Month: May 2007

Buy and hold, please

For Nasdaq,
the difference between buy-and-hold and dollar-weighted returns is even
larger. An investor who bought the Nasdaq index in 1973 and sold in
2002 would have earned an average yearly return of 9.6 percent. But the
typical investor in Nasdaq earned only 4.3 percent over this period.
This is true not just in the United States – the same thing occurred in
18 of 19 international markets that Mr. Dichev examined.

That’s Hal Varian, who argues that actively trading investors are excessively swayed by what is in the news, thus earning less than random returns.  If you can’t restrain your trading, at least chuck your newspapers and magazines.

How can you spot a good professor?

An infamous study by Nalini Ambady and Robert Rosenthal, “Half a Minute: Predicting Teacher Evaluations From Thin Slices of Nonverbal Behavior and Physical Attractiveness,” shows that students can predict a teacher’s ratings with significant accuracy after watching a 30-second silent video clip of the teacher at work.  Resist the urge to attribute this to the superficiality of students’ ratings.  What is the nonverbal magic that an audience recognizes so quickly?

I believe self-confidence is the critical non-verbal quality which audiences pick up on very quickly.  Do you agree?  Here is more, full of good advice, via Greg Mankiw (now a member of the American Academy) and Craig Newmark.

Are NBA referees racist?

I wouldn’t have thought so, but Justin Wolfers, writing with Joseph Price, says maybe yes:

…during the 13 seasons from 1991 through 2004, white referees called fouls at a greater rate against black players than against white players…[the authors] found a corresponding bias in which black officials called fouls more frequently against white players, though that tendency was not as strong.

Here is the paper.  The effect is big enough that an all-white team would, all other things equal, win two extra games over the course of an 82-game season.  A panel of three independent experts has judged that the Wolfers-Price analysis is more convincing than a David Stern-sanctioned rebuttal that no bias is present.

The NYT web site is slow this morning, try back later if the first link is giving you trouble.

Thomas Sowell’s cure for degeneracy

When I see the worsening degeneracy in our politicians, our media, our
educators, and our intelligentsia, I can’t help wondering if the day
may yet come when the only thing that can save this country is a
military coup.

That is via Matt Yglesias, who now is a columnist for Atlantic Monthly.  The title of Sowell’s piece is "Don’t Get Weak: Random Thoughts on the Passing Scene".

Are high nominal interest rate currencies such a good deal?

I’ve wondered about this for years, here is a neat but to me unconvincing result:

Aggregate consumption growth risk explains why low interest rate currencies
do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.

That is from The American Economic Review, March 2007.  Here is an earlier version of the paper

If you are investing lots of money in foreign currencies in the first place, how much consumption risk do you really face these days?  (And does this mean that philosophical Stoics, who can make do with whatever, should load up on the Kiwi dollar?)  I tend to think there are now enough marginal investors who are in any case set for life in terms of consumption risk or rather the lack thereof.

Simple home bias, and the fear of looking like a fool, may be better explanations for the persistence of high nominal interest rate currencies which do not on average depreciate very much.  Yes it sounds a little lame to postulate those loose millions, but a) it’s only in expected value terms, and b) it is consistent with the fact that investors don’t optimally diversify across borders either.


The Lighthouse Keeper

My ear, a shell on the pillow;

        the down, the sea from which his mouth arrived

Strange to live in a wet world, then wake in the desert.

        The cactus on whom milky needles grow.

Let me live offshore, where the water is low.

        Strange, and then so much less so.

I was seventeen.  Do you want

        to know what I didn’t know?

I do.

That is from the new book of poetry by Meghan O’Rourke, columnist and culture editor at  Here are five more poems from the book.  Here is a page on the book.  Here is an interview.  Here is a rave New York Times review.

Markets in everything, Baghdad corpse kidnap edition

Criminals in Baghdad are stealing corpses from the scenes of car bombings and murders in order to extract "ransoms" from grieving relatives.

