Month: September 2007

Facts about CEOs

1. In Danish data, if a CEO’s child dies, the value of that CEO’s company falls by one-fifth in the following two years.

2. If a CEO’s wife dies, the value of that CEO’s company falls by fifteen percent.

3. If a CEO’s mother-in-law dies, the value of that CEO’s company rises slightly.

4. American CEOs with McMansions run companies which significantly underperform the market

The Danish paper is here, the McMansions paper is here.  On both studies, see today’s WSJ, "Scholars Link Success of Firms to Lives of CEOs," the ungated link is here.

When should you buy a home?

Jeff, a loyal MR reader, asks:

I’m currently considering buying my first home.  I’ve aware of the condition of the current housing market, and am not counting on any appreciation to make this financially viable.  However, I still am not sure that a home purchase will maximize my well-being.  I won’t ask for a personal evaluation of my financial decision, but I am interested in where I should seek quality advice.  I’m afraid my realtor’s incentives are structured so that he would like to see a sale irrespective of what is best for me.  Is there a resource beside my realtor I should contact?  In general what is some practical advice to reduce the principal-agent problem in my daily life?

Like Robin Hanson, often my preferred mode is meta-advice.  Once you have received all the rest of your advice, in which direction are you likely to overweigh it?

My view is that Americans are more likely to overrate the value of buying a home, if only because they underestimate the probability of divorce.  It is also harder for them to imagine career opportunities in other geographic areas, plus many people overestimate the historic returns to real estate.

I can’t think of comparable biases that would favor renting, especially in our sub-prime, not so liquidity constrained age, which in my view has been dented only temporarily.

An alternative approach is to see the buy/rent decision as equal in value for the marginal buyer, and ask where you stand relative to the market margin.  Since this would be Jeff’s first home he is probably young and that also suggests renting.

Here is a good post on home ownership rates.  Here is a good Arnold Kling post on real estate.

Readers, what do you all think?

Eight more years until I am rational

Here is a new study of how age affects and channels decision-making abilities:

The sophistication of financial decisions varies with age: middle-aged
adults borrow at lower interest rates and pay fewer fees compared to
both younger and older adults.  We document this pattern in ten
financial markets.  The measured effects cannot be explained by observed
risk characteristics.  The sophistication of financial choices peaks
around age 53 in our cross-sectional data.
[emphasis added]  Our results are consistent
with the hypothesis that financial sophistication rises and then falls
with age, although the patterns that we observe represent a mix of age
effects and cohort effects.

Here is the paper.  Here are non-gated versions.

Should economists rule the world?

Here is Anil Hira:

This article examines more carefully the oft-made hypotheses that (1) "technocrats" or politicians with an economics background are increasingly common and (2) that this "improvement" in qualifications will lead to improvements in economic policy. The article presents a database on the qualifications of leaders of the world’s major countries over the past four decades. The article finds that while there is evidence for increasing "technification," there are also distinct and persistent historical patterns among Asian, African, Middle Eastern, and Latin American leaders. Using statistical analysis, the article finds that we cannot conclude that leadership training in economics leads to better economic outcomes.

Here is the (only temporarily non-gated) link, thanks to Bill Evers for the pointer.  There is also an article in the Chronicle of Higher Education on this work, I am told.  The natural defense of economists, which I will not attempt, is to cite selection effects for which economists achieve public office, and what they must do to rule. 

I am happy to admit that governing is most of all about building viable coalitions (more than having good policy knowledge, at many margins), and that we economists are not especially good at that.  So I don’t find this result a surprise.

How much cash should you carry?

Bryan Caplan gets abstract:

At a recent GMU lunch, two economists sparred over the optimal
quantity of cash to keep in one’s wallet. Economist A holds very little
cash, on the grounds that you can pay for virtually everything with
credit cards. Economist B holds lots of cash, on the grounds that the
foregone interest is virtually nothing, and his time is very valuable.

Whose side do you take, and why?  Value of time and foregone interest calculations are welcome.

