Category: Economics

Does Amazon have an investing advantage?

Thought experiment: How would Amazon enter the venture capital business?

Use data from AWS to inform investment decisions

Amazon can leverage its proprietary data from AWS (Amazon Web Services).  Amazon’s edge is that most of the best technology start-ups are built on its services.  Amazon has a lot of information about how much these companies are spending, what services they use, what technologies they use, and more.

The AWS data could be extremely predictive and give Amazon early signs that companies are growing fast or reaching an inflection point.  And it can use the data as a better diligence check of a company … for instance, the data could help determine which companies that claim they have “AI” are real and which are just marketing.

Using this data to invest in public companies would likely not be legal since it could be deemed as inside information.   But using it for private companies is something Amazon could do.

There is much more at the link from Auren Hoffman.

Craig Palsson does economics on YouTube — Market Power

His channel is Market Power, and he promises new economics videos every Tuesday.  Here is the associated Twitter account for the channel.  Here is his video “How much does vibranium cost in the Marvel movies?”:

Here is another video “How much is an Oscar nomination worth?

And I am pleased to announce that Craig is a newly minted Emergent Ventures fellow.  He also is an economic historian, and has lived for two years in Haiti, both big pluses in my view.

Philanthropic hospital markets in everything

Nonprofit hospitals across the United States are seeking donations from the people who rely on them most: their patients.

Many hospitals conduct nightly wealth screenings — using software that culls public data such as property records, contributions to political campaigns and other charities — to gauge which patients are most likely to be the source of large donations.

Those who seem promising targets for fund-raising may receive a visit from a hospital executive in their rooms, as well as extra amenities like a bathrobe or a nicer waiting area for their families.

Some hospitals train doctors and nurses to identify patients who have expressed gratitude for their care, and then put the patients in touch with staff fund-raisers.

…it could make patients worry that their care might be affected by whether they made a donation.

Despite such concerns, these practices are becoming commonplace, particularly among the largest nonprofit hospitals. A 2016 survey of 108 hospitals found that 68 had grateful patient programs, according to the Advisory Board, a consulting firm.

Here is more from Phil Galewitz at the NYT.

The Buying Slow but Selling Fast Bias

In this clip professional money manager Ben Griffiths approvingly quotes fellow-trader Larry Williams, “If you get one thing right in your career it is to learn to be a slow buyer and a fast seller”. “If you can master that”, Griffiths continues “you will be well down the way to being a successful manager of money.” Using a huge database of 783 portfolios averaging $573 million in size and covering 4.4 million trades over 16 years, Akepanidtaworn, Di Mascio, Imas, and Schmidt show that professional money managers follow exactly this advice and it is exactly wrong.

Professional money managers do well on their “slow”, buy decisions–somewhat surprisingly, well enough to beat benchmark portfolios. It’s on their “fast”, sell decisions that money mangers significantly underperform the market. Remarkably, the authors show that on average professional money managers would have done better had the chosen what to sell randomly. Why? On their buy decisions money managers put in effort–you can tell they are putting in effort because their buy decisions cannot be explained by simple heuristics based on past returns (such as buy past winners or buy past losers). On their sell decisions, however, managers do appear to follow a heuristic of selling their big past winners or past losers. See the graph where the blue buy decisions are independent of past returns while the red sell decisions show a clear preference to sell positive or negative return outliers. The authors show that this bias reduces return (just as you would expect). When you sell fast you sell what comes to mind quickest, an availability bias, and that’s often a past winner or a past loser even if greater thought would convince you that these are not the best stocks to sell. The sell fast bias, however, is pretty easy to fix. I expect that institutional investors will induce money managers to take a second look at sell decisions, much as computer systems now ask physicians to check branded prescriptions when generics are available.

Addendum: In related news, Deep Mind’s Alpha Star trounced human players of StarCraft II, a game of imperfect information that is much more complicated than chess. Amazingly, Alpha Star made fewer actions per minute than the human players. As with GO the AI developed new long-range strategies never before seen.

