How Do You Like Them Apples?

Congress, April 2011;

"Moody's Corp and Standard and Poor's triggered the worst financial crisis in decades when they were forced to downgrade the inflated ratings they slapped on complex mortgage-backed securities, a U.S. congressional report concluded on Wednesday.
...
``The problem, however, was that neither company had a financial incentive to assign tougher credit ratings to the very securities that for a short while increased their revenues, boosted their stock prices, and expanded their executive compensation,'' the report said."

Well, I guess we can consider this particular problem solved! Yessir, Standard and Poors have learned their lesson about the perils of letting risky, systematically important debt stay classified as riskless long after that has stopped being an appropriate description.

Congress must no doubt be thrilled.

Meanwhile, S&P are probably drinking a tasty glass of schadenfreude right about now, and cheerfully giving the US government this one:


Oh, so now you DO want us to be charitable in our ratings, huh?


(inspired by an observation of Coyote's)

Being a brilliant coder does not one a philosopher king make

I am periodically given cause to reflect on the bizarre attitudes that quite a lot of science and computer science types have towards finance.

There is a thread on slashdot where a programmer at a high frequency trading finance firm explains what he does:

I work on the algo and core infrastructure. I wrote price feeds that take 1/5th of a microsecond in C++ and (a little slower) in Java. I understand in fine detail how cache and the the PCI-e bus works.

blah blah blah technical details to show I'm really good at what I do.

And then, of course, the punch line

I also hope to make $500,000 this year.

You always hear about Google programmers being the best in the industry, but I've been to a couple Google interviews and turned them down both times because the engineering quality just isn't there. I'd put the average HFT programmer up against the best in Google anyday.

My response? Good for you, mate. I have very little basis to distinguish whether you're actually as good as you say you are, or whether you just have a very inflated opinion of yourself. Frankly, I doubt anyone else does either. Not that it matters, really. Your employers feel that you earn your salary, and the rest is nobody else's business.

But witness the strange and impotent rage that this fairly innocuous post generates. Let's start with the merely stupid:

What could possibly change in the underlying value of a corporation made up of flesh and blood humans and capital with decades of depreciation in a fucking microsecond? Here's a hint: nothing. You are not investing, or trading, but simply racing other gamblers. Investing doesn't benefit from microsecond response times, and trading doesn't need it either. People could buy IPO shares just fine over the phone. Nobody ever needed a microsecond response time to buy a thousand bushels of wheat, and never will, because bread is baked daily, not a million times a fucking second.

If politicians had two braincells to rub together, they'd enact a law to prevent trades faster than some tick, say, an hour. Your 'trading' company would go out of business in a week, and nobody would care. Farmers would still sell their wheat, and bakers would still buy it, but without you leeches skimming off the top.

Thank you, patriotic comrade! The Party has determined that your skills are not being allocated in a way most beneficial to the glorious People's Republic of San Francisco. Under the new 5 year plan, you will report to your new assigned socially optimal task, or will be transported to the Gulag.

This turkey just can't wait to unleash his inner totalitarian. If what you are doing is judged to not be socially optimal by some nebulous calculus, then it is to be outlawed, even if someone else was freely willing to pay you for it and there was no obvious social harm. Coming soon, a ban on Playstations, gossip magazines, and movies over 90 minutes long!

Also witness the complete lack of understanding of how markets work. Person A has an outstanding order to sell IBM stock for $80. Person B has an order to buy at $78. Person C comes along, more anxious to sell, and places an order to sell at $78.20. Along comes a high frequency trading firm, and 2 microseconds later agrees to buy the share at $78.20 off Person C. This is clearly exploitative, how? Oh, presumably because the HFT firm might sell the share a minute later for $78.22. According to this nitwit, the HFT firm is 'skimming something off the top'. So what? Your supermarket buys apples in bulk at $1 per kilo, and sells them at retail for $2 per kilo, 'skimming something off the top'. Your antiques dealer buys a nightstand at $100, and sells it a week later at $150, 'skimming something off the top'. Do you rage against them too? And you, noble untainted computer programmer, will hire out your underlings at $200 per hour, while only paying them $100. You know why? Because the alternative to people 'skimming something off the top' is the 'All Good Must Be Sold At Cost Act of 2011', also known as 'shutting down all business immediately by mandating profits to be at most zero, and negative if you can't actually sell the item you bought'.

Bt believe it or not, that' not the worst comment of the thread. That honor goes to clown #2:

I am most likely better than you at each and every aspect of software (and HDL) development you have mentioned.

I would be intrigued to hear you flesh out the details of how exactly you came to this conclusion.

Except, of course, "debugging in minutes" -- that kind of irresponsibility would get me fired.

