Category: Economics

Market Anomalies Fail to Replicate

by  Alex Tabarrok in

It’s now well known that many findings in social psychology fail to replicate. Social psychologists have often discovered noise rather than fundamental aspects of behavior. A new paper suggests that many market anomalies also fail to replicate. Hou, Xue and Zhang write:

The anomalies literature is infested with widespread p-hacking. We replicate the entire anomalies literature in finance and accounting by compiling a largest-to-date data library that contains 447 anomaly variables. With microcaps alleviated via New York Stock Exchange breakpoints and value-weighted returns, 286 anomalies (64%) including 95 out of 102 liquidity variables (93%) are insignificant at the conventional 5% level. Imposing the cutoff t-value of three raises the number of insignificance to 380 (85%). Even for the 161 significant anomalies, their magnitudes are often much lower than originally reported. Out of the 161, the q-factor model leaves 115 alphas insignificant (150 with t < 3). In all, capital markets are more efficient than previously recognized.

My EconTalk podcast with Russ Roberts on *The Complacent Class*

by  Tyler Cowen in

Here is a link to the download and partial transcript, Russ is one of the very best interviewers and of course he is a pioneer in the podcast genre.  Here is one excerpt:

Tyler Cowen: And I think overall academics are among the most complacent of the complacent groups in American society.

Russ Roberts: Fair enough.

There is more…

African manufacturing facts of the day

by  Tyler Cowen in

Several African countries have tried in the past to become tailors and cloth-makers to the world. Nigeria’s northern cities of Kaduna and Kano were once home to textile mills that employed 350,000 people. Yet these factories are now rusting, and employ perhaps a tenth of that number.

This mirrors a wider trend. In 1990 African countries accounted for about 9% of the developing world’s manufacturing output. By 2014 that share had slumped to 4%.

That is from The Economist.

My two favorite books about management, ever

by  Tyler Cowen in

They are:

Johnny Rogan, The Byrds: Timeless Flight Revisited, The Sequel, get the full-length edition, not the much shorter 1980 volume.

Chris Twomey, XTC: Chalkhills and Children.

…in addition to the very recent Dreaming the Beatles, which I just reviewed.

NB: These are music books and I am not even recommending them to most of you.  These books only make sense if you already know a good deal about the careers of the artists involved.

Here is my advice on how to find excellent management books and management advice: pick some areas you know fairly well, be it music, sports, military campaigns, a scientific discovery, the making of a historic plane flight, or whatever.  Read a very detailed book about that.  Think through the lessons of that book(s).  Unfortunately, books about corporations so often filter their management information through homilies, hidden agendas, NDAs, ego boosts, paybacks, and other forms of…bullshit.  Music and sports books won’t, as they are too concerned with other kinds of stupid filters.  But you will get the lowdown on management for the most part.

There are some special reasons why I find the Byrds and XTC fruitful areas for reading for management advice, above and beyond my knowledge of the history and the musical content.  Neither group was massively profitable in a sustained manner, though they had their successes.  The two histories contain both triumphs and some major mistakes.  The main creators worked very consistently at their music for decades, and were not afraid to take chances or to operate with a long time horizon.  Nor did they destroy themselves, even though they were fatally flawed as creators.  Both histories are also studies in small group dynamics, including their eventual collapse; the Byrds are more a story of changing personnel and its costs.  Both histories embody tales of retreat and also return, and an ongoing evolution of styles and media.  Both stories have (relatively) happy endings, but only for those who kept at work rather than partook in indulgences.  Those features may or may not apply to your own personal circumstances, choose your management books accordingly, but I those kinds of stories more interesting than say books about the Rolling Stones.

If you can find books such as these, they are among the most valuable you will read.  Yet it is very hard to find them through recommendations, given the idiosyncratic nature of the content and its relevance.  Of course that is precisely why they have such high marginal value.

Informal dress and social mobility, a Sicilian perspective

by  Tyler Cowen in

Roberto emails me:

There is another aspect that corroborates your theory on how casual dress is somehow connected to less mobility. Dressing in a casual but very good way is economically and “socially” expensive. When I was a young associate at the biggest law firm in Rome, casual friday was the time when my Sicilian provincial middle-lower class background was most transparent. I didn’t have the money for smart but impressive casual clothing. But above all I didn’t have the cultural and social capital to know how to dress casual in the right way. My casual dressing was made of nerdy, unfashionable and cheap clothes: you could immediately say that I haven’t accomplished anything. And I didn’t even know that there was a “rich” way to dress casual. A decent suit and tie is not that expensive but, above all, is socially and culturally accessible in a very easy, standard and replicable way.