Nav Canada

As La Guardia closes due to the government shutdown, this seems like an opportune time to think about Nav Canada.

We are Canada’s Air Navigation Service Provider (ANSP) managing 3.3 million flights a year for 40,000 customers in over 18 million square kilometres – the world’s second-largest ANSP by traffic volume.

Our airspace stretches from the Pacific West coast to the East coast of Newfoundland and out to the centre of the North Atlantic, the world’s busiest oceanic airspace with some 1,200 flights crossing to and from the European continent daily. It also stretches from the busy U.S-Canada border with major international airports to the North Pole where aircraft fly polar routes to reach Asia.

We are also the world’s first fully privatized civil air navigation service provider, created in 1996 through the combined efforts of commercial air carriers, general aviation, the Government of Canada, as well as our employees and their unions.

Our revenues come from our aviation customers, not government subsidies. By investing in operations and controlling costs, we strive to keep customer charges stable, while improving safety and flight efficiency.

In addition to Canada, New Zealand, Germany, Australia, and the United Kingdom have moved in recent decades towards a more private system based on user fees rather than government funding. See also my earlier post on European airports.

Unsolved Shootings are Rising

In 2015, I documented that crime in Baltimore was rising rapidly as police resources became stretched as they dealt with riots and anger following the death of Freddie Gray. I warned that the city could tip into a permanently higher crime rate.

It’s now become clear that is exactly what happened as an investigative report by The Trace reveals:

Instead of getting backup, detectives were pulled from their cases, sometimes for days at a time, to help quell the violence. By 2016, homicide investigators cumulatively spent 10,000 hours working riot duty and patrol rather than tracking down murderers…

In the ensuing months, Baltimore’s closure rate for shootings dropped to 25 percent, the lowest in recent history. More than 1,100 cases from 2015 and 2016 alone remained unsolved by the following summer.

As the closure rate fell, the number of shootings increased (see data at right).

It’s not just Baltimore, however:

The crisis of unsolved shootings isn’t confined to cash-strapped cities like Baltimore, but also hits some of America’s most affluent metropolises. In 2016, Los Angeles made arrests for just 17 percent of gun assaults, and Chicago for less than 12 percent. The same year, San Francisco managed to make arrests in just 15 percent of the city’s nonfatal shootings. In Boston, the figure was just 10 percent.

Crime is lower today than in the past but we are in danger of becoming complacent. The rate of unsolved crimes is very high and in some cities it is soaring. Any city with an arrest rate for assaults of 15% is primed for a crime wave.

We need more police as well as better policing.

Addendum: I wonder how many of these cities are still devoting significant resources to marijuana busts?

Great Britain land privatization fact of the day

What has been Britain’s biggest privatization to date?

…Britain’s biggest privatization has not been of housing or a bank.  It has been of land.  Since Margaret Thatcher entered Downing Street in 1979, and continuing all the way to the present day, the state has been selling public land to the private sector.  It has sold vast quantities — some 2 million hectares, or about 10 per cent of the entire British land mass…my best estimate…is that, at today’s prices, the land that has been sold is likely to be worth something in the order of £400 billion…

That is from the new and useful The New Enclosure: The Appropriation of Public Land in Neoliberal Britain, by Brett Christophers.  Land, land, land!  The author, by the way, is mostly critical of this privatization.

It seems to me Amihai Glazer deserves the credit here

I keep on seeing papers and notices of the notion that commonly owned firms — say commonly owned by diversified mutual funds — might collude rather than competing vigorously against each other.  After all, maximization of joint profit would seem to be the imperative, not firm-by-firm profit.

It is not so widely known who first came up with that idea, and it is my former colleague at UC Irvine, Amihai Glazer.  I know this because Ami and I had a co-authored paper on this topic, could it have been as early as the late 1980s?  (I don’t remember the year.)  And while it was genuinely joint work, the key idea came entirely from Ami, not from me.

We tried to publish the paper at several journals, but they all told us it was crazy.

