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 that...it 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)gmail.com! (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!