My view is simple.  If you have a job ("economist"), and you live in the safe suburbs, hold gobs of cash, even if you don’t want to use it very often.  Economists like Bryan stress that people notice monetary opportunity costs but often ignore time opportunity costs, so the bias is toward too little cash on hand.  Paying with cash is sometimes quicker, you make fewer ATM trips, and you pay fewer special fees for using non-home bank ATM machines.  The cashless society may someday come, but it’s not here yet.  Don’t join it before its time.

Here is an earlier and related post on the tennis ball problem.

Addendum: Greg Mankiw weighs in, hold more cash!

Facts about milk

1. Global milk prices have doubled over the last two years.

2. In some parts of the United States, milk is more expensive than gasoline.

3. There are reports of cows being stolen from Wisconsin dairy farms.

4. The rising demand for milk is coming mostly from developing nations; the average Chinese consumes six gallons of milk a year, up from two gallons in 2000.  China is now the world’s leading milk importer.

5. Parts of New Zealand are booming.

6. Only 7 percent of all milk commercially produced is traded across national borders.

7. Sufficiently high (market-driven) milk prices may render many milk price supports and subsidies irrelevant.

Here is the article (NYT, permalink may be pending but not yet).

A Farewell to Alms, through p.272

…comes again on the question of science.  He points out correctly that most of the major technological innovators did not get much for their efforts.  Clark therefore does not see the late 18th century or early 19th century as giving special incentives for science.  I agree as far as he goes, but I view the incentives for science more broadly.

Core Europe, starting in late medieval times, developed a new and still poorly understood organizational technology.  This was, very roughly, the ability to work in groups, cumulate technologies and advances, and learn from each other in competitive environments.  Most notably, this new technology led the Florentine and Venetian Renaissances, especially in the visual arts.  But there was more.  The rise of printing.  The rise of classical music, starting in 1685 or whenever.  The rise of early modern philosophy.  Europe goes crazy with inventiveness, albeit in splats and bursts.  (Clark’s own chapter 12 gives good evidence for this tendency, though it will play a less central role in his version of the story.)

It is also the case that most of these bursts of inventiveness didn’t do much for the average standard of living.  Yes mastering oil paint technique made Florence richer but not so much.

It just so happened that one of these bursts came in science, technology, and engineering.  And it came in England, mostly for reasons of "national character."  It just so happened that the English burst did more for the standard of living, for reasons of external benefits.  But having had such a burst was not unique to England.  England was just one spoke on a more broadly turning wheel, and a European distribution of bursts was well in place prior to most of the special conditions we might find in England.

England, by the way, also had the literary revolution of the 18th century, and England plus Scotland drove the rise of modern economics.  There is no Chinese Adam Smith and that is because that Europe was pulling decisively ahead in ideas production.  I consider this a fact of great importance whereas for Clark it is a sideshow to some other story.

Most generally, I see the historical problem of growth through the lens of culture — in the sense of the history of the arts, music, and letters — more than through the economic history literature.  I am very taken by Max Weber’s writing on Western music and also his conception of the broader style of Western rationality.  And I see the rise of these organizational improvements as a central — the central? — story of early modern Europe and the move to prosperity.  It simply took a long time to apply these organizational movements to science, and to turn that science into concrete technical advances.

None of this need contradict Clark and indeed you will find parts of this narrative in his book.  But unlike Clark I would not superimpose this on a broader Malthusian story or an emphasis on the long run.  Nor am I putting much stock in genetic evolution.  So these organizational/technological improvements, in my view, move closer to the center of the story of European progress.

Unlike Clark, I think incentives to create matter greatly, but not through patents or other direct pecuniary rate of return effects.  The great creators have a burning desire to create, provided they have the opportunity to do so.  This new European technology of organization (whatever it should be called), combined with growing wealth for the upper classes, meant that such creative opportunities were far more available than ever before.  And powerful intellects grabbed them, for reasons of psychic incentives.  So incentives are paramount to the European story, while Clark remains correct in criticizing the standard account of how those incentives might have mattered.

I also see England has having innovated with the quality of its state in particular its fiscal grounding.  I wish this played a larger role in Clark’s account although of course I understand why it does not.  Institutions are not allowed to become a competing force on center stage.  The economic returns from colonies might be given more play as well.

