The prediction market Intrade is a neat contribution to economics as well as everyday living. It offers odds on a variety of important world events occurring, and allows users to buy or sell "shares" in the occurrence of events (take a look at the site for details of how it functions).
If you're interested in knowing what the chance of some upcoming event is, go to Intrade and you can see what the market rates the odds as. It's better than listening to pundits because on Intrade, people are putting money where their collective mouths are.
The recall election of Governor Scott Walker is going on in Wisconsin as I type this. Ballots are yet to be counted and Intrade currently prices his chance of victory at 93.6%. I'm ignorant about the political climate in Wisconsin, but even so I can quickly see that it would be an extremely strange event for Walker to lose this recall.
There are more subtle benefits to be gained from Intrade besides just information. Mainstream economic models of consumer behavior predict that people want to equalize consumption across time; a stable income with minimal variance is most desirable. Another nice aspect of Intrade (although I suspect rarely taken advantage of) is smoothing consumption over time.
For people who are deeply concerned about the outcome of political events, this should be a great service.
For example: if you expect that a loss for Walker will cause fiscal crisis and collapse of civilization, you should bet against the possibility that he wins, so you'll have enough shotgun shells and canned beans to survive the oncoming apocalypse. If instead you think that Walker winning another term will bring about a neo-fascist corporate state and crush middle-class living standards, you should bet heavily that he wins so you can bribe your way out of the country. Either way, the option is there!
Realistically, few people likely think that the outcome of political contests will have such divergent results. If money was used to match political rhetoric, Intrade would have even more money and traffic flowing through than it does now (hopefully enough to keep the site open, unlike some past attempts at prediction markets).
Showing posts with label money. Show all posts
Showing posts with label money. Show all posts
Tuesday, June 5, 2012
Obesity: Class Warfare, Imperfect Information... or both?
Saw this on CNN today: Poor and fat: The real class war, by L.Z. Granderson. Some figures from the article:
We can quantify the effect of income on food choices through this simplified model. Imagine two different families, both trying to fill a calorie requirement of 2000, but the low-income family has a food budget of $3 and the high-income family has a food budget of $10.
After plugging numbers into the formula above, the high-income family buys only 0.3 servings of potato chips and 9.7 servings of fruit, while the low-income family gets about 1.4 servings of potato chips and 1.6 servings of fruit.
The same intuition is expressed graphically below. Purchasing decisions are represented by points where the red and blue lines cross.
So far, so good: as one would expect, the high-income family buys more fruit and less potato chips than the low income family. One problem for this example, though, is that neither of these families will be gaining any weight!
If people only eat the necessary calories to keep an even weight, it won't matter whether their income is high or low. They'll just adjust their purchasing choices to get the right amount of calories. A dietitian might frown on you for eating chips as a snack instead of fruit, but as long as your consumption of chips is small, it won't necessarily cause you to gain weight.
It takes some extra assumptions to model over-eating. Maybe there's some property of potato chips that causes people to eat too much of them, i.e. what if someone buys potato chips thinking that a $1 serving will be 1200 calories, when it's actually equivalent to 1600 calories? Keeping with the numerical example above, the rich family would overeat by about 120 calories and the poor family by 560 calories.
It's only imperfect information or self-control problems which make food choices cause weight-gain. If we assume that low- and high-income types have exactly the same sort of bounded information, we'll find that the rich gain less weight, because their greater resources have them purchasing less unhealthy food to begin with.
This story gets even more pessimistic if there is some difference between low- and high-income people's capacity to overcome imperfect information. It might be that the poor have less time/energy to research and craft their diet than the rich do, so they are more prone to mistakes. Additionally, there could be some personal attribute - an impulsive nature or low conscientiousness - which both causes someone to have low income and also makes diet control more difficult.
While the costs of obesity are worth addressing given their heavy contribution to public healthcare spending, as Granderson rightly observes, the lens of class warfare isn't the best for understanding the problem.
Ultimately, to prevent obesity people need more incentive to monitor their own health. For me, it's knowing that on the current trajectory of public health care spending, there probably won't be any money left by the time I'm old and infirm. It doesn't entirely surprise that current beneficiaries of public health care are not too concerned about solving this spending problem for the rest of us (morbid fact: about a third of health care spending goes to patients in their last year of life). Which class is under attack, and which class is attacking anyway?
Maybe the obesity problem will resolve itself as young people make the calculations and figure they will likely be on their own, in terms of medical care, by the time it is most necessary. Or maybe the lure of potato chips is simply too great for us as a nation and will lead to our fiscal undoing.
Ground beef that is 80/20 is fattier but cheaper than 90/10. Ground turkey breast is leaner than the other two but is usually the more expensive. And many of us can't even begin to think about free-range chicken and organic produce -- food without pesticides and antibiotics that'll cost you a second mortgage in no time at all.I would interpret Granderson's argument as: low-income leads to unhealthy foods leads to fat (leads to more healthcare spending and even lower incomes). Looking at calorie counts compared to food prices does seem to support that. However, bringing some micro theory into the discussion complicates this causal story somewhat.
...The American Journal of Clinical Nutrition recently published a study that found $1 could buy 1,200 calories of potato chips but just 250 calories of vegetables and 170 calories of fresh fruit. And it is also true that Mississippi, the poorest state in the country, is also the fattest.
In fact, the five poorest states are also among the 10 fattest, and eight of the 10 poorest states are also among the 10 with the lowest life expectancy.
I guess one could dismiss this as one big coincidence, but is it also a coincidence that half of the top 10 states with the highest median incomes are also in the top 10 in life expectancy?
