Month: March 2006

Dubai market falling

…the Dubai Financial Market Index shed 81.18 points or 11.7 percent to
close at 611.86 points. It has so far dropped 40 percent from its
end-2005 close and down 57 percent from its all-time high.

Is Ski Dubai like buying corporate naming rights to a sports arena, namely a sign of trouble?  Here is the link, check out the blog, and thanks to jck for the pointer.  Try this post on whether psychologists are better market speculators than economists.

Caught my eye

1. Incentive pay to make the buses run on time in ChileAddendum: See also this paper.

2. A review of the new Judith Harris book.

3. Markets in everything: a torso goes for $3,000.

4. James Surowiecki defends pricing neutrality for the Internet.

5. $1000 prize for repressed memory evidence before 1800.  Or was it all just made up?

6. The Dutch show a movie of naked women and homosexuality (tulips too) to potential Muslim immigrants, to make sure they understand the Netherlands is about tolerance.  In Iran only a censored version of the movie — without nudity and homosexuality – is shown.

7. Europe’s free riders, and why the Euro may be headed for trouble.

Could Steve Levitt get into a top Ph.d. program today?

Read the debate.  Steve says U. Chicago would nix him for lack of undergraduate mathematics classes.  He believes that Harvard or MIT "might still take a chance on me today." 

I am a strong believer in having at least one top school — Chicago once played this role — which accepts virtually everybody and lets competition sort them out in brutal fashion.  I am also a strong believer in having more graduate students at top schools know economic history than real analysis.  I don’t expect either of these wishes to come true anytime soon.

Male reproductive rights?

With the suit, NCM hopes to establish that a man who unintentionally
fathers a child has the right to decline financial responsibility for
that child, a right based on the same principles laid out in the 1973
case that made abortion legal…

The NCM has been looking for an appropriate plaintiff for this case
for more than 10 years. It finally found one in Matt Dubay…who claims he and
his ex-girlfriend did not use birth control because of her assurances
that she could not get pregnant due to a medical condition. But the
couple, who Dubay told Salon were together for about three months, did
conceive, and Dubay’s ex elected to keep the child, for whom he now
pays $500 a month in child support, despite his contention that he was
always clear about not wanting the child.

Save your moralizing, let’s do tax incidence theory.  If you were a woman and wanted an unwilling father, or at least wasn’t trying too hard to avoid one, what kind of guy would you pick?  Smart, not a criminal, tall, high-earning, and possibly nerdy.  You also would pick a flexible, mild-mannered guy, on the grounds that he might grow to like the idea of parenthood (there is some chance you will decide to keep him in the picture). 

If financial responsibility could be repudiated, these guys would find it harder to get quality sex.  This is a simple economic principal: change the terms at one end of a deal, and they shift back at the other end.  The ex-cons, who will take off in any case and are known to have this quality, would not be penalized.  They might get even more sex.

Now which of the nerdy guys will suffer the most from holding greater "reproductive rights"?  The risk-loving, sex-crazed nerds who like to sleep with strange women and are willing to chance paternity (just rolls off the tongue, doesn’t it?).  And the nerds who know they are sterile or vasectomized.  Did I mention the nerd who doesn’t much mind a bit of financial (and other kinds of) servitude?  No longer will these guys be viewed as potential appealing "victims."

Who will mind this change the least?  The local dullard — you went to high school with him but hoped you never had to marry him — who wants to settle down with a wife and family, but otherwise faced competition from the smarter nerd tricked or lured into siring a kid. 

The bottom line: This change would be a tax on male nerd sex.  It would boost male nerd autonomy, but which of these do nerds need more?

No, one data point does not test a theory, especially when that data point is selected for purposes of national image.  Nonetheless here is a photo of Matt Dubay, computer technician.  Here is a video of Matt.  Prior to the paternity suit, Matt had owned his dream car, a 1998 Trans Am.

At the Bastille

As I arrived at the Bastille Metro a mass of students exited, marched across the 5 lane roundabout and sat down.  Chaos ensued.  Unfortunately for them the road was so wide they could manage a blockade only 2 to 3 students deep.  This was not enough as angry young french men with jobs drove their mopeds through the crowd kicking the students along the way.  Apparently the workers of the world are not united, at least not in France.  Unable to maintain their ranks the protest fell apart.  Today, however, some 40,000 students protest across France and the police presence in Paris remains strong. 