In a macabre off-shoot of the capital’s kidnapping epidemic, the gangs pose as medics collecting bodies to be taken back to the city’s overflowing morgues.

Instead, though, they take the corpses to secret hiding places and then demand payments of up to £2,500 a time to release them to relatives for burial. Because Muslim custom dictates that a body must be buried as soon as possible after death, many families simply pay up, rather than involve the police.

The new racket in "dead hostage taking" is thought to be run by gangs connected to the city’s sectarian militias, many of whom are already involved in conventional kidnappings.

Iraqi police said the gangs often responded to car bombings, which can leave more than 100 corpses on the streets. In the chaos, police and army units seldom questioned the credentials of people posing as ambulance crews.

Here is the full story.

What’s wrong with long books?

“I am guilty of never having read Anna Karenina, because it’s just so long.  I’d much rather read two 300-page books than one 600-page book.”

Here is the link, which details the recent publishing attempt to mutilate Moby Dick and other classics.  Of course I’ve yet to read Terra Nostra (785 big pp.) by Carlos Fuentes.  Why not?  No one is doubting that many long books are good books.  Doesn’t the Modigliani-Miller theorem teach us that nominal variables are irrelevant?  Can’t you, on your own, turn Anna Karenina into a larger number of shorter books?  Just a few months ago I bought a collection of five Eric Ambler novels, in one volume, and ripped it into five separate, easy to transport pieces. 

As usual, I can think of a few hypotheses:

1. The detachable book is in fact the wave of the future, we just haven’t seen it yet.

2. The blog post is the detachable book.

3. What people enjoy is finishing books, and the resulting feeling of satisfaction, not reading them.

4. What people enjoy is starting books, not reading them.  Starting books is a bit like going shopping, but after the actual reading starts ennui soon sets in.  The books of the future (present?) will allow readers to feel they are starting a new product every chapter.  (Is the real secret of blogs simply that readers always enjoy the promise of starting something new?  How many of you spend hours with the MR archives, still highly relevant and of course always stellar in quality?)

Here is a meditation on reading Pynchon, commentary here.  I’m now pawing through Against the Day — slowly — and so far enjoying it.

Here is my earlier post on this topic, I believe that today I am contradicting my earlier self.  Of course that is obvious to anyone who has read through the archives.

Pop!: Why Bubbles are Great for the Economy

Bubbles leave behind an economic infrastructure that spurs later growth.  The telegraph and railroad bubbles of the 19th century gave birth to modern communications and transportation.  The fiber-optic bubble of the 90s paved the way for YouTube and MySpace.  Might we need a "green bubble" to solve current energy problems?  So argues Daniel Gross, and NYT columnist, and also blogger.

I can think of two mechanisms:

1. The bubbly asset price spurs overoptimistic innovators, thus counteracting the tendency to underinvest in new ideas (which are public goods to some extent)

2. The bubbly asset price spurs clusters of production, which help overcome the fixed costs of innovating with a new technology.  I am reminded of Andrei Shleifer’s seminal work on implementation cycles.

Of course Gross is smart enough not to defend all bubbles.  Perhaps bubbles are best when an economy has the potential for breaking through to a new high-growth mode; that would cover today and the mid- to late 19th century.  I am less convinced by his treatment of the 1920s bubble, which he cites as beneficial in paving the way for the New Deal.  I see a smoother economic path as having brought the better parts of the New Deal without so many of the overreactions.

Gross argues that government should support many bubbles instead of choking them off.  At the very least, bubbles are underrated.  This is a stimulating book, worth your time and money. 

I am of course interested in the cross-sectional cultural contrasts.  Paintings are resold for profit, and they are possibly bubbly assets, but CDs are not.  Does that make the artistic market more supportive of innovation than the music market?  Are bubbles beneficial in the auctions for book contracts?  Was this book the result of a bubble?

Here is an FT review.