New Blog Section

I added another section to the blog, titled "Other Writings." It contains links to my (currently sparse) published works, as well as other papers I've written over the last two years that haven't been published yet. Comments welcome.

First Textbook in Social Media Marketing

Blatant self-promotion, but I can't resist.

(c) Cengage Learning 2013.

The book that I helped write is now in print. Find it here. Many thanks to my co-authors as well as the professionals at Cengage Learning for making this possible.

While intended to accompany a college- or graduate-level marketing course, I think this text does a pretty good job of encapsulating the advice that can be found in other prominent trade books, in addition to presenting some original and innovative material (I'm especially proud of Chapter 3). As far as I know, it's the most thorough treatment of social media marketing that can be found in one place. A boon to students and aspiring professionals alike. A magnum opus indeed.

Hyperbole aside, I'm very pleased with how the book turned out. I hope that some other people are able to derive utility from it as well.

Liberal Arts Degrees as Social Signaling

The model of education as signaling for the labor marketing has been thoroughly developed by Bryan Caplan; for some examples, see here, here, and here. I think the argument is pretty convincing, but it leaves a few details unexplained. Namely, some majors - especially liberal arts - are not even very good as signals!

The highest unemployment rates for college graduates are found among architecture, art, and humanities majors. Especially given the relatively low salaries for jobs in these "industries" why go into serious debt to get a degree, when the signal is likely to be weak or even totally ineffective? While the number of liberal arts colleges has been declining over the last 20 years and business is the most popular major for under-graduates (chosen by 20% of students) the liberal arts curriculum is far from disappearing.

It could be that these students are maximizing with regard to something other than wealth, such as social status. This may accrue to either the college student or that student's parents, who get to brag about how their son/daughter will be a progressive hero and "save the world one day." Parents have incomplete control over what major their child picks, but at least some power to encourage or discourage certain fields of study.

Thinking of education as a status symbol helps to explain variation in choice of majors across countries. In the United States, the poor and middle-class can get luxury items like fancy cars, jewelry, nice TVs, smartphones etc. by using credit (Robert Kiyosaki's "Rich Dad Poor Dad" observes that this is a big reason why they do not ascend to the capitalist upper-class). Seeing someone with nice jewelry or the latest tech is no longer a good indicator of high status in America; in fact, it is often a signal of the opposite! A liberal arts degree then becomes a new status symbol, a way of displaying "yes I can spend four years doing nothing productive, and rack up debts while doing it, because money isn't important to me."

In China, by comparison, most of the affluent or middle-class people have attained that status within the last one or two generations. The rich in China display their wealth through luxury items, but parents still often discourage or frown upon liberal arts degrees (or so I'm told by someone with personal experience). Based on the social signaling theory sketched out above, one would expect that as the middle-class in China grows and expensive items are no longer limited to the nouveau riche, more will go get liberal arts degrees, instead of the focus on STEM (science, technology, engineering, and math) which is the stereotypical image of Chinese students currently.

If this model is accurate, it just further reinforces Dr. Caplan's point that we should not be subsidizing higher education as much as we are now.

Statistical Fallacy #176: Ignoring Selection Effects

I stumbled on a post at a credit-related blog. It starts off with the bombastic first line

"The average consumer is saddled with $29,985 in student loan debt..."

 Wow! That's a lot of debt! It's true that the U.S. population has a giant amount of student loan debt -- even more so than the amount of credit card debt. Last year, I wrote about the subject. But, the figure above is pretty high. That statistic is drawn from "262,887 CreditKarma.com user scores." Sounds pretty robust. But, some simple math reveals there's more to the story.

Facts:

• Total student loan debt in the U.S. is about $1 trillion (~$1,000,000,000,000).
• The U.S. population is 308,745,538. Of that, 24% are under 18, leaving 234,646,609 adult consumers.

Do some division, and you'll find that the average adult consumer has $4261.73 in credit card debt. That's about $25,000 less than the Credit Karma estimate!

