Month: January 2006

Adverse selection is overrated

An anonymous correspondent sends me news of the young Henry Schneider, Yale Ph.d. student.  Here is the abstract to his Estimating the Effects of Adverse Selection in Used Car Markets:

In this paper, I address the long-standing question of whether adverse selection prevents used
cars from reaching owners who value them most highly. In doing so, I confront the challenge
of identifying the effects of adverse selection separately from the effects of efficient sorting of
vehicles based on their conditions. This latter process would usually occur simultaneously to
adverse selection and also affects the distribution of vehicles that trade. Using the prediction
in Hendel and Lizzeri (1999), that adverse selection and efficient sorting both increase the
rate of price depreciation, I propose to use their joint effect as an upper bound on the effect of
adverse selection. My estimate of this joint effect, based on proprietary data on one million
dealer used car sales and trade-ins, is close to zero, a result that indicates that adverse selection
is unimportant. Using Consumer Expenditure Survey data, I provide additional support
for this conclusion by showing that vehicles that were recently purchased from a dealership
received approximately the same number of repairs as comparable continuously-held vehicles.
I conclude with a discussion of the role that sellers’ concerns for their reputations may play
in limiting information-based inefficiencies.

But Henry is no apologist for the market.  Here is his paper on how much auto mechanics rip you off.  Half of all the money spent on auto mechanics appears to be deadweight loss.  He does note they neglect urgent problems 77 percent of the time, which suggests some stupidity instead of (in addition to?) pure venality.

Here is Alex’s earlier post on adverse selection.

On the evolution of religion

Consider the following sayings from two prophets of different religions:

It is easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of God.

An honest merchant has a guaranteed place in paradise.

Now if you had to predict, which religion would you suspect would be more compatible with markets and modernity?

The first quote, of course, is from Jesus the second is a saying attributed to Muhammad.

My point is not to argue that Christianity or Islam are either more or less compatible with capitalism or liberal democracy.  In my view all religions of reasonable age and numbers contain traditions and teachings compatible with modernity and all religions of reasonable age and numbers contain traditions and teachings incompatible with modernity.  Call it the completeness theorem.

It’s how religions adapt and evolve to modernity that is important.  Religions are constantly changing, emphasizing certain features, downplaying others, creating new interpretations.  Given enough time, I believe that any religion will evolve towards compatability with modernity because it’s the memes that combine modernity and religion which will survive and prosper. 

The problem is that Christianity has had hundreds of years to adapt itself to modernity while Islam has had modernity thrust upon it.

Fish don’t walk overnight and neither do religions.  Nevertheless there are Islamic leaders who, under the pressure of current events, see the direction in which Islam must move and who are actively encouraging evolution in that direction.  Dan Drezner, for example, points to this article on developments in Morocco:

42-year-old King Mohammed VI has discovered religion as a means of
modernizing his society — and progress through piety seems to be the
order of the day. By granting new rights to women and strengthening
civil liberties, the ruler of this country of 30 million on Africa’s
northern edge, which is 99 percent Muslim, plans to democratize Morocco
through a tolerant interpretation of the Koran.

350-year-old dynasty, the world’s oldest next to the Japanese imperial
dynasty, claims to be directly descended from the prophet Mohammed. And
as "Amir al-Muminin," or leader of the faithful, the country’s ruler
enjoys absolute authority.

The Conseil Supérieur des Oulémas, or
council of religious scholars, which the king installed a year and a
half ago, has been issuing fatwas on the most pressing questions of the
21st century — and, surprisingly, they’ve been well-received by both
young people and hardened Islamists. If the king’s reform plan
succeeds, Morocco could become a model of democratic Islam.

Addendum: For more on Islam, markets and democracy see the Minaret of Freedom Institute.

Comments are open.

Aaron Copland on Mozart

[W]e can pore over him,
dissect him, marvel or carp at him. But in the end there remains something that
will not be seized. That is why, each time a
Mozart work begins . . . we composers listen with a certain awe and wonder, not
unmixed with despair. The wonder we share with everyone; the despair comes from
the realization that only this one man at this one moment in musical history
could have created works that seem so effortless and so close to perfection.

Here is the Commentary article offering the quotation.

