, 2009

Geneva policymakers: Brilliant choice architects?

I once received a letter from the Geneva State telling me that, as I had failed to choose my health insurance, they were automatically suscribing me to the default plan. I wasn't very happy about was three times more expensive than my plan of choice at 3000 CHF per year instead of 1000!

This made me wonder why the default plan was so expensive. They are thieves I concluded. Well, turns out I was maybe completely wrong. They could be brilliant choice architects, really.

As I read in the amazing book Nudge, by making the default option unattractive (super expensive), the government forces people to choose the more appropriate plans for themsleves. This stirs competition among plan offers and results in active choices, which, assuming choosers know a lot and policymakers are essentially guessing, is an optimal allocation.

The Word On Altruism

Reading the IHT this morning, I came across this article. It's an excerpt from the book 'Superfreakonomics', by Levitt and Dubner (PL, have you read this one yet??), and challenges the notion that humans are altruistic.

The last line of the article - 'People are people, and they respond to incentives. They can nearly always be manipulated -- for good or ill -- if only you find the right levers' - neatly summarises why we're all in the economics business, I guess.

Oct 19, 2009

The Rigotnomics Collection

The Winter 2010 Rigotnomics Collection is here! Check out the catalog of t-shirts, polo-shirts and hoodies. Ordering instructions can be found on the last page.The offer ends on October 30!

Oct 18, 2009

Roulette - how (not) to make money on the Martingale Strategy

I was taught a sure way to win money when playing roulette. You bet on color, if you lose you double your bet, if you lose again, you double your bet again. You keep on doubling bets until you win, wining back all your money plus profits equal to the original stake. You have a chance of winning in the first round close to 50%, and you are sure to recover your money later on. Sounds good, doesn’t it?
Even the gamblers admit there is a problem with it. You might not have enough money to keep on gambling.

They are partly right. In reality the strategy has a negative expected value, no matter how much money you have, you could be Rothschild, Rockefeller, Gates or owner of the entire Universe you are poised to lose money when playing the Martingale Strategy.

The probability of winning in the first round is 18/37. The probability of losing your entire fortune is (19/37)^n where “n” is the number of the round in which you run out of money. The probability of winning your initial bet (recovering all money + initial bet) is (1-(19/37)^n-18/37). It turns out that the expected value of the bet is negative for n=1 (when you can cover only round 1) and is monotonically decreasing in “n” (the more rounds you can / are determined to cover the more negative the expected value of your bet gets)… So running out of cash when playing does not hamper your strategy, it saves your ass!

Obviously the expected utility theory can’t explain why anyone would want to play this strategy. You should be super afraid of big losses. This strategy tells you to take huge bets when things go sour. NO GOOD

Prospect theory can’t explain it either. You should be underweighting probabilities close to 50% and overweighting low-risk high loss events (that’s why you insure). You should never play this strategy. NO GOOD

Biases in the evaluation of disjunctive events (Put simply, breaking a chain of same events). But these should be underestimated! But the gambler apparently overestimates the probability that the chain will be broken and so he wins his money back. NO GOOD

The last line of defense is Regression to the Mean. People are stupid and think that the outcome of round X predicts the outcome in round (X+1). (Red in this round predicts black in the next). I actually think this is it…GOOD

The problem is that “Regression to the mean” is just not rich enough, it doesn’t feel right that people should so easily disregard the huge bets they are potentially taking. People probably think that all previous outcomes predict outcome in this round (the more reds have fallen previously the more confident you feel about black falling this round), on the other hand if many reds have fallen in the previous rounds maybe people will expect more reds to fall… I NEED A PSYCHOLOGIST TO EXPLAIN THIS!!!

If you think this is fascinating, you need to read Judgement Under Uncertainty:Heuristics and Biases, A.Tversky, D.Kahneman. It's one of the most fascinating econ papers ever! (Published in Science, authors are psychologists)

All the computations that show why Martingale Strategy Doesn't work are here. (p.s. It's 1 in the morning, I'll need to recheck the math tmw, but it should be OK).

Oct 17, 2009

Cream Skimmer or Underdog?

Cream Skimmer or Underdog? in a social program that is "perhaps the largest in term of scale of training in human history". This is the question that Prof. Chen will be answering next Wednesday in Rigot.

I had the pleasure to share with him part of the Gambian Micrometrics Experience.

The rationalization of humans

Humans are not rational, i.e., they suck at making the right decisions. While behavioral economics suggest they should be nudged in the right direction by proper choice architecture, recent advances in psychology and neuroeconomics might now provide even better tools, like the Rationalizer.

"The device is an emotion-sensing system designed to help investors keep a cool head when buying and selling [as] day-traders who exhibit more intense emotional reactions have significantly worse trading results."

