I'm changing blog titles.

New updates will now be found at Suspicious Heuristics. I think the name is a better fit (and much more fun to say!) All the old content will stay here to avoid confusion, but please join me at the new URL!

New legislation responding to old EU crisis

From BBC Business News on the status of Spain and a potential bail-out:

On Wednesday, the European Commission unveiled proposals designed to stop taxpayers' money being used to bail out failed banks.
The aim is to ensure losses are borne by bank shareholders and creditors and minimise costs for taxpayers.
However, new legislation is unlikely to come into force before 2014 at the earliest, too late to protect taxpayers from any further immediate bank failures.
"The proposal we have today may be only useful for the future but it does not solve the current problems we face," said Sharon Bowles, chair of the European Parliament's economic and finance committee.
There would be new requirements for countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees.

Brilliant. The European Commission will have new laws on the books to prevent a redux of the EU crisis occurring again in the future... if the EU even still exists in the future.

It seems European politicians are acting as if their policies could apply retroactively, but even if these sort of reforms could have stopped the current crisis, that's no guarantee that future crises will look anything like the current one.

There's also the chance that this new legislation - "an annual levy on banks that would be used to provide emergency loans or guarantees" - will just add to the moral hazard problem and make excessive risk-taking by banks even more likely.

Responding to the last crisis is of great temptation to politicians, who must be "doing something" in order to satisfy their constituents, but this foolhardy rush to action may do more damage than good. Post-Enron accounting reforms have been blamed for making the U.S. financial crisis worse, and Europe could be reading a parallel story five years from now if these proposals go through.

Will Xbox Gold be Set Free? Doubt It.

This post today on Gizmodo, It’s Time for Xbox Live Gold to Be Free by Brian Barrett:

Why would I go to the club that has a cover charge when there are three right next door—each almost exactly identical—that'll let me in for free? Xbox 360 might offer great streaming, but it's also got a hell of a moat.
Yes, your Xbox Live Gold membership includes online gaming. And Microsoft is totally within its rights to charge for that; it's an added value experience unique to its ecosystem...
But the calculus has changed. Microsoft is so focused on making the Xbox the beating heart of your home theater, it's even convinced Comcast to stream its on-demand offerings through it. You can watch ESPN live, 24 hours a day, without ever signing out of your Xbox Live account. And when SmartGlass arrives later this year, you're going to route every piece of content you own through your Xbox.
All of which is wonderful. It's a beautiful future, and one that's never going to happen if Microsoft keeps a velvet rope up around all those wonderful services. It's frustrating enough to pay once for things that used to be free. Xbox Live Gold makes you pay twice.
So let's try this, Microsoft: Forget subsidizing a cheaper Xbox with a more expensive Xbox Live plan. Go ahead and charge a monthly fee for online gaming. Do it in Xbox Live points or yuan or mustard green bushels for all I care. But leave the services your customers are already paying good money for—and that every other set-top box serves up for them free—out of it.

A noble sentiment but not likely to happen. Looking at Microsoft's annual shareholder report tells the story.

In 2010, out of $62.4 billion in revenue, Microsoft took in $6.2 billion from their Entertainment and Devices Division, which includes the Xbox and Xbox gold. That same year, it was estimated that Xbox Gold subscriptions pulled in over $1 billion for Microsoft, or 1.6% of their overall revenue.

Sounds small in comparison to the total, but that Xbox Gold revenue matters a lot: operating and R&D costs to keep it running are relatively low compared to Microsoft's other divisions, I would guess. Also, revenue in the Entertainment and Devices Division grew by 40% between 2010 and 2011, much faster than any of Microsoft's other four divisions.

Don't expect Microsoft to kill the goose now that it's started laying golden eggs. Roku can try to compete with its cheaper offerings, but the Xbox still has a relatively slicker interface and better multimedia integration, so I don't think Microsoft is under much pressure.

Microsoft is also starting to offer Gold subscriptions at retail outlets rather than just online. All signs suggest that Xbox Gold is almost certain to stay a paid service.

Intrade and hedging your bets in life

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).

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:

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.
...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?

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.

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.

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.

Source: US Department of Labor, Bureau of Labor Statistics, Current Population Survey, and Census of Fatal Occupational Injuries, 2012.

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 Conservative/Libertarian Echo Chamber on Twitter

Lately I've noticed many many free market think tanks showing up on my "Suggested People to Follow" list on Twitter. I'm not sure if this is because the Twitter suggestion algorithm has improved to better reflect my interests, or these organizations have been beefing up their efforts in preparation for the electoral cycle, or some of both.

I was curious how many of these free market think tanks are following each other. So I used some social network analysis tools to plot out what those follower relationships look like. I was hoping to see a diverse cast of players, connected perhaps by region or common interests. What I got instead was a hairball.

