Tobias J. Moskowitz has a recent paper on this question, the results are illuminating:

I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved that allows any mispricing to be detected. Analyzing more than a hundred thousand contracts spanning two decades across four major professional sports (NBA, NFL, MLB, and NHL), I find momentum and value effects that move betting prices from the open to the close of betting, that are then completely reversed by the game outcome. These findings are consistent with delayed overreaction theories of asset pricing. In addition, a novel implication of overreaction uncovered in sports betting markets is shown to also predict momentum and value returns in financial markets. Finally, momentum and value effects in betting markets appear smaller than in financial markets and are not large enough to overcome trading costs, limiting the ability to arbitrage them away.

SSRN and video versions of the paper are here.  The underlying idea here is neat.  The marginal utility of consumption is unlikely to be correlated with the outcomes of sporting events, so we can test some propositions of finance theory without having to worry much about those risk factors.  Lo and behold, a version of momentum results still holds up.  And if you would like an exposition of that approach, do see my earlier dialogue with Cliff Asness.  And here is Cliff on Fama on momentum.

Defer to the Algorithm

by on February 6, 2016 at 1:39 pm in Current Affairs, Economics, Web/Tech | Permalink

A BuzzFeed article predicts that Twitter will soon move from a time-ordered feed to an algorithmic feed, one that shows you tweets that it predicts you will like before it show you lesser-ranked tweets. Naturally, twitter exploded with outrage that this is the end of twitter.

My own tweet expresses my view ala Marc Andreessen style:

It is peculiar that people are more willing trust their physical lives to an algorithm than their twitter feed. Is the outrage real, however, or will people soon take the algorithm for granted? How many people complaining about algorithmic twitter don’t use junk-email filters? I want ALL my emails! Only I can decide what is junk! Did junk email filters ruin email or make it better?

Facebook moved to an algorithm years ago. At the time, the move caused complaints but I think algorithmic feed has made Facebook more relevant, especially in recent years when the algorithm has gotten quite good. The profits agree with my assessment. Many people don’t understand that there is no serious alternative to an algorithmic feed because most people’s uncurated feeds contain well over a thousand posts every day. It’s curate or throw material out at random.

Think of the algorithm as an administrative assistant that sorts your letters, sending bills to your accountant, throwing out junk mail, and keeping personal letters for your perusal. The assistant also reads half a dozen newspapers before you wake to find the articles he thinks that you will most want to read that morning. Who wouldn’t want such an assistant? Moreover, Facebook has billions of dollars riding on the quality of its assistant algorithms and it invests commensurate resources in making its algorithm more and more attuned to our wants and needs.

It’s not simply that the algorithms are good and getting better it’s that the highest productivity people will use their human intelligence to complement machine intelligence. That means trusting the machine to curate millions of items, bringing only the most important to your attention, and then using human intelligence to take action on the most important items. By trusting the machine intelligence to filter, you can open yourself up to a much wider space of information. I have many more friends on Facebook than I have IRL because I trust the algorithm to bring me only the best of my friends on any given day. A twitter algorithm will mean that I can follow more people without being overwhelmed. Even when the filter is imperfect, you are more likely to discover something of importance from 100,000 items imperfectly filtered to 100 than from 1000 items perfectly filtered to 100.

As Tyler argued in Average is Over, the future belongs to people who can defer to the algorithm.

Saturday assorted links

by on February 6, 2016 at 12:34 pm in Uncategorized | Permalink

1. Installment #2 in the Caplan symposium on ancestry and long-term economic growth.

2. The economics of Indian beef bans.

3. Applying computer science to game theory.

4. Jason Furman defends the Cadillac Tax.

5. Dirk Nowitzki responds to Kareem’s charge that he is a “one-trick pony.”

That is from Venkatesh Rao, retweeted by Ben Southwood, a version of “Questions that are rarely asked.”

I suppose if you haven’t read the Bible or Quran those are easy answers, but let’s say you have.

I’ve only read snippets of Mein Kampf, so that has to stand as a contender.  But has the book really influenced and shaped my life?  Maybe you can attribute the relevant marginal product to the life of Hitler, with the book being intermediated by Hitler himself.  Therefore I am not sure that answer is true to the spirit of the question.

How about a training manual of some kind, which perhaps my early teachers read but I have never seen or even heard of?  Might my mother have read Dr. Spock or other parenting books?  That would be my best guess.

1. The subtitle is A New Theory of Chinese History, and volume one has just been translated and published from the Chinese.

2. The author, Dingxin Zhao, now is a Professor of Sociology at the University of Chicago.

3. The book has a curious 19th century air to its intellectual influences.  The main argument uses Herbert Spencer to revise Michael Mann, a 20th century British sociologist who wrote on the sources of power.  Lamarckian ideas are deployed frequently.