No shit, eh? Perhaps that's because you're working in a job that DOESN'T REQUIRE THINGS TO BE DEBUGGED IN MINUTES. If you were, and you decided that you just couldn't in good conscience debug something in 5 minutes, then you'd be COMPLETELY FUCKING USELESS IF THEY ACTUALLY NEEDED THE TASK FINISHED IN 5 MINUTES TIME.

I also have to work long hours, and have to have clear understanding of complex issues unrelated to software.

Well, bully for you.

Except I do embedded software and FPGA development for professional audio equipment. Each device I worked on, each firmware release, each line of code, does something useful for many, many people. Some of those people don't even know that audio equipment, leave alone software, is involved with what they are hearing. Large fraction of my work ends up being free/open source, too -- platform, drivers, etc.

To which I keep asking, so what? Nobody's taking pot shots at what you do. But as long as you're up on your high horse, making audio software and doing a bit of open source doesn't exactly make you Mother Theresa. Johnny Totalitarian in the first quote may well decide that the world has quite enough audio software already, and you'd be better off cleaning garbage. And when he did, I'd tell him to piss off them as well. Your employer pays you good money for what you do, and the other guy's employer pays him for what he does. Good. If you want to take a lower paying job that gives you more satisfaction, because you produce something tangible, I applaud that choice. If the other guy doesn't, I'm fine with that too.

And so from this carefully constructed argument, comes the obvious conclusion:

I also don't have any problems with posting here under my real name. Or with telling you, and people like you, to die in a fire.

I'm going to assume that you're just throwing this out there as a gratuitous insult, not as something that readers should be concluding based on the premises you've laid out.

You work as a programmer for a finance firm, ergo you should die in a fire.

You, sir, are a pompous fuckwit. You rage against an industry you don't understand, and against the fact that the world does not accord you the income and status that you feel is your right. But unfortunately for you, the finance industry doesn't actually give a rat's ass what you think of it. There is not a single employee at a finance firm that is going to lose a minute's sleep because you happen to not approve of their vocation, and your fury is all the more fierce because you know this is true.

George Bernard Shaw was a brilliant writer.He was also a Communist who liked eugenics and star chamber executions of people who couldn't prove their social worth. Being smart doesn't stop you believing stupid things.

[Edit]: Clown #2 uses his real name as his post, but on reflection I decided not to post it. If you, like me, don't like the trend of personalising internet attacks, you need to resist the urge to take part. If he changes his mind, his dumbass earlier comments should haunt his reputation.

Great news for German taxpayers!

So the big economic news of the day is that Greece is going to default, and that the ECB and the IMF are going to bail them out. The first part was a virtual certainty sooner or later, the second part less so.

European politicians being who they are, there is never a single problem for which the solution is not 'more powers for the EU, more centralised government!'. True to form, they've done it again:

Euro zone leaders were set to give their financial rescue fund sweeping new powers to prevent contagion and help Greece overcome its debt crisis, according to the draft conclusions of an emergency summit on Thursday.
...
The leaders were also set to promise a "Marshall Plan" of European public investment to help revive the Greek economy, in a deep recession due to draconian EU/IMF-imposed austerity."

Well that's great! Now that they've solved the problem with the level of debt (sort of), I'm sure the problem of the first derivative of debt (I.e. the ongoing Greek budget deficit that they still can't close, and keep getting riots whenever they try) will just take care of itself, right?

Ha ha ha! Yeeeeah. About that...

In much better news, Ireland, Portugal, Spain and Italy all solemnly announced that they really truly ruly aren't going to default as well:

In Brussels, the governments insisted that Greece was "a uniquely grave situation in the Euro area". In the draft agreement, the 17 leaders agreed that "all other euro countries solemnly reaffirm their inflexible determination" not to default.

And that's a guarantee you can take to the bank! Probably not a European bank, mind you, as they've got quite enough debt from these governments already, thanks very much, and are busy dusting off their 'How to respond to a bank run' manuals.

Let me translate all this for German taxpayers:

The good news is, you're going to have to pay for all those Greek civil servants!

The better news is, it's incredibly unlikely that this is the last time you're going to have to reach for your wallet.

Casinos - A Moneymaking Machine!

One of the things I find interesting about casinos is how they expose people's odd ideas about what makes a good stock purchase.

In popular conception, the casino is the ultimate licence to print money. You can't fail! The house always wins! Suckers come in, spend money on gambling, suckers walk out, profit!

Because of this, so the reasoning goes, you should always want to own the casino. The best approximation is to own the casino's stock.

For some reason, people don't think this way about, say, the box factory. The reasoning, however, is just as (in)applicable. Wood pulp comes in, boxes get made, suckers come in, spend money on boxes, suckers walk out, profit!

