The Capital Asset Pricing Model specifies that the expected return on an asset is a function of the market rate of return plus another factor ("Beta") for the covariance of that asset with the market portfolio.  The intuition is that pro-cyclical assets are riskier and thus they must give you higher expected return.  But I don’t buy the whole Beta bit, especially not for equity markets:

1. For the marginal investor today, the marginal utility of money doesn’t vary much across world-states.  Let’s say you expect to earn a few million dollars over your lifetime and you have access to capital markets.  How much do you care about the covariance of a single stock?

2. Tossing in any second variable will improve predictive performance of the model.  To me the broader multi-factor models just look like data mining.

3. I can see that Beta might lower the expected return to holding gold, a traditional safe harbor in tough times.  I just don’t believe Beta matters for most equity assets.  Yes construction is pro-cyclical but does this affect real world thinking about which stocks to buy?  I think views on cyclicality are dwarfed by idiosyncratic expectational factors about particular facts of the world.

4. Unlike say, profit maximization, CAPM-reasoning will not evolve in the marketplace unless people are at some level aware of the fundamental principals of the theory and take care to minimize systematic risk.  If you are ignorant of CAPM you might have lower utility but you needn’t earn less money over time.  You don’t drop out of the marketplace as a broken down beggar.

5. People compartmentalize their fears.  Insofar as you worry about systematic risk it will affect your human capital decisions and real estate decisions, not your equity investments.

6. Risk affects your equity investments by getting you to diversify.  The story ends there.  Greater fear might mean you buy more individual stocks, but you don’t look into their Betas to prefer one stock over another.

7. Did I mention that ex post Beta is not always accurate as a predictor of future Beta?

8. Fama and French have shown that the line connecting Beta and expected returns has an almost flat slope, at least if we adjust for the size of a firm relative to its book value. 

For risky equity assets in the United States, my preferred economic model is simple.  Expected return equals seven.  That is my model, "Seven."

Plus of course an random or error term.  How’s that for Occam’s Razor?

I love the main ideas of Jane Jacobs.  Her passing was truly sad for me.  I read her as a teenager.  It shook my world.

Nonetheless I think she is a tiny-teeny bit overrated.  She never coped with the problems of scale.  Nor did she explain how infrastructure should be built.

It is fine to juxtapose the old Greenwich Village against the gargantuan planning of the corrupt Robert Moses.  Few other social scientists of her time grasped the idea of  spontaneous order.  But what to do if a city grows from one million to ten million people, as has happened many times in the Third World?

To be sure, favelas and shanties work far better than their reputations.  Drug gangs aside, they embody many of the best qualities of Jacob’s analysis, or for that matter Hayek’s.  But surely it is a problem when there is no piped water or reliable electricity.  How can you get those services into new areas without some serious planning?  You can call for private sector involvement but it is planning nonetheless and it probably will involve some use of eminent domain.  Or how about new roads?

Perhaps I am unfair to Jacobs, but I read her as thinking we can confront the problems of cities without answering those questions.

It is perhaps unfair to note that Jacobs’s "straight economics" often made little sense, but surely this is relevant to how she understood the major problems of cities.  She doubted the necessity of the nation-state and was suspicious of internal economies of scale under a common legal order.  She promoted "import substitution," which is now a discredited idea among both left-wing and right-wing economists.

Here is a list of Moses’s projects for New York City.  Could the Big Apple have prospered and grown without them?

A Wall Street lawyer gave new meaning to the term
"futures market" when he tried to auction his future Social Security
checks – money did doesn’t now have – on eBay for $200,000 so he could
use the cash for a down payment on a Manhattan apartment.

"I’ve put a lot of money into the Social Security system, so why can’t I sell it to someone else?" mused Thaddeus Wojcik.

File that under "Department of HA!."  Ebay yanked the auction.  Here is the full story, and thanks to Chris D. for the pointer.

Hugo Mialon writes:

Is economics an art?  I address this old, but important, question empirically by examining the impact of rhetorical features of the titles of published economics articles on the ultimate success of these articles, as measured by their cumulative citations over the six-year period following their publication.  Twenty-eight percent of articles in the sample have a fresh figure of speech in their title.  Surprisingly, adding a rhetorical device to the title of an empirical article adds more than four citations to the article’s "lifetime" count, which represents about twenty percent of the lifetime citations of the average empirical article.  This result testifies to the continuing power of rhetoric and poetry in economics science.

Here is the paper.  To be sure, quality of author and article are elusive variables, especially since we cannot assess them by citation counts (here the dependent variable).  Smart authors might write better papers and come up with better and more poetic titles; maybe the poetry is not what matters.

Nonetheless this paper has many fun facts.  Poetry in the title doesn’t help theoretical papers.  Coming from a top school boosts the cites for empirical work more than theory.  Having a research assistant, or a math appendix, correlates negatively with the number of cites for a theory paper.  It is easier for an empiricist at a non-top school to get into the top journals than for a theorist; the latter market shows greater presence of "superstars" in the Sherwin Rosen sense.