Overall I am willing to accept many of Clark’s arguments, but I always go back to wanting to superimpose a broader institutional story on his microfoundations.

He resists that move, and that is the major place where I part company with him.  I think he is too intent on pushing institutional and ideological factors off the stage; I am happy to allow Clark’s factors on the stage — most of all gradual growth downward mobility and quality of labor — but I want a very busy and cluttered stage.

I believe, by the way, that if Clark’s vision were correct, Australia and New Zealand would be stronger economic powerhouses than has turned out to be the case.

Larry Craig

Maybe I spent too much time reading Thomas Schelling (is that possible?), but my main reaction was to wonder how such trade-maximizing conventions get started.  I mean the foot tapping, the leaning of the bag against the stall door, and the like.  In the early stages of such conventions, I can think of a few paths:

1. Signal something harmless and non-incriminating and hope for reciprocation.  Yelling out a clue-laden but non-obscene word or phrase ("Fire Island!") might do the trick.  But if the other guy yells back "Berlin!", is that enough to act upon?

2. Signal something costly — incriminating or at least potentially embarrassing — in the hope of establishing your credibility as a social transgressor.  Of course you hope to get a costly signal in return.  A step-by-step escalation of the signals then follows, so that trust in mutual social deviance is established prior to action.  At some point in the escalation the action is worth the risk because the other person is sufficiently out on a limb.  As the years pass the escalation of signals proceeds more quickly and cuts out some of the intermediate steps.

3. The initial gains from trade are so high that most participants are willing to run the risk of the blatant signal and the equilibrium is inevitable.

4. High-demanding and reckless "pioneers" establish the convention, by signaling blatantly but against their self-interest.  Nonetheless the convention becomes relatively safe once it spreads to many traders.

5. The convention never become so safe (ask Larry Craig) and so we have a separating equilibrium in which only the risk lovers manage to trade in this public environment.

My intuition suggests a mix of #2 and #4 as the most likely paths.

How might you signal your willingness, to a friend, to make fun of or gossip about a common acquaintance?

George Clooney

The critique is that some mothers mix dirty water with the dairy formula and give their kids diarrhea, from which some of these kids die.  (Yes I do know that breast milk has other health benefits for kids.)   But isn’t dehydration the major mechanism of death?  Forgive me for sounding flip, but shouldn’t Nestle be advertising its dairy products to mothers with kids with diarrhea, so then they wouldn’t die?  (Even dirty water is better to drink than doing nothing and usually it will save most lives, or so I have been told.)  Isn’t one way of looking at the problem that Nestle doesn’t have good enough ads?

Flipness aside, Clooney supposedly is not being paid for his role in the movie, so
his behavior raises a question for utilitarianism.  Should not a saint
work for evil causes, earn more money, and subsidize good causes with
the surplus?  I believe this depends on whether good or evil causes rely more on cash flow, whether good or evil causes invest resources more productively toward their good or evil ends, and the costs of mixing good and evil causes in terms of symbolic values.

Under what conditions will evil causes end up manned exclusively by good people?

Your Money & Your Brain

The subtitle is How the New Science of Neuroeconomics Can Help Make You Rich, written by financial journalist Jason Zweig.  I enjoyed the content of this book, and would recommend it as a stimulating source of ideas, but with some caveats:

1. The new science of neuroeconomics cannot help make you rich, unless perhaps you have inherited a scanner and then rent scanner time to neuroeconomists (often $500 an hour or more).  Or unless you decide to simply buy and hold, compared to some other foolish plan you might have had.

2. I would have liked more emphasis on the tentative nature of neuroeconomics results.  Most studies have very few data points (see #1).  And if human choice is so context-dependent — a message of the book — doesn’t it matter if people are removed from their normal environment, told they are in an experiment, and subjected to a loud, whirring machine?

3. What does it really mean if some part of your brain lights up?  Who really knows?

4. The book mixes in results from experimental economics, surveys, and field experiments.  That’s fine, but if the neuro results had to stand alone on an open plain they would look less impressive.

I genuinely am a fan of neuroeconomics, but in the interests of science it’s important not to oversell it.