The reality is that casinos are a business, just like any other. Sure, once you get people playing, the odds are in favour of the house. But if there's free entry into the casino market, there's going to be a lot of casinos cropping up to compete for gamblers. And to get them to come to you, you have to spend money - on subsidised hotel rooms and buffets, on lavish decoration, on complimentary drinks etc. All of these things cost money. And as long as you're making abnormal profits, new casinos are likely to keep entering until you're only making normal profits.

To give you a sense of this, let's compare some real casinos and box factorys. Let's start with the most basic measures of profitability. We'll compare a typical Casino (Las Vegas Sands corporation (LVS) with a typical box factory (International Paper (IP).

According to Yahoo, the box factory had a return on assets of 5.34%, and a return on equity of 16.38%. The Casino, by contrast, had a return of assets of 4.78%, and a return on equity of 13.55%.

Not exactly a slam dunk for the casino, is it?

But there's a bigger misconception here - most people don't make a distinction between a good company and a good stock. In the language of the common man, you're better off buying a crappy but underpriced company than a solid but overpriced company. Stock prices only react to news. If everyone already knows that Google is going to be an awesome company in the future, you'll have to pay extra for that fact now. And when it in fact becomes awesome, your stock price won't go up, because people had already taken that into account. The stock price will only go up if Google turns out to be an even better company than people thought.

In finance, one way to think about this idea is comparisons of price and asset value. Price-to-Book Value of Equity measures the ratio of the share price to the accounting value of equity. Price-to-Earnings measures the ratio of the share price to the previous year's earnings. Both of these capture a rough sense of how "cheap" or "expensive" the company is.* (I hope finance students will forgive my hand-waving here)

By this measure, our box factory has a price-to-book ratio of 1.73, and a price-to-earnings ratio of 10.94. The casino has a price-to-book ratio of 4.20, and a price-to-earnings ratio of 49.48. By both measures , the box factory is cheap and the casino is expensive.

According to no less an authority than Fama and French (1992) , this predicts that the box factory will also have higher stock returns in the future.

And this is in part due to the basic point at the start. Precisely because everyone thinks that casinos are a money-making machine, they bid up the stock price, making them a lousy purchase and forecasting low stock returns. And because the box factory isn't exciting to people, it has a lower price, making it a better purchase and forecasting high stock returns.

The moral of the story is that you should be wary of pop-culture perceptions of what makes a good stock purchase. And if you need a rule of thumb, boring is better.

*Fama and French claim that book-to-market could also be a measure of risk, and it might be. In my anecdotal experience, if there's someone other than Fama or French who deep-down truly believes this, I'm yet to meet them.

Mental Accounting and Countries

Mental accounting is the idea that people think about outcomes in terms of particular categories, or mental accounts. You think of the profits on your risky share portfolio as being one set of money, and the profits on your kid's college fund invested in safe bonds as another set of money, and evaluate them differently. In reality, it's all your money, and it's all transferable. You ought to be optimising over the whole portfolio, but people usually don't.

Another area this shows up is in terms of travelling to countries. There is a certain class of traveller who I refer to as a 'list-checker'. They view it as their mission to go to as many countries as possible. But crucially, they tend to only go to each one once, and each one is somewhat interchangeable. Typically, these people are amongst the worst bores for telling travel stories, constantly interjecting 'I've been there' whenever a country comes up. This interruption is rarely associated with an actually interesting anecdote related to the current discussion, but instead is merely there to remind you how cultured and worldly they are. Their aim is not necessarily 'seeing more stuff', but more 'getting to tell people they've been to dozens of countries'.

If you want to see how this makes no sense at all, consider a map of South America.


(image credit)

According to wikipedia numbers, Brazil has about 48% of the total land area of South America, and about 52% of the people in South America. So regardless of whether you're after a representative sample of seeing different geography in South America or meeting different people in South America, you ought to spend half your South American vacations in Brazil, and the other half in the rest of the countries combined.

The list-checker doesn't work this way, of course. They'll spend a week in Brazil doing 4 days in Rio and 3 in Sao Paulo, and declare victory. "I've already been to Brazil!", they'll declare. "Let's check out what's in Suriname."

The answer is of course, "f*** all", and they'd be much better off seeing more of Brazil. That's assuming that they're actually after more interesting experiences. On the other hand, if you take their preferences seriously and think that there really is nothing more important than checking off that list, then they should stick to what they're doing. Tick off that country!

Here's the way to tell if you're a list-checker or not. If the northern half of Brazil decided to split off into a separate country called 'Holmesia', would you feel a subtle urge to go there that you don't currently feel?