We can quantify the effect of income on food choices through this simplified model. Imagine two different families, both trying to fill a calorie requirement of 2000, but the low-income family has a food budget of $3 and the high-income family has a food budget of $10.
After plugging numbers into the formula above, the high-income family buys only 0.3 servings of potato chips and 9.7 servings of fruit, while the low-income family gets about 1.4 servings of potato chips and 1.6 servings of fruit.
The same intuition is expressed graphically below. Purchasing decisions are represented by points where the red and blue lines cross.
If people only eat the necessary calories to keep an even weight, it won't matter whether their income is high or low. They'll just adjust their purchasing choices to get the right amount of calories. A dietitian might frown on you for eating chips as a snack instead of fruit, but as long as your consumption of chips is small, it won't necessarily cause you to gain weight.
It takes some extra assumptions to model over-eating. Maybe there's some property of potato chips that causes people to eat too much of them, i.e. what if someone buys potato chips thinking that a $1 serving will be 1200 calories, when it's actually equivalent to 1600 calories? Keeping with the numerical example above, the rich family would overeat by about 120 calories and the poor family by 560 calories.
It's only imperfect information or self-control problems which make food choices cause weight-gain. If we assume that low- and high-income types have exactly the same sort of bounded information, we'll find that the rich gain less weight, because their greater resources have them purchasing less unhealthy food to begin with.
This story gets even more pessimistic if there is some difference between low- and high-income people's capacity to overcome imperfect information. It might be that the poor have less time/energy to research and craft their diet than the rich do, so they are more prone to mistakes. Additionally, there could be some personal attribute - an impulsive nature or low conscientiousness - which both causes someone to have low income and also makes diet control more difficult.
While the costs of obesity are worth addressing given their heavy contribution to public healthcare spending, as Granderson rightly observes, the lens of class warfare isn't the best for understanding the problem.
Ultimately, to prevent obesity people need more incentive to monitor their own health. For me, it's knowing that on the current trajectory of public health care spending, there probably won't be any money left by the time I'm old and infirm. It doesn't entirely surprise that current beneficiaries of public health care are not too concerned about solving this spending problem for the rest of us (morbid fact: about a third of health care spending goes to patients in their last year of life). Which class is under attack, and which class is attacking anyway?
Maybe the obesity problem will resolve itself as young people make the calculations and figure they will likely be on their own, in terms of medical care, by the time it is most necessary. Or maybe the lure of potato chips is simply too great for us as a nation and will lead to our fiscal undoing.
Monday, June 4, 2012
Paycheck Fairness Act is anti-womens' employment
Scheduled to come to a vote in Congress tomorrow, the Paycheck Fairness Act is a bad solution to a statistically trumped-up problem.
The most frequently cited statistic is that women earn 77 cents for every dollar a man makes. However, not all of that gap can be attributed to discrimination.
The Bureau of Labor Statistics reports that comparing male and female full-time workers, men work more hours: 8.2 versus 7.8 hours per day, on average. Just assuming an exactly even hourly rate, we'd expect women to earn 95% of men's total on a yearly basis; however, there are also more women working part-time than men, widening the gap further. Men are also disproportionately likely to die from an injury on the job, as this chart shows.
But put aside those statistical details. A gap in male-female wages undoubtedly remains, and some of it is probably due to gender-bias and discrimination. What does the Paycheck Fairness Act do to fix that?
The Act would strengthen the Equal Pay Act of 1963, which already requires similar workers be paid the same. The new legislation would expand the damages that women can claim in court, and give women more tools to sue their employers if discrimination is suspected.
The new law would result in effectively unlimited liability for a business sued for giving unequal pay. Put yourself in the shoes of a small business owner. Suppose you are considering hiring either a male or female employee for an entry-level position. Suddenly knowing that your business could be shut down if a court decides your payment to the woman is unfair, who would you be more inclined to hire?
Let's think of another group that has been "protected" by sweeping federal legislation. Persons with physical disabilities are given additional tort resources by the Americans with Disabilities Act if it's found that they were treated unfairly. A paper by Acemoglu and Angrist (2001), using reliable econometric techniques, found that employment of disabled people dropped substantially following the ADA's passage. Now, twenty years later, physically disabled persons are unemployed at record levels.
There are obvious weaknesses in the analogy between the Paycheck Fairness Act and Americans with Disabilities Act - women are a larger segment of the population, and aren't physically limited from doing most jobs - but a lesson remains. Creating new protected classes of workers is not always to that group's overall benefit.
Even well-intentioned laws may end up punishing businesses for hiring certain workers, which hurts both individuals and the economy as a whole. The Paycheck Fairness Act is almost certainly dead in the water; even without passage, its political purpose will have been achieved. But, if President Obama and the Democrats want to show they are helping women, a first step is to not shut them out of the labor market.
The most frequently cited statistic is that women earn 77 cents for every dollar a man makes. However, not all of that gap can be attributed to discrimination.
The Bureau of Labor Statistics reports that comparing male and female full-time workers, men work more hours: 8.2 versus 7.8 hours per day, on average. Just assuming an exactly even hourly rate, we'd expect women to earn 95% of men's total on a yearly basis; however, there are also more women working part-time than men, widening the gap further. Men are also disproportionately likely to die from an injury on the job, as this chart shows.
 |
| Source: US Department of Labor, Bureau of Labor Statistics, Current Population Survey, and Census of Fatal Occupational Injuries, 2012. |
The Act would strengthen the Equal Pay Act of 1963, which already requires similar workers be paid the same. The new legislation would expand the damages that women can claim in court, and give women more tools to sue their employers if discrimination is suspected.
