Saturday, December 29, 2012

An outsider's view of insider trading

As an investment professional, I follow the insider trading laws. And as a CFA charterholder, I follow the more rigorous ethics required by the CFA Institute. But I don't believe in insider trading restrictions. That is I don't subscribe to the theory of justice underpinning insider trading prohibitions. I would like to see these prohibitions largely changed to the extent of elimination generally. I believe this would be an improvement to our society's justice and economic/market efficiency.

The idea of prohibitions on insider transactions hinges on the idea that profiting from knowledge is good but profiting from too much knowledge is bad. Those supporting insider trading restrictions would probably say I've got that wrong. That it isn't too much knowledge but rather unfair knowledge. My answer to that is there is no principled concept of "fair" that allows one to draw a line in the way insider trading laws do making the distinguishment between fair knowledge and unfair knowledge. It takes logical magic tricks to make the distinction. Simply put, the distinction is arbitrary, which is antithetic to logical principals. The arbitrariness can be seen in how ridiculously vague the insider laws are. This makes for dangerous risks--it puts arbitrary power in the hands of already powerful people.

Let's make clear a couple of points. In my opinion insider trading prohibitions are not about prohibiting fraud or misrepresentation. Hence, reducing or eliminating them would not be any sort of condoning of fraud or misrepresentation. They are about making illegal a victimless crime that has in the general public opinion a very negative perception (people benefiting from too much information).

Prohibiting insider trading has several very real negative effects:

  • It violates property rights--the right to freely buy and sell in the market.
  • It reduces economic/market efficiency by limiting who can bring knowledge into the price system.
  • It promotes a false sense of security (moral hazard) by promising that securities transactions are between generally equally equipped traders--this illusion as well as the above problem with market efficiency is mitigated by the next effect.
  • It drives some market transactions (insider transactions) into the dark and gives pause to other transactions for fear of raising insider suspicions. This is very much like the negative effects an onerous, complicated tax system brings--wasted resource allocation in compliance and reduced otherwise beneficial activity in avoidance.
My solution is disclosure-based insider trading rules. I am not alone in this idea. Basically I would like to see insider trading laws replaced by a rule requiring open disclosure of any "significant" transactions from an "insider". I would let the courts decide what a "significant" transaction would be, but as a guidance perhaps a trade over $10,000 in notional or exercise value. I would expand the definition of an "insider" to include any employee of a firm (not just the current definition which includes a company's officers, directors and any beneficial owners of more than 10% of a class of the company's equity securities) and as with the current definition any individual who trades shares based on material non-public information in violation of some duty of trust whether inherent or imputed (e.g., getting a tip from the CEO one could reasonably expect was material non-public information). Now more truly if you're not "inside", you're "outside". Failure to properly disclose an insider trade would result in a fine equal to say 25% of the gross profit from the alleged trade. Any employee trade not properly disclosed would also result in the same fine incurred by the employer unless the employee was acting with malicious intent. 

The reason companies would find this change to be largely in their interest is the same reason why companies would want restrictions on insider trading in many cases. Companies have at least two reasons why they don't want their officers making some kinds of insider trades: 
  1. It makes for very negative PR for a CEO to sell (buy) the company stock on insider knowledge that negative (positive) news is forthcoming. 
  2. A company wants a CEO's incentive to be with the long-term interest of the company whereby he gains (looses) as the firm gains (looses). (Unfortunately, we continue to allow insiders to avoid losses their firms incur generally at tax-payer expense. But that is a problem for another blog post.)
I would anticipate greater popularity of agreements between corporations and their insiders that allow for clawback of earnings or outright damages for insider trades not in company interest. 

Friday, December 28, 2012

Resolve to be happier

What should your New Year's Resolution be? I'm glad you asked. I think a good go to resolution is to simply resolve to be happier. Simply looking to have a better outlook on life and especially if followed up with happiness-increasing actions, can improve your life significantly.

The Happiness Project might offer some clues that would help including these tips on how NOT to be happy.

Here is my contribution. It is a bit of a happiness hack. I think one should view developments not fully within one's control but definitely affecting one's life as first offers where one has a right of negotiation. Rather than seeing these developments as ultimatums or demands or requirements that are "happening to me", I like to think of them as changes in my opportunity set. Some examples:

  1. My child's soccer team's new practice schedule conflicts with other activities, or my child's soccer  team is moving up into a more competitive league that I am not necessarily comfortable with. 
  2. At work my department is moving floors where I am probably getting a downgrade if offices, or my employer is changing the schedule of benefits reducing those most advantageous to me, or my employer is asking me to go into a conference room to discuss how I spend my day with a consultant.
  3. Near my quiet home a new commercial development is announced with the possibility of more traffic, more noise, and perhaps more crime.
Aside from the nearly always applicable assuaging line that it is probably just not that bad, I look at these types of developments as challenges where I have options. Assuming even that I cannot fight directly to reverse or direct the changes, I consider my options: 
  1. This may be the end of soccer for my child (perhaps she wasn't destined for World Cup) and perhaps another sport or other activity would be a close substitute (it may even be an improvement), or perhaps there is another soccer league.
  2. Is this the impetus I need to consider a change in jobs, or perhaps this offers the incentive I need to work harder for a promotion or other recognition.
  3. What do I truly value in a home and can I find a better match to my desires? How might the new commercial property actually benefit me?
This is not about "bright-siding" every situation. It is about being realistic and open minded. Life is about constant change of varying degrees and at sudden impacts. Those who adapt to that immutable quality of the universe are better equipped for success and happiness.

Update: new research indicates that being happy correlates and perhaps contributes to success.

Wednesday, December 26, 2012

New Year's Resolution

Last year my New Year's Resolution was to change a strongly held personal belief. I definitely changed my mind about quite a few things, but one stands out as truly qualifying: I changed my belief about the direction and implications of Federal Reserve policy. Basically, I adopted Scott Sumner's view that The Fed has been too tight in monetary policy, despite the phenomenal explosion in base money, reversing my previous view that The Fed was recklessly expanding the money supply with an accommodative policy that was creating an imminent threat of significant inflation. As a corollary to this change came an understanding that this tight-money Fed action was a significant contributor to the financial crisis and recession and slow recovery.

My thinking in choosing this resolution is my belief that we all tend to error in not changing our minds enough, not challenging the beliefs we hold, and not being open minded in general. This is the major contribution of Freakonomics to the human race. We need to do more self-critical thinking. Much of what we believe is to some degree factually wrong or weakly understood often to the point of being shallow drivel.

To continue and expand the progress, my New Year's Resolution for 2013 is to either 1. Change or significantly modify a strongly held personal belief or 2. Find a completely new and significant rationale in support of a strongly held personal belief. 1 is preferable to 2, but having both keeps me searching and thinking more.

On a blog-specific note, I seek to expand upon my Nov. 10, 2012 declared intention of referencing a movie in every blog post. I will expand the allusions to books, television, and other art forms. Coming up with just movie references was stretching my Swiss-cheese brain to its limits. These leaps are getting harder.

Signs (at Christmas) that you are a parent . . .

You measure the quality of the Christmas day by the following criteria:

  1. How late you could sleep in.
  2. How few batteries were required.
  3. How little assembly was needed.
  4. How little packaging needed to be removed (including those gawd-awful twist ties).
  5. How quickly you could pick up and put away all the loot. 
  6. How well received were all items especially as compared to any enjoyment derived from large, now empty boxes. 
  7. How soon school starts back up.
Update: 8. You actually think about toys and gifts considering the risk that you'll shoot your eye out.

Wednesday, December 19, 2012

What if the Fiscal Cliff solution were to actually get us out of this fine tax mess?

As mentioned previously, I would like to briefly sketch out an approximation of what a terrifically better tax system would look like. This is a second-best solution since I start with the assumption we need a tax burden so massive as to accommodate a government nearly as massive as the one we have today.