If you would, you are mega lame. (Unless you're so enamoured of yer 'umble narrator that you're drawn by the name alone - in that case, think of it as 'Amazonia', and do the exercise again.)

Don't be that guy. Nobody likes a list-checker.

You can-NOT be SERIOUS!!!

Greg Mankiw links to this very interesting paper by William Davis, Bob Figgins, David Hedengren, and Daniel Klein in Econ Journal Watch. It's a poll taken of economists, asking who their favourite economists are. Presumably 'me' (in the general form, not 'Me, Bob Smith') was not an available option, otherwise I suspect that this would be the dominant winner in nearly every living case.

The first question I have is on Page 7 of the pdf - Favourite Pre-20th Century Economists.

#5 is Karl Marx.

Karl @#$%ing Marx!!! Ahead of Walras! Ahead of Pareto! Ahead of Cournot!

Good God, which 'economists' were they interviewing? East Podunk State School of Sociology?

I suppose the likely explanation (consistent with evidence elsewhere) is this isn't a measure of 'who do you think were the best economists', merely your favourite ones. This would also explain other trends that would be strange in terms of actual contribution to economics - putting Galbraith (who mainly wrote popular works) ahead of giants like Irving Fisher, von Mises, Hicks, Stigler, Veblen, and Tobin.

In the spirit of bipartisanship, this isn't just a diss on left-leaning economists. Thomas Sowell was a surprising inclusion in the living economists age 60 or over. Now, I yield to nobody in my love of Sowell's brilliantly lucid and enjoyable explanations of basic economic principles, but like Galbraith he is mainly known for popular writing. I'd struggle to rate him ahead of Martin Feldstein or Robert Fogel.

I guess this is partly the mind projection fallacy at work.

But even so! Karl @#$%ing Marx? How do you even rate him as a serious economist, let alone your favourite one?

It's a sick world alright.

The main saving grace was that Gary Becker was the favourite living economist age 60 or older. A well-deserved honour!

Oooh, the burn!

Via Zero Hedge, comes Ice Cap Management's assessment of the fiscal situation in Greece. It includes these two pearlers:

To put the situation into perspective, the yield on a Greek 2 year bond is about 25%. It may actually be cheaper for Greece to fund their deficit using their VISA and Master Cards instead.

Zing!

Reasons why the EUR will escape crisis:   [This page intentionally left blank]

Double Zing!

Zero Hedge also makes a plausible case for what will happen when (not if) Greece defaults. Some highlights:

• Every bank in Greece will instantly go insolvent.

• The Greek government will nationalise every bank in Greece.

• The Greek government will forbid withdrawals from Greek banks.

• To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

• Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

• The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

Read on for more.

Sadly I can't see much to argue with in this analysis. The ultimate problem is the same as elsewhere in Europe - the current round of 'austerity measures' isn't even enough to close the budget deficit, merely to reduce the rate of issuing new debt. And even this has caused near riotous levels of dissent. Short of miraculous 10% per year economic growth and/or a magic infinite German Chequebook (which is, as far as I can tell, is the current ECB plan), the money just isn't there, and sooner or later this is going to become apparent.

This slow-motion train-wreck has been coming for some time. The only reason it's been slow-motion is the desire of all concerned to just keep rolling over the debt and buying time until the inevitable has to happen (ideally on some other politician's watch). I think the author of the second post is right - the sensible thing at this stage is to start figuring out what happens next. People differ on specifics, but the first commenter at Zero Hedge gets the big picture right:

So it's bullish for stocks...

Yeeaaahhh.. About that...

By the way, at the risk of congratulating myself, I did enjoy the title of that earlier post "Greece - Circling the Drain, Fiddling with the Second Derivative of 'Screwed' with respect to 'Time'".

Valet Parking

Every now and again, you stop and think that we live in a very remarkable society.

One of the things that brought this feeling was giving my car to a valet the other night. Just consider for a second how his institution works. Guy A pulls up and gives his $80,000 Mercedes, keys and all, to Guy B. Guy B is likely making about $10 per hour and may very well have a net worth significantly less than the car he is entrusted with, and yet Guy A lets him drive it away to park it. Guy A probably walks away without even checking what happens when he leaves and without asking where it will be parked. At the end of the meal, Guy B brings the car back intact, possessions all inside.

To make things stranger, this happens for run-of-the-mill restaurants, amongst people who've never met before and may never meet again. It's not just at some high-end country club with repeated interactions.

How many countries in the world do you think this kind of norm could reasonably work in? How many periods in history did people exhibit this much trust towards complete strangers? My guess is that the rate of theft wouldn't need to get very high at all before this institution would collapse completely.