The new law would result in effectively unlimited liability for a business sued for giving unequal pay. Put yourself in the shoes of a small business owner. Suppose you are considering hiring either a male or female employee for an entry-level position. Suddenly knowing that your business could be shut down if a court decides your payment to the woman is unfair, who would you be more inclined to hire?
Let's think of another group that has been "protected" by sweeping federal legislation. Persons with physical disabilities are given additional tort resources by the Americans with Disabilities Act if it's found that they were treated unfairly. A paper by Acemoglu and Angrist (2001), using reliable econometric techniques, found that employment of disabled people dropped substantially following the ADA's passage. Now, twenty years later, physically disabled persons are unemployed at record levels.
There are obvious weaknesses in the analogy between the Paycheck Fairness Act and Americans with Disabilities Act - women are a larger segment of the population, and aren't physically limited from doing most jobs - but a lesson remains. Creating new protected classes of workers is not always to that group's overall benefit.
Even well-intentioned laws may end up punishing businesses for hiring certain workers, which hurts both individuals and the economy as a whole. The Paycheck Fairness Act is almost certainly dead in the water; even without passage, its political purpose will have been achieved. But, if President Obama and the Democrats want to show they are helping women, a first step is to not shut them out of the labor market.
Tuesday, March 6, 2012
The Durable Goods Problem in Software
Being a monopolist isn't all it's cracked up to be. Produce a durable good, and you're functionally competing against yourself.
For a Durable Goods Producer with Market Power:
Problem 1: durable goods can be re-sold. If re-sale purchases are cheap and reliable, why buy new?
Problem 2: after selling at high price, the firm wants to reduce price to get more customers. So, if you're a customer, you shound wait for the lower price to purchase... If you're the firm, how can you ever manage to sell at the high price?
Software is perhaps the ultimate in durable products. Once you have the program installed, it never wears out. Resale is prohibited by license agreements and made impractical by other technical means, but the second problem remains. How can software companies prevent consumers for holding out and demanding cheaper prices?
Big players in the software industry have found various ways to overcome this durable goods problem.
1) Bundling. Most famously, Microsoft got its big start by combining the Windows operating system with IBM machines. While the software may be durable, the computer most definitely is not. Replacement of consumer products guarantees repeat customers for their OS. Waiting doesn't help the consumer, because they retailer they purchase from will have to get a copy of Windows regardless.
2) Ongoing payment schemes. Subscription fees, downloadable content, and micro-payments have been used successfully by companies from Blizzard to Zynga. In addition to providing a check against piracy, each of these pricing methods ensure the up-front cost is only a small part of what the consumer pays for that software. Holding out for a lower price on the base product doesn't exempt someone from paying for the extras.
3) Build price discounts into the sales model. Some video game marketing tools (I'm thinking of Steam, from Valve software) build semi-frequent sales into their distribution channel. Users can buy a new game when it comes out at full price; wait a few months for the game to go on sale at 33% or 50% off; or wait several years to get it at deep discount. The amount paid depends on the gamer's urgency in wanting the game. It's temporal price discrimination which separates out high- and low-demanding users.
Software companies still end up competing against themselves to some degree, but with these sorts of pricing mechanics they're able to keep revenue higher than it would be otherwise.
For a Durable Goods Producer with Market Power:
Problem 1: durable goods can be re-sold. If re-sale purchases are cheap and reliable, why buy new?
Problem 2: after selling at high price, the firm wants to reduce price to get more customers. So, if you're a customer, you shound wait for the lower price to purchase... If you're the firm, how can you ever manage to sell at the high price?
Software is perhaps the ultimate in durable products. Once you have the program installed, it never wears out. Resale is prohibited by license agreements and made impractical by other technical means, but the second problem remains. How can software companies prevent consumers for holding out and demanding cheaper prices?
Big players in the software industry have found various ways to overcome this durable goods problem.
1) Bundling. Most famously, Microsoft got its big start by combining the Windows operating system with IBM machines. While the software may be durable, the computer most definitely is not. Replacement of consumer products guarantees repeat customers for their OS. Waiting doesn't help the consumer, because they retailer they purchase from will have to get a copy of Windows regardless.
2) Ongoing payment schemes. Subscription fees, downloadable content, and micro-payments have been used successfully by companies from Blizzard to Zynga. In addition to providing a check against piracy, each of these pricing methods ensure the up-front cost is only a small part of what the consumer pays for that software. Holding out for a lower price on the base product doesn't exempt someone from paying for the extras.
3) Build price discounts into the sales model. Some video game marketing tools (I'm thinking of Steam, from Valve software) build semi-frequent sales into their distribution channel. Users can buy a new game when it comes out at full price; wait a few months for the game to go on sale at 33% or 50% off; or wait several years to get it at deep discount. The amount paid depends on the gamer's urgency in wanting the game. It's temporal price discrimination which separates out high- and low-demanding users.
Software companies still end up competing against themselves to some degree, but with these sorts of pricing mechanics they're able to keep revenue higher than it would be otherwise.
Wednesday, February 15, 2012
Light bulbs and implied discount rates
What does your choice in light bulbs say about your attitude toward the future? In terms of discount rates, quite a lot.
An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.
Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.
Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.
People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.
There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.
If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.
An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.
Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.
Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.
People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.
There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.
If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.
Tuesday, January 3, 2012
Do higher tax rates spur more charity? I doubt it.
