Mar 31, 2009
Mar 26, 2009
In another experiment, a white rat in a maze repeatedly beat groups of Yale undergraduates in understanding the optimal way to get food dropped in the maze. The students overanalyzed and saw patterns that didn’t exist, so they were beaten by the rodent.
Thanks to Cedric Tille for forwarding this article.
Mar 25, 2009
Foreign aid is given by the US government to poor countries' government to help them cope with hard economic conditions. Bailouts are given by the US government to "too big to fail" companies' managment to help them cope with hard economic conditions. Foreign aid ends up in the pockets of elite corrupt politicians. Bailouts end up as bonuses for corrupt top managment buddies. Foreign aid creates moral hazard and keeps poor countries poor. Bailouts create moral hazard and will ruin the economy.
Top management are funny people. They really feel they are entitled to their bonuses. This letter by one vice president at AIG says "As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house." But do plumbers receive bonuses from the insurance money to rebuild the house?
Mar 24, 2009
He writes "Chinese investors also have a major advantage over their Western counterparts in that they know how to make money in a developing–country business environment where the rule of law is optional, corruption and bribery are the norm, and infrastructure is patchy. Their experiences at home give them a big leg up on the competition."
But then that woudl mean that country-level rule of law affect individuals' buisness skills? Sounds like a testable hypothesis to me!
Mar 18, 2009
A recent IMF working paper provide some casuality between the two events. The authors show that, after September 2008, Investment Banks like Morgan Stanley, Merryl Linch, Goldman Sachs, have seen a sharp drop in the amount of collateral received that can be pledged in their prime brokerage activities. These Investment Banks in facts, act as a prime dealer for the Hedge Funds, in that they are able to provide securities or cash the hedge funds need to borrow to finance their investments. The Banks lend to Hedge Funds and get in exchange some collateral ,which they can more or less re-use (rehypothecation in jargon) to finance their own activities without limits. Feeling pressure from investors, after Lehman's collapse, Hedge Funds have seemingly reduced their collateral exposure to Investment Banks (putting these assets in segregated accounts so that they cannot be rehypotecated) , and Investment Banks are finding it harder to raise liquidity on the market because of the shortage of high quality collateral (and also probably because of higher costs of financing as a consequence of higher counterparty risk). This means, lack of high quality collateral, higher counterparty risk, overall liquidity is drying up and we are in the midst of a credit crunch.
Thus, the policy response of providing liquidity, surely alleviated the symptoms, but did not solve the whole problem. Making the less liquid assets again tradable, as the Brady Bonds were meant to be, would have surely reduced better this disordered delevaraging and avoided the current credit crunch.
Mar 17, 2009
Anyway, I love my ipod and I think I bought it at the right place, i.e. Québec. It cost me $399.99 (Canadian) plus a 5% federal VAT and a 7.5% provincial VAT for a total of $451. That is CHF420 at today’s exchange rate. Compared to the CHF575 I would have needed to buy it at Manor that is definitely a good deal. Too bad I am not able to get a tax refund like it used to be possible here…But I am also traveling to New York, so I had to compare the prices there too…It costs $399.99 (US) plus an 8.375% State sales tax. That is a total of $433 or CHF513, way more than what I paid!
Why is the Ipod cheaper here? The answer is sticky prices. When Apple set their prices, the Canadian and American dollar were worth the same thing (hence the same price of 399$ in both currencies), now you can buy $1.27 CAN with $1 US! So I’m quite happy about my decision to buy it here, not only did I save money but I gave more to my government and less to Apple and none to the US government! What a deal! Post-purchase anxiety has been rubbed off!
Mar 13, 2009
Mar 10, 2009
in my undergraduate degree in Australia, one of my (more irreverent) Professors told me that the economics profession is full of failed mathematicians who couldn't make the grade in their own world.
This piece of wisdom came to mind when I read this article from the IHT, about the rise of the so - called 'quants' - former physicists who were attracted to the mathematical elegance of quantitative finance - on Wall Street. Apparently, this surge of physicists into finance is quite well established, dating as far back as the 1970s. Incredibly, recent turmoil on the markets has only increased the demand for their expertise!!
Whilst most of these guys are interested in making big bucks by analysing the stockmarket or churning out complicated risk management models (gee, they did real well recently, didn't they....), there are admittedly some super interesting areas of research being pursued, such as using artificial intelligence to better understand the behaviour of humans in markets (a comprehensive listing of the research areas can be found here, where physicists post their recent papers).
One central criticism of the migration of physicists into the finance world (one acknowledged by quants themselves) is that this introduction of highly complex mathematical models has only served to lend quasi scientific legitimacy to some of the dodgier practices undertaken in relation to complex financial instruments (as seen in recent times in relation to the current crop of fraudsters). Whilst these models are developed with the sole purpose of making (lots of) money, can it really be that science is about generating cash (hang on, I thought that science was about the advancement of the state of human knowledge, or is that too naive a perspective.....)?
So is it a good thing that we have all these crazy complex mathematical models in the world of finance? Or, as Warren Buffet said, should we instead 'beware of geeks bearing formulas'?
Mar 9, 2009
to paraphrase Monty Python, it's now time for something completely different......
..........I was reading the international press tonight and saw this article about a Swiss guy living in the Australian capital of Canberra who, when a Kangaroo jumped through his bedroom window at 2am in the morning and then attacked his family, put the animal in a choke hold, wrestled it to the ground and threw it outside!!
Here's the news report:
Although you often hear about Australians wrestling crocodiles and fighting Great White Sharks, this is definitely the first time I've heard of anyone wrestling a Kangaroo........this Swiss guy was super brave in doing what he did -Kangaroos can be extremely dangerous, just check out the video below......
another day, yet another grim forecast for the world economy as we move through the financial crisis. With all the emerging bad news, it would be super easy to get depressed about life.
So in case you are feeling down, you should take a leaf from the Austrian's book, and party like there is no tomorrow. Even in the midst of economic doom and gloom, the Viennese Bankers Club circa 1913 threw the 'Bankruptcy Ball' - partying all night, even whilst the Habsburg empire was bleeding red ink and plunging into financial oblivion at lightspeed.
Hopefully this Austrian idea - of partying away the economic blues - will lead to more positive outcomes than the evils that other Austrian economic ideas (eg. those of von Hayek) have led to!!
Mar 8, 2009
so I just read this super interesting article from Amartya Sen concerning the future of capitalism beyond the financial crisis, in the New York Review of Books.
Sen's take is essentially that calls for a 'new breed of capitalism' as a result of the crisis are misplaced. He does however advocate that in order to present solutions to problems at hand, we need to have another look at some older economic ideas - not only the work of Keynes which is in vogue now, but also those of Pigou (concerning psychology and economic activity), and of course the doyen of economists, Adam Smith himself (who was perhaps the first to highlight the pivotal role of trust in economic transactions).
A must read for those interested in the bigger picture to emerge from the current crisis!!
Interesting fact from the FT, men in the UK are losing jobs at twice the rate as women. While the article discusses a lot how to interprete these results in light of the statement that "women are hurt more by the recession", it does not provide any information on sectoral composition of these jobs losses. As reported here for the EU, and I suspect that the same is valid for the UK, men have a higher representation in sectors like construction and transportation, which are very likely to be affected way more by the crisis. As a side note to the article, it's also reported that moms are increasing their participation rate in face of the recession, to support familiy income.
So, whether you believe in this celebration or not, dear Rigotnomics (females) readera, I still find it useful to wish you happy IWD!!!
Mar 7, 2009
Economic theory would predict that, humans being rational, any proposed splitting up should be accepted as anyone is better off with 1$ than nothing. But second players, knowing that they are being ripped off by an unfair division of money, always reject it, even though this implies less money in their pocket (0$ instead of 1$).
So what does this tell us about economics? Well, an IUED person would tell you that this means economics is all crap and all the models may now be thrashed or…as an economist could tell you, refusing a deal here may be explained by bio-evolutionary game theory. Humans know that they cannot accept shitty deals if they want to survive in this world. This would send a vulnerability signal and increase chances of further abuse, hence diminishing your inter-temporal cash inflow.
But the game is played only once in the experiment so this cannot be the explanation…Well, this may be an instinctive reaction (subconscious rationality) that has nothing to do with the experimental setting.
But I guess this reveals something way more important. An unequal distribution of wealth makes those at the