The bracelet measures changes in the electrical resistance of the skin which can be caused by various stimuli, like anger or elation and transmits it to the “EmoBowl”, which alerts you to stop trading if you’re too hyped!

Maybe this was dreamed up by freshwater economists whose rational expectations models may now become relevant.

ht: The Economist

Oct 16, 2009

Indiana Jones and the Financial Crisis

Indiana Jones has been spotted in the corridors of Rigot! After cracking the secret of the Holy Grail and the Crystal Scull, it seems that the famous archeology professor has changed his field of interest to CDOs, subprime mortgages and other mysterious objects of our time.

Oct 14, 2009

What is the point of a mascot?

Are mascots a relibale indicator of a team's success? Here are the findindgs of the Wall Street Journal.

In another article, the WSJ wonders why don't men and women compete against each other at chess...this ain't no physical sport!

Where is the Zedillo report?

The World Bank has to change. A whole bunch of people were discussing what to do and how to do it last week in Istanbul. Of course nothing will change as those who can make it happen would lose. "Oddly [read obviously], the Zedillo Commission report on reforming governance at the World Bank has yet to be released—although it is said to be complete. President Zoellick announced the creation of the commission in a speech one year ago at the Peterson Institute for International Economics, and he has evidently received the report. My guess is there is something about it that disappoints him, perhaps regarding the role of the Bank’s Board – or something sufficiently controversial he didn’t want it crowding out his calls for more IDA funding and a capital increase?" (source: CGD)

I think the WB should be downsized and divided into focused and autonomous units. And Bill Easterly or Simeon Djankov should be director. That Brazil and China should have more say in its governance goes without saying.

Can you trust hedge funds?

I read today in the FT about a study related to Hedge Funds (HF) which shows how reports about performances are often misrepresenting the true facts. Stephen Brown, William Goetzmann, Bing Liang, Christopher Schwarz, respectively from NYU, Yale, Amherst and Irvine, collected data on Due Diligence (DD) reports of HF from a third party provider of this service. They show, first, that HF misreport past regulatory problems and performances more often than not. Just to cite a result, in 42% of the cases, there were "verification problems". Second, having informational conflicts in the past increases the future returns but also the probability of a fund failure. Third, lacking official audit increases operational risk. Fourth, DD reports are only asked for by investors when investing is considered, which means that people assess the quality and integrity of the firm they put money in (which is what DD are about) only slightly before the peak of returns or at the peak of the HF cash inflow. Even though they chase returns, the authors also show that they value "truthtelling" behaviour, which means, unsurprisingly, that the integrity of the management is highly appreciated by investors. This suggests that, while it is true that being successful and honest is often the best way to disclose information, if you are open to a third party auditing process investors will reward you even more.

Oct 12, 2009

Who cheat more, consultants or academics?

Chris Blattman: "I spent three years in [business] consulting before becoming an academic...I do recall feeling like a bit of a fraud most of the time. If it’s any consolation to the consultants out there, not much has changed now that I am an academic..."

So who cheat more, consultants or academics?

The 2009 Nobel prize in Economics goes...

half to Elinor Ostrom from Indiana University, "for her analysis of economic governance, especially the commons"

and half to Oliver E. Williamson from University of California Berkeley "for his analysis of economic governance, especially the boundaries of the firm".

check the Nobel website for more information. Congratulations to both!

Oct 11, 2009

Obama & Nobel II

Here are data from Google on how often is given term searched.

Term : Nobel Prize - People care what kind of prize Obama won

Term : Nobel Prize money - They care even more how much money he actually won

Term : Obama charity - But what they care most for is what the hell is he gonna do with that money

For the last graph: I was looking at some random combinations of the term "Obama" + "word"(for example: Obama radio, Obama car, Obama underpants) and they've increased as well after the Nobel Peace Prize announcement, but by a magnitude less than "Obama Charity".

Oct 10, 2009

“Noble Nobel”: legitimacy and prospects for the Sveriges Riksbank Prize in Economics

The Taliban condemns Obama’s Nobel Peace Prize saying that "[Obama] reinforces the war in Afghanistan, sent more troops to Afghanistan and is considering sending yet more. He has shed Afghan blood and he continues to bleed Afghans and to boost the war here." This being rather an extreme position on the Norwegian Nobel Prize Committee’s decision from this Friday, it is indisputable that Barack Obama’s win has generated mixed reactions across the world. The committee said it honored the American president for his “extraordinary efforts to strengthen international diplomacy and cooperation between peoples.”