How I stop myself from eating too much dark chocolate

I buy dark chocolate when I should not.  But I buy for the immediate moment.  I have no problem buying less than my impulsive self ideally might desire.  I run out of the stuff quickly, even though when I run out part of me wishes I had bought more (this is similar to "gamma discounting.")

I need only make fewer trips to the store.  Each time I go, I should fill the cart with milk, grapefruit juice, and cereal, so I need not return for a long time.  Fewer store trips mean fewer chances to be weak.  Being myopic in my weakness of will, I won’t much adjust using larger chocolate inventories.

Chocolate below 70 percent is not worth my while.

The best solution to my self-constraint problem is to tell my wife where the chocolate is hidden.

Sadly, I know she does not like the 85 percent.

The quest for the perfect Don Giovanni

It has comedy, drama, terror, and a sense of cosmic justice.  Freedom and dread are intermingled.  da Ponte’s libretto stands on its own; read Geoffrey Clive’s The Romantic Enlightenment for a good interpretation, or Kierkagaard’s Don Juan essay.  Leporello and the Don are among the most memorable characters of literature.  Don Giovanni might be the single most impressive, most magnificent, more comprehensive, and most complete piece of classical music (Bach’s Passions have a narrower emotional range, and no single Beethoven symphony compares).  You simply must buy it, if you don’t own it already.

Yet I cannot find the perfect recorded version.  Here are remarks on a few contenders:

1. Carlo Maria Giulini: This recording has splendid voices but the sound is muddy and the conducting is not always so sharp.  I much prefer his Figaro.

2. Otto Klemperer: I had high hopes, since his Magic Flute is the best performance of that opera.  But he is lugubrious with the Don and I find this one hard to get through.  Otto’s Beethoven (the mono, odd-numbered symphonies and his Fidelio) and his Bach remain pinnacles.

3. Colin Davis: Perhaps the most evenly rounded version.  More than adequate in every way.  But it is not a first choice along any particular dimension.  And I have never been a fan of Kiri Te Kanawa’s warbling.  But if you want modern sound, this may be your best bet.

4. Georg Solti: As usual, too muscular and too much whiplash.  His approach to the classics worked better live, and as the years recede, people will wonder what all the fuss was about.

5. von Karajan: Stiff, as was too often the case.  He is best for music which needs some additional stiffness, such as Richard Strauss or Sibelius.

6. Charles Mackerras: I’ve never heard this one, but this conductor has been getting better as he ages.  I might give it a shot someday.

7. Fritz Busch: It has the charm of age, but the performances are just not up to snuff.  It remains the sentimental favorite of some people, but not deservedly so.

8. Claudio Abbado: At the time most of the serious reviews declared it a disappointment, so I never bought it.  His recent Beethoven symphonies are gems.

9. Bernard Haitink: A good moderate pick, just as Davis is.  Haitink is one of the most reliable and "buyable" conductors.  Yet he has never developed a truly personal sound.  A good introduction to the opera nonetheless.

10. Ferenc Fricsay. Nope.

11. Erich Leinsdorf. Double nope, and I won’t even give you an Amazon link.

12. John Eliot Gardiner: Better than you might have expected.  It is short of first-rate vocalists, but the conductor’s musical intelligence elevates this.  Gardiner is almost always better than you think he will be, and I mean that as a compliment.

13. Dmitri Mitropoulos: Fiery; it grabs you by the balls and doesn’t let go.  Sloppy at times and not perfect.  So-so live sound from 1956.  At times this is my favorite Don.  Cesare Siepi sings the lead role with abandon.

14. Wilhelm Furtwangler: Do not neglect the differences between the 1950, 1953, and 1954 Salzburg versions by Furtwangler.  The link above is to the 1953 (only $18, plus you get part of Magic Flute).  I have a 1954 on EMI, but no Amazon link for that one.  Many people with better ears than I have prefer the 1953, which is supposed to be slightly more energetic.  Either way you get Cesare Siepi as the Don, passionate conducting, and a celestial feeling throughout.

Recommended, as they say.

How many Don Giovannis must one hear? 

