People hate flexible prices
They really do. Consider L. Chester Carter, who raised the prices of his ice and gasoline after Hurricane Isabel, only ten cents more a gallon for gasoline. He also took on the added burdens of running generators, bringing in ice, and cooking for emergency workers. He nonetheless claims to have experienced a public outrage against his pricing behavior, here is the full story.
His description of what happened is perhaps more to the point:
“What I did was what the state and federal governments couldn’t do: Stay open and deliver services to the general public,”
Here are links to my earlier postings on price-gouging. We now hear that more than 40 price-gouging complaints were levied in Virginia, after this year’s storms. Virginia officials are considering writing the state’s first anti-gouging law, comparable to a law already on the books in Florida.
No doubt, this is voter-driven. This example, if nothing else, should tip us off about what kind of economic policy you can get in a democracy.
Addendum: Kevin Brancato discusses other anti-gouging laws.
Being a bigot is exhausting, and makes you stupider
People with implicit racial prejudices are left mentally exhausted after interacting with someone from a different race, perhaps because they are trying to quell their feelings.
The new study, the first of its kind, shows that areas in the brain associated with self-control light up in white people with implicit racial biases when they are shown images of black people.
Furthermore, the study showed that the level of this brain activity correlated very closely with poor performance in a test of thinking ability given right after a face-to-face interview with a black person. The researchers believe this indicates that the subject’s mental resources have been temporarily drained by their efforts to suppress their prejudices.
Here is the full story.
The Mutual Fund Scandal – much ado about nothinig
Let’s take it for granted that insiders have used the peculiar pricing practices of the mutual fund industry to transfer some profits from buyers. According to some accounts, hundreds of millions of dollars have been transferred in this way (see Tyler’s posts here and here). But remember mutual fund buyers get quarterly statements showing their returns net of all chicanery. Is it so hard to believe that buyers make their decisions based upon their actual returns? A mutual fund that performs poorly is a mutual fund that performs poorly regardless of whether this was due to bad investment decisions, high expense ratios, or a slick transfering of funds. A few investors might buy and then accept any return as a matter of luck but the marginal investor can and does move funds around easily (what market is more contestable?) – not to mention the institutional investors. As a result, it makes little difference whether the managers get their return through the above-board expense ratio or the under-handed exploitation of stale pricing.
Sure, there may be some exploitation at the margin but this is akin to banks that charge fees for “free checking” or restaurants that include a gratuity in their bill. It’s annoying and the occasional consumer may be dunned but once consumer and competitor responses are taken into account the net transfer is small.
If you doubt the above, assume that we eliminate all under-handed practices. Do you think that consumers will now earn higher returns? Or, do you think, that other fees will rise to make up the difference? I predict the latter. The only danger is that in their haste to make political hay the politicians will end up passing some dumb law that makes everyone worse off.
End Phase 3
Harvard neurologist Peter Lansbury argues in the WP that we should end mandatory Phase 3 clinical trials for new pharmaceuticals. Aside from the expense of Phase 3 trials (hundres of millions of dollars) and years of delay he writes that:
There are also scientific reasons to replace Phase 3. The reasoning behind the Phase 3 requirement — that the average efficacy of a drug is relevant to an individual patient — flies in the face of what we now know about drug responsiveness. Very few drugs are effective in all individuals. In fact, most are not effective in large portions of the population, for reasons that we are just beginning to understand.
It’s much easier to get approval for drugs that are marginally effective in, say, half the population than drugs that are very effective in a small fraction of patients. This statistical barrier discourages the pharmaceutical industry from even beginning to attack diseases, such as Parkinson’s, that are likely to have several subtypes, each of which may respond to a different drug. These drugs are the underappreciated casualties of the Phase 3 requirement; they will never be developed because the risk of failure at Phase 3 is simply too great.
Lansbury also recognizes the importance of off-label prescribing and how it flies in the face of FDA power.
Once the FDA has approved a drug based on its effectiveness against one condition, it can be prescribed for any other condition. This practice recognizes that your physician is best equipped to evaluate all the available information and advise whether you could benefit from a particular drug. About 40 to 50 percent of all drug use is for such unapproved, or “off-label,” uses. Some drugs that “failed” in Phase 3 trials for one condition, but were approved for another, are still widely prescribed for the first because physicians agree that the evidence shows they can be effective.