Perhaps this is a problem that affects women more seriously than men, exactly for the same reason: women’s formal clothing is not as standard and replicable as men’s. For women, even formal business dressing reveals a lot of background.

How would an implosion of cable revenue affect the NBA?

by  Tyler Cowen in

That is the topic of my latest Bloomberg column, here is one bit:

The decline of TV revenue is not the same as a decline of interest in the sport. NBA basketball is alive and well; it’s just that more people are cutting the cord on cable. They still might follow the NBA through its website, or watch highlights on YouTube, or share gifs on Twitter.

That shift is likely to favor the stars and the most athletic players, because they are more likely to be featured in very short clips. As for the incentives, player salary will matter less, and the desire to become famous on the internet — and thus win lucrative endorsement contracts — will discourage team play. Expect more attempts to produce spectacular sequences, even if that doesn’t always translate into wins. “Boring” but fundamentally sound teams — which are better to watch for a 2.5 hour game — will be disfavored by this trend. Sorry, San Antonio!

Here is another:

Another possibility is that the NBA will consolidate with fantasy basketball and video gaming to augment their revenue. The NBA already has plans to introduce an e-sports product. More speculatively, if more states legalize sports gambling, the league could enter into a revenue-sharing agreement with casinos or bookmakers. Imagine redesigning the playoffs to maximize the number of decisive games and thus boost betting interest — that could mean more but shorter playoff series. At least the fantasy component of such a basketball conglomerate might redistribute some of the attention back to players who are not superstars. Gamblers also tend to be well-informed about the teams they bet on, so this direction could encourage a smarter NBA, better designed for the nerds and fanboys.

Do read the whole thing.

How much do people value health insurance?

by  Tyler Cowen in

There is a new and very good paper on that question by Amy Finkelstein, Nathaniel Hendren, and Mark Shepard (pdf).  In reality, the price elasticity of demand for health insurance is quite high, at least among lower-income groups:

How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts’ subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults…For at least 70 percent of the low-income eligible population, we find that willingness to pay for insurance is far below the average cost curve – what it would cost insurers to provide coverage to all who would enroll if the premium were set equal to that WTP. Adverse selection exists, despite the presence of the coverage mandate, but is not the driving force behind low take up. We estimate that willingness to pay is only about one-third of own costs; thus even if insurers could offer actuarially fair, type-specific prices, at least 70 percent of the market would be uncovered.

That is from both the abstract and conclusion.  I do understand the ideal of universal coverage, but note this:

For example, we estimate that subsidizing insurer prices by 90% would lead only about three-quarters of potential enrollees to buy insurance.

The somewhat depressing and underexplored implication is that the beneficiaries do not love Obamacare as much as some of you do.  In fact you may remember a result from last year, from the research of Mark Pauly, indicating that “close to half” of households covered by the unsubsidized mandate, by the standards of their own preferences, would prefer not to purchase health insurance.  And that was before some of the recent rounds of premium increases, and overall these new results seem to imply even lower demands for health insurance relative to cash.

Now, I think it is an open question how much “non-paternalism” is the correct moral stance here.  Maybe we should force upon people more health insurance than they would purchase in an adverse selection-free market, because a) they are ill-informed, b) they have children, or c) ex post we still need to take care of them in some way, if indeed their gamble to not purchase insurance turns out badly.

Do, however, note the words of the authors: “We conclude that the size of uncompensated care for low-income populations provides a plausible explanation for their low WTP.”  In other words, many of the poor do not value health insurance nearly as much as many planners feel they ought to, in large part because they are already getting some health care.

In any case, consider a political economy point if nothing else.  If you institute a policy that forces on people more health insurance than they think they wish to buy, do not be shocked if a huckster comes along offering them a supposedly better deal, and gets away with it.

Along related lines, consider also this result:

From the perspective of social welfare, to justify connecting the 5% least dense areas of North Carolina would require each adopting household value high speed wired broadband access at more than $1519 per month.