I should also note Ami and I never quite agreed on what the paper meant.  I always viewed it as more of a theoretical curiosity.  I’m still not sure I understand Ami’s take, but in general he saw it as closer to a real world possibility or maybe stronger than that.  I also thought that even if joint ownership came about, forces akin to those discussed in the socialist calculation debate still would require something akin to firm-by-firm competition, rather than managed collusion (what about just picking managers with sluggish temperaments, thus leading to an intermediate solution?)  I don’t think that was Ami’s view back then at least.

I don’t know where my copy of the paper is, I hope Ami still has one.  In the meantime, I hope credit goes where credit is due, and that is to Amihai Glazer.

Drop Gangs

Cryptocurrencies, GPS, drones, and cheap beacons are driving a new evolution in illegal markets:

…[A] major change is the use of “dead drops” instead of the postal system which has proven vulnerable to tracking and interception. Now, goods are hidden in publicly accessible places like parks and the location is given to the customer on purchase. The customer then goes to the location and picks up the goods. This means that delivery becomes asynchronous for the merchant, he can hide a lot of product in different locations for future, not yet known, purchases. For the client the time to delivery is significantly shorter than waiting for a letter or parcel shipped by traditional means – he has the product in his hands in a matter of hours instead of days. Furthermore this method does not require for the customer to give any personally identifiable information to the merchant, which in turn doesn’t have to safeguard it anymore. Less data means less risk for everyone.

The use of dead drops also significantly reduces the risk of the merchant to be discovered by tracking within the postal system. He does not have to visit any easily to surveil post office or letter box, instead the whole public space becomes his hiding territory.

…Classically, when used by intelligence agencies, dead drops relied on being concealed. This lead to dead drops being hard to find even by the intended recipients without costly preparation and training. One of the results of this was that dead drops were often used repeatedly, which increased the probability of both sender and recipient being identified by surveillance.

An ideal dead drop is however used exactly once. Only then can the risks of using it be reduced to pure bad luck.

This challenge is met by Dropgangs in various ways. The primary one is that the documentation of each dead drop is conducted in minute detail, covering GPS coordinates, photos of the surrounding and the location, as well as photos of the concealment device in which the product is hidden (such as an empty coke can). The documentation however increases the risk for the Dropgang since whoever creates it would be more easy to identify by surveillance. In addition, even great documentation still requires the customer to understand it and follow it precisely, which can lead to suspicious behavior around the dead drop location (staring at photos, visually comparing them to the surrounding, etc).

A first development to mitigate the problem of localizing is the use of Bluetooth beacons. In addition to the product, the dead drop contains a little electronic device that sends a signal that can be received by a smartphone, which in turn can display the direction and approximate distance to the device. In addition to the GPS coordinates, the customer requires only a smartphone with the correct App. Beacon devices like these are available on the open market for under ten dollars.

They do however pose the risk of a non-authorized party to discover the dead drop, simply by searching an area suitable for hiding dead drops with their own smartphone.

There are first reports of using beacon devices that are not constantly sending a signal, but have to be activated first. The activation usually happens by establishing a WiFi hotspot on the customer’s phone (by using the WiFi tethering feature). Only if the beacon sees a WiFi hotspot with a specific, merchant provided, unique name will it start to send a homing signal itself. Devices like these are very cheap (<15 USD) and have gained traction in the field, but they pose risks to the customer: His smartphone becomes identifiable by observers, even over considerable distance. This can lead to tracking the customer.

…A plausible next step would be the development of markets for dead drop operators that make their living by picking up product from one dead drop and placing it in another, working as a proxy for the customer to increase his safety and to reduce his efforts. This would also make this distribution model wider spread and available to more products, which will blur the lines between the black and the legal market. On this blurred line new services and technologies will establish themselves, inherently dual use services like lock boxes that can be paid by peer-to-peer cryptocurrencies.