If I were asked, "explain taxes to me like I'm a four-year old," I would struggle. Ron Swanson (below) does a decent job striking the emotional chord many of us feel, but this is obviously an emotional appeal designed around the tight confines of satirical comedy. For if it were a comprehensive approach, the tax code would come out looking much worse.

Swanson only gets at the raw theft of it all. He leaves out the destructive properties of bad incentives and resources wasted in compliance and avoidance and evasion.

If we have to have a taxes, we at least should have them with minimal impact both direct and indirect. Directly we waste resources complying and seeking to avoid. Indirectly the effects are much more severe. By taxing capital, we discourage work, risk-taking, and saving. By taxing consumption, we discourage work, risk taking, and consumption. By taxing work, we discourage work, risk taking, consumption, and saving. Work, risk taking, consumption, and saving are all desirable things. But saving has added desirability as it creates opportunities for more of all the other desirable things. Saving is deferred consumption. The reward for the deferring is more later. So it should be obvious, but sadly is not to too many that taxing (discouraging) saving has a compounding negative effect. Which brings me to my proposal for greatly improving upon this fine mess of a tax system we have.

First, we must eliminate all capital taxation (capital gains with its ridiculous long-term/short-term distinction, dividend and interest income, estate taxation, et al.). A flat-income tax would be a big, BIG improvement over were we are today. But we can do better still as this would still be an income tax with the associated negative effect on saving.

Here is the idea (not at all original to me): tax consumption (a sales tax). Let's assume the rate is 20%. We will apply this rate to the purchase of all final goods and services. Income taxes and payroll taxes (save for a new one outlined below) are gone. No longer will we need to turn in an annual term paper on our income to the IRS. No more manipulations of charitable giving and loss carry forward. No more shelters, loopholes, deductions, exemptions, forms 8166 sub A worksheet nine, math that you never can get to add up to the same total twice. Buy something and a tax is built in (this is preferable rather than being added on after the fact). The business submits sales data and taxes due. Most of this infrastructure is in place already. And notice how little opportunity there is for tax evasion save for the ever-dwindling cash side business.

"But what about the poor?" I hear you say. We rebate to every adult the amount of consumption tax that a spending level near the poverty level would imply. Let's target $20,000 (about $5,000 below the official poverty level of income). 20% of $20,000 is $4,000. That amount is payable to every adult American citizen.

"But what about poor children?" I hear you cry. We rebate to every adult claiming a unique dependent (someone cannot be claimed twice as with the current regime) some amount of consumption tax an incremental amount of spending would imply. Let's target $10,000. 20% of $10,000 is $2,000.

"But what about the 'rich' who are now getting checks from the government?" I hear you shriek. That's where the low-impact payroll tax comes in. I think of it as "low impact" because it will be handled by employers similarly to how they handle payroll taxes now. We will maintain the benefit of not having individuals have to play guess how many toothpicks are on the floor with Uncle Sam. The payroll tax will be a marginal rate of say 10% applied to total compensation (wages and benefits) starting at $100,000 with this threshold indexed to inflation.

The structure is the major source of the benefits. The rates and levels are negotiable. Here is what it looks like for a family of four:

Notice that it is progressive. Notice that it is straightforward. Notice that it is not of this world . . . yet.

Update: Some might ask how housing should be treated: as a capital good excluded from taxation or a consumption good subject to taxation. The answer is it depends but can work well in either case. As a capital good making the assumption (probably a bad assumption, that housing is always an investment), it would be excluded. As a consumption good, it would lower the overall tax rate necessary to generate appropriate revenues. The most logical treatment in my mind is to treat any sale or rental of real property as a capital good. Although this increases the tax rate otherwise applicable to consumption, it is a much more straightforward and less manipulable arrangement.

Wednesday, December 12, 2012


As we continue to hurtle ourselves toward the fiscal cliff as the Mayans predicted, the prospects for meaningful tax reform dwindles. I thought I'd take a second to reflect on some brief ideas about what good tax reform should encompass.

  • Simplification - this is the lower-hanging fruit. We need fewer exemptions, deductions, rates, categories, etc. Unfortunately, this reform has some of the biggest obstacles since so many vested interests are at stake. 
  • Eliminating the worst tax policies from an economic-desirability standpoint - this is where economics needs to trump emotion. We need to stop taxing capital--capital gains (both individual and organizational), dividends, interest, corporate profits, etc. These taxes are economically destructive. They discourage savings and lower the trajectory of economic potential. The economic distortion from taxation is no where more insidious than in capital taxation. There is certainly crossover between this reform group and the next. 
  • Eliminating the worst tax policies from a justice/fairness standpoint - this is where justice and ethics need to trump envy. We need to stop taxing estates. Death should not imply an additional tax liability. Not only does this tax unfairly tax wealth that has been repeatedly taxed already, but it also causes economic resource distortions as people go to great lengths to avoid the tax. Additionally, we need to stop taxing so progressively. Taxation that compounds as success increases assumes that property rights have a diminishing marginal validity. I fail to see how that can be a reasonable principled position. 
In a later post I plan to sketch out my idea of the tax policy I would most like to see replace our current nightmare. 

Saturday, December 8, 2012

The Heisman isn't what you think it is.

In a few hours from my writing this post the winner of the 2012 Heisman Memorial Trophy will be announced. The mythology and atmosphere of the prize are perfect for what the Heisman is, a beauty contest, but they mislead the many into believing there is an objective order at work. Kevin Gemmell at has a great article defending the Heisman, and I have to agree with many of his points. However, he stops short of a meaningful understanding of the key difference I believe I have identified. Namely, that we are recognizing someone who has lucked into winning the beauty contest rather than definitively achieved the status of "outstanding college football player in the United States"--the trophy's official meaning.

Here are my main faults with the Heisman:

  • It is ironic that in the most quintessentially team team sport, the most celebrated individual award at the college level is bestowed. We should already be suspect that there is less meaningfulness in the award than conventional wisdom holds.
  • There is certainly an element of Keynes' beauty contest going on in the voting where voters are attempting to vote a ballot they expect others will respect. The easiest way to do this is to vote congruently to the perceived typical ballot. 
  • But at the same time there is rampantly poor voter performance including nearly fraudulent behavior. Leaving candidates off ballots because including them hurts the chances of a voter's preferred candidate undercuts the legitimacy of the award. Voting early is also a problem. The bias in voting cannot be overlooked when evaluating if the process is flawed. 
  • The criteria is unclear and inconsistent. Gemmell holds this as a feature, not a bug. He may be right, but it still argues against the idea that this process produces an objective result. Running with that a little more, we have to recognize that statistics drive this award. And not just any stats, cumulative and simplistic stats. Stats that have little to do with a team winning football games but a lot to do with an individual winning awards. Stats that are highly correlated with winning but that have weak casual or predictive effect on winning. That is a very key distinction. Do you realize that most teams who lead the game at half time go on to win the game? If you find that meaningful, reread the sentence again until it fails to impress you. Coffee is for closers. If stats are your guide to Heisman immortality, they should be stats that indicate contribution more than just participation.
  • The pretentiousness of the prize must also be mentioned. For all the reasons above, we cannot be so pious when considering the prize. 
If we gave a Heisman Trophy in business, Apple would win for its beauty narrowly edging out Wal-Mart who is a finalist based on size. Yet, the goal of business is to make a profit. Both of these firms are very profitable, but Microsoft achieves about 50% more profit per dollar of revenue than does Apple and Exxon Mobil is more profitable than Apple and Wal-Mart combined. The goal of a football team is to win games and the objective of an individual football player should be to contribute to his team's winning. Just as our hypothetical Heisman Trophy for business is recognizing the wrong firms, the real Heisman Trophy is flawed in process such that the recognition fails to be very meaningful.