Here is my previous post describing the economics behind the protests.

Assorted links

1. The Tyrone meme spreads to Liam, and also to my favorite movie critic.  (Tyrone wants to "do Prudie," by the way, but I told him to go start his own blog.)

2. I speculate how Battlestar Galactica should end; dig into about comment #50 or so.

3. Orin Kerr, a mainstay of Volokh Conspiracy, has his own legal blog now.

4. Eric Rasmusen on living standards: "As far as [household] appliances go, it seems that the inflation adjustment is off by at least 100%.

5. From Ben Muse land, wealthy parents prefer popular rather than strict teachers for their students, and here is a new blog about the economic marvel of Mauritius.

6. The fashion trade is looking for copyright protection.

Why don’t more businesses use prediction markets?

Last week in The New York Times (TimesSelect), Joseph Nocera quoted Robin Hanson as saying private businesses had not made a breakthrough with the use of idea futures.  It seems natural to let your employees bet on future business conditions, the success of product lines, or broader questions of corporate strategy.  Microsoft and Google and a few other companies have played with the idea, but it does not (yet?) seem to be taking off.  Why not?

1. Prediction markets threaten the hierarchical control of top managers.  It would become too obvious that most managers are idiots, unable to predict the future.

2. Prediction markets make a big chunk of the bettors into "losers."  Yet within a company morale is all-important.  Businesses proceed by soliciting feedback, and by reshaping their plans to pretend that everyone is on board and has an ego stake in the final outcome.  Prediction markets make this coordination more difficult.  Once people make bets, they start rooting for their bet to win and for the other bet to lose.  They move away from maximizing the value of the firm and develop an oppositional mentality vis-a-vis other employees.  Furthermore it is disruptive to have a running tally on who are the winners and losers each day.

3. No matter what they pretend, businesses are not much interested in forecasting many future variables.  Successful businesses find product markets they can control for long periods of time.  They do a few things really well, and let a surprisingly large number of tasks slide.

4. We already have implicit betting markets in the form of resource prices.  When the information contained in those prices is sufficiently important, institutions will be organized in terms of "markets," rather than "firms."  Or firms can look at resource prices in outside markets for the information they need.

5. Most employees have no rational basis on which to bet.  If someone knows the truth, but is otherwise locked out from credibly signaling that knowledge to management, something is wrong with the organization of the company.  The small prizes from corporate prediction markets won’t be enough to elicit that knowledge from him in any case.

6. The corporate beast is far more constrained than most outsiders imagine.  Interest groups must be courted, coordinated, and sometimes fought every step of the way.  When it comes to choice, there are fewer degrees of freedom than one might think.  The real question is not what to do, but rather having the will and effectiveness to do it.  A bit like international free trade, no?  Prediction markets don’t help much in this regard.

7. When reward systems are created, employees view them as a means to distribute further privileges to insiders and favorites.  Prediction markets would be viewed the same way and in fact this might be true.  Who else is going to win all those bets?  Do corporations really need more insider favoritism?

Your thoughts?  Here are five open questions about prediction markets.

My favorite things Virginia

It feels like an eon since I have traveled, plus I have been at home with the sniffles and a nasty cough.  So here goes:

1. Music: Right off the bat we are in trouble.  Ella Fitzgerald was born in Newport News but she is overrated (overly mannered and too self-consciously pandering to the crowd).  We do have Patsy Cline and Maybelle Carter, the latter was an awesome guitar player and a precursor of John Fahey, not to mention the mother of June Carter.

2. Writer: There is Willa Cather, William Styron, and the new Thomas Wolfe.  Cather moved at age ten to Nebraska.  Some of you might sneak Poe into the Virginia category, but in my mind he is too closely linked to Baltimore.  If you count non-fiction, add Booker T. Washington to the list.

3. Deaf, Dumb, and Blind Person: I have to go with Helen Keller.  If you choose her for "20 Questions," no one will hit upon her category.

4. Movie, set in.  The first part of Silence of the Lambs is set in Quantico, Virginia.  No Way Out, starring Gene Hackman and Kevin Costner, is set in DC and around the Pentagon.

5. Artist: Help!  Can you do better than Sam Snead?  George Caleb Bingham was born here, but I identify him with Missouri.