Zoos and Endangered Species -- trade-offs in everything

Take a look at this article by Leslie Kaufman for the New York Times, "Zoos’ Bitter Choice: To Save Some Species, Letting Others Die." An excerpt:

As the number of species at risk of extinction soars, zoos are increasingly being called upon to rescue and sustain animals, and not just for marquee breeds like pandas and rhinos but also for all manner of mammals, frogs, birds and insects whose populations are suddenly crashing.
To conserve animals effectively, however, zoo officials have concluded that they must winnow species in their care and devote more resources to a chosen few. The result is that zookeepers, usually animal lovers to the core, are increasingly being pressed into making cold calculations about which animals are the most crucial to save. Some days, the burden feels less like Noah building an ark and more like Schindler making a list.

A core dilemma is whether zoos should be more focused on entertainment, which people are more willing to pay for, or on preserving biological diversity for the "public good."

In some cases, it seems like advocates in the latter camp are more concerned with shaping public preferences than responding to them. The article continues:

Zoos are essentially given a menu of endangered species that the association is trying to maintain and can then choose according to their particular needs. But final decisions are often as much about heart as logic.
St. Louis, for example, has committed $20 million — or the equivalent of 40 percent of its annual operating budget — to building an enormous exhibit for polar bears — complete with a fake ice floe — even though its last polar bear died in 2009 and the Marine Mammal Protection Act makes it illegal to remove or rescue the bears from the wild. The zoo hopes that in the five years needed to open the exhibit, it can argue for an exemption, import orphaned bears from Canada or perhaps secure the cubs of captive bears.
Dr. Bonner acknowledges that the polar bear project runs counter to many of his more practical convictions on the role of the modern zoo. He has insisted that his keepers spend what limited field conservation dollars they raise on threatened animals that are most likely to make a comeback in the wild. With sea ice disappearing at an alarming rate, polar bears do not fit the profile.
But he justifies the exemption as a lesson for zoo visitors: “I want people to see this beautiful creature and ask, ‘How could we have let this happen?’ ”

Personally, if I went to a public zoo and saw nearly half of its operating budget spent on an object lesson in how difficult it is to preserve polar bears, collective guilt over habitat loss would not be the first thought to cross my mind.

There is a valid argument to be made for preserving biological diversity. Fear of a catastrophic breakdown, expressed through a variety of vivid analogies, is one of the more popular arguments, although perhaps one of the less valid. This "invisible threshold" argument has become a rationale for preserving species within even the most marginal ecological niches.

Several large buckets of dirt are now home to the threatened American burying beetle, so named because it buries the corpses of small animals, like birds and squirrels, and lays its eggs around them. Once, the beetles, with their brilliant red markings, ranged over 35 states. By the time the United States Fish and Wildlife Service listed them as endangered in 1989, there was one known population left, in Rhode Island.
At the government’s behest, the St. Louis Zoo, in conjunction with a zoo in Rhode Island, has been successfully breeding them and returning them to the wild.
Mr. Merz says the effort was worthwhile because the beetle might play an irreplaceable role in the ecological web. He considers picking species worth saving akin to life-or-death gambling. “It is like looking out the window of an airplane and seeing the rivets in the wing,” he said. “You can probably lose a few, but you don’t know how many, and you really don’t want to find out.”

One has to wonder, if burying beetles and partula snails are so crucial to the ecosystem, why are they only surviving in the back closet of a zoo? The burying beetle has functionally vanished from the North American ecosystem for over twenty years. Why haven't we seen any consequences yet?

Of course maybe this is just one more "rivet in the airplane's wing", the loss of which pushes us imperceptibly closer to global disaster. But, when you have to compare the costs of saving potentially millions of different endangered species, it helps to have an idea of the probabilities, rather than saying they are all equally unknown and potentially deadly.

What is the chance that any one particular species is completely irreplaceable? It is incumbent on the defenders of biodiversity to make these estimations, instead of demanding that every species must be saved, regardless of the cost. Even zoo-keepers can't live up to such an unattainable goal.

Twitter List Networks, Part 2: Spammers

As a point of comparison with my last post, here's another network of Twitter lists.

Instead of using my main account, this was built from a separate "follow-back" account I check on occasionally, which posts no genuine content whatsoever. All the accounts listing it are themselves follow-back bots or promotional accounts (lots of rappers and penny stock experts represented).

The "follow back" hairball.

I'm going to guess this is what happens when there are lots of accounts using some auto-listing utility. When compared to a network structure based on actual common interests instead of strategic Twitter-usage, the difference is striking.

Are Twitter Lists another social network?

Twitter has a "List" feature, which allows users to organize their followers, or view tweets from only a select group. Until recently, the number of lists following each Twitter account was visible on that person's homepage, but that changed in the most recent overhaul of the Twitter interface.