A few days ago I was talking with my mother about the state of the economy, income inequality, and social obligations... Typical evening conversation on any New Years, I'm sure. From life experience and observations on a (privileged) extended family, her opinion was that more charity occurred when tax rates were higher. I disagreed, and offered to present a mathematical demonstration on why that was the case. After that effort, I wanted to show the Internets the fruits of my labor.
Charitable giving is a very personal decision and the tax law surrounding it is complicated and arcane, so I start with some simplifying assumptions to make the problem more approachable. These are:
Now imagine a tax rate of 0% (and if you're a libertarian, try not to faint with excitement). An individual earns $100,000 and keeps all of it, earns $10,000 in interest before the second period, makes another $100,000 then dies and gives all of it away. Total charity given is $210,000.
One could argue that this result emerges just from the assumptions made, which is partially true. However, as long as individuals can earn a higher return on investment than the government (which is not a controversial claim) and all money is transferred upon death (a de facto necessity) then the result, qualitatively, will still be the same. If you make the example more realistic, and envision a person making money then saving and investing it for more than just two years, the difference between the two tax rates becomes even more apparent.
Charitable giving is a very personal decision and the tax law surrounding it is complicated and arcane, so I start with some simplifying assumptions to make the problem more approachable. These are:
- Money given to charity is 100% tax-deductible.
- Each person lives for two periods, then dies, and their entire stock of wealth is donated after death.
- An individual's money earns 10% interest.
- To make the problem concrete, I'll imagine a person earning $100,000 in each period, and two different tax regimes: one with a 0% tax rate, and another with 50%.
Now imagine a tax rate of 0% (and if you're a libertarian, try not to faint with excitement). An individual earns $100,000 and keeps all of it, earns $10,000 in interest before the second period, makes another $100,000 then dies and gives all of it away. Total charity given is $210,000.
One could argue that this result emerges just from the assumptions made, which is partially true. However, as long as individuals can earn a higher return on investment than the government (which is not a controversial claim) and all money is transferred upon death (a de facto necessity) then the result, qualitatively, will still be the same. If you make the example more realistic, and envision a person making money then saving and investing it for more than just two years, the difference between the two tax rates becomes even more apparent.
Of course, someone might say there are
distributional issues this exercise neglects. Maybe needy recipients of charity
are more sympathetic than the undeserving heirs of some wealthy person. Aside
from that, the general point still stands: when government takes money through
taxes, the overall social "pie" becomes smaller. When individuals can
invest it, they put money into productive activities which can generate more
wealth, making the "pie" bigger. Even if higher tax rates drive some
people to give more money to charity than they otherwise would, society in the
aggregate is better off if that money can be productively invested by
individuals instead. Charity is then a pleasant side-benefit of greater social
wealth.
Saturday, December 24, 2011
Fuzzy Economics and Legal Fees
The New York Times has published several articles in the last two months targeting the American Bar Association. In October, Clifford Winston questioned the need for bar exams and professional licensing. Last week, David Segal wrote "For Law Schools, a Price to Play the A.B.A.’s Way" which blames the ABA's control over law school accreditation for overly high legal fees.In that article, he writes
Even if the ABA does drive up the cost of law school tuition, that alone can't explain why legal fees are so high. I'd hypothesize that clients pay lawyers a premium wage in order to ensure a high level of effort. As it is hard to monitor an attorney's effort directly, better wages are used as an incentive to keep on the job instead of slacking. In the economics literature, this is referred to as an efficiency wage; the concept has been used to explain why wages remain rigid during periods of high unemployment. That seems to apply quite easily to the legal industry.
I'm sympathetic to the argument for lowering entry barriers to practicing law, but there are other factors at work too which cause lawyer wages to be high. Otherwise, competition in the legal industry would have already driven down prices and serviced the unmet needs in low- and middle-income communities.
...The lack of affordable law school options, scholars say, helps explain why so many Americans don’t hire lawyers.This reasoning doesn't make sense to me. It may be true that lawyers are driven to make more money in order to pay off student loans. But, high fees are not the only way to make lots of cash; there is also the low-cost, high-volume strategy (think Walmart). If so much unmet demand for legal services exists, it could be more profitable to charge a lower hourly rate and just work faster or put a little less effort into each case. This wouldn't be practical if the supply of lawyers is artificially restricted, but given the 45,000 new lawyers every year as well as reportedly high numbers of unemployed or idle lawyers, a shortage seems to be unlikely.
“People like to say there are too many lawyers,” says Prof. Andrew Morriss of the University of Alabama School of Law. “There are too many lawyers who charge $300 an hour. There aren’t too many lawyers who will handle a divorce at a reasonable rate, or handle a bankruptcy at a reasonable rate. But there is no way to be that lawyer and service $150,000 worth of debt.”
This helps explain a paradox: the United States churns out roughly 45,000 lawyers a year, but survey after survey finds enormous unmet need for legal services, particularly in low- and middle-income communities...
Even if the ABA does drive up the cost of law school tuition, that alone can't explain why legal fees are so high. I'd hypothesize that clients pay lawyers a premium wage in order to ensure a high level of effort. As it is hard to monitor an attorney's effort directly, better wages are used as an incentive to keep on the job instead of slacking. In the economics literature, this is referred to as an efficiency wage; the concept has been used to explain why wages remain rigid during periods of high unemployment. That seems to apply quite easily to the legal industry.
I'm sympathetic to the argument for lowering entry barriers to practicing law, but there are other factors at work too which cause lawyer wages to be high. Otherwise, competition in the legal industry would have already driven down prices and serviced the unmet needs in low- and middle-income communities.
Sunday, November 6, 2011
Fun Facts about Microsoft Co.