Looking even further into the future, it seems plausible that the whole urban environment might find itself integrated into a dynamic landscape of very short-lived dead drops that are serviced by humans and cheap drones (unmanned aerial vehicles), which are already cheaply available and likely only require one market actor to develop and spread a mechanism to pick up and drop goods. Both merchant and customer could use drones, that are available for rent through dedicated Apps, to deliver product to a meeting point on a roof, where another drone would pick it up. Chaining multiple exchanges like this will make the tracing of the delivery extremely hard, essentially leading to mixing techniques so far used only in anonymizing digital communication.

Read the whole thing.

Hat tip: Eli Dourado.

How productive are owner-managers?

We find that the average premature death of a million-dollar-earning owner causes an 82% decline in firm profits.

And:

The data reveal a striking world of business owners who prevail at the top of the income distribution.  We find that most private business profits reflect the return to owner human capital.  Overall, the top earners are predominantly working rich, and the majority of top income accrues to the human capital of wage earners and entrepreneurs, not idle owners of financial and physical capital.

That is from Matthew Smith, Danny Yagan, Owen M. Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century,” a new research paper.

Does housing wealth boost start-ups?

I don’t mainly mean tech start-ups but rather the broader concept:

…house price effects work through wealth, liquidity and collateral effects on the propensity to start new firms and expand young ones. Aggregating local effects to the national level, housing market ups and downs play a major role – as transmission channel and driving force – in medium-run fluctuations in young-firm employment shares in recent decades. The great housing bust after 2006 largely drove the cyclical collapse of young-firm activity during the Great Recession, reinforced by a contraction in bank loan supply. As we also show, when the young-firm activity share falls (rises), local employment shifts strongly away from (towards) younger and less-educated workers.

That is from a new paper by Steven J. Davis and John C. Haltiwanger.

The wisdom of Arnold Kling (a Kamala Harris parable)

Here is the opener of my Bloomberg column:

One of the worst tendencies in American politics is to restrict supply and subsidize demand. (The phrase is from the economist Arnold Kling.) The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices.

That is what makes early accounts of Senator Kamala Harris’s economic plans so disappointing. There is still room for course corrections as she campaigns for president, but too much of what is being bandied about seems designed to annoy Arnold Kling.

Do read the whole thing.

Facts that contradict the standard housing bubble story

Here I am doing a mix of quoting and paraphrasing the excellent Kevin Erdmann:

1. “Housing construction has been constricted in our most prosperous cities.”

2. “Home prices in many developed countries rose at least as sharply as inthe US.”

3. “…rent inflation has been persistently high for 20 years.”

4. “Growth in real rent expenditures generally had been declining throughout the supposed boom period.”

5. “During the boom, the relative income of the typical homebuyer did not decline.”

6. During the boom, homeowners were not “buying up.”

7. Homeownership rates, even at their peak levels in 2004, among age groups under 65 years old, were no higher than homeownership rates had been in the late 1970s and early 1980s.”

8. “…when taking into account all types of housing, the number of new housing units never even rose very far above the long-term average.”

Those are all from Kevin’s new and very important book Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy.  The simple “housing bubble” story is not in fact as true as it might seem, as Kevin shows, and furthermore just look at how many parts of America now have home prices at or above their “bubbly peaks.”  I hope this work gets the attention it deserves.

Short-term lending in response to the government shutdown

Gridlock in Washington over President Donald Trump’s plans to build a wall on the border with Mexico has deprived hundreds of thousands of government employees and contractors of their wages. As a result, some have turned to specialist consumer-finance companies to bridge gaps between earnings and outgoings. Shares in World Acceptance, a South Carolina-based short-term lender, are up 22 per cent since the shutdown took effect about a month ago. EZ Corp, a pawnshop operator based in Austin, Texas, is 20 per cent higher over that period. In both cases, the rises are much more than benchmarks, suggesting investors could be betting on a surge in demand to cover unexpected expenses.

…Chad Prashad, chief executive of World Acceptance, said his company was seeing demand in Texas and the south-east of the US where there were big airports employing government workers. In response to the shutdown, World Acceptance is offering cash-strapped government employees deferrals on their loans without interest or fee penalties. New customers can get up to $1,250 in a 10-month loan with 0 per cent interest and no fees.

Here is the full FT article by Nicole Bullock.