Truthfully, I am more impressed by awards like Oklahoma's Don Key Award. From SoonerSports:
Oklahoma coaches describe the award as the highest honor an OU football player can receive while playing for the Sooners. The Don Key Award is the only individual award given in Oklahoma football. It goes to the player who best exemplifies the many superior qualities of Key, both on the field and in the classroom.
That award is subjective, but it is limited to the subjectivity of a highly informed coaching staff. It goes to the player or players who contribute to the team and achieve individual success almost as a byproduct.

Friday, December 7, 2012

What's so bad about prices that can change or "float"?

In a surprising and somewhat hopeful development, SEC member Luis Aguilar has told the WSJ (gated) that he has now changed his position on allowing money market mutual funds to have prices different than $1 per share. Technically, the net asset value (NAV) of money market funds are currently pegged to a fixed unit value. Investors put a dollar into a fund, are paid interest on that dollar (recently as low as .01% but not too long ago more like 2-3%), and then can redeem their investment at any time to be returned exactly one dollar. If the value of the fund's investments ever falls below $1 per dollar invested, the fund has "broken the buck" and goes to time out . . . and the financial world comes to an end, or so Federated Investors among others would have us believe.

Federated has been a vocal incumbent fighting these reforms. The firm started one of the first money market funds back in 1974. It has a lot at stake here. The dollar peg restriction acts as a check on entrants into the industry. 

I applaud the idea of a floating NAV for money market funds. As a money manager for hundreds of investors of very wide and diverse liquidity needs, I understand what is at issue with a floating NAV. It probably makes my job a little harder at least initially. But it will make the market deeper and more informative. 

One major benefit of the change could be that the moral hazard that comes from the "guaranteed" dollar value of money market funds is reduced. Investors, especially institutional investors like myself, will have to be more diligent in selecting money market funds. But with that will come more choices and richer choices as competition increases.

Another benefit would be the choice investors would have between funds that aim for a continuation of the dollar peg, but without the legal obligation, and those that allow a wider range of value. Couple this with another important potential reform--allowing funds to gate or block investors from making redemptions on demand. Again, this means more choice for investors allowing them to trade off between liquidity and performance.

Before we get too carried away with this sudden move by the SEC to rationalvania, let's wait to see what actually emerges. The SEC probably hasn't freed itself of the public choice capture that has long plagued it. The exact quote by Mr. Aguilar was, "I'm not fundamentally opposed to including a properly structured floating net asset value as part of a proposal." There is wiggle room there. Still, this seems to be a promising development. Someone somewhere is probably complaining, "This country is going to the dogs. You know, it used to be when you bought a politician, that S.O.B. stayed bought."

Update: Just in case anyone is out there trying to make 2 + 2 = 7, I am not implying there has been any literal purchasing of regulators in Mr. Anguilar's case or any other. 

Tuesday, December 4, 2012

What explains the ideology we choose?

Arnold Kling writing at his new blog (I join many others in welcoming his return to blogging) calls to task those of us who uncharitably describe our ideological opponents in this excellent post. This opened my eyes a bit to my own uncharitable attitudes.

But that wasn't the thing I liked most about the post. The highlight was his characterization of what drives ideologies. I recently was sketching out my own theory as to what the essence of political and ideological beliefs are. Here is my theory:

Most people from all political positions base their beliefs primarily out of a desire to mitigate if not eliminate their fears.

  • Progressives fear free market outcomes from three respects:
    1. Perceived inefficiencies (too many cereals, three gas stations at one intersection, streams of failed businesses, et al.)
    2. Perceived uncertainties (again failing businesses, uncertain future investment & retirement values, fluctuating prices, job losses or changes, et al.)
    3. Perceived inequalities (different pay scales, different growth rates of income, consumption, wealth, etc., varying levels of quality/quantity for goods and services, et al.)
  • Conservatives fear disorder from three respects:
    1. Perceived indulgences (gluttony, sexuality, et al.)
    2. Perceived freeloading (unnecessary welfare, shirking of duty, et al.)
    3. Perceived radicalism (morality without God, challenge to authority, breaking of protocol or decorum, et al.)
  • Libertarians fear corrupt control from three respects:
    1. Perceived economic restraint (property rights violations, reordering of economic outcomes, reversals of earned fortunes, et al.)
    2. Perceived intolerance (personal life decisions like who to marry, methods to find pleasure from drugs to sex to music to travel to thoughts, et al.)
    3. Perceived association prohibitions (where and with whom to live, to work, to trade, et al.)

Maybe I've been reading Kling so long that we are mind melding, or perhaps great minds independently think alike. I look forward to the essay he says in the post is forthcoming on this topic.

P.S. Another way of looking at these three groups might be that progressives worry about who wasn't invited to the party, conservatives worry there will be a party, and libertarians worry the progressives and conservatives are going to ruin the party, TOGA! TOGA! Yes, this is probably uncharitable. 

Planes, trains, and central planning

I recently took the family to the 36th annual Oklahoma City Train Show. Since my 3-year-old son thinks trains are the reason for man's being, this event was a big hit. Several of the displays were quite impressive. It is always amazing to me how diverse and intense human interests can be.

Looking at the various model towns and layouts, I couldn't help but think how much these models look like the real world but are in fact so very different. There is a lesson here for economics. Our models are vague facsimiles of what human existence looks like. They are not complete representations. We zone and plan cities as if we were designing a model train set rather than establishing incentives/disincentives in relative darkness.

The human world is filled with incredible complexities no individual or group can possibly know, understand, or fully appreciate. The train set world is a design-able project aimed at satisfying one train enthusiast or at most a small group. The human world must evolve over time with many random, chaotic elements interceding. The train set world is fixed.

There is no cause and effect in designing model train layouts aside from the designer wanting something and then acting to bring it about. But cause and effect is multidimensional and phenomenally jumbled in the human world. Of course this inconvenient fact need not stop our attempts at assigning cause to effect. Hence, renters and multi-unit housing cause higher crime rates and lower home values. Good urban planning causes successful restaurants and profitable entertainment districts.

Yet again I hear Hayek:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Monday, November 26, 2012

A predictable intrusion

The Commodity Futures Trading Commission (CFTC) today sued the Ireland-based prediction market firms Intrade and TEN effectively shutting them out of the U.S. market. Here is the CFTC's press release. Intrade has this statement posted on the site stating that all U.S. customers should immediately close their positions and their accounts.

Here are two early takes on the matter from John Stossel and Bryan Caplan. I eagerly await Robin Hanson's take on the matter.

To me this is a prime example of government regulatory failure. It is also an argument for Principals-Based Regulation. The law will always be slow to recognize and respond to market evolution and innovation. As a result, we fight yesterday's war by applying rules designed around past practices and transgressions to new creations. Instead of considering or even looking for victims, the regulators look for breaks in the pattern where similar activities are not being equivalently regulated.

In this we also find the arrogance of the aristocratic regulator. But for the watchful eye of the regulator, we the naifs and fools would wonder helplessly into harm. Here is the quotable example from the CFTC rationalizing their actions:
The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity.
We continue to live in a world less than what it could be all for our own good. The CFTC gave a conclusive prediction to prediction markets that ran something like this: I'll give you a winter prediction: It's gonna be cold, it's gonna be grey, and it's gonna last you for the rest of your life . . . or at least until we stop bluntly applying invasive regulation to every strange thing we see.

Sunday, November 25, 2012

The difference between winning and losing

Oklahoma football coach Bob Stoops likes to say, "there's a big difference between winning and losing." Generally this in invoked after a narrow victory especially when the opponent was supposedly over matched. Here is an example from the 2002 season describing the 37-27 victory over Alabama where OU had blown a 20-point lead. And here is an example from the 2004 season describing the 42-35 victory over Texas A&M. But here is an example from this season where he is seemingly contradicting the often repeated mantra. Last night's thrilling Bedlam game gave Stoops another chance to claim that the difference between winning and losing is a vast gulf. So far, I don't believe he has.

I am not aiming to indict Bob Stoops for this common but nonetheless faulty reasoning. Many coaches in many sports have said the same. But I do want to take this opportunity to dispute the idea that a narrow victory is a substantial victory, and I will be using OU as my example. I had planned this blog post before last night's game. What an interesting coincidence that the game was a perfect example for the case I will make.