6. The Presidents.  I’ll pick Washington as the best, simply because he had a successor, and Madison as the best political theorist.  Jefferson’s writings bore me and Woodrow Wilson was one of the worst Presidents we have had.

The bottom line: Maybe you are impressed by the Presidents, but for a state so old, it makes a pretty thin showing.  It has lacked a strong blues tradition, a major city, and has remained caught up in ideals of nobility and Confederacy. 

Economic costs and benefits of the Iraq War

I’ve read through the new Davis, Murphy, and Topel paper on the Iraq War.  They conclude that if you account for the future dangers of a Saddam-led Iraq, the war might make sense in cost-benefit terms, and yes that does count dead Iraqis.  Most of all, this paper takes seriously the costs of future containment efforts that might have been needed against Saddam.

This is serious work and it deserves more attention than it will likely receive at this point.  On one side, I very much doubt their assumption that a Saddam-led Iraq "raises the probability of a major terrorist attack by 4 percentage points in any given year…"  On the other side, perhaps the current civil war might have occurred, sooner or later, if we had stayed out.  It is also hard to estimate the costs from skepticism about U.S. WMD intelligence the next time around.  As you might expect, the most important variables are the most difficult to quantify.  File this one under The Policy Will be Judged by its Absolute, Not Relative, Consequences.

Why does underdevelopment persist?

Who better to ask than Rajan and Zingales:

Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain why poor education is so persistent. This paper tries to reconcile these two views by arguing that the underlying cause of underdevelopment is the initial distribution of factor endowments. Under certain circumstances, this leads to self-interested constituencies that, in equilibrium, perpetuate the status quo. In other words, poor education policy might well be the proximate cause of underdevelopment, but the deeper (and more long lasting cause) are the initial conditions (like the initial distribution of education) that determine political constituencies, their power, and their incentives. Though the initial conditions may well be a legacy of the colonial past, and may well create a perverse political equilibrium of stagnation, persistence does not require the presence of coercive political institutions. We present some suggestive empirical evidence. On the one hand, such an analysis offers hope that the destiny of societies is not preordained by the institutions they inherited through historical accident. On the other hand, it suggests we need to understand better how to alter factor endowments when societies may not have the internal will to do so.

In other words, for a long time the Mexican government didn’t want to educate rural campesinos for fear they would capture a greater share of the rents.  Low human capital, initial monopolies, and overly strong interest groups create an intersecting triple whammy to oppose the sacrifices necessary for development.  There is much of interest in the theory, including a discussion of when democracy is superior to dictatorship.  Here is the paper.

How happy should I be?

Sometimes I will pull up to a red light and be, in the middle of the day, the first car in line waiting for the green.  (Northern Virginia, of course, has its fair share of traffic, so this is unusual but it does happen.)  I often wonder: should I be happy?

Under one view, I should be unhappy.  The absence of other cars means the light hasn’t been red for very long.  That suggests I have a relatively long time to wait for a green.

Under another view, I should be happy.  It is a brute fact, carved into "the furniture of the universe," when the light will turn green.  How many cars I see won’t change that.  I should be happy that no cars will impede my forward progress.

Much rests on this question.  I am very happy to have the friends I do.  But exactly how happy should I be?

Should I be happy if I know the answer to this question?  Or would knowing be like seeing no other cars around?

Tyrone takes on free will

Just last week Tyrone told me the following:

The traditional debate pits determinists against voluntarists.  The determinists believe that man is caught up in the grand causal nexus.  The voluntarists believe you somehow break free of cause and effect.  You are able to spew forth "uncaused events" more or less at will.  You are a truly special being, rather than just another toad.

As for the compatibilists, I say ugh.  I am sorry, but you can’t believe A and non-A at the same time.

The voluntarists just don’t cut it.  What strange theory of physics do they hold?  At what moment in the evolution of man (or monkeys) did cause and effect cease to apply to brains?  Plus neuroscience shows that subconscious brain activity, in the relevant parts of the brain, precedes the moment of conscious decision.

Furthermore I doubt if the voluntarist vision of free will is so fun.  How sad to have to stand apart from the causal nexus.  How alienating.  How totally gauche.  Isn’t the causal nexus what makes sex so fun?