I agree with Lansbury’s analysis and so do a lot of physicians. See my papers Assessing the FDA via the Anomaly of Off-Label Drug Prescriptions and Do Off-Label Drug Practices Argue Against FDA Efficacy Requirements? Testing an Argument by Stuctured Conversations with Experts.
Terrorism futures are back
Yes, those terrorism futures, here is a story from cnn.com. The old group, Net Exchange, is behind the current revival, but this time without a Pentagon connection.
The idea is being marketed as a research tool:
In response to the highly charged criticisms that ended the Pentagon’s association with the project, Polk [a Net Exchange spokesman] noted the market is designed mainly as a research tool, not unlike the Iowa Electronics Markets, which have done a pretty good job of predicting the outcomes of presidential elections.
“It is potentially an interesting alternative to Gallup polls or to specialists reporting from the region,” Polk said. “It’s a way of going directly to individuals in the region or outside who have knowledge or interest in the political and economic events in the area.”
Polk said Net Exchange would initially limit the amount of money traders could invest in the market, so that people won’t be profiting from violence or upheaval in the region.
What’s more, the futures contracts would be based on general questions, such as the likelihood that the King of Jordan will be overthrown at some point during the second quarter of 2004, for example, rather than on specific acts or events, which could lend themselves to manipulation by terrorists.
My prediction: These markets require legal tolerance, given that they otherwise violate anti-gambling rules or fall under regulatory jurisdiction. I’ll bet that this revival is shut down pretty quickly.
My view: Most of the movements in asset prices are noise, rather than based on fundamentals. The main problem with the idea is that the price movements, even if “unbiased” in the mathematical sense, feed us a steady stream of misinformation about world affairs. I also could imagine public panic resulting, or bad events being accelerated into greater likelihood, imagine how Jordanese politics is altered if the betting market says the King of Jordan is a goner.
Road Pricing
Adrian Moore of the Reason Foundation writes:
A new report from Deloitte Research is one of the best overviews of the current state of the art of road pricing that I’ve seen. It provides an in-depth assessment of London’s 2003 area-pricing scheme, as well as up-to-date discussions of corridor pricing (e.g., California’s 91 Express Lanes), national schemes (like Germany’s forthcoming GPS-based tolling of all heavy trucks), and future integrated schemes (in which pricing would become the predominant means of paying for surface transportation).
Looking for a new job?
Mexicans in Tijuana will pay you up to $1500 a piece to drive them across the border. If you are caught you receive no more than a slap on the wrist, the first time you are caught that is.
At the most, 1 in 50 vehicles is searched. Today’s Wall Street Journal describes smuggling as “a mini employment boom” for single mothers, military personnel, and especially teenagers.
My prediction: This can’t last forever.
Or, if you are looking for another job, you can drink pesticides, for $200 a day. I’d rather drive across the border.
What is the real mutual fund scandal?
It’s not market timing, not according to Mark Hulbert. He writes:
Market timing, as the phrase has traditionally been used in the stock market, refers to shifting a portfolio from equities to cash in the hope of sidestepping a market decline, then moving back into the market in anticipation of a rally. There are many approaches to market timing; they vary according to the techniques used to forecast rallies and declines and in the frequency of the switching. Market timers’ track records also vary widely.
Strictly defined, market timing has little to do with the fund industry’s current troubles.
In part, late trading allows some shareholders to trade after the market close. But much of the real problem is — stale pricing:
Some mutual funds have been accused of allowing certain investors to take advantage of out-of-date securities prices used by funds in calculating their net asset values. Because those stale prices were sometimes too low or too high, investors who frequently switched into and out of these funds could realize substantial profits at the expense of other shareholders.
This stale-price arbitrage, as the practice is sometimes called, happens most often in international stock funds. When funds calculate their net asset values at 4 p.m., they generally use the prices at which their portfolio stocks traded most recently. For international funds, those prices can be several hours out of date.
Here is a related New York Times article, on Eric Zitzewitz, who is developing means of measuring asset values more correctly, to prevent stale pricing. The problem: fund managers themselves engage in the practice, and so they are reluctant to adopt these innovations. The solution?: Enforce current laws, already on the books.
See also my earlier post, on how much the mutual fund scandals cost investors.