Missed it by that much

Stoops, et al. have it backwards. There is actually a very little difference between winning and losing in general in life and especially in college football. College football outcomes, like in the NFL, are surprisingly largely driven by random chance. For the NFL, Brian Burke estimates that over 50% of the outcome is random. I've made similar calculations to those of Brian to come up with a 60%-70% share of college football outcomes attributable to random chance. That alone should give us pause. If there is a lot of randomness (a large error term) in football outcomes, how much or little credit can we attribute to everything else?

Let's think about the difficulty in evaluating performances ex post without letting the actual outcome bias the appraisal. Consider a comeback against a lesser opponent that falls short versus one that succeeds. Suppose the game ends up being decided by a last second field goal attempted by the team favored to win. Make the field goal, and the commentators will look back on a splendid series of gritty plays that made the difference. Miss it, and the same commentators will describe how inept was the entire performance. This isn't consistent. All of the performance was the same up until that one single play.

So it turns out that a "brilliant" throw by a quarterback threading the needle between two defenders for a touchdown and the same throw being "ill advised" when intercepted can impact both the outcome of a game greatly as well as how we feel about that outcome. The random factors that govern the success of such a high impact, high sensitivity event are probably the critical factors, and they can cut either way. It seems there really is a fine line between stupid and clever.

OU was close, very close, to winning the BCS National Championship in the 2003 and 2008 seasons. A handful of plays against LSU and Florida, respectively, went a long way to determining those championship games' outcomes. But it would be inconsistent to hold that view about those seasons and games while clinging to the Big Difference theory. If the Big Difference is true, OU was a long way away from holding the crystal ball. Similarly, the Sooners were able to ever so narrowly escape numerous tight situations in their 2000 title run. Oklahoma State was a few fingertips away on a last-second, touchdown pass to ending the dream season. But for a few heroics at Texas A&M two weeks before the OSU game and in the Big XII title game against Kansas State, OU would have been out of the hunt. In the championship game itself Florida State came very close to winning.

Here are the lessons to draw from this:
  • It is not the actual outcome of specific close events that matter so much as the entire volume of evidence. 
  • As distasteful to some as it is, margin of victory matters. Prediction models for college football among others are significantly enhanced when margin of victory is included rather than just win-loss results.
  • Whether declaring the strength of the mandate a close election has created for a winning candidate or trumpeting a narrow victory on the gridiron, the logic is flawed. We need to be humble and reasonable in our assessments. That includes working hard to not let the outcome bias the assessment. 
Congratulations to both the Sooners and the Cowboys on a great game filled with wonderful excitement. As a fan I can write that more easily because my team prevailed. I know that my joy is not equal to the pain felt by Cowboy fans, and, perverse as it is, my joy is enhanced knowing they suffer and what that suffering feels like--I've been on the other side. I am very happy the Sooners won. I'm not sure if I wish they could have won 51-0 rather than 51-48, but I am sure a 51-0 outcome would mean a lot more.

Update: edited to correct a few grammatical mistakes.

Tuesday, November 20, 2012

Steal this blog post

I want to discuss my views on the currently trendy topic of copyright and patent law. It seems the more the law tightens its grip, the more innovation slips through its fingers. First it was Napster, et al. and next it is 3-D printing. Are these continued developments a threat to our principals and way of life? It is important to remember Article 1, Section 8, Clause 8 of the U.S. Constitution, which states that Congress has the power:
To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.
As the recently published and almost immediately pulled House Republican Study Committee report noted, this is the purpose of copyright [and patent, I'll add]. Not to simply or necessarily compensate the creator of content [or inventions in the case of patents]. The issue at state is not about what a creator deserves or is owed. It is about promoting the general good of society. Too often the vested interests (Big Mouse, Big Music, Big Drug, Big Computer, etc.) confuse the issue by confusing successful market outcomes (the worthy goal per se) with individual creator or company or industry success (potentially but not necessarily worthy goals).

Copyright and patent are ultimately about special contracts. They are societal contracts that are forced upon us--a government-granted monopoly which casts a do-not-compete clause upon us all. We already should be concerned. But there is logical, principled footing here. I cannot make you share is a good property rights principal. I want to extend it to another, similar concept: You cannot make me not share. That's where I'm heading shortly. But first, some grounding.

Pragmatically and in principal, we want both creativity and sharing. The problem is sharing can hinder creativity because creativity can be costly and sharing can prevent benefits from flowing adequately to the creator who incurred the cost. Hence, we get copyrights and patents as the method to find a happy middle. But we have many reasons to believe we are far from the happy middle.

Briefly, here is my understanding of current law. To claim a copyright an idea must meet three requirements:

  1. The idea must have fixation in some tangible medium of expression.
  2. The idea must be original.
  3. The idea must meet a minimal level of creativity.
To receive a patent an invention must also meet three requirements:
  1. The invention must be novel
  2. The invention must be non obvious.
  3. The invention must be useful.
An easy but perhaps not complete solution to our problem (remember the problem, sharing might hinder creativity) would be to significantly reduce the duration of copyright and patent (C&P). You can complicate this solution and perhaps improve it by differentiating by type of C&P--i.e., pharmaceutics different than software; books different than Internet breaking news stories. Another possibly complementary idea at least for patents would be to make proving the patent case much, much harder. John Duffy at Wired has some very good thoughts on this. Specifically, he suggests we should do a better job defining and enforcing non obviousness. 

I like these solutions, but they don't seem complete. In fact to be critical, Duffy's idea might be too much hand waving and wishful thinking ignoring the public choice problems. What I want ideally is to jointly maximize sharing and creativity--find the happy middle. Let's start by assuming creativity is independent of sharing. In that case I submit the following: 

Principles of Ethical Sharing, Duplication, and Simulation in a World of Costless Creativity

Duplication is a form of sharing. Sharing is ethical. I can listen to my copy of a song with you, I can lend you my physical copy of a song, I can give you my physical copy of a song, and I can duplicate my copy of a song and give or sell the duplication to you. Duplication satisfies two conditions; it must:

1.      Be indistinguishable from the consumer’s point of view.
2.      Be non-rivalrous from the consumer’s point of view.

The second part is important: Sharing is duplication only if you and I can enjoy it at the same time separately. The first part is where it gets interesting: Sharing is duplication only if the good or service cannot be distinguished from the authentic from the consumer's point of view—otherwise it is simulation. Simulation is ethical if the consumer in a specific case realized or the reasonable-man consumer in a general sense would be expected to realize the simulated good or service is distinct from the authentic. If this test of simulation fails, we have a case of fraud. Trademark violations are fraud, for example. 

Because we don't live in a world of costless creativity, we are going to need C&P to some extent. My solution is to apply C&P only to cases of duplication--not to simulation and of course not to other forms of sharing. In doing so we GREATLY limit the applicability of C&P. Many inventions currently protected by patent law are no longer eligible as they are cases of simulation (this makes moot most of the software patent wars). 

In this solution C&P would honor first to file but recognize concurrent, independent discovery/creation. This allows for simultaneous C&P protection to multiple parties where the first to file would begin the clock on C&P duration. Copyright would be inexpensive to file commensurate with current practices and fees, but patent filing would require a high fee (high enough to discourage speculative, squatting patent filings). There would also be a very substantial cost indexed to inflation to enforce both C&P. The cost of enforcing C&P would be the cost of bringing suit including a loser-pays rule for plaintiffs only. The standard duration of enforcement would be 5 years. This duration would be extendable by purchasing time in annual increments up to a total of 15 years of protection including the original 5. Extensions would need to be filed prior to within one year remaining of C&P life, and the cost of each additional year should be equal to 1/5 the cost of a new 5-year enforcement initial filing of C&P, respectively. Because willingness to pay for additional protection would be based only on the perceived unrealized value of the idea (NPV of future cash flows) and the assumed ease of duplication, there should be a relatively efficient tradeoff between protection and release.