And yet there it is.

Luigi Zingales, who's done a lot of work on this area, would argue that trust is linked to economic development. There's all sorts of value-increasing transactions that can only take place among strangers when there's strong norms of co-operation and low rates of screwing people over.

In other words, we shouldn't be surprised that institutions like valet parking only exist in highly developed nations.

Strange times.

(from a conversation with The Greek).

Predictable Preference Reversals in Procrastination Choices

In the category of 'stupid mistakes I make that I will admit to', let me add this one.

Procrastination is a classic sign of hyperbolic discounting. It's what happens when you know that something is in your interests to do, but you don't want to pay the small upfront costs just yet. You'll do it soon, really. As a result, it creates in predictable preference reversals. After you're done procrastinating, you'll wish you hadn't. Moreover, even as you're doing it, you know that you'll later regret it. But you do it anyway.

My mistake is not that I procrastinate and wish I didn't (although that happens too). It's more that hyperbolic discounting also causes me to procrastinate with things that aren't optimally enjoyable. So how does this mistake work in this context?

Procrastination typically tends to take the form of lots of small chunks of time. You tell yourself that you'll only waste five minutes, and then you'll work. Five minutes passes, then you want to spend another five, and so on. You may end up wasting a lot of time, but the decision has to be made incrementally because it's only the really immediate effect that has the high discount rate. In other words, in 5 minutes time, you really are willing to work. The problem is that '5 minutes time' keeps turning into 'now', when you aren't willing to work.

Someone who is hyperbolically discounting will only do so in tasks that individually require a small amount of time. Like checking one more blog. Or playing one more game of solitaire. They generally won't set aside in advance a large chunk of time to waste, such as by watching a TV show, or worse, a whole movie.

But here's where the preference reversals come in. In total, I will often waste 2 hours of time over the course of a day. If I could commit in advance to wasting this time and then getting on with work, I would rather spend it watching at least one TV show, or maybe a whole movie.

But I won't want to commit to that, because standing in the present, the first 5 minutes seem like acceptable procrastination, but the remaining 85 seem like an unconscionable waste of time when I should be working. They'll only seem like acceptable procrastination when they turn into 'now'.

An alternative title for this post is "Why, 6 months later, I still haven't watched 'The Hangover' that SMH lent me, even though I honestly believe it's a good movie"

This private company isn't offering me the contract I want!

What can I do?

Take my business elsewhere? Negotiate a better deal? Start a competitor that offers the service and undercut them?

Nah, that sounds hard. Wait, I know what we should do: lobby the government to strongarm them for us!

"56% of Americans have Internet data caps; FCC asked to investigate 

Two prominent Washington DC tech policy groups have asked the Federal Communications Commission to investigate Internet data caps in the US—with a special focus on AT&T."

Yes, because we all know that internet provision is a clear monopoly.

Some people make absolutely no distinction between statements of the form 'I would like X' and 'the government should mandate that I receive X'.

Would I love unlimited internet? Sure!

Do I expect unlimited internet, if mandated, to be free? No. Nothing is free.

Do I expect prices for everyone to rise if unlimited internet is mandated? Yes.

Do I expect this to benefit the 99% of internet users who aren't currently exceeding the caps? No. They'll pay more, and are unlikely to use the internet more as a result.

Do I expect this to benefit the 1% of large-scale movie-downloaders and spam site operators? Yes.

Do I expect this ex-post government rule-changing to reduce the incentive of technology companies to invest more in the future? Absolutely.

 Let's examine a more correct version of the article:

"56% of Americans have Internet data caps by revealed preference don't wish to pay more for unlimited internet use; FCC asked to investigate  something-for-nothing shills ask government to force private parties into a different contract with higher prices and different services from the one they have freely chosen  

Two prominent Washington DC tech policy groups have asked the Federal Communications Commission to investigate Internet data caps in the US—with a special focus on AT&T."

There, fixed it for you.

Disclaimers - Legally Important, Practically Useless

I recently saw a bunch of ads for Fidelity Investments. At the bottom, in small print, they included this terribly useful advice:

"Investing involves risks, including risk of loss."

You don't say! I personally thought that investing involved no risk at all - if we've learnt only one thing in finance from the past five years, it's that the housing market can only go up.

The second half is even more puzzling - 'including the risk of loss'. What other risks are their in investing? The risk of profit? The risk that you'll make lots of money and your kids will turn into brats? The risk that you'll waste lots of time clicking 'refresh' on Yahoo Finance to see how your portfolio is doing? Beats me.

Honestly, if you didn't know this to begin with, how on earth did you earn enough money to require Fidelity's services?

