Wednesday, August 28, 2013

Highly linkable

Google, the great disruptor, is at it again this time targeting TV.

All those beauty queens may finally get their wish.

This one from Megan McArdle is heavyweight great. Far too often the simplistic analysis of policy advocates fails miserably to fully appreciate the nuances and complexities of life and its tradeoffs.

Angus points to a paper showing that 401(k) plans can have hidden and unavoidable pitfalls.

More sharing is made possible through technology. This time it involves ad hoc tasks. The future isn't plastics as much as it is butlers and maids for the masses. (HT: Mark Perry at Carpe Diem)

Far be it from me to advocate more regulation, but the NCAA is a government sanctioned and subsidized monster that may need some babysitting. Here is a nice start.

John Cochrane raises some quibbles but largely agrees with Greg Mankiw's take on Au.

Steven Landsburg shows us one awesome version of the Game of Life. (Warning: the nerd indications are high on this one.)

Here at MM we love sports ticket intermediators (pejoratively also known as "scalpers"). Here is a great video arguing our point.

Sunday, August 25, 2013

Risky business

People generally understand the concept of a trade off between risk/return, but their understanding of this relationship is not always technically correct. The true nature of this relationship can be more nuanced than our intuitive feel for it allows. Here is an example of an incorrect way to conceive of risk/return and the appropriate alternative.

All three charts are using the same data set, total return of the S&P 500 by month going back to 1975. In the first case we see how people commonly are led astray when conceiving of this relationship. It is not fully correct to simply think that "return" is what you gain when you gain and "risk" is what you lose when you lose. More appropriately, risk is volatility, deviation from the trend both up and down. Fortunately, the trend is biased upward in the case of the S&P 500 (at least historically and probably in the future). This bias is because upward risk (call this positive volatility) tends to be greater than downward risk (call this negative volatility). Because of this bias and the fact that the S&P 500 tends to outperform many other capital assets, we are encouraged to get exposure to the S&P 500 when we otherwise wouldn't have any. As an added advantage exposure to the S&P 500 comes at a relatively low cost, but that is a little outside of the scope of this blog post.

PS. Note that in the last chart the risk in red depicts the range of one standard deviation of total return above and below actual total return. One standard deviation will tend to capture about 67% of historical volatility. Two standard deviations reflects about 95% of historical volatility. Because we are adding one full standard deviation to return and subtracting one full standard deviation from return, we are depicting in the chart 95% of historic volatility.

Sunday, August 11, 2013

WWCF: Immunity to venom or immunity to food allergies?

Which will come first?

Immunity to deadly venom (snakes, spiders, wasps, etc.)
Immunity to life-threatening food allergies (peanuts, shellfish, etc.)

Since these share the root problem of anaphylaxis, an immune system response to allergen exposure, they may be solved together. I'm not sure which one is the most breathtaking in terms of a media response, but from the standpoint of fatalities, animals top food. However, both are fairly small in absolute magnitude. While cases of anaphylaxis seem to be on the rise, it is important to note this is not the low-hanging fruit of death prevention. 

Of course, it is not all about dying. Living with a food allergy as many do is life under constant threat knowing that something many people enjoy as a small part of everyday life is potentially your death sentence. And if you don't die, it is a very agonizing medical emergency. To an allergic person, hearing you've just eaten lobster-filled eggs can be as shocking and unforgettable as hearing that your baby is ugly. Similarly, most of us go through life with a primordial fear of that which hisses or buzzes. So, don't discount too steeply the long-term benefits from immunity to these problems. 

Keeping in mind that I am asking about immunity rather than developed tolerance through incremental dose therapy (i.e., not just a shrinkage of the problem), these both seem more distant especially in light of the better living through prevention (avoidance) option. I would count any sure-fire, immediate result therapy that stops anaphylaxis in its tracks as "immunity". 

My guess is that because children are most at risk with food allergies and we can kill or avoid venomous animals with increasing ease, food allergy immunity comes first. But I'll add that it will probably be 30+ years away, and I would guess it will be the serendipitous result of other research/developments. 

Thursday, August 8, 2013

Flooding the sports autograph memorabilia market

This past weekend was Meet the Sooners Day for the Oklahoma Sooners football team as the kicked off the start of fall practice. I would assume that this fairly common event throughout college football shares the same rules, which attempt to keep it child-focused. Those rules specify:
Each child may be accompanied by a maximum of one adult, but adults will not be permitted to submit items for autographs.
Each child may bring ONE item to be signed - no exceptions.
These rules are designed to keep Ernie eBay from having all the start players and coaches sign 15 items all to be auctioned off to the highest bidder. This leads me to some thoughts:

  1. Is the university or athletic department opposed to sports memorabilia? More specifically, opposed to a secondary market in sports memorabilia? Do they find it unhealthy, unwholesome, and this is a way to somewhat defund it? If so and setting aside the silly moralistic position, I think they are going about it the wrong way. I'll elaborate shortly but in another point because I find it unlikely this is the primary cause.
  2. I do think there is some highbrowishness supporting the motives, but I generally think it is a genuine and legitimate attempt to be mindful of the players' scarce time (minimally exploitative for a change) and direct the benefits to the most deserving group (children).
  3. Are the universities, athletic departments, and the NCAA missing a revenue opportunity while at the same time missing the best method to limit or control the secondary market? I think the answer here is a resounding yes. I think with two actions Meet the Sooners Day would be all about the kids without the rules needed to make it so. 
    • Organize a signing by the entire roster on a limited number of sports items to be sold through the athletic department. Johnny Manziel purportedly was paid $7,500 to sign 300 mini and regular-sized helmets. These would be "authentic, originally-signed" autographed items. 
    • At the same time take an electronic image of each player's signature. Use this to mass produce signed items. This essentially floods the market for signed goods taking away most of the impetus for others to duplicate these efforts.
  4. Of course these business actions might be a bridge too far making it obvious that a third action would be necessary to avoid charges of exploitation--give the players the proceeds of these sales.