For the pointers I thank Peter Metrinko and Kevin Lewis.

The Paradox of India’s Vacant Houses

by  Alex Tabarrok in

Walking around Mumbai I see many vacant houses and apartments and the statistics verify what I see on the ground, an astounding 15% of Mumbai’s housing stock lies vacant. In Mumbai, the slums are full but thousands of homes lie vacant. The share of vacant housing in Mumbai is only slightly higher than the national average of 12% (In comparison, the United States has a vacant homeowner rate of less than 2%.) Sahil Gandhi and Meenaz Munshi, two of my colleagues at the IDFC Institute, examine the paradox of India’s vacant housing:

Urban India has a severe shortage of housing, yet Indian cities have many vacant houses. According to the census of India 2011, out of the 90 million residential census units, 11 million units are vacant; that is about 12% of the total urban housing stock consists of vacant houses.

Gandhi and Munshi focus on two issues. First, government built housing is shockingly underused. In one centrally sponsored housing project in Delhi, for example, the government built 27,344 units and 26,288 lie vacant! Government housing has often been built far from jobs and public transport and in some cases the houses have been of low quality and lacking basic infrastructure. As the government acknowledged:

“In spite of the continuous efforts by the government, slum dwellers are reluctant to move to the houses built by the government due to lack of proper infrastructure and means of livelihood,” the statement to Parliament said, explaining further that the new houses often lack electricity and water, cheaply available–often through illegal connections–in slums. The new houses are usually not close to workplaces, the ministry acknowledged.

People living in India’s urban slums have often preferred to stay living in the slums rather than move to government built housing–which is really saying something.

Government built housing, however, is only a small part of the housing stock. The bigger problem is that owners of private housing would prefer to see their housing capital lie vacant than to rent.

Renting out a property is a risky affair in India due to perceived (often, correctly) difficulties of evicting tenants, particularly under the onerous regulatory framework of the various rent control laws that are still applicable across states in India.

….These laws fix rent for properties at much below the prevailing market rates and make eviction of tenants difficult. As a result, they increase perception of risk and distort incentives for renting. To get around this, leave and licence agreements are being used as an alternate legal mechanism to rent properties. Despite this, the legacy of rent control and policy uncertainty creates reluctance to rent. To provide an example of policy uncertainty, in 1973 the Maharashtra government brought the then existing leave and licensees contracts under rent control (Gandhi et al 2014). Instances like this have had an adverse impact on the confidence of investors and landlords.

As I pointed out in A Twisted Tale of Rent Control in the Maximum City it can take courts decades to resolve legal disputes, especially those involving land and tenancy so this further disincentives rental housing.

As Gandhi and Munshi note, the problems in the housing market exacerbate probems in the labor market (just as in the United States):

Without a vibrant rental housing market labour markets cannot function efficiently (see Shah 2013). Bringing the private vacant housing stock into the rental market and understanding and resolving the reasons for vacancy in the government provided stock could significantly improve efficiency in utilising available stock of housing.

See Gandhi and Munshi’s blog post and a forthcoming IDFC report on housing for more details.

Reviving productivity

by  Tyler Cowen in

That is a new series on Bloomberg View, here are the beginnings of the symposium.  Here is Clive Crook on productivity as a moral imperative.  Here is Noah Smith on the easy ways to boost productivity.  Here is my piece on the human constraints behind the productivity problem, here is one excerpt:

The logic of the usefulness of face-to-face contact also shapes the geographic distribution of economic activity…

Given all this, at least three answers to the productivity problem suggest themselves. First, we can make online communities more vivid. E-sports, a diverse set of online competitions, have hundreds of millions of viewers. Through the development of internet fandoms and communities, many people now find these activities more exciting to watch than the World Series. Even chess on the internet has proved popular, as commentary and chat rooms make it more exciting for the viewers. The community-building tactics used by e-sports could be applied elsewhere.

Second, we can make face-to-face communities more effective. I am struck by the occasional scorn shown to ex-President Barack Obama for his past as a community organizer. Yet building communities is a critical skill for boosting business productivity in a service economy.

Third, individuals should read and cultivate Stoic philosophy in themselves, whether explicitly or as they might pick up from a best-seller. More self-reliance and less dependence on social cues for doing the right thing will increase economic performance.