It's all a charade, of course. Doubt not that absolutely nobody's investing behaviour will be changed one jot by these nonsensical disclaimers. They are just part of the kabuki theatre that modern torts law demands, where the world is littered with useless warnings undertaken merely to deter unscrupulous lawyers and their gold-digging clients. Every now and again, you stop and reflect how bizarre it is that your coffee cup is warning you that coffee is hot, but then you go back to accepting it as part of the landscape.

Somewhere, Lord Buckmaster is looking down on us and laughing his head off.

Visible Variable Costs Uber Alles!

When figuring out what measures will reduce costs people love to fixate on variable costs. They doubly love to fixate on variable costs that are highly visible. They tend to downplay fixed costs, and anything hidden.

Witness, for instance, the hype about Hybrids and electric cars. This is the principle taken to the extreme. Petrol is a visible variable cost for the environment. The more you drive, the more you use. And since you think of it every time you fill up your car, it's highly salient to you.

Now, when you buy a Prius, there is also the fixed cost of the manufacture of a second motor and the battery. This second battery and motor also require more services and replacement parts. None of this comes for free, either in terms of money or resources used. But that's not salient to people, so they ignore it.

With electric cars, the comparison is even more extreme. The car produces no greenhouse gas emissions, because it uses no petrol at all!

Unless you count the emissions from the power plant that makes the electricity. If that's a hydro power plant like in the Pacific Northwest, great! If it's a coal-fired power plant like in the Midwest, it's not clear you're helping at all.

But as long as it's not my emissions, it's okay. It's the evil power plant!

I'm not saying that these types of cars are necessarily not a good deal, or a net benefit to the environment. I'm just saying that the vast majority of the people who bought them probably never stopped to consider these costs properly. 'Lower petrol consumption' is my rough guess at how sophisticated the average thought process is.

I think this is part of the fixation with solar and wind power. People have the idea that since the sun will always shine and the wind will always blow, once you pay a fixed cost then it's free forever! Surely that makes it a bargain, no?

Well, first of all there's maintenance. Solar and wind power sources degrade, get broken, and need to be repaired.

But even if they didn't, the average person doesn't understand the value of a perpetuity. In other words, suppose the interest rate is 10%. How much should you be willing to pay for $20 per year, forever? It must be, like, an infinite amount of money! Or at least a huge amount of money!

No. You should be willing to pay $200. That's all.

Even if solar power pays off until infinity, if the payoffs are small and the upfront costs are high, you still don't want to do it. Matter of fact, "the payoffs are small and the upfront costs are high" is not a bad description of the whole solar power industry at this point of its development.

This isn't just an environmental thing. I remember a childhood friend of mine talking about a lottery in Scotland where the tickets were a couple of hundred bucks to buy, and they held a lottery that paid off a certain amount every week, forever. You could even resell your ticket to whoever you wanted! Surely this was the best deal in the universe. To the young Shylock, this deal sounded so awesome that it couldn't possibly be right.

As I grew up, I figured out this was a simple case of selling an overpriced perpetuity, but in the form of a lottery. You've got to admit, it's a great scheme.

Shylock says learn how to calculate a present value, or you'll end up giving away your money to hucksters and frauds.

Phrases designed to infuriate economists

"About 50 high polluters to bear carbon tax brunt, Greg Combet tells Press Club"

Politicians love statements like this. Don't worry about this big tax I'm about to pass, it will only be paid by those evil corporations!

The first problem with this is that corporations don't pay tax, shareholders pay tax. A corporation may be a separate legal entity, but sooner or later its cashflows belong to the shareholders, who are real flesh and blood people.

In Australia, this is particularly pertinent as superannuation retirement savings are (by law) generally invested at least partly in the stockmarket. So the only people paying the tax are those evil corporations and, oh, your retirement portfolio.

But suppose we don't care about those evil capitalist shareholders either - we're cool then, right?

No, we're not. You can place a tax on producers but that doesn't mean it will end up being paid by the producers. In economics terms, the incidence of a tax does not stay where it is placed.

So who else pays for it?

Customers, that's who. If I raise taxes on coal and petrol, part of that cost will be paid for by coal and petrol producers in lower profits, and part of it will be passed along to consumers through the form of higher coal and petrol prices. And part of those coal price increases will in turn be passed on to consumers of other products, who pay more for all the items that have to transported via petrol powered cars, and manufactured in factories running on coal powered electricity. Which is to say, everything in the economy.

The only case where coal producers pay the whole amount is if demand for coal and petrol is perfectly elastic. That is, if the price of petrol rises by one cent, you reduce your demand for it to zero.

Is that how you decide whether to fill up your car each week?

No, me neither.