What went wrong? My guess: selection effects. Members of a site specializing in credit advice are not a random sample of the population. People who join are probably concerned about their credit... and people who are concerned about their credit probably have a lot of debt.

Nothing personal against the writers for that site, as it would be an easy mistake to make (and they were very nice, even in response to my snarky comment pointing this out). But still, they should have been more careful. A quick test, by multiplying their estimate of average debt by the number of consumers, finds that the U.S. has a total of $7,035,878,570,865 in student loans outstanding, about seven times the real figure. If it were true, that would be about 11% of the entire world GDP owed by American students!

The lesson: look out for non-random sampling due to self-selection, or your numbers will be nonsense.

How to judge campus safety?

A few days ago I was emailed a pdf document: the 2011 Annual Security Report for George Mason University. As mandated by the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (yeah I hadn't heard of it before either) it provides a breakdown of all criminal activity which occurred on campus, by year, and with special columns for "Hate Crimes." The picture I attached has the numbers for Fairfax. This is the most interesting part of the document to me because it contains some raw figures on different offenses committed in the campus I attend. Statistics for the other George Mason campuses (Arlington, Prince William, Loudoun, etc.) are also available but are a lot less edifying, because the columns have just a bunch of zeroes. Coincidentally, Fairfax also happens to be the only campus with attached undergraduate housing -- make of it what you will.

The most exciting table I've seen since breakfast.

This report is obviously intended to increase public awareness about crime rates on campus, allowing potential students and their parents to make an informed decision when comparing different universities. What I wonder is, how does someone look at this report and get any sense of the probability that they themselves will be victimized? This blog post is a rough attempt at answering that question.

Some useful figures to get started with:

• Roughly 30,000 students attend GMU, 7,000 of them on living on campus.
• From the BJS, around 35% of property crimes and 45% of violent crimes are reported to the police.

Self-Educate on Economics – Seven Books to Read.

Selected based on three criteria: content (the book does a thorough and exhaustive review of the material) relevance (the book speaks to issues which matter in terms of current world events) and readability (writing style is accessible and engaging). With that said, here are seven good books for an economic self-education.

1. Exchange & Production: Competition, Coordination & Control. (1983) by Armen Alchian & William R. Allen.

Any student of economics has to start with solid principles textbook. While many different books could suffice, this Alchian & Allen book is readable, comprehensive, and avoids unnecessary complexity while providing excellent coverage. In spite of being several decades old and out-of-print, copies of this book are still available from various online retailers.

2. The Wealth and Poverty of Nations: Why Some are So Rich and Some So Poor (1999) by David S. Landes.

Landes’ book covers a broad spectrum of history, and has the benefit of being an easy read. The general thesis: richer countries tend to be those that embraced trade, private property rights, and intellectual inquiry (these three, historically, tend to occur together). Europe gained a developmental advantage because, by accident or historical circumstance, the conditions for innovation which made the Industrial Revolution possible happened to thrive there. Lest this seem overly Anglo-centric, Landes also does an interesting coverage of other civilizations, and attempts to explain what factors prevented them from making the same leap that occurred in Europe. This book situates the global context of wealth and poverty that exists today.

3. The Wisdom of Crowds (2005) by James Surowiecki.

A recently-published book that has already become a classic in some circles, The Wisdom of Crowds explains why decentralized knowledge informed by self-interest can result in highly accurate predictions. Contradicting the common opinion that experts are better at predicting outcomes than ordinary people, Surowiecki finds that not only are supposed “experts” much less accurate than they claim, but that guesses taken by ordinary people when aggregated are far closer than any single estimate. As this is the principle which guides most markets, it offers a compelling insight into why those systems work so well.