4. The Western model has had four independent power sources: states, churches, aristocracy, and the urban bourgeoisie.

5. Neither merchants nor religion had much of a strong, independent role in early Chinese politics.  Only the state and the aristocracy were powerful actors.

6. In the model of this book, the dual forces of competition and institutionalization drive historical change.  More than anything else, individuals maximize power.

7. The empowerment of economic power by ideology is the most fundamental feature of modernity.

8. “Three pivotal institutions of Western Zhou origin exerted an enduring impact on the history of China: the Mandate of Heaven, the kinship-based “feudal” system, and lineage law.” (p.79)

This is not an easy work to parse, but it is a book of substance and it reflects a considerable amount of careful thought.

Friday assorted links

by on February 5, 2016 at 11:02 am in Uncategorized | Permalink

1. Don’t bid with a round number.

2. Fellowships for the Center for Effective Altruism at Oxford.

3. Runaway zebra drill at Tokyo Zoo.

4. “…undergraduates are more likely to major in a subject if their first course in the subject was taught by a graduate student…

5. The Gerben comedy immigration video that everyone is talking about.

5. My chat with Randall Kroszner on “The Future of Money.”

Hanging up on annoying telemarketers is the easiest way to deal with them, but that just sends their autodialers onto the next unfortunate victim. Roger Anderson decided that telemarketers deserved a crueler fate, so he programmed an artificially intelligent bot that keeps them on the line for as long as possible.

Anderson, who works in the telecom industry and has a better understanding of how telemarketing call-in techniques work than most, first created a call-answering robot that tricked autodialers into thinking there was an actual person answering the phone. So instead of the machine automatically hanging up after ten seconds, a simple pre-recorded “hello?, hello?” message would have the call sent to a telemarketer who would waste a few precious moments until they realized there really wasn’t anyone there.

But Anderson then wondered just how long his robot could keep a telemarketer on the line for. It turns out, for surprisingly long.

…Here’s the best part: anyone can connect telemarketers calling and harassing them to Anderson’s auto-responding robot using the simple instructions he’s posted to his site

There is more here, via HarpersNotes.

The break in the prison population’s unremitting growth offers an overdue reprieve and a cause for hope for sustained reversal of the nearly four-decade growth pattern. But any optimism needs to be tempered by the very modest rate of decline, 1.8 percent in the past year. At this rate, it will take until 2101 — 88 years — for the prison population to return to its 1980 level.

And this:

Other developments should also curb our enthusiasm. The population in federal prisons has yet to decline. And even among the states, the trend is not uniformly or unreservedly positive. Most states that trimmed their prison populations in 2012 did so by small amounts — eight registered declines of less than 1 percent. Further, over half of the 2012 prison count reduction comes from the 10 percent decline in California’s prison population, required by a Supreme Court mandate. But even that state’s achievement is partly illusory, as it has been accompanied by increasing county jail admissions.

Three states stand out for making significant cuts in their prison populations in the past decade: New York (19 percent), California (17 percent), and New Jersey (17 percent). The reductions in New York and New Jersey have been in part a function of reduced crime levels, but also changes in policy and practice designed to reduce the number of lower-level drug offenders and parole violators in prison. But the pace of reductions in most other states has been quite modest. Moreover, 22 states still subscribed to an outdated model of prisoner expansion in 2012.

There is more here from Marc Mauer and Nazgol Ghandnoosh.

That is the topic of a new paper by Meyer R and Desai SP, here is the abstract:

News of the successful use of ether anesthesia on October 16, 1846, spread rapidly through the world. Considered one of the greatest medical discoveries, this triumph over man’s cardinal symptom, the symptom most likely to persuade patients to seek medical attention, was praised by physicians and patients alike. Incredibly, this option was not accepted by all, and opposition to the use of anesthesia persisted among some sections of society decades after its introduction. We examine the social and medical factors underlying this resistance. At least seven major objections to the newly introduced anesthetic agents were raised by physicians and patients. Complications of anesthesia, including death, were reported in the press, and many avoided anesthesia to minimize the considerable risk associated with surgery. Modesty prevented female patients from seeking unconsciousness during surgery, where many men would be present. Biblical passages stating that women would bear children in pain were used to discourage them from seeking analgesia during labor. Some medical practitioners believed that pain was beneficial to satisfactory progression of labor and recovery from surgery. Others felt that patient advocacy and participation in decision making during surgery would be lost under the influence of anesthesia. Early recreational use of nitrous oxide and ether, commercialization with patenting of Letheon, and the fighting for credit for the discovery of anesthesia suggested unprofessional behavior and smacked of quackery. Lastly, in certain geographical areas, notably Philadelphia, physicians resisted this Boston-based medical advance, citing unprofessional behavior and profit seeking. Although it appears inconceivable that such a major medical advance would face opposition, a historical examination reveals several logical grounds for the initial societal and medical skepticism.