This tax will be paid by the general public twice, once as shareholders in companies, and again as consumers of products produced by fossil fuels.

Typical of fools from union backgrounds, Greg Combet appears to view the world as a zero sum game of workers against the corporations. He is either ignorant of basic economics, or is being deliberately misleading for political gain.

If you don't believe me, let Milton Friedman explain it far better and more persuasively.

The value of a Berkeley Economics Major

Comedy gold!

(In case you didn't get the joke, a SFW answer here)

Hollywood has no idea where wealth comes from

The other day I saw a billboard ad for a movie called 'Arthur'. (You can watch the trailer here, but I wouldn't recommend it). It's a Russell Brand 'comedy' remake about this quirky guy who's the heir to a huge fortune, but has to live by the stuffy rules that his uptight family makes as conditions for his inheritance. Oh noz! omg! How dare they put strings on his billion dollar gift, those fascists!

The billboards for this read 'Meet the world's only lovable billionaire'.

Let's count the ways this is ridiculous.

Firstly, have you ever seen any movie featuring a rich character where the notion of 'adding value' is explored in a non-ironic fashion? Hollywood can't conceive of the idea that if you want to get a billion dollars, you need to add a billion dollars worth of value to people's lives. Actually, you'll need to add a lot more - this is assuming you're capturing the whole surplus.

No, in the world of Hollywood, the ways to get wealth are as follows;

-Inherit it

-Steal it

-Exploit lots of workers

'Arthur' is in the first category. In this world, rich people never work for their money. Or if they do, it's only ever in the context of portraying how they're neglecting their family by spending too long at the office. For an industry as ruthlessly capitalist as Hollywood, they sure do cling to some strange ideas about how societies got rich.

Now, I don't need to explain to readers of this illustrious periodical why this is an absurd picture of wealth. But in case you need to explain it to your idiot co-worker, consider the case of pre-historic man living in sub-Saharan Africa. No amount of inheriting, stealing, and exploiting other tribesmen is going to make me a space shuttle. Clearly something else big is involved.

Bill Gates created a product that powers my computer, creating untold billions of dollars of value for the world economy. And with all the wealth he amassed, he gave it away to charity, supporting the most cost effective causes he could find, and encouraged other wealthy people to do the same.

But what actually makes you lovable is to be some goofy clown who's never worked a day in his life, a free-loading clueless moocher on earlier generations effort and thrift. As long as you have the right attitudes against 'the man', conformity, crack jokes etc.

Harry, Albert, Sam and Jack Warner (all of whom were seriously impressive entrepreneurs) must be rolling in their graves to see what's produced under their names these days

Superman demonstrates the efficient markets hypothesis

Via Saturday Morning Breakfast Cereal, the best comic on the internet (it's true, you xkcd fanboys).

Stated vs. Revealed Preference in Abusive Relationships

It is always a good rule of thumb that when people say they want one thing and consistently do another, this should make you suspicious of whether they actually know what they want. Or in economists terms, when people's stated preferences and revealed preferences diverge, they are probably screwing something up. ("Screwing something up" is in fact a technical term :)  ).

Economists, for largely good reasons, tend to trust revealed preference. Talk is cheap, but when the chips are down, go with what people actually do. Usually this is a good way to bet - when a guy tells you he wants to see more opera but actually spends his weekends watching TV, it's a fair bet that he doesn't actually want to see opera, he just likes the idea of it.

But what about a woman who is in an abusive relationship who manages to leave and tells you she really wants to be done with the man, but then keeps going back again and again after he apologises?

In that case, it's not so simple. Right-minded people immediately jump to the conclusion that the woman actually wants to leave, and must somehow just be being prevented from this (such as by threats from the man).

The trouble with this view is that it has difficulty explaining why there is such cyclicality - women will leave, and then come back, many times over. It can't be that they never can find a way to leave. Even if you have all the sympathy in the world for such women, you're still left with a puzzle of trying to explain what the hell they're doing. In other words, something funny is going on.

One of my favourite papers in economics looks at this. They argue that women in abusive relationships have time-inconsistent preferences - in other words, they truly do want to leave when they leave, but they predictably change their mind and return to the guy. Hence their preferences are inconsistent over time.

They study a fascinating case that provides evidence for this - the case of 'no-drop' laws, whereby when a woman complains of domestic violence, prosecutors are obliged to proceed with the case even if the woman subsequently recants her testimony. This tends to happen a lot, which should also make you suspicious - if the guy is already in prison pending charges, what's the harm in going to trial?