4. The Housing Boom and Bust (2009) by Thomas Sowell.

Probably the most important and relevant book on recent financial history there is to read. Unlike many other treatments of the financial crisis which focus the blame on one particular party, Sowell constructs a multi-faceted picture, including all the relevant policies, government decisions, and lobbying groups whose efforts unintentionally led to the recent financial crisis. He also debunks the common perception that “markets run amuck” caused economic downturn, and instead traces the series of government intervention which built the housing bubble and then led to its collapse. For anyone is convinced that more regulation can save the economy, this book will give reason to rethink that position.

5. Failure and Progress: The Bright Side of the Dismal Science (1993) by Dwight R. Lee and Richard B. McKenzie.

An interestingly prescient (but little known) book, this short publication by the CATO Institute explains why it’s best if the government stays out of the way when a business begins to fail. It exposes the inherent contradiction in political positions which desire the wealth which capitalist systems can attain, but also want to prevent the painful dislocations created by business failure or bankruptcy that occurs under a free market. Lee and McKenzie convincingly explain why wealth for all is impossible without failure for some enterprises; unprofitable businesses represent a misuse of society’s resources, so it is better they fail so those inputs can be put to better use by other firms. When government becomes involved in preventing failure it ends up creating further deprivation, by favoring producers with connections over those who can provide goods using the fewest resources. Political victories for inefficient producers are a loss for society.

6. The Mind of the Market: How Biology and Psychology Shape our Economic Lives (2008) by Michael Shermer.

This book does an excellent job of summarizing recent research in behavior psychology, neuroeconomics and similar fields, and explaining how they relate to behavior in a free market economy. While many studies show that humans have an altruistic, egalitarian and cooperative element to their interactions, this does not deny the role or importance of markets in shaping social behavior in positive ways. While a slightly more challenging read than some of the other books, The Mind of the Market provides a comprehensive look at how psychology and evolution have played a role in shaping economic interactions.

7. The Only Investment Guide You'll Ever Need (most recent edition in 2011) by Andrew Tobias.

The first edition of this book was written back in the 70s, and since then it’s sold millions of copies world-wide. The premise: if a deal sounds too good to be true, it probably is. Tobias happens to be both very smart about money and also a highly enjoyable read. I went through this book several times as pleasure-reading when I was too young to understand what money, investing, or economics even was and still found it very entertaining. To secure your future wealth and have a good time doing it, this is probably the best book you could purchase.

It might seem from these summaries that I’ve chosen a highly partisan, libertarian or even “conservative” set of books to represent economics. While I will not claim this is the definitive “best books” list, in my personal and limited experience, I found the ideas contained very useful in interpreting economic events. There are obviously some giants not represented (Friedman, Hayek, and so on) but most of the relevant ideas can be found above. The summaries are just my biased take, but I honestly believe that all of these books are written from an open (if not apolitical) perspective. Even if you disagree with the conclusions, the analysis contained is worth thinking about for anyone.

The point: If someone wanted a crash-course on economic thought with a minimum of fluff, jargon, or general verbosity then the above list would be the direction I’d point them. If you think I left off something important or just disagree with all the above then let me know in the comments.

Attention Undergrads -- you're still paying for all those classes you skipped.

Graph made by Mark Kantrowitz of FinAid.org

We've reached a momentous, but little celebrated moment in financial history. Credit card debt has been surpassed by student loans (including both federal and private). Let's give a big 800 billion cheers for education!

You can see this trend in the graph to the left. Notice how in 2008, credit card debt peaked and has now declined, while student loan debt has gone up at a steadily increasing rate. The modern family unit (mom, dad, and the federal government) have been paying a larger and larger bill, and for those who can't afford it, the slack has been taken up by private lenders. Unlike credit card bills, which fluctuate with the larger economic climate, student loan debt just kept going up and up.

Education is always a good investment, right? With costs of tuition rising by 8% per year, one might expect students would soak up every valuable minute of classroom instruction. That hasn't been the case. While tuition rates have gone up steadily, student attendance has gone down. This trend has been especially strong in recent years. According to Blair Hedges, a biology teacher,