Why would anyone bother reading shareholder reports? They're dry, long-winded, and functionally outdated by the time of arrival, so there's no way to profit from the information. Reasons for reading would have to include boredom, duress, or idle curiosity. It was the latter which led me to the Microsoft Annual Report for 2011. A few interesting facts pulled from that document:
What, if anything, does this say about the corporation and its future? Microsoft's product focus is split between entertainment/gaming and business services, while the company's prior breadwinner - bundling software with new PCs - is taking a back seat. As stated in a note from their CEO, Steven Ballmer: "increasingly, we will view ourselves as a devices and services company." It sounds closer to Mattel than the Evil Empire. Regardless, Microsoft's diverse selection of both patents and products provides a foothold to compete against intimidating rivals like Google, Apple, and Salesforce.com.
- Microsoft is divided into five segments. The Windows & Windows Live Division gets 75% of its revenue from selling Windows to computer manufacturers, to be pre-installed for end users. The remaining 25% comes from sale of miscellaneous hardware products and online advertising on Windows Live.
- In the Windows Division, most growth over the last year was business sales (+11%) while consumer purchases went down (-1%). A substantial part of the drop in consumer PC sales was from netbooks (-32%).
- Employee severance expenses were $59 million in 2010 and $330 million in 2009. Why the huge change? Microsoft: "In January 2009, we announced and implemented a resource management program to reduce discretionary operating expenses, employee headcount, and capital expenditures."
- Research and Development costs took up 15% of Microsoft's revenue, or $9.0 billion, in 2011. That investment is well-protected -- by 26,000 U.S. and international patents, and another 36,000 pending.
- Kinect for Xbox 360 is the fastest-selling consumer electronics device; confirmed by Guinness World Records.
- If you'd bought $100 of Microsoft stock in June 2006, six years later it would be worth $122.71 (compare to $115.61 for the S&P Index, or $157.48 for the Nasdaq Computer Index).
What, if anything, does this say about the corporation and its future? Microsoft's product focus is split between entertainment/gaming and business services, while the company's prior breadwinner - bundling software with new PCs - is taking a back seat. As stated in a note from their CEO, Steven Ballmer: "increasingly, we will view ourselves as a devices and services company." It sounds closer to Mattel than the Evil Empire. Regardless, Microsoft's diverse selection of both patents and products provides a foothold to compete against intimidating rivals like Google, Apple, and Salesforce.com.
Thursday, October 6, 2011
Shirking, Malingering, and other Unpopular Terms regarding the American labor force
So, the title might be overly sensational.
For an outside observer, finding measures of low conscientiousness on the job (shirking) or active deception to evade work (malingering) is a bit of a challenge, because workers have an incentive to conceal that sort of activity.
This rough study addresses worker injury on the job and attempts to determine whether outside incentives motivate changes in sick time and injury rates. Using some unsophisticated econometric techniques, surprising results are found. Surprising if you think unemployment levels and interest rates will not influence worker absences, anyway.
The paper:
For an outside observer, finding measures of low conscientiousness on the job (shirking) or active deception to evade work (malingering) is a bit of a challenge, because workers have an incentive to conceal that sort of activity.
This rough study addresses worker injury on the job and attempts to determine whether outside incentives motivate changes in sick time and injury rates. Using some unsophisticated econometric techniques, surprising results are found. Surprising if you think unemployment levels and interest rates will not influence worker absences, anyway.
The paper:
Monday, August 29, 2011
My 13-bean inflation hedge.
Never mind gold or TIPS. There are much more mundane ways to protect your purchasing power from inflation. Durable food commodities work just fine. I recently invested in 75 lbs. of 13-bean soup mix, purchased from The Great American Spice Company.
Assuming that core commodity inflation continues at its current pace (almost guaranteed) and that these beans last the several years it will take me to consume them (less certain), I think it's a nearly foolproof investment. Other methods of hedging against inflation carry their own risks and are also much more expensive. Bulk food purchases are the chickenhearted investor's best friend, as Andrew Tobias has put it.
Now, any suggestions on bean soup recipes?
Followup (2/4/2012): I'm not quite as excited about the beans as I used to be. The problem with a bean mix is that some types of beans cook faster than others... and the gastrointestinal consequences of under-cooked beans are obvious to anyone who's suffered through them. If I were doing this over again, I would have gotten a bulk order of one type of beans and saved some money and hassle. Oh well - live and learn.
 |
| Beans: the grad student's investment vehicle. |
Now, any suggestions on bean soup recipes?
Followup (2/4/2012): I'm not quite as excited about the beans as I used to be. The problem with a bean mix is that some types of beans cook faster than others... and the gastrointestinal consequences of under-cooked beans are obvious to anyone who's suffered through them. If I were doing this over again, I would have gotten a bulk order of one type of beans and saved some money and hassle. Oh well - live and learn.
Friday, April 8, 2011
Inefficiency of health, education sectors is more than coincidence or the "Baumol effect."
From The Economist, March 17:
Is it truly just random chance or amazing foresight which has led the state to invest in sectors which just happen to be resistant to productivity enhancements? The Economist article points to the so-called Baumol effect, whereby some activities are immune to improvements in labor productivity. For example, it still takes the same number of musicians to perform a Beethoven symphony as it did in the 1800s.
To me, this seems like a completely inadequate explanation for the growing costs of education and health care. Unlike symphonies, there have been many technological improvements which should make the provision of those services much cheaper. Increased access to computers has revolutionized other industries and this would seem to be especially true in health or education, where the rapid and accurate transfer of information matters especially. But that hasn't happened.