Everything you always wanted to know about currency boards…
Here is an extensive web site on currency boards and dollarization, maintained by Kurt Schuler (conflict of interest notification: he is a former student of mine).
If you doubt Kurt’s thoroughness, follow the link to a piece on currency boards in St. Helena, yes that’s right the place where Napoleon went. The site also offers an extensive discussion of what went wrong in Argentina, again all links run through the main page. Thanks to the Mises blog for the pointer.
Vuelos Baratos
Not sure what the headline means? Then you won’t be able to get the cheap flights. A little known, but standard means of price discrimination among airlines is to advertise different prices in different languages and in particular to sell blocks of cheap seats to discounters who specialize in serving poorer immigrant communities.
Worrying Survey on Democracy
An article in Sunday’s Washington Post drew encouragement from a World Values Survey that found over 60 percent of people in Arab countries agree that “Democracy is the best form of Government.” It passed over without comment, however, the finding from the same survey that less than 40 percent of people in the U.S., Canada, Australia and New Zealand agreed. What were the other 60 percent thinking? Can this survey be accurate? The figure is not in the online WP article and I couldn’t verify it’s accuracy from the source but this United Nations report has the same figure (figure 1).
Score one for humanity
Yes, Kasparov comes back to take the third game from Fritz. Here is the link.
The computer played weakly and aimlessly throughout, showing that the machines are still often inept at positional play and strategic thinking. Kasparov, after a horrid blunder in game two, was masterful. The machines have not yet taken over!
The bottom line so far: In the first two games the machine pulled out a draw and a win, largely because Kasparov committed uncharacteristic outright blunders. It is clear that the machine is not capable of outplaying Kasparov from scratch. The deciding game is this Tuesday, and it is up to Kasparov, who will have black, whether he should play for a win, and thus risk losing, or settle for a draw.
Who are the top Marxists?
Here is the result of one survey, thanks to www.crookedtimber.org. First place goes to Rosa Luxembourg, I suppose that Marx himself is out of the running by definition.
Why is she number one? Could it be because of her violent murder in 1919, which both martyred her, and likely prevented her from later endorsing totalitarian regimes?
You will note that numbers three (Lenin) and seven (Mao) on the list are mass murderers, don’t neglect to follow this link to Bryan Caplan’s award-winning site on the communist slaughter of innocents.
I don’t want to go on record as, well, “pushing” for Stalin, but I can’t help noticing that he doesn’t even make the top thirty. There is, after all, a book called The Essential Stalin, on his theoretical contributions. Nor can it be said that mass murder is an immediate disqualification from doing well on the list. Note that the creator of this poll, who calls himself anti-communist, is both highly intelligent and honest in his writing. He questions whether a poll of “top Nazis” would be no less legitimate, remarking that “greatness” and “goodness” are not the same thing.
My question: Would they have let me vote for David Horowitz?
Price Discrimination at Light Speed
According to an estimate reported in Preston McAfee’s Competitive Solutions (I recommend this book for MBA classes in strategy), American Airlines changes some 500,000 prices a day. Even if this is too high by an order of magnitude it’s amazing.
Milton Friedman’s early life
“He was born in Brooklyn in 1912. His parents had been poor immigrants from Carpatho-Ruthenia. Milton and his three sisters grew up in Rahway, New Jersey, where his parents earned a modest living as merchants. His father died when he was a senior in high school, but a state scholarship permitted him to go to Rutgers College, which was then a small private school.
“A high school teacher had taught him to love mathematics, and, like Kenneth Arrow about a decade later, he prepared for a career as an insurance actuary. At the same time, economics courses by Arthur F. Burns, later Federal Reserve Chairman, and Homer Jones, later research director of the Federal Reserve Bank of Saint Louis, aroused his interest in economics. Eventually he majored in both fields.
“Upon graduation in 1932, influenced partly by his teachers and partly by the Depression, Friedman chose a tuition fellowship in economics over one in applied mathematics at Brown University. He described Jacob Viner’s first-year graduate course in economics as the greatest intellectual experience of his life. One of his classmates was Rose Director, who later became his wife, his life-long collaborator, and mother of his two children.”
This is from David Warsh, quoting Jurg Niehans.
I can only say that our gain is the insurance industry’s loss. Warsh’s columns are consistently excellent, you can get a free subscription by following the link above.