File under “@pmarca bait.”

Hat tip goes to Neuroskeptic.

The authors are Christopher H. Achen and Larry M. Bartels, and the subtitle is Why Elections Do Not Produce Representative Government.  This book is brutally depressing, not to mention very well presented, though I cannot say the core message is surprising at this point.  Voters choose on the basis of partisan loyalties, and these days party voting has a much bigger influence on state and local elections than it used to.  So where is the accountability?  Some voters engage in “retrospective voting,” but on the basis of super-short time horizons, and often the voters hold politicians accountable for matters those politicians cannot control, even storms and other natural disasters.  The authors really do demonstrate these points with lots of rigorous analysis.

OK, now a segue.  Given all this, the natural and appropriate policy response should be to a) expand the responsibilities of democratic government, or b) consider limiting the responsibilities of democratic government?

You are allowed only two guesses…

The book is due out in April.

Markets in everything

by on February 4, 2016 at 1:08 pm in Books, Religion | Permalink

From my email Inbox:

Greetings T. Cowen,

I’m L. Ron Gardner and I’ve just published a mind-blowing novel/libertarian manifesto — Kill Jesus: The Shocking Return of the Chosen One — that you might want to review at your site. It is about Jesus reincarnating and attempting to end the Fed, which his father controls. The book, which has been described as “Atlas Shrugged on ‘roids,” is available at Amazon in paperback and Kindle.

Thursday assorted links

by on February 4, 2016 at 12:03 pm in Uncategorized | Permalink

1. Why they get naked at LSU: simple economics.

2. Should your tech firm have an economist?

3. “One of my favorite emails said something like “once you create a body of data, it’s subpoenable.””

4. Livestream for my Chicago chat with Randall Kroszner on the future of money, 6 p.m. CST.

5. “Now, Amazon Japan lists a company that offers budget-friendly monk delivery service.”

6. Substantive update on Amazon America’s retail plans.

7. What are the differences in Ivy League reading lists?  And terror plans often leak.

In Launching the Innovation Renaissance I argued that students were not graduating with the degrees that pay (see also my piece in the Chronicle of Higher Education).

In 2009 the U.S. graduated 37,994 students with bachelor’s degrees in computer and information science. This is not bad, but we graduated more students with computer science degrees 25 years ago! The story is the same in other technology fields such as chemical engineering and math and statistics.

If students aren’t studying science, technology, engineering and math, what are they studying?

In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

So what has happened since 2009? The good news is that enrollment in STEM fields has increased dramatically. The number of graduates with computer science degrees, for example, has increased by 34%, chemical engineering degrees are up by a whopping 49.5% and math and statistics degrees have increased by 32%.

The bad news is that we are still graduating more students in the visual and performing arts than in computer science, math and chemical engineering combined. As I said in Launching nothing wrong with the visual and performing arts but those are degrees which are unlikely to generate spillovers to society.

We are also graduating more students in communications and journalism than in computer science, math and chemical engineering combined and more students in psychology than in computer science, math and chemical engineering combined. Here’s what I said about psychology:

In 2009 we graduated 94,271 students with psychology degrees at a time when there were just 98,330 jobs in clinical, counseling and school psychology in the entire nation. The latter figure isn’t new jobs — it’s total jobs!

Despite these problems, the number of psychology degrees conferred annually has increased since 2008-2009 by an astounding 21.4%! Visual and performing arts degrees have increased by 9.7% and communication and journalism degrees are up 8.1%. Do you think that jobs in these fields have gone up by equal percentages?

Stated differently, in 2012-2013 we graduated 20,418 more students in computer science, chemical engineering and math and statistics than we did in 2008-2009 but we also graduated 20,179 more students in psychology alone! We have a long way to go.

Here is the data:

EducationData

The Importance of Institutions

by on February 4, 2016 at 7:34 am in Economics, Education | Permalink

So far, in our Principles of Macroeconomics class at MRUniversity we’ve covered GDP (how it is calculated, nominal versus real, GDP as a measure of the standard of living etc.). We have also covered the basic facts about differences in income both across countries and over time, the importance of growth rates, and the presence of growth miracles and growth disasters, among other topics.

In our latest video, Tyler covers the Importance of Institutions. Next up geography and growth and shortly after that on to the Solow model!

As always, these videos are freely available for non-commercial use. They can be used with any textbook but why would you want any but the best?

Bank of Japan should call them willie wonka bonds “YOU GET NOTHING. yOU LOSE!”

Who is advising Japan? Forcing banks to lend all ¥ will not get 2% inflation. It creates loanees market with even lower rates. Dumb move

Negative interest rates in Japan is blowing my mind

Here is his Twitter account, here is the Bloomberg story.  They promised us flying cars, and all we got was…

Jose Canseco