Obama is the fourth US President to win the Nobel Peace Prize, however, in contrast to Carter, Roosevelt or Wilson, he has been chosen not for past accomplishments, “but for “vision” and inspiring “hope” at the beginning of his presidency” (CNN). In my opinion such decision above all questions the legitimacy of the Nobel Prize itself. Giving out Nobels for the ability to “capture world’s attention” is bonkers (in a public statement the Committee as part of their explanation supporting their decision has also stated that the US President won because “Only very rarely has a person to the same extent as Obama captured the world's attention”)…

Undoubtedly, the Committee’s irrationality further builds up the anticipation with which many ( I assume) will be awaiting Monday’s Announcement of the 2009 Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel. It just might be so that this year, Thomson Reuter’s adumbrations, are completely off. Creditability may also be a problem with the InTrade and Ladbrokes’ predictions and probabilities (odds) for the 2009 Nobel prize in economics. For example here are Ladbrokes' probabilities:

Eugene Fama 2/1

Paul Romer 4/1

Ernst Fehr 6/1

Kenneth R. French 6/1

William Nordhaus 6/1

Robert Barro 7/1

Matthew J Rabin 8/1

Jean Tirole 9/1

Martin Weitzman

The Inkling Market’s valuations can be just as cocky...

Thus I believe that with the cuckoo nature of the Nobel Prize Committee nowadays any of the following are just as good bets for Econ winners as the Fama, Romer or the others: Bottom line: Even though not as 'bronzato' there is hope for Silivio in the end (at least for the 2010 Nobel Peace Prize)…

p.s. Be sure to turn on your volume when you go to his support website!

Oct 6, 2009

HEID student cited in The Economist

In its special report on the world economy, The Economist refers to a paper by one of us (a HEID current PhD student):
"An emerging-market government can therefore promote this learning process by keeping its currency cheap... This is a tried-and-trusted growth strategy promoted in the past by economists such as Bela Balassa and lately championed by Dani Rodrik of Harvard, among others. In a recent paper Caroline Freund and Martha Denisse Pierola of the World Bank show that sustained export surges in the developing world are often associated with sharp currency depreciations, which encourage entry into new markets and products."

Oct 4, 2009

Sunday fun with the credit crunch

I've re-named my morning bowl of muesli at the desk Credit Crunch.
Robert Fulford, London, UK

Oct 1, 2009

Farmers and Market Incentives

Last week we mentioned how the plummeting prices for cow milk are causing farmers' protests and urgent re-action by policymakers. In the meanwhile, in the Swiss Alpine region of Appenzeller, some farmers have increased the production of goat milk, because for each liter they produce, they get twice as much as what they get payed for cow milk. Watch this video to enjoy the beauty of the landscape, the poetry of farmers' life, and the working of the invisible hand.

RDB Quarterly Report

Here is the RDB's second Quarterly Report. If you are a new econ student (or anyone else!) and wanna invest some money, send an email to rigotnomics(at)! (You can invest as little as 5 CHF if you wish). As you will read in this report, we are part of the mobile money revolution! Not only do we lend money to many mobile shops in Kenya, but also most borrowers pay back their loans with their mobile phones!

Sep 30, 2009


With the ICC Champions Trophy entering the last-four stage, and Australia winning against Pakistan after a last-ball thriller – I’m running a high cricket fever! While growing up in my country, like every other kid my age, my dream was to become a cricketer (like Wasim Akram or Brian Lara), but as time progressed, and after the school cricket coach failed to realize my immense cricketing talents, I realized that I was better at another sport called Economics! Cricketers are “like derivative traders or rock musicians or authors. They are a small group of people who have an exceptional chosen talent”

Edward Lazear and Sherwin Rosen, who did an in-depth analysis of tournament theory, show how small differences in abilities (or luck) can result in a large difference in players’ pay-check. “A salesman who can sell 10% more than his peers in a company is likely to get paid 10% more. On the other hand, a batsman with a 10% faster-than-average response to a ball traveling towards his throat at 100 miles per hour is likely to end up earning 100 times more than the average cricketer.” Complete article here.

A cricketer cannot make his mark at the highest level unless he is selected in the national team, unlike football where playing in the EPL or La Liga (or the LA Galaxy for some!) might be the ultimate goal of some, or a Canadian hockey player might as well get a chance to be drafted in the NHL if not Team Canada, or a Japanese batter in the MLB etc. There are a whole host of choices in these team sports (in terms of monetary gains), but not in cricket. Yes, we now have the Indian Premier League (IPL), but that is an event which is wrapped up within 6 weeks in a given year, and there are stark intra-team differences in the salaries paid to players within the IPL – as most of it goes to the players who have already been playing for their respective national sides for quite some while. Playing for English or an Australian country, might help a cricketer earn more than what he earns while playing for his national side, but the difference in remuneration isn’t much when compared to other team sports (and English counties have a cap on selection of overseas players). So in the cricketing labor market, there is only one buyer of your talent, and that is the National team selection committee – a situation we would like to call Monopsony. But this is what makes cricket interesting – you do everything for the love of the sport, even if that entails having a no-result after a five-day test match!