The security and productivity of farms

Nick Szabo has a superb post about the interaction between historical agricultural productivity and security.   Most obviously, security increases the incentive to invest so agricultural productivity will increase with security.  But what determines security?  Geographic factors are one possibility:

…two large islands which have been largely or entirely protected from
invasion for hundreds of years, Japan and Britain, also had among the
highest agricultural productivities per acre during that period as well
as the greatest cultivation of even marginal arable lands…. Contrariwise, this theory predicts agricultural productivity
will be lowest in unprotected continental regions. Indeed, interior
continental regions easily reached by horse tended to be given over to
much less productive nomadic grazing. Security constraints were
probably what prevented any sort of crop from being grown.

Security issues influence and can be influenced by a wide variety of other choices and institutions.  Some crops will recover from a razing quicker than others, for example, so crop choice will be influenced by security.  Primogeniture may have been an optimal institution to maintain economies of scale in land defense, as Adam Smith first discussed.

Read the whole thing there is a dissertation or two here.

Northern Mexico bleg

In seven days’ time I will spend a few days in northern Mexico.  I am researching, among other topics, how health and safety regulations influence food markets and why a border can matter so much for foodstuffs.  My sites will be Hermosillo, Chihuahua, and Tijuana.  Do you have any recommendations?  I won’t have much free time.  No whales, no Copper Canyon, etc., but of course I will eat three (or more?) meals a day and have some time in each city.  I thank you in advance for your ideas.

Someday I will relate to you my misguided and delusional plan to visit every major urban area in the New World.  I would not have otherwise made it to Hermosillo, so perhaps the gods are on my side.

Do you love cats?

Toxoplasma gondii is a favorite parasite of evolutionary biologists because it has an incredible property.  The parasite lives in the guts of cats where it sheds eggs in cat feces that are often eaten by rats.  Now how to get back from the rat to the cat?  Amazingly, Toxoplasma gondii infects the brains of rats making them
change their behavior in a subtle way that increases the genetic
fitness of the parasite.  Toxoplasma makes the infected rats less scared of cats and so more likely to be eaten! 

Now here is the kicker.  Toxoplasma gondii also infects a lot of humans.

Intertemporal arbitrage

Positive time preference is not the constraint it once was:

You can’t take it with you. So Arizona resort operator David Pizer has a plan to come back and get it.

Like some 1,000 other members of the "cryonics" movement, Mr. Pizer has made arrangements to have his body frozen in liquid nitrogen as soon as possible after he dies. In this way, Mr. Pizer, a heavy-set, philosophical man who is 64 years old, hopes to be revived sometime in the future when medicine has advanced far beyond where it stands today.

And because Mr. Pizer doesn’t wish to return a pauper, he’s taken an additional step: He’s left his money to himself.

With the help of an estate planner, Mr. Pizer has created legal arrangements for a financial trust that will manage his roughly $10 million in land and stock holdings until he is re-animated. Mr. Pizer says that with his money earning interest while he is frozen, he could wake up in 100 years the "richest man in the world."

…To serve clients who plan on being frozen, attorneys are tweaking so-called dynasty trusts that can legally endure hundreds of years, or even indefinitely. Such trusts, once widely prohibited, are now allowed by more than 20 states — including Arizona, Illinois and New Jersey — and typically are used to shield assets from estate taxes. They pay out funds to a person’s children, grandchildren and future generations.

The chilling new twist: In addition to heirs or charities, estate lawyers are also naming their cryonics clients as beneficiaries. If they come back to life after being frozen, the funds revert back to them. Assuming, that is, that there are no legal challenges to the plans.

That is from The Wall Street Journal, January 21 2006, p.A1.  Of course if you take the St. Petersburg Paradox literally, you should chop off and freeze your head for a very long time; there is some chance of enormous wealth at the end.

Addendum: Here is the full article.

Tax fact of the day

Have you ever noticed you pay three percent federal excise tax on your phone bill?

Some say it’s absurd. According to seven federal courts, it’s also illegal. But one thing is for sure: America’s excise tax on phone service has soaked consumers for more than a century.

Rep. Gary Miller, R-Calif., recently introduced legislation in the House – supported by 98 co-sponsors – aimed at repealing the tax, which was imposed in 1898 to help pay for the Spanish-American War. The war was over in six months, but the tax stayed.

The general excise tax has so far cost consumers about $300 billion, says the Congressional Research Service. The entire Spanish-American War cost only about $6 billion, adjusted for inflation.

Here is the link.