There is a much simpler explanation: more government intervention causes higher costs. As health and education became increasingly regulated, the incentive to increase productivity became smaller. Teachers and doctors have to satisfy the demands of politicians and not just the parents or patients. There's no reason to rein in costs because taxpayers will foot the bill regardless.
I'd speculate that if the government had decided to regulate and oversee the production of symphony music, it would take twice as many people as it did to perform in the 19th century (and they'd miss twice as many notes). Instead, we have a medical industry that kills 98,000 people per year with preventable accidents, and an educational system that spends the most in the world but can't keep us in the top ten for global rankings of student proficiency in basic math and sciences.
Is this really a success story for government social spending? To me, it sounds like a reason to chop down the vines of red tape choking the market for education and health care. If costs continue to rise after the government's influence has ended, there may actually be an argument for the Baumol effect. Until then it's just empty apologetics.
Larry Summers, Mr. Obama's main economic adviser till the end of 2010, argues that the goods governments buy, especially health care and education, have proved much more resistant to productivity enhancements than the rest of the economy. Since the 1970s real wages in America have risen tenfold if you measure them against the cost of televisions; set against the cost of health care, they have gone down.Unintentionally, Mr. Summers has presented some truly fabulous arguments against the increase in government spending he seems to advocate.
Mr. Summers expects that trend to continue. An ageing population will need ever more health services provided by the state...
Is it truly just random chance or amazing foresight which has led the state to invest in sectors which just happen to be resistant to productivity enhancements? The Economist article points to the so-called Baumol effect, whereby some activities are immune to improvements in labor productivity. For example, it still takes the same number of musicians to perform a Beethoven symphony as it did in the 1800s.
To me, this seems like a completely inadequate explanation for the growing costs of education and health care. Unlike symphonies, there have been many technological improvements which should make the provision of those services much cheaper. Increased access to computers has revolutionized other industries and this would seem to be especially true in health or education, where the rapid and accurate transfer of information matters especially. But that hasn't happened.
There is a much simpler explanation: more government intervention causes higher costs. As health and education became increasingly regulated, the incentive to increase productivity became smaller. Teachers and doctors have to satisfy the demands of politicians and not just the parents or patients. There's no reason to rein in costs because taxpayers will foot the bill regardless.
I'd speculate that if the government had decided to regulate and oversee the production of symphony music, it would take twice as many people as it did to perform in the 19th century (and they'd miss twice as many notes). Instead, we have a medical industry that kills 98,000 people per year with preventable accidents, and an educational system that spends the most in the world but can't keep us in the top ten for global rankings of student proficiency in basic math and sciences.
Is this really a success story for government social spending? To me, it sounds like a reason to chop down the vines of red tape choking the market for education and health care. If costs continue to rise after the government's influence has ended, there may actually be an argument for the Baumol effect. Until then it's just empty apologetics.
Tuesday, April 5, 2011
Real causes of debt are simple; debtors' explanations more complicated.
In my constant quest to find the pot of gold at the end of the Internet, I discovered this gem.
Does this make sense to you? As far as I know, there's only one cause of debt: borrowing money. Whether that is "bad" debt depends on the circumstances surrounding efforts to pay it back.
In short, there are two big problems with the statistics above.
1) Data are from surveys of where people say their debt came from (revealed in tiny font at the bottom of the picture). Perhaps I'm too cynical, but I think more people are apt to blame their debt on external events, such as a pay cut, rather than admit they are spending beyond their means. It's more sympathetic and less hard on the ego to say that you were forced into debt rather than led down the path willingly.
2) After losing a job or taking a pay cut, if you continue to spend at the same rate as before, in my book that still counts as "going wild in the aisles." If expectations remain static as situations change, is it really accurate to blame the situation (less pay) for the outcome, rather than one's personal failure to adapt to the new circumstances? If it were the opposite case and income had just increased, I don't think many people would say "I blame this higher wage for my not having time to go shopping and spend as much as I want" (holding hours worked constant, of course). The real problem is not adjusting behavior to fit the new constraints that reality imposes.
I'm sure some people end up in bad debt through no fault of their own, or as a result of unavoidable expenses or unforeseen changes in income which may coincide with less opportunities for work. However, I don't think that number is large enough to make up 48% of all cases of bad debt. Further, by claiming that a pay cut is the largest cause of bad debt this chart implies that people are largely incapable of changing their consumption patterns to fit a more modest standard of living, which is not a very good lesson to live by.
If anything, the big difference between "perceived" and "real" causes of debt would be better labeled as "how I think other people got into debt" and "how I explain my own debt" respectively. Knowing only a little about psychology, it is unsurprising that respondents hold other people responsible for their choices (spending too much) but apply a much more ego-gratifying standard when considering themselves.
Maybe the 21st century version of old proverb "don't take any wooden nickels" will become "don't trust statistics off of online infographics." Less catchy perhaps, but much more common application!
Does this make sense to you? As far as I know, there's only one cause of debt: borrowing money. Whether that is "bad" debt depends on the circumstances surrounding efforts to pay it back.
In short, there are two big problems with the statistics above.
1) Data are from surveys of where people say their debt came from (revealed in tiny font at the bottom of the picture). Perhaps I'm too cynical, but I think more people are apt to blame their debt on external events, such as a pay cut, rather than admit they are spending beyond their means. It's more sympathetic and less hard on the ego to say that you were forced into debt rather than led down the path willingly.