Sunday, November 18, 2012

Two monkeys walk into the EEOC . . .

A friend sends me this link to a video of research done on Capuchin monkeys concerning payment for learned tasks. The essence of the video comes at the very humorous moment when one monkey discovers that the other monkey is being paid "unequally" for the same task. It is said that the first monkey is "rejecting" the "unequal" pay with the implication that you as a human should do the same. The caption/punchline below the video reads, "If monkeys reject unequal pay, shouldn't you?" We can't really assess from the brief video the meaningfulness of the research. This isn't about the Capuchin, Donnie. But we can comment on the implied call for pay equality and the rather pedestrian approach to the argument.

It would really be something if the second monkey rejected the "unequal" pay (actually getting a more desired grape instead of a less desired cucumber piece). Or if a third monkey went on a hunger strike in protest. The fact that the first monkey only realizes the visible grapes are actually available for payment after the second monkey attains one is impressive (or at least interesting--perhaps this says something about how little we expect of monkeys).  But it is only upon completing the task a second time and then not being awarded a grape that the protest begins. The first monkey didn't connect the "unequal" pay backward to the prior task--she didn't protest immediately upon seeing the second monkey get a grape. Maybe this is the truly remarkable part: The first monkey learned something about the market price for completing the task and appropriately raised her reservation raise.

Higher life forms (those who understand economics like this monkey) understand that the market is a discovery process. It isn't so simple to say what is or is not equal pay. The second monkey seems to get this too in that he doesn't feel ashamed for receiving "unequal" pay. In fact in the human world there are a number of reasons why two people apparently in the same situation presumably performing the same task would in fact receive different compensation. There is nothing inherently unjust or inefficient about it. To assume so is to beg the question about under what circumstances the difference arose.

It seems the first monkey not only understands economics but also understands property rights as well. By reserving her protest for higher wages until after completion of the task a second time, she makes clear that she doesn't believe she deserves the same deal the other monkey got. Rather she is just insisting and aggressively negotiating a new compensation package. She knows that a fair deal isn't "fair" simply and only because it is "equal" to another seemingly identical situation. It is fair if all parties to the deal agree to it freely without force, coercion, or fraud regardless of the comparable deal struck by other parties in another situation. While most monkeys have been diligently working themselves up from nothing into a state of extreme poverty, this one has been studying Locke not Marx.

Yes, I'm reading into this a little too deeply, but live by the exaggerated metaphor, die by the exaggerated metaphor.

If monkeys reject bad economics and faulty understanding of property rights, shouldn't you?

Saturday, November 17, 2012

Arguing against the Infield Fly Rule

Over at the Sports Law Blog, Howard Wasserman continues to try to make the case for the Infield Fly Rule but worries that his four-point test is running into a problem considering the "kneel down" or "victory formation" in football. Here is the essence of his concern:
This will expand on The Atlantic piece. In that essay, I identified four features of the infield fly situation that justify a special rule: 1) The fielding team has a strong incentive to intentionally not do what they are ordinarily expected to do in the game (catch the ball); 2) the fielding team gains a substantial benefit or advantage by intentionally not doing what is ordinarily expected (this is the prong I want to flesh out in economic terms of optimal outcomes, costs incurred, and benefits gained for each team); 3)the play is slow-developing and not fast-moving, so the player has time to think and control what he does; and 4) even doing what is ordinarily expected of them, the opposing players are powerless to stop the play from developing or to prevent the team from gaining this overwhelming advantage.
As I said, I believe the infield fly is the only situation in all of sport that possesses all four features. But in conversations with friends and readers, one situation keeps getting brought up: The kneel down (or "Victory Formation") at the end of football games.
I like his reasoning with the four-point test, but ultimately I believe it fails. I don't like the IFR generally. And I think this test does not sufficiently justify it (or change my mind). Below is the comment I've left on his post. Check out his entire post, and judge for yourself. The Sports Law Blog is a thoughtful source I follow regularly and generally don't quibble with. Messing with those guys is like a sixth grader picking a fight with the entire seventh grade.

My comment:
I really like your reasoning, but I ultimately believe I disagree. 
I think the example of the kneel down is problematic in a few respects. On point one especially but touching on the others, this seems an incorrect or arbitrary description. We should ordinarily expect that an offense is doing its best to continually put its team in the best position to win. This includes running the ball in a play that is unlikely to gain great yardage much less score but that puts the team in a position to score later on. It also includes running to force a trailing opponent to use valuable time outs to stop the clock. It also includes taking a safety rather than give an opponent very good field position for a touchdown opportunity. It also includes (last one, but I think these are progressively important) a defense that intercepts a ball late in a game thrown by a trailing team's offense falling down rather than advancing the ball and risking a fumble. 
If we are to take your four-point test and apply it to football, it seems we must start making a lot of judgment calls restricting these types of plays among others (my apologies for the redundancy, but this is a new point): An offensive team running the ball and falling down in bounds late in the game on 3rd and 20 to force the opponent to use a time out; A team taking a safety on purpose; A defense that is winning late in the game not advancing an interception because of the risk of fumble. My problem with the four-point test is not so much that it will have to be applied to so many other situations potentially, but that I don't find the IFR to be such a problem. It is a bang-bang, during the regular course of play event that happens to create both a situation of advantage (IFF executed properly) for one team as well as the time to execute it. This happens a lot in all sports. Should we prohibit fast breaks in basketball if enough of the defense is not able to contest the play? Should we force a football team on offense, up by one point, with one minute to play, and with no opponent time outs to score a touchdown when they would rather run out the clock and disallow the opposing team's offense from getting the ball back (reference: NY Giants versus NE Patriots in last year's Super Bowl)?

Tuesday, November 13, 2012

The King knew that great inputs were essential

Barry Switzer was one of the greatest college football coaches ever because, among other qualities, he was one of the greatest college football recruiters ever. Great talent building is a necessary component for success in any team sport be it through recruiting, drafting, or trading. The league structure will dictate the form the talent building takes. It is up to the management to maximize the opportunities given constraints. That sounds a lot like choice under scarcity, and it is, and that sounds a lot like something economics can help shine light on, and it is as well.

Obviously, a college football team would ideally be composed of the top 25 players by position to be drafted by the NFL each and every successive year. Well, that isn't actually obvious. Many of those players don't work out so well for reasons including the NFL isn't perfect in drafting the top performers in order. Tom Brady was a sixth-round pick in 2000 and was the sixth quarterback selected that year. Already we have a knowledge problem, and that is before we get to competition for resources and other factors driving scarcity. It is important to note at this time that the knowledge problem has two dimensions: (1) how well a player can play, and (2) how well a player will play. Neither is fully knowable even by the player himself. The player may think he coulda been a contender, but believing that does not prove it to be so.

Here is how I break the two dimensions down. The first I generalize under the heading "athletic talent". The second I generalize under the heading "grit". Each encompass many components.

Athletic Talent would include:
  • Athletic skills within the sport
  • Athletic skills in general
  • Intelligence
Grit would include:
  • Ability to be motivated
  • Ability to motivate
  • Desire
  • Work ethic
  • Attitude
Notice that a basic level of both groups of attributes are necessary. Notice also that each should complement the qualities of teammates and the team where the whole is greater than the sum of the parts, but grit probably plays a bigger role here than does athletic talent. This gets us to the tradeoff aspect. Here is where economics comes in.

The first dimension is higher profile and more easily observable, albeit with a significantly large standard deviation. The recruiting services don't give stars for determination to succeed. Their recognition is much more closely aligned with record-setting stats. From the start coaches will be biased toward recruiting with a heavy emphasis on the first dimension. The fan, donor, administration, and peer group will expect it up through accepting it as an excuse when a player under performs.