When these laws were passed, they resulted in a drop in violence of men towards women - no surprises there. But here's where it gets interesting - the law also resulted in a drop of murders of men by abused women. The authors argue that people with time-inconsistent preferences need commitment mechanisms to stop them changing their mind. Murder is one such mechanism, albiet a very poor choice. These no-drop laws work because they substitute a much less costly commitment mechanism, helping women stop themselves from predictably going back to their man. They might be my favourite example ever of 'nudging' type laws, where you can stop people making bad mistakes by subtly crafted laws.

The reason this is such a fantastic paper is that it gets towards the heart of understanding why people end up in these crappy situations. The feminists of the world would tell you that the women are 100% victims, and that if they're returning to the men, it must be because of threats - we just need to be harsher on the men. In fact, believing this misplaced sympathy would cause you to completely miss the bigger picture of how these relationships persist, and what you can actually do to help end them.

Sympathy is not a substitute for analysis. And you can depend on it that when stated preference and revealed preference diverge, it's a situation worth your studying.

Everything that's wrong with Australia's industrial policy in one video

Article headline: "Prime Minister Julia Gillard has launched the new Holden Cruze".

Honestly, what the hell is the Australian Prime Minister doing being the spokesman for a private company launching a new product? The only reason they're doing this is because the government decided long ago that it was crucially important that Australia produced cars. Because, you know... no wait, I have absolutely no idea why. Consequently, the government (sadly of both parties) continue with ridiculous car tariffs which make the competition artificially expensive, and now have reached the new low of being the public face of these pieces of junk.
Doesn't she have anything better to do with her time?

As it turns out, no. No she doesn't.

Scrap that! Let the car launches and ribbon cuttings and meetings with seniors proceed apace! It is by far the least value destroying policy that the Gillard Brown government is likely to undertake. 

Meddling government policy has unintended consequences, news at 11!

Oh, the tasty Schadenfreude.

San Francisco provides a subsidy for  low-flow toilets.

San Francisco gets huge stench from low flow toilets clogging up drains.

San Francisco buys huge amounts of bleach to try to combat the stench.

In terms of scoring that policy, it saves 20 million gallons of water, but uses but uses 8.5 million pounds of bleach, which will go into drains or the drinking water supply. I don't know about you, but I'd score that as an environmental loss, or at best breaking even.

Meanwhile, the cost of the bleach is $14 million, they spent $100 million upgrading the sewer system to deal with the problem, as well as the cost of the subsidy itself, whatever that is.

Shylock says, it's a bargain!

Another money quote from the article:

A Don't Bleach Our Bay alert has just gone out from eco-blogger Adam Lowry who argues the city would be much better off using a disinfectant like hydrogen peroxide - or better yet, a solution that would naturally break down the bacteria.

A natural solution! Brilliant! We'll break the poo down with magic pixie dust. I'm sure Adam Lowry is hard at work right now, toiling in a biology lab to generate this new solution.

What's that you say? He's just lazily demanding that someone else do it, on the premise that because he wants it to happen, it's got to be feasible?

Personally I like the idea of San Francisco living in the stench of it's own filth. It seems like a fitting monument to the governance of the place.

Markets Cater to All Demands, However Stupid

One of the great things about markets is when they expose the dumb and contradictory things that people believe.

When it comes to relieving pain, people have a view that essentially any change in temperature is helpful. Reducing the temperature helps - add ice! No wait, heat helps too - take off the ice and add a heat pack!

People are deeply attached to both ice and heat as methods of pain relief - it's as if the worst possible temperature is room temperature, and anything other than that is an improvement.

Now, of course, as anyone with even a rudimentary understanding of thermodynamics will tell you, something cannot be both cold and hot. This isn't even the zeroth law of thermodynamics - it's like the -1th law of thermodynamics - the same point in space can't have two different temperatures. They didn't bother to write this down, as it can be approximated by the phrase 'Duh!'.

But the heart wants what the heart wants. Enter markets, which step in to cater to people's ridiculous simultaneous demands for both heat and cold as methods of pain relief.

I give you 'Icy Hot'.

Just pause and reflect on this for a second:

IT CAN'T BE BOTH COLD AND HOT AT THE SAME TIME YOU IMBECILES!!!

Because I object to actually giving money to companies attempting to flagrantly lie to me, I haven't actually invested in one to find out if it makes the area cold, hot, or neither (because as we've already established, it's clearly not making it both). But I imagine it probably just makes it tingly, which is sort of like being cold, right?

NO! NO IT'S NOT!

I can just see the idiots at the pharmacy thinking 'Gee, I was going to buy both a heat pack and an ice pack, but now I can just buy a single pack of 'Icy hot' and combine them into one!'.

LORD KELVIN IS SPINNING IN HIS GRAVE WHEN YOU FALL FOR THIS MORONIC MARKETING!!!

Ugh.

/rant