There are more installments coming in the series.

Is rising consumer confidence coming from the elderly and the less educated?

by  Tyler Cowen in

Americans with degrees have been getting steadily less optimistic since mid-2015…

Americans without degrees are as optimistic now as they’ve ever been since the survey began nearly four decades ago. Only the peak of the tech bubble compares. By contrast, Americans with degrees are about as confident in the future as they were in September 2007, when the credit crisis had already begun…

Since the start of 2015, the outlook among the young has deteriorated sharply, albeit from a high base. Meanwhile, the expectations of Americans ages 55 and older have soared in the wake of the election to their highest level in more than fifteen years…

And this in sum:

The groups responsible for the aggregate change in sentiment are the least likely to experience big real wage increases and therefore the least likely to boost their spending. Moreover, they appear unwilling to translate their vague optimism about the future into specific expectations about behaviour.

So even if those expectations were reliable guides to the actual choices people make — something strongly debated among forecasters — there is little reason to believe the “Trump bump” in consumer sentiment is a harbinger for sharply rising real spending.

That is all from Matthew C. Klein.  I would stress the broader point that in a polarized time such survey results may not be very reliable at all, and perhaps we should dismiss the pessimistic responses of the young as well.

What is the relevant uncertainty for climate change policy?

by  Tyler Cowen in

A number of people have climbed onto Twitter and outlined (correctly) how increased uncertainty about the impact of climate change increases the value of doing something about it.  There is downside risk, and of course we wish to buy insurance against that in the form of a more active climate change policy.  Still, that is not looking deeply enough.  I see some of the relevant uncertainties as embodied in the following scenario, which is more about policy means than climate change science:

Following a Trump debacle, finally the Democrats win all branches of government and pass a climate change bill.  There is a carbon tax, and further anti-coal measures, but it isn’t enough to shift energy regimes in a transformational sense (besides, truly transformational technologies require luck and “the right time” far more than price incentives).  Instead the United States becomes more like Western Europe, with higher levels of conservation but no ground-breaking new energy source.  Solar goes up by ten percentage points, and wind by two or three, given NIMBY opposition.  Fracking becomes more efficient yet, which nudges fossil fuels back a bit onto center stage.  Nuclear is closed down altogether, and hydroelectric also goes in reverse or stagnates.  China is as China does, and they slowly move away from their installed coal base, in the meantime taking steps to control their particulate matter but not so much their carbon, copying America in this regard.  India starts a shift from coal to natural gas but still has rising carbon emissions.  Africa and Vietnam exceed growth expectations, with a lot of solar power to be sure, but not enough to counteract their growing industrialization.  The carbon tax causes a mild recession in America, and environmentalism becomes less popular.  The global boost in temperature continues, unchecked.  The people who die each year from regular air pollution — six to seven million at last count — diminish in number with economic growth, but we react largely with indifference to that problem, because it doesn’t fit into domestic political struggles very neatly.

Now, to me something like that is the single most likely scenario, albeit with a lot of uncertainty.  I am still happy to try remedial policy measures, and to try them now, if only out of non-complacency or perhaps just desperation.  But come on, let’s be honest.  If all you are doing is trying to combat uncertainty about the science, you are unwilling to look the actual problem square in the eye, just like the climate deniers, the very people you so much decry.

Why the gains from e-commerce are spreading across the country

by  Tyler Cowen in

Here is one reason:

We find that Amazon saves between $0.17 and $0.47 for every 100 mile reduction in the distance of shipping goods worth $30. In the context of its distribution network expansion, this estimate implies that Amazon has reduced its total shipping cost by over 50% and increased its profit margin by between 5 and 14% since 2006. Separately, we demonstrate that prices on Amazon have fallen by approximately 40% over the same period, suggesting that a significant share of the cost savings have been passed on to consumers.

That is from a new NBER working paper by Jean-François Houde, Peter Newberry, and Katja Seim.