Monday, July 29, 2013

The Ben Bernank ordering breakfast doesn't make him hungry, or . . .

Getting cause and effect backwards.

Often I hear investment pundits describe an effect as a cause giving them reason to be bullish or bearish on particular sectors, etc. The typical mistake runs like this: "We expect equity flows (investments into stocks) to increase driving stock prices higher." Think for half a second how one might determine the value of a stock . . . Stock is ownership in a company. That company derives value for owners by creating profits. Those profits eventually must become a series of cash flows back to the owners. If we could make a good estimate of the timing of those cash flows and apply a reasonable discount rate, we could approximate the present value of the cash flows (what they are worth in one, lump-sum price today) and hence the present value of the company.

Nowhere in that analysis is room for the thinking that if more people like the cash flows, they are worth more. True if more people like the series of cash flows, the discount rate goes down and the present value goes up. But here again we are getting it backwards. Why do people like the series of cash flows at a given price more all of a sudden? Because the discount rate used to calculate the present value now seems wrong. Therefore, the price seems low making it more attractive driving the desirability up until the price seems right again.

The girl is more attractive after the Extreme Makeover not because people are now more attracted to her. People are more attracted to her because of the makeover.

So how does this relate to The Ben Bernank and The Fed? I think many people including some economists often get it wrong in describing the cause and effect related to the economy and Fed activity. Consider this Arnold Kling post which points back to this Scott Sumner post which points back to this David Glasner post all of which got me thinking about this issue once again. And here is a money quote from another Arnold Kling post that illustrates my thinking:
Probability that monetary policy “merely reacts to what would have occurred anyway” = .75
I think I would put that probability at least that high. To explain why, I'd like to introduce a metaphor that I believe aptly illustrates the right way to think about the Fed's role in the economy as it "sets" monetary policy ("sets" is too powerful a word here; "escorts" might be better):

Think of The Federal Reserve as the regulator of a man-made lake where The Fed controls the dam and where it controls a floating dock that many boats use as a prime spot for anchoring. The lake is the money supply and the dock is both the Federal Funds Rate (the interest rate at which reserves held at The Fed are traded between banks) and the Discount Rate (the rate at which The Fed will lend money to banks to cover short-term needs). The Fed can control the outflow from the lake to help determine the water level (money supply), but this is a clumsy process. If The Fed doesn't have a good handle on what nature (the market) will bring in terms of rainfall and drought (i.e., if indicators are poor), then too much or too little water may be in the lake. Likewise, if The Fed sets the federal funds rate or the discount rate inappropriately low (high), the dock will be under water (way out of the water). In either event, boats can't use the otherwise popular dock which makes lake activity difficult.

Some want The Fed to look out on the lake with omniscient vision seeing well-planned development. In truth The Fed is simply trying to accommodate the level of water nature otherwise wants for the lake while trying to satisfy those who desire to use the lake as a resource--adding or reducing water to smooth the ups and downs. If only The Fed could ask nature what was in store for lake water levels (an NGPD futures market), it could do so much better getting the water level "correct".

Sunday, July 28, 2013

Highly linkable

John Cochrane points us to a painting depicting the history of trade. We see the (symbolic) beef, but I'm left wondering where's the gold?

Noam Scheiber of The New Republic says we're about to lose another Big.

Steven Landsburg brings us another great riddle whose solution I did not reach on my own. My downfall was a knee-jerk reliance on the ubiquity of the Monty Hall Problem.

Finally, if you want some good ideas of places to go to get away from it all (including people), check out this.

photo by Mark Stevens

Monday, July 22, 2013

WWCF: Driverless cars or 3D printers in the average household?

Which will come first?

50%-household penetration for driverless cars
50%-household penetration for 3D printers

News about both of these technologies of the future are in vogue right now. I've talked a bit about them here and here. The economic possibilities are quite promising. In fact, I see the factors slowing the progress of each to be more political in nature rather than technological. Regulators will be the first to cry, "Jane, stop this crazy thing!" Some of the very serious people are already sounding alarms about robot cars. Expect them to be joined soon by all those millions, and don't doubt for a second that it is indeed millions, of people whose livelihoods are threatened by a driverless future. For 3D printers the fears begin with guns and end with patent infringement run amok. Nevermind the fact that I've already solved the patent problem, et al

But back to the question at hand. While the Makerbot is selling like hotcakes, John Deere is already selling a driverless lawnmower. I say the driverless car edges out the 3D printer by less than five years, and I expect the 50% mark to be hit by the winner before 2033.

PS. With driverless cars you effectively don't need compulsory insurance or state licensing just as you don't have those conditions for guns, chainsaws, swimming pools, or outdoor grills. Good luck with that logic, though.