The best examples I have where a player exhibits the extreme case of having a lot of one dimension and a little of the other are Marcus Dupree with extremely high athletic talent but little grit and Wes Welker with slightly above average athletic talent and extremely high grit. A better example than Wes Welker would be a player with the grit but who failed because of a lack of talent. But that player doesn't exist because of the factors mentioned in the prior paragraph. In recent years Boise State had a lot more grit but probably one level less athletic talent than did Texas. The players recruited into each program most likely had a lot to do with this. Of course there were other contributing factors, but the point remains.

My simplistic approach to recruiting for the realistic ideal college football team is a great quarterback (extremely high levels of both dimensions) surrounded by above average athletic talent and highly above average grit. Yes, I said it was simplistic--probably should have said obvious too. But I don't think the process employed by many or any college football programs actually works this way. I think the process is actually a great or above average quarterback surrounded by highly above average athletic talent and average grit. And these are in all cases the goals of which a program will fall short in varying degrees of magnitude. Categorize this under the heading educated conjecture. I am sketching out an argument and theory not finalizing a thesis.

If we were to approach college football recruiting for a Moneyball angle, I believe this would be it. Athletic talent is the expensive input; grit is much less well paid. Where possible, trade athletic talent for grit at the margin. What this would mean in practice is being not very choosy when looking at players high in athletic talent--a three-star and a five-star might be nearly equivalent. You'd be looking for indications of grit where a little goes a long way to make up for relative athletic talent shortcomings. The first and most basic filter would be athletic talent. Get that out of the way quickly, and then focus the majority of your resources filtering on the dimension of grit.

Saturday, November 10, 2012

A little something for the readers

Just to prove this isn't all about me, I am announcing my intention to add something to every blog post. From now on I will try to incorporate a reference to a movie, usually a line of dialogue, in every blog post. I've already done this in at least a couple (there may be more, I do this so often and naturally in my everyday life that I lose track myself).

This should give you something to savor everyday. A reason for living perhaps. Or at least a reason to check in daily. Every time you find the reference, you win. Add the points up and keep track. At the end of the year you'll have a total. That total can be redeemed for merchandise in the Magnitude Matters general store (location and merchandise pending). You know, it's all about merchandising. Merchandising, merchandising, where the real money from the movie is made.

Yes, these references will be biased toward my taste in movies. So if you have bad taste in movies, you probably won't be cashing in for a set of steak knives at month end.

Friday, November 9, 2012

2012 Election is in the books, Obamney wins/loses!

So that happened. And a status quo, lame duck session begins. I forecast whip-lashing, headline risk as we endure the race to do nothing significant about the fiscal cliff. Let's prognosticate, shall we...

Winners, Losers, and Trends:

Immigration reform and liberalization seems likely to be a winner. It is clear the Republicans lost critical votes on net from the hard-line positioning the party took from the primaries on regarding immigration. This may make a lot of the bad winners in this election worth it all. And who'da thunk it from the victory of the president responsible for a record number of deportations.

Data crunching a la Sabermetrics is a winner. The Obama team took it to new heights, and Nate Silver showed just how powerful a nerd and some numbers can be.

Generally, social freedom was a winner as marijuana legalization at the state as well as the municipal level continued its success and marriage equality lept forward.

Economic freedom probably took a hit on net; although, that remains to be seen and unseen . . . so we'll never quite know. The chances for good tax reform including simplification ebbed some I believe.

The politics of envy and distrust were winners.

One-size-fits-all social policies defeated one-size-fits-all social mores.

Central planning by good intentions won out over fiscal planning by good intentions.

Count also bailouts and TBTF as continued winners. While Romney/Ryan didn't have a sterling record on this front, they promised better in rhetoric. That at least gave a small rational expectation to believe they would be better.

Defense contractors were probably losers while every other conceivable beneficiary of government largess was victorious on net.

Speaking of "defense", war was probably given a change of venue. Iran is a less likely destination for our restless drones but they still may get to vacation in the sunny Middle East in Syria.

There is a good chance I add to or edit this list.

Thursday, November 1, 2012

United versus Southwest

My wife is about to take a short trip up to Denver. She is flying up on Southwest Airlines and back home on United Air Lines. Because she is taking our five-month old, she needs to arrange with the airline that she has an infant lap child.

She called Southwest first. She immediately spoke with a person, was never put on hold, and quickly relayed the information. The agent of Southwest said it was taken care of and thanked her. Easy as that.

She then called United. She was greeted by a recording: (I paraphrase) "Thank you for calling United Air Lines. We are currently experiencing extreme telephone congestion due to the recent events from Hurricane Sandy. We are unable at this time to take any additional calls or to place you on hold. Good bye." And with that they hung up.

The story reminded me of this post from Bryan Caplan re: John Cochrane's recent essay, "After the ACA: Freeing the Market for Health Care"

This passage has the direct point (emphasis added):
The fact that so much cost reduction comes from new entrants, not reform at the old companies, is testament to the painfulness of this process, and the ability of incumbents to protect the status quo. The big 3 still take 40 hours to build a car relative to Toyota's 30. And two of them went bankrupt, while Toyota sits on a cash reserve. American and United are still struggling to match Southwest's efficiencies, after 30 years. The parts of Kodak invested in film simply couldn't let the company exploit its technical knowledge in optics and electronics. Chicago's teacher unions are fighting charter schools tooth and nail. And a quick look at a modern hospital, and its suppliers, suggests just how wrenching the same transformations will be.

How far we have yet to come

It is shameful and amazing that as far as we have come as a society, we not only still have legislation on the books like this, but we have politicians who gain favor by promoting it. It would be bad enough if anti-price gouging law was legacy law left over from a bygone age. It is far worse that this harmful nonsense is actively supported.

Look here (from a "leftist" economist), here (the maximum temperature analogy), here (directly refuting the other side), here (a roundup with videos), here (Cowen reminds us that the current owners of resources, shopkeepers, are also the competition), and here (interference with economic triage) for some wisdom on the topic.

To those who support anti-price gouging: The price increase you find distasteful is a symptom of the distasteful (big understatement) events that have transpired. Don't blame the price messenger. He is one of your greatest allies.

Mantis versus Moth

I was walking in the backyard and noticed a fluttering sound coming from the flower garden in the back corner. Upon inspection, I found an amazing sight right out of wild kingdom. A 4-inch-long preying mantis had captured a very large moth in its front legs. It was proceeding to basically eat the moth's face. Despite the moth's intense struggle, it could not free itself. The mantis was basically strong enough to hold down the moth's attempt to fly away. Below are some pictures and a link to a video I shot.

Tuesday, October 30, 2012

Let's get up a football league

Legend has it that one day in 1895 while sitting in Bud Risinger’s barbershop on Main Street in Norman, Oklahoma John A. Harts spoke some famous words: “Let’s get up a football team”. From there the Sooners were born.

The NCAA has approved what seem to be significantly more powerful sanctions on those who break the cartel’s rules. Be sure to read the article at SI. This comes as a response to the fact that the rewards from “cheating” are greater today by an order of magnitude than they were in decades past. NCAA czar president Mark Emmert recognizes as much:
We have sought all along to remove the 'risk-reward' analysis that has tempted people - often because of the financial pressures to win at all costs - to break the rules in the hopes that either they won't be caught or that the consequences won't be very harsh if they do get caught. The new system the board adopted today is the result of a lot of hard work and membership input devoted to protecting the collegiate model.
Unfortunately for the cartel, this is a losing battle in a soon to be lost war. Besides the growing sentiment against the NCAA’s practices, this change reflects the stakes growing in the sports world. The attractiveness of an alternative model wholly removed from the grip of the NCAA is higher than it has ever been. King Cnut Emmert will not halt this rising tide.

Value of life

Economists get into trouble they don’t deserve for a lot of bad reasons. One area where this is highly prevalent is when discussing the value of life. Those who don’t understand economics well misunderstand what an economist is really saying about the value of life. Importantly, economists are generally interested in the value of a statistical life. This is important to understand. Let’s consider some hypothetical situations to tease out these distinctions.