Sep 29, 2009

Goodbye to 1 grosz...

The Polish National Bank (NBP) wants to withdraw from the market in 2 years one and 2 grosz coins (lowest nominal value, equivalent to 1 cent/penny/etc...). According to the Bank, the consumer will not be harmed since, while some prices will be rounded down, others will be rounded up. Marketing specialists, however, for whom a price of PLN 3.99 is a better selling line than PLN 4 due to consumers' framing schema of interpretation, have already started to show concern. Such "price illusion promotions" are so common that the NBP could easily introduce a 0.99 coin.

Undoubtedly, some people will benefit from the change... history has seen many swindlers who made their fortunes on price rounding. For example, consider the famous example from Sweden. When pensions were readjusted to account for inflation, a post office accountant would round up all numbers after the second decimal place, and accumulate them on his private bank account. Moreover, the books didn't show anything, and there were no dissatisfied consumers, since the pensioners received precisely what they expected.

NBP states that last year it produced 172 million 2-grosz coins and 316 million 1-grosz coins, which translates into PLN 24,4 million taken out of the taxpayers' pockets. Not a small sum! However, for me even more puzzling is whether the substential demand for 1 and 2 grosz coins is in fact so largly due to marketing specialists. In March of last year, in an online forum I read about a group of amateur charlatans who wondered whether it pays to collect 1 and 2 grosz coins and sell them as scrap metal. Under the market prices, for 1 kilogram of 1-grosz coins (604 coins) they could earn PLN 4. Not too much, but maybe just enough to make a deal on the price difference...

Sep 27, 2009

geen go home!!! gringos vayanse a su casa

Here and here a paper with a nice identification strategy to show that US military bases in Colombia are causing more harm that help.

Opportunity costs of romantic evenings and IQ of babies

Couple of months ago we were talking with my girlfriend about the impact of season of your birth on your intelligence, and health. My theory was that less educated, poor people are more likely to conceive a child in the winter. Children born in fall and early winter underperform their peers simply because they are more likely to come from a family with low socioeconomic status.

Guess what, NBER published a paper "SEASON OF BIRTH AND LATER OUTCOMES: OLD QUESTIONS, NEW ANSWERS, 2008" that is supporting my theory. The sad thing is, that I am not the author of the paper, the cool thing is that they got it wrong (or so I believe)! They argue that less educated, poor man are more likely to be exposed to temperature extremes. Such exposure lowers their sperm count and they are less likely to conceive a child. Fine, but I think I have a more plausible explanation.

In my opinion the differences are caused by opportunity costs of making a baby. The less intelligent baby is likely to be conceived in december, january, february , and march. All of these are rather cold months.
In my opinion richer people have significantly wider choices of entertainment during the winter, but the gap narrows during the summer. In the summer you can hike, go to a park, sun bath, swim in the lake, jogg all of these without having to pay a single penny. What can you do for free in the winter? Virtually nothing! While the rich ones have wide range of possible pastimes in the winter (skiing, snowboarding, going to movies, going for a dinner and thousands more) and would have to give them in order to have a romantic evening, the poorer ones have way simpler choice: "Shall we watch TV or make love?". And this is what in my opinion drives the difference, opportunity costs of romantic evenings! On average smartest children are conceived in the months when the gap between opportunity costs of making a baby for a rich and poor are smallest. The least intelligent are conceived when the gap between the opportunity costs is the largest...

Sep 26, 2009

The Swiss menace

No, I’m not talking about the Geneva housing market, but am referring to one of the Op-Ed columns by Mr. Krugman on the American Health Care system in the NYT. This time though, it is ‘cheese’ and ‘health insurance’ we see in the same sentence. According to Krugman, there are three possible ways for an improvement in the US health system.

#1: The British way
#2 The Canadian way
#3 The Swiss way

Krugman says “.. the truth is that the plans on the table would, roughly speaking, turn America into Switzerland — which may be occupied by lederhosen-wearing holey-cheese eaters, but wasn’t a socialist hellhole the last time I looked.”

Two years ago, Michael O. Leavitt (US Health and Human Services Secretary) visited Switzerland and the Netherlands, since policymakers had been promoting a system with universal coverage but rely on the private sector. Ironically though, the Swiss health-care system is based on the “Managed care” which is a concept originating from the American health system. A Swiss system would further mean increased regulation to ensure universal coverage.

What if Obamacare is chosen by the US as the ‘right’ way to go, would it actually “Swissify America” as Krugman states? Would the American public be comfortable with the Swiss model, given that health costs in Switzerland have been rising more than 4%, and a country where insurance costs have been increasing at a higher rate than the general increase in price and GDP – yet health indicators far superior than the US!

The following graph shows the distribution in the cantons of the average monthly premiums for adults (older than 26 years) in CHF for 2005 - GE (Geneva) is right where it should be!