My vision of free will starts with the problems in defining the self.  You know: Parfit, Hume, time-slices, and the fact that I cannot remember what I did last night (fyi, I don’t remember what my wife and I discussed on our first date but I do remember what she ordered).

If you are nothing but a time-slice, the free will "problem" goes away.  There is no "you" freely choosing, but there is also no "you" caught up as a prisoner of the causal chain.  Instead you are your choice.  At least "that you" was your choice at the time.  No more and no less.

You are identical to your choice.  What more dignity or freedom could you possibly expect?  Surely that is better than the voluntarist notion of exogenously originating autonomous control.

This view allows us to maintain that human beings are ruled by the same natural laws which govern the behavior of stones.  Physics remains monistic.  At the same time, you are not reduced to a mere puppet.  Ha!  There’s not even a "you" to be subject to reduction!

To up the ante just a bit, dare I mention multiple worlds quantum mechanics, David Lewis’s modal realism, and inflationary cosmology?  These views are distinct but all lead us to the conclusion that many possible universes, perhaps all possible universes, exist in some fashion.  They will give you lots of time-slices and lots of bits of you walking around.  Who cares in what order the deck is shuffled, or where the different cards lie spatially?  The time-slice you, temporary as he or she may be, is connected to an infinite or very large number of other time-slices.  A very large number of those time slices will be very close to the "you" that constituted your choice.  Furthermore some other time-slice will get to experience some almost identical version of your choice, sooner or later.  Being a solitary fellow, I like that better than voluntarism.

In some versions of these views, literally everything is removed from the causal nexus.  In fact there is no causal nexus in the first place.  Surely that should make you feel better and restore your underlying pantheism.  No self.  No reduction.  No causal nexus.  Just lots of you, you, you.  Better than having your own TV show.

Tyler, of course, is a determinist.  He thinks I had to write this post.  More to the point, this post is who Tyrone really is.

Tyrone is really quite a sad fellow.  Many of you believe in free will, but I know determinism applies to me and to my choices.  I feel the pull of those causal chains, day in and day out.

At the Sorbonne

French riot police stormed the Sorbonne on the weekend, ousting students who had barricaded themselves in the first occupation since the events of 1968.  I am in Paris (did you guess?) and the police presence at the Sorbonne is impressive, but student protests continue in the streets. 

     The students are protesting a new labor law which would make it easier to fire workers under the age of 26.  Of course, this would also make it easier to hire young workers who currently have an unemployment rate of 23 percent.  You cannot have it both ways; raise the cost of firing and you raise the cost of hiring.  In my opinion, the Sorbonne students need a little less Foucault and a little more Bastiat. 

Or perhaps the students know more economics than I credit them with.  Under the current law it is costly to fire anyone but the effect on hiring is not symmetric.  The workers least likely to be hired are those who are perceived, rightly or wrongly, as a risk.  The fear of hiring effect falls not on the privileged students at the Sorbonne (trust me today’s protesters were tres chic), but on young French North Africans whose unemployment rate exceeds 30 percent. 

Thus, paradoxical as it may seem, today’s protests by the Sorbonne elite are a cause of the riots of late last year. 

Assorted links

1. New Freakonomics study guide, explained and downloadable here.  Elsewhere on the Steve Levitt front, he argues with Roland Fryer that black and white kids have roughly the same mental abilities when measured at age one.

2. Google map of Mars, hat tip to Yana.

3. Here is a new cost-benefit study of the war in Iraq, from a hawk-friendly point of view.  The authors are Steve Davis, Kevin Murphy, and Bob Topel; I’ll let you know more once I’ve read it.

Do you want to be inspired?

Adam Phillips remains one of our most underrated thinkers:

However much we want inspiration, if it disturbs our normal sense of ourselves then we are going to resist it. Most people are not seeking self-knowledge; they believe – they live as if – they already know who they are. So self-knowledge in this sense is the enemy of inspiration, our best defence against this alien invasion. As in sex, we may long to lose our composure and self-control but there is one thing we desire even more, and that is not to. Self-knowledge protects us from inspiration; inspiration, like sexual desire, undoes us. For non-believers, inspiration is more like sexual desire than anything else; a fascination, a fear, and something we think of as having a secret solitary pleasure attached to it.

Read the whole thing.  If you want to try one of his books, On Kissing, Tickling, and Being Bored is the best place to start.