First, let’s arbitrarily assume the value of a statistical life (VSL) is $10 million. This isn’t the value of each life uniformly. Rather this is an average approximation of the value of a general human life for purposes of analysis at the margin. That last part about marginal analysis is key. We’ll come back to it shortly.

Consider a baby somewhere in America. This baby may grow up to be the next Steve Jobs or a terrible criminal, but probably something in between. In the former case his economic contribution to society will be vastly greater than $10 million, and in the latter his contribution will be considerably smaller if not negative. But we don’t know ahead of time what a person will turn out to contribute economically, and further this definition of a life’s value is not what an economist is getting at. To see that consider this false bargain:

The baby and a new building worth $10 million are located directly beneath the path of an approaching meteor. The implication of the economic value of life is not we are generally indifferent between moving the baby or the building out of the way. This should be obvious on its face as it is a lot more difficult (read expensive) to move a building than it is a baby. But what if next to the baby was an $100,000 armored car containing $9.9 million worth of gold? Are we indifferent now?

To ask the same question a different way consider this: An evil person somewhere in America has this baby in his clutches. He threatens that unless he is paid $10 million of societies resources (not paper money), he will inject the baby with a lethal dose of cyanide. We are certain never to catch this evil person or recover any of the resources given in exchange for the baby, but we will certainly get the baby back completely fine if the ransom is paid. Is the proper economic thinking here that we are indifferent between paying the ransom and letting the baby perish? You’re gut tells you no, and your gut is correct. The economic thinking on the VSL has nothing at all to tell us about these decisions. The key is marginal analysis.

The VSL is a tool for marginal thinking; that is, thinking about the costs and benefits of an incremental change. VSL tells us that the value of avoiding an increase of 1% in the chances of getting a baby into the path of a meteor or clutches of an evil person is some figure that when divided by .01 equals a number like $10 million. But the circumstances of actually being in the dilemma dictate entirely different thinking. Value is ultimately a subjective concept. The value of the next cup of water you will drink is vastly different if you are lost in the desert or chatting about last night’s football game at the water cooler. To attempt to extrapolate either of those values out to be the value of the Earth’s water supply would be complete foolishness. Similarly, to equate a decision made to avoid an incremental increase in risk multiplied by the weighted quantity all possible risks and the value of avoiding total risk (risk of certain death in an immediate moment) is foolishness as well.

Like the great Mr. T said, “I pity da fool who [confuses thinking at the margin with thinking in the aggregate]”.

Monday, October 29, 2012

Secretary of Business

Copying the success of the Department of Homeland Civil Rights Abuses Security, Obama has eluded to a Secretary of Business in his next administration heading up a consolidated group of business-related agencies. A one-stop shop for corporate welfare.

Efficiency in this area would not mean better SBA loans and smarter import-export subsidies—assuming there is a role for government to play in these endeavors. It would mean simply more of these activities with the associated growth in spending and malinvestment.

Generally, organizations don’t consolidate to bring efficiencies to the end customer or enhanced production. They do so to make it easier on the reported-to entity. Instead of nine offices reporting up the chain separately, the nine report to one office who then reports further up. The opportunity for cost savings is very limited by combining these functions. As functional areas are combined with “redundancies” eliminated, the risk of losing specialized knowledge grows, and the chance of good practices dwindles.

Sunday, October 28, 2012

Sports roundup: October 28th

Here is my take on a few sports results and sports-related news. From my perspective these are three stories of losing.

First the big one for me, Notre Dame defeated the Sooners last night yet again. I was very impressed by Notre Dame's game plan, execution, and grit. I was also "impressed" by the officials ability to call a questionable holding penalty on an OU touchdown, miss a pass interference call in a play that had an "interception", and then also miss after review that the ball clearly was trapped on the ground in that  interception. These were critical plays that could have changed the outcome. But I definitely recognize that the team that played better last night won the game.

Because they remain relatively untested for the rest of the season, it will be hard to assess to what degree ND is great versus to what degree OU is just above average. OU has played two very highly ranked opponents this year and underwhelmed in each case.

OU is now 1-9 against the Irish. It is interesting how a team can seemingly "have your number". Those of us at MM know that the number to have is sample size, and that is the key here. This small sample size just doesn't tell us much at all about how great and evenly successful both programs have been. The sample size being so small makes it very susceptible to selectivity bias. In this case some of that is opportunistic while most of it is pure chance. Notre Dame never played a Switzer team and they managed to avoid quite a few Wilkinson teams as well. They've only played Stoops twice catching the Sooners in relatively down years. OU and ND were supposed to play in 2000 and 2001, but it is my understanding that ND bowed out of those appearances.

I can relate to Notre Dame fans in ways I can relate to few programs' fans. They are a highly successful organization with the highest expectations year after year. That makes it hard when losses come. OU's season is now a bitter disappointment for me and most OU fans. When your goals are to compete for conference and national titles, the bar is set very high. It looks very hard for OU to still win the Big 12 this year. Winning the remainder of the games including a bowl game by 50 points would only bring to high relief the disappointment of not completing what would then look to have been possible. This is classic loss aversion as described by behavior economics. Losses hurt more than wins, and that diminishing return affect is greater and greater as winning is more and more expected/achieved.

The pageantry last night was second to none. I was very impressed by how it all came together. We put on a beautiful show for the Irish to fondly remember.

Switching gears, let's mention something about the Harden trade by OKC-Houston. This is striking many as a major WTF? Those sentiments may prove off the mark, but from what we know and see now, the head scratching appears reasonable. Harden is great and valuable. So, either Presti mistakenly estimated value (direct revenue from winning and brand strength and indirect from chemistry) or Simmons overstated the economic upside for the Thunder. There is a chance this tension is looking in the wrong place. The Thunder ownership could be loss averse in the financial sense. They aren't willing to make the investment and pay the luxury tax to effectively bet the come on future gains being worth certain extra expense. They could also suffer as an organization from several behavioral economics shortfalls including optimism bias and overconfidence effect.Or maybe it was spite: Harden wasn't showing "loyalty" and knowing his place as a sixth man. It wouldn't be the first time NBA owners asked not what a player deserved but what that player could give to the cartel organization.

One last topic, the double injustice of Tyrann Mathieu of LSU. The Honey Badger worked hard for negative current wages in the 2011 season for LSU. While not being reasonably paid for his labor, he brought happiness to LSU fans and profit to the LSU athletic department. Contemporarily and subsequently to that season he apparently chose as an adult old enough to die for his country to use some chemicals that are deemed highly naughty. Now his expected future wages are a slight fraction of what they were nine months ago. His life has been a tough and at times sad one. NCAA policies and U.S. law have made it tougher and sadder with less hope.

Thursday, October 25, 2012

Cliff Hanger

I mentioned in a post awhile back about writing a post concerning the spending side of the so-called Fiscal Cliff we are approaching. This is that post. Promise kept.

Don’t expect that same kind of responsiveness from Washington regardless of who wins the election. My expectation is that Rombama will deliver as much and as little as it takes to lie with a straight face that, "In the face of an epic challenge, the American people came together to forged a grand compromise. While this solution does not match the ideal of any one party or interest group, it does satisfy many of those goals and all of our greatest needs…." Disaster avoided, I am your savior. Or something to that political effect.

The spending side of the equation, forced spending cuts disproportionately affecting the Defense Department (because that is where the discretionary money is), is arguably the less concerning part of the equation. This is especially so in the long run. The short run effects of sequestration can be mostly if not entirely offset through proper monetary policy. The monetary authority must change expectations to demonstrate a willingness to accommodate any fiscal reduction. The political will for this is weaker than it should be, but it probably is strong enough and will strengthen in the put up or shut up point of fiscal cliff diving. The added bonus would be that monetary policy arguably has much less distortionary effects than does fiscal policy—the former says demand increases somewhere and the market guides the where, the latter says demand increases through government. Unfortunately, I don't think this will happen as I don't think we will fall off the spending fiscal cliff.