*Dreaming the Beatles*

by  Tyler Cowen in

The author is Rob Sheffield and the subtitle is The Love Story of One Band and the Whole World.  So far this year this is my favorite book, in part because it stretches genres in a creative way.  In addition to being a study of fandom, celebrity, 1960s history, “how boys think about girls,” and of course the music itself, it is most of all a splendid take on small group cooperation, management, and the dynamic between John and Paul.  I enjoyed every page of this book, and learned a great deal, despite having read many other books on the Beatles.  Here is a typical passage”

The Beatles invented most of what rock stars do…They invented breaking up. They invented drugs. They invented long hair, going to India, having a guru, round glasses, solo careers, beards, press conferences, divisive girlfriends, writing your own songs, funny drummers. They invented the idea of assembling a global mass audience and then challenging, disappointing, confusing this audience. As far as the rest of the planet is concerned, they invented England.

A few of the more specific things I learned were:

1. For a while Stanley Kubrick was planning on making a movie version of Lord of the Rings with Paul as Frodo, Ringo as Sam, and John as Gollum.  George was to be Gandalf.

2. When the cops raided Keith Richards’s mansion in 1967 and found cocaine, they threw it away because they had never seen it before and didn’t know what it was.

3. When Paul McCartney played an acetate of “Tomorrow Never Knows” for Bob Dylan, Dylan’s response was “Oh, I get it.  You don’t want to be cute anymore.”

4. The French title for “A Hard Day’s Night” was Quatre Garcons Dans Le Vent, which translates roughly as “Four Boys in the Wind.”

The book is funny too:

I always loved this sentence in Our Bodies, Ourselves, the Eighties edition I had in college: “The previous edition of Our Bodies, Ourselves included a brief section on astrological birth control, which just doesn’t work.”  So much going on in that sentence, dispatched with no drama.  Maybe a shade of irony, but no hand-wringing — just a change of mind announced as efficiently and discreetly and decisively as possible.

And:

Paul has a compulsive need to feed his enemies all the ammunition they could want.  The software of “don’t take the bait” was never installed in his system.  No celebrity has ever been easier to goad into gaffes.  I love that.

And:

As Lennon snapped in 1980, after getting asked one too many times if they [he and Paul] still spoke, “He’s got 25 kids and about 20,000,000 records out.  How can he spend time talking?  He’s always working.”

On the revisionist upswing in this book are Rubber Soul, “I’m so Tired,” “It Won’t Be Long,” and John Lennon’s “God.”  On the revisionist downswing is Let It Be and Paul McCartney’s “My Love.”

Not for the unconverted, but I’m glad to see people writing books with me as the intended audience.  Here is a quite insightful review, in which Chris Taylor writes: “…it may be the first book to encompass the entire Beatlegeist. If aliens land tomorrow, and demand to know why we keep on pumping this particular brand of music into space, this is the first book you would hand them.”

Loving winning vs. hating losing

by  Tyler Cowen in

Loving winning and hating losing are two fairly distinct motivations.  For instance, a fairly joyless person may nonetheless be motivated by the humiliation of a loss, or a non-envious, non-spiteful type could receive great pleasure from being number one, while not minding if someone later climbs higher yet.

If you both love winning and hate losing that is especially useful in one-on-one, zero-sum competitions, such as chess and tennis, and also in most team sports and perhaps securities trading as well.  Such people are more motivated, and motivated from more sides of their being, and if one of the emotions flags a bit the other is there to step in and maintain the pace and focus.

In venture capital, I suspect that hatred of losing may be a disadvantage.  No matter how successful you may be, most of your individual investments will lose money and hatred of losing may make you too risk-averse.  It might be better to have the ability to simply forget your losses and put them behind you.

For academics, it is more important to love gains than to hate losses.  Provided they don’t embarrass you, your forgotten articles just aren’t that big a deal and everybody has them, including Nobel Laureates.  A single key piece can make your career, however.

Is hatred of loss also unnecessary for book authors and music stars?  Ideally, you would think they should take lots of chances, but the exact tracking of sales makes them more risk-averse and thus boosts the relative status of the loss haters.  If they release a clinker book or album, the intermediaries are less keen to promote them next time around.  To the extent intermediaries become more important, that boosts the loss-hating performers, because intermediaries themselves are somewhat loss-hating.

What is the correct mix of gain-loving and loss-hating for a Navy Seal?  For a journalist?  A lawyer, programmer, or engineer?

In a job interview, what question should you ask to discern if someone is a gain lover or a loss hater or both?  Or neither!