2) After losing a job or taking a pay cut, if you continue to spend at the same rate as before, in my book that still counts as "going wild in the aisles." If expectations remain static as situations change, is it really accurate to blame the situation (less pay) for the outcome, rather than one's personal failure to adapt to the new circumstances? If it were the opposite case and income had just increased, I don't think many people would say "I blame this higher wage for my not having time to go shopping and spend as much as I want" (holding hours worked constant, of course). The real problem is not adjusting behavior to fit the new constraints that reality imposes.
I'm sure some people end up in bad debt through no fault of their own, or as a result of unavoidable expenses or unforeseen changes in income which may coincide with less opportunities for work. However, I don't think that number is large enough to make up 48% of all cases of bad debt. Further, by claiming that a pay cut is the largest cause of bad debt this chart implies that people are largely incapable of changing their consumption patterns to fit a more modest standard of living, which is not a very good lesson to live by.
If anything, the big difference between "perceived" and "real" causes of debt would be better labeled as "how I think other people got into debt" and "how I explain my own debt" respectively. Knowing only a little about psychology, it is unsurprising that respondents hold other people responsible for their choices (spending too much) but apply a much more ego-gratifying standard when considering themselves.
Maybe the 21st century version of old proverb "don't take any wooden nickels" will become "don't trust statistics off of online infographics." Less catchy perhaps, but much more common application!
Monday, February 7, 2011
How to Gain Twitter-Fame for Penny Stock Advice, with no Skill, Knowledge (or Profits) Required.
Along with upcoming rappers, Bieber fans, and ad-bots there’s a rash of penny stock advice to be found on Twitter. At first I dismissed it as one of many eccentricities of the platform, but after seeing a few dozen assorted “penny stock” accounts I started to wonder. What could explain these accounts peddling advice on securities that most investors wouldn’t line a litter-box with?
So-called "penny stocks" may range in cost from a few dollars to a fraction of a cent. For example, instead of buying one share of IBM at $164.68, it would be possible to instead purchase 4,450 shares of Double Eagle Gold Holdings (DEGH) at $.037 per share (amusingly, both stocks are currently near their respective peak historical values). DEGH had been running at an average price of about $.003 for most of the last year. If an investor had a crystal ball and could foresee this recent ten-fold run up in price, there would have been a lot of money to be made; therein lies the temptation of penny stocks.
Of course, anyone who actually had that crystal ball and put it to use in the market would be far too rich to bother with running a Twitter account. So why are there hundreds of penny stock tweeters out there? To explain, here is a theory of how ANYONE can appear blessed with penny stock clairvoyance.
The Five-Step Guide to Achieving Twitter-fame with Penny Stock Advice:
Step 1: Pick out 100 penny stocks at random, and buy $10 worth in each of them for a total cost of $1,000 plus brokerage fees (or, if you’re cheap, just consistently follow the prices of 100 penny stocks).
Step 2: Wait. As is normal for inexpensive and highly volatile stocks, the price of some will go up dramatically and others down equally dramatically.
Step 3: Ignore the stocks that go down. Out of the 100, by random chance you’re almost assured to see one go up every now and then. Get on Twitter and brag about how well your picks in the stocks that went up are going.
Step 4: Construct self-promotional statistics to describe how well an investor could have done if they had known exactly when these volatile stocks would move up and down, then tweet about anyone can generate “POTENTIAL 237% PROFITS!!!” based on your expert advice.
Step 5: Bask in fame and adulation. If you are lucky, people will buy a subscription to your newsletter. Or, if they follow your advice, it will drive up the price of penny stocks you own. Then sell off the penny stocks that went up due to your “wisdom” and leave your followers to eat the losses as the stock shifts back down.
I can’t verify that every penny stock tweeter uses this self-serving strategy. However, it’s the only way I can think of making money off penny stocks, so I’d guess that a large ratio of those Twitter accounts have something like this in mind.
In the time it took me to write the above, DEGH – which I noticed as a result of a penny stock tweet – has dropped 35%. IBM, on the other hand, changed 0.30% in that hour. In a nutshell, this is why investing in penny stocks is probably not a good idea: you get all the risk of stock market speculation without much stake in any real value (or else why is the stock so cheap?). Markets tend to be efficient and integrate available information into stock prices, so when a stock costs a fraction of a cent, it’s probably because many people rate its investment value somewhere near a lottery ticket.
To make matters even worse, even if you successfully buy low and sell high with penny stocks – a difficult proposition, given how quickly the values change – you’ll be eaten alive in brokerage fees. For the example above, even if one used a discount brokerage like Scottrade, the cost of each purchase would be a $7 flat fee – making a $1,000 investment cost a total of $1,700. It would take a crystal ball, extraordinary luck, or loads of self-serving information delivered to a mass audience in order to generate enough returns to cover that cost. When you see someone giving investment advice on Twitter, mentally ask which of those three categories you think they fall into.
Note: for entertainment purposes only. I’m not dispensing investment advice; the stocks named were solely for example purposes, not as endorsement. If you’re reading this and run a penny stock service I’m sure you’re the exception to the above, and love children, flowers, kittens and your advisees all equally and would never pull such a scam on them. I’m just writing about your competition. But I would awfully like to peak at your crystal ball sometime when you get a chance.
So-called "penny stocks" may range in cost from a few dollars to a fraction of a cent. For example, instead of buying one share of IBM at $164.68, it would be possible to instead purchase 4,450 shares of Double Eagle Gold Holdings (DEGH) at $.037 per share (amusingly, both stocks are currently near their respective peak historical values). DEGH had been running at an average price of about $.003 for most of the last year. If an investor had a crystal ball and could foresee this recent ten-fold run up in price, there would have been a lot of money to be made; therein lies the temptation of penny stocks.