The tax side of the fiscal cliff remains the more imposing part and has the more important long-run considerations. The uncertainty alone is a source of reduced economic growth. I'm cautiously optimistic about the chances for tax simplification and otherwise meaningful reform. I'm more optimistic about tax rates and incidence not being as severe as a full plunge over the cliff would be. Here I think there will be a decent compromise, but most of the benefits will be in terms of certainty rather than good policy--we'll at least know how badly taxation will be moving forward.

Back to the spending, I am very pessimistic about the chances of substantial spending reform or reduction. That means the fiscal cliff is avoided from the spending side—we don't get the big cuts, hence we don't fall off the cliff with the associated risks to short-term growth. But the manner in which we avoid the cliff is in no way a sustainable path to fiscal prudence. For evidence supporting my view on spending and the compromise to come, look at how Obama defines a "grand bargain".

Tuesday, October 23, 2012

Thinking like an economist at the Sooner Club Tailgate

As part of the benefit package associated with being a large enough donor to The University of Oklahoma Athletic Department, our group gets two complimentary passes to the Sooner Club Tailgate before each home football game. The event is described as:

Before each home football game, more than 5,000 Sooner Club members are treated to a variety of complimentary food and beverages provided by more than 40 local restaurants and vendors. Special entertainment is provided by the Sooner spirit squads, the Pride of Oklahoma marching band, and our own emcee and DJ.

It is held inside the Mosier indoor practice facility originally used by the football team (before the Sooners discovered the forward pass circa the 1990s—the roof is too low) and currently used by track & field teams. It is almost as large as a football field inside. The overwhelming majority of the floor space from the middle out is occupied by tables and chairs while the surrounding sidelines on both sides host the various vendors of food and beverage.

While I don't actually over analyze this opportunity as described below, I thought it would be a good thought experiment to explore.

Here are some relevant facts to consider as I try to think like an economist:

  • The event opens 2.5 hours before kickoff; I like to be in my seat at least 45 minutes before kickoff.
  • I generally will be on campus 2.5 hours prior to kickoff--I am already in the area naturally but on the other side of campus. I enjoy eating something before the game and I always have done so.
  • The line to get into the tailgate begins forming outside the doors about 30 minutes before it opens. Getting to the front of the line would mean leaving 30 minutes earlier from my house.
  • The event is very crowded for the space and lines are present at nearly every vendor booth constantly.
  • Vendors often run out of some items. Occasionally, one will run out of all items.
  • The event is about a half-mile walk out of my way, which would mean, of course, a half-mile extra in return.
  • There is a good variety of food offered considering only tailgate-likely foods. The food is very similar to what is offered elsewhere inside and outside the stadium. More on this in the strategy below.
  • Generally, I attend the tailgate with my 8-year-old daughter.
  • Just to be clear this is an all-you-can-eat event including all-you-can-drink with soft drinks, bottled water, and beer offered. The beer offered includes real beer like Shiner Bock and that from the local microbrewery Coach’s Brewhouse along with nonsense like Budweiser, Bud Light, and other forms of badly flavored water.
  • The two complimentary Sooner Club Tailgate tickets are part of the package for the stadium tickets my group purchases including the season donation. Receiving the tickets cannot be avoided and does not factor into our decision to purchase our stadium tickets. Regardless, once I’m at the game, it would be a sunk cost even if we had explicitly purchased the tickets for the purpose of attending the tailgate in the future. More on this in the strategy.
  • You basically can’t take food or drink out of the event, but only beer is really monitored. A bottled water or some of the packaged goods like Hostess donuts pass inspection. The layout of the facility and its surroundings preclude the risk that someone would make a repeated run in and out distributing food to outsiders.
  • A normal plate at one of the vendors inside the tailgate would probably be priced outside the tailgate on game day at between $8 and $12.

Here are some irrelevant facts to disregard:
  • The Sooner Club sells tickets at the door priced at $30 for adults and $15 for children 12 and under. Since it is just me and my daughter and we have tailgate tickets already, these price points are not important. This is the first lesson. To determine the value of the event to me, I must consider my opportunity cost in obtaining it--the value of the next best alternative foregone. The price of the tickets at the door is not relevant.
  • A normal plate at one of the vendors would probably be sold at the vendor's primary place of business on a normal day at between $5 and $8. Also not relevant and in this same vein, a hot dog in 1940 cost $.30.

Here is my thinking and strategy:

Do I attend?
  • If the weather is bad (rain or snow or high, very cold winds), the decision not to attend the tailgate is easy. The walk over is unprotected from the elements. I’d rather stay warm and dry in the Student Union and pay for the same meal. The price of my food thus at most equals the amount at which my daughter and I value being warm and dry. Remember, the tickets, even if explicitly purchased before the season, would be a sunk cost at this point.
  • Otherwise, I will generally attend unless there are some special circumstances like meeting friends from out of town before the game. Again, the price of food purchased as an alternative would be equal to or less than the value I place on meeting the friends. So far this year I am 3 for 3 in attendance. I must need better friends :).

Do I get there early to get to the head of the queue before it opens?

  • No. The food is good, but that isn't really important. It must already be good enough because I am attending. What matters is the range of opportunities within the tailgate (the best food relative to the worst food), and all this leads us to the expected food. Remember that I said vendors do run out. Presumably the highest demanded food has the greatest chance of running out. Also, there are varying lines of people within the tailgate waiting to get each vendor’s food. The best food will have the longest and quickest forming lines. So, I was wrong before? Here is where thinking like an economist helps and leads me to the answer not to get there early.
  • It is unlikely that there is much difference between the vendors for the typical consumer. If you have very atypical tastes, this might be a reason to get there early. More likely it would be a reason not to attend as the cost would be too high. Snobby foodies can’t afford to attend “free” tailgates.
  • If there were much of a difference, the line to get in would form that much earlier and the fight inside would be that much more intense. It is hard to beat the crowd when price is not a rationing tool.
  • I like to watch as much football as possible on Saturdays. My daughter can't walk as fast as me. Leaving early or rushing across campus to get to the front of the line is costly. And we can safely assume it isn't worth it. The food isn't likely to be that much better than the competition outside, isn't likely to be greatly different once inside, and isn't likely to all run out—not if the Sooner Club really intends this as an enticement to be a big donor. 

Am I picky about what I get to eat?

  • No. While not snobby, I do consider myself a foodie. The food here is good, and some is better than others. Do I scout out my options on the website before the game knowing some vendors drop in and out? Do I do an initial recon mission once first in the facility to plan my attack? No and no. Remember, there is a limit to how good and how bad the food can be, and the internal lines will smooth out the differences for the typical consumer. I do consider myself fairly typical in this case.
  • An example: Bubba’s BBQ is very good. Burger King is an average burger. Bubba’s BBQ is at the back, and the line moves slowly. Burger King is at the front and is quick. There are a lot of trade offs here, but they most are negligible except for my time. The marginal benefit of the BBQ over the burger is greatly outweighed by the marginal cost of 10 minutes longer spent waiting. My goal is to get in, get something decent to eat, get over to the game.
  • You just can’t go that wrong or that right in this situation. There is no grand arbitrage to be played here. Grab some food. Attempting to find the optimal solution is costly to the point of ridiculous. The margin of error on food choice is much, much lower than the risk of wasting your time. In short, you're fearing regretting the wrong thing (food choice instead of time spent).
  • The one area where I will exert a little choosiness is beverage. My preference is beer, but my first choice, Coach's Brewhouse, is usually out of reach because the line is too long. Moving down the preference chain until time spent is worth the taste usually lands me at Blue Moon or Shiner Bock. Again, the best choice is made at the marginal trade off.

How much do I eat?
  • It is not that good; hence, it is not worth getting stuffed. In fact, I think the risk of overeating is high; so I am careful to be moderate--unlike I was in expounding upon this post.