Lists are now much less visible in the average Twitter user's experience. This leads me to wonder, do Twitter lists follow the pattern of other social networks? Did the change even make any difference? With NetworkX and some fiddling around on the Twitter API, I was able to answer that question.

Diablo III and the Newsvendor Model

How does a long-awaited sequel, which became the fastest selling PC game of all time, still end up with a 2-star rating on Amazon? Probably because so many people were excited to play it and then couldn't, due to Blizzard's "always online" anti-piracy strategy combined with shaky server support.

Diablo III has made tons of money, but still turned into a PR nightmare for its parent company. From an economic perspective, however, these two things are not necessarily in opposition.

The newsvendor (or 'newsboy') problem, popular in the operations management literature, gives some insight into this apparent contradiction. It models a retailer who doesn't know exactly how much demand there will be for his/her product in the next period, and has to decide on inventory levels now. The vendor knows quantity demanded will be pulled from some statistical distribution, and wants to maximize expected profits.

This situation isn't too different from a video game company trying to decide how much to invest in server capacity. Blizzard doesn't know exactly how many people will buy the game on its release date, although they probably have some estimate (based on pre-purchases or past sales totals for their games, for example). They ideally want to have just enough server capacity to let everyone play, and no more. Given uncertainty, however, that goal is hard to accomplish.

The newsvendor model would advise a firm to purchase the average quantity demanded, assuming the costs of over- and under-purchase are exactly equal. For Diablo III, costs aren't exactly equal: once someone has bought, they won't be able to return the game if servers are overloaded -- at worst, maybe they tell friends not to buy it. But, if Blizzard over-purchases in server capacity, they're stuck with those costs.

In this case, over-purchase costs are higher than under-purchase costs, so it's rational for Blizzard to buy less than the average expected demand for their server capacity... Much to the chagrin of their loyal fans.

Consumers have a right to be annoyed, but these opening-day server issues shouldn't be much of a surprise. Counter-intuitively, if everyone could play without any interruptions at all, that outcome would probably be even more inefficient, at least from Blizzard's perspective.

Don't interact with strangers' children.

The way current law is set up, being a Good Samaritan and trying to rescue someone else's kid can only get you in trouble.

Browsing the Internet, I've found a few anecdotes which support this view. I don't have any verification that they're true, so you'll just have to take my (and their) word for it.

First story: a young woman is waiting at a street corner. She sees a mother, who is not paying attention, whose child wanders out into the street in front of an oncoming bus. The young woman jumps out and pulls the child back onto the sidewalk. Her reward? The mother yelling "how dare you touch my kid!!" and our would-be hero is treated as a villain, and forced to flee the scene.

Second story: a young man is on the beach. He observes a small male child falling off his surf board a long distance from land. The young man swims out and rescues the child from drowning. On returning to shore, he's greeted by an irate mother who calls the police and wants to press charges for child molestation. Luckily, witnesses confirm the man's story and the cops let him go.

Following this second anecdote a (self-proclaimed) lawyer comments, describing how this situation could have led directly to the young man being registered as a sex offender. By the time police would have questioned the child, his head would be full of misinformation from the angry mom, causing him to tell the police what they "want to hear", possibly putting the Samaritan behind bars or at least requiring a costly and life-disruptive legal defense.

Now, I'm not blaming either the moms in this situation (they are probably freaked out and will naturally accuse the first person they see who might be responsible for their child's endangerment) or the harsh treatment of sex offenders (children should obviously be protected from predators). But it's worth noting the incentive effects that these sort of stories have on potential Good Samaritans.

My personal stance is to never interact with a stranger's child no matter what the circumstances are. I won't engage in conversation, nod, smile, or hold a door open. I was about to say that the most proactive thing I'd do if I saw a child in danger would be to record the incident on video to give to YouTube the authorities later, but even taking pictures of kids can get a guy in trouble... So I probably wouldn't even do that.

Being a Good Samaritan is really a lose-lose proposition. If I succeeded in saving the child, best-case scenario I get a pat on the back, worst-case is a sex-crimes trial that will haunt me for the rest of my life. If I fail to save the child (it still falls under the bus) then maybe I get accused of murder or assault because the angry parent saw me "push" the kid instead of trying to rescue it!

There is absolutely no upside to helping or interacting with a stranger's kid. Perversely, this fact makes being a Good Samaritan far worse: because rational people know it's a bad idea to help a kid, the people who do try to help are even more likely to be creeps or labeled as such (the selection effect).

In its efforts to prevent strangers from harming vulnerable children, society has also unintentionally deterred strangers from assisting vulnerable children. It's hard to say which impact is more important, but given the relative magnitudes (there are lots more healthy, well-intentioned people out there than sex offenders) it's very possible the overall effect has been negative for child safety.