Of course, anyone who actually had that crystal ball and put it to use in the market would be far too rich to bother with running a Twitter account. So why are there hundreds of penny stock tweeters out there? To explain, here is a theory of how ANYONE can appear blessed with penny stock clairvoyance.
The Five-Step Guide to Achieving Twitter-fame with Penny Stock Advice:
Step 1: Pick out 100 penny stocks at random, and buy $10 worth in each of them for a total cost of $1,000 plus brokerage fees (or, if you’re cheap, just consistently follow the prices of 100 penny stocks).
Step 2: Wait. As is normal for inexpensive and highly volatile stocks, the price of some will go up dramatically and others down equally dramatically.
Step 3: Ignore the stocks that go down. Out of the 100, by random chance you’re almost assured to see one go up every now and then. Get on Twitter and brag about how well your picks in the stocks that went up are going.
Step 4: Construct self-promotional statistics to describe how well an investor could have done if they had known exactly when these volatile stocks would move up and down, then tweet about anyone can generate “POTENTIAL 237% PROFITS!!!” based on your expert advice.
Step 5: Bask in fame and adulation. If you are lucky, people will buy a subscription to your newsletter. Or, if they follow your advice, it will drive up the price of penny stocks you own. Then sell off the penny stocks that went up due to your “wisdom” and leave your followers to eat the losses as the stock shifts back down.
I can’t verify that every penny stock tweeter uses this self-serving strategy. However, it’s the only way I can think of making money off penny stocks, so I’d guess that a large ratio of those Twitter accounts have something like this in mind.
In the time it took me to write the above, DEGH – which I noticed as a result of a penny stock tweet – has dropped 35%. IBM, on the other hand, changed 0.30% in that hour. In a nutshell, this is why investing in penny stocks is probably not a good idea: you get all the risk of stock market speculation without much stake in any real value (or else why is the stock so cheap?). Markets tend to be efficient and integrate available information into stock prices, so when a stock costs a fraction of a cent, it’s probably because many people rate its investment value somewhere near a lottery ticket.
 |
| The DEGH rollercoaster, courtesy of Google Finance. Notice the peak, then sudden drop at the end. |
To make matters even worse, even if you successfully buy low and sell high with penny stocks – a difficult proposition, given how quickly the values change – you’ll be eaten alive in brokerage fees. For the example above, even if one used a discount brokerage like Scottrade, the cost of each purchase would be a $7 flat fee – making a $1,000 investment cost a total of $1,700. It would take a crystal ball, extraordinary luck, or loads of self-serving information delivered to a mass audience in order to generate enough returns to cover that cost. When you see someone giving investment advice on Twitter, mentally ask which of those three categories you think they fall into.
Note: for entertainment purposes only. I’m not dispensing investment advice; the stocks named were solely for example purposes, not as endorsement. If you’re reading this and run a penny stock service I’m sure you’re the exception to the above, and love children, flowers, kittens and your advisees all equally and would never pull such a scam on them. I’m just writing about your competition. But I would awfully like to peak at your crystal ball sometime when you get a chance.
Monday, December 6, 2010
The printing presses have broken down; how will we inflate the currency now?
This just in. A recent printing run, in hundred dollar bills, has substantial defects that make many of the notes unusable. How big of a printing run? Just $110 billion worth. From CNBC:
Apparently, during this print run of 1.1 billion, no one checked at the beginning/middle for quality control. A private firm that operated like this would be out of business. With almost a third of the prints unusable, I can't imagine many repeat customers... other than the federal government.
Kidding aside, this poses some tangible problems for the Federal Reserve, whose strategy has depended on getting currency flowing in the economy. With at least a year's delay before this money will actually be reaching consumers' hands, it complicates monetary policy. Facing an already Herculean task of managing market perceptions and signals, having this additional lag between action and effect could make the results of Fed decisions even more difficult to anticipate.
At the time, officials announced the new bills would incorporate sophisticated high-tech security features, including a 3-D security strip and a color-shifting image of a bell designed to foil counterfeiters.The total cost of producing the bad bills was $120 million, excluding whatever it will take to sort the good from the bad. The unusable bills will have to be burned; frankly, it might be cheaper to just burn the entire print run, compared with sorting over 1.1 billion items of currency.
But the production process is so complex, it has instead foiled the government printers tasked with producing billions of the new notes.
An official familiar with the situation told CNBC that 1.1 billion of the new bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face.
A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.
The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in "cash packs" of four bundles of 4,000 each, with each pack containing 16,000 bills.
Officials don’t know exactly what caused the problem. "There is something drastically wrong here," a person familiar with the situation said. "The frustration level is off the charts."
Because officials don’t know how many of the 1.1 billion bills include the flaw, they have to hold them in the massive vaults until they are able to develop a mechanized system that can sort out the usable bills from the defects.
Sorting such a huge quantity of bills by hand, the officials estimate, could take between 20 and 30 years. Using a mechanized system, they think they could sort the massive pile of bills, each of which features the familiar image of Benjamin Franklin on the face, in about one year. [Emphasis added.]
Apparently, during this print run of 1.1 billion, no one checked at the beginning/middle for quality control. A private firm that operated like this would be out of business. With almost a third of the prints unusable, I can't imagine many repeat customers... other than the federal government.
Kidding aside, this poses some tangible problems for the Federal Reserve, whose strategy has depended on getting currency flowing in the economy. With at least a year's delay before this money will actually be reaching consumers' hands, it complicates monetary policy. Facing an already Herculean task of managing market perceptions and signals, having this additional lag between action and effect could make the results of Fed decisions even more difficult to anticipate.
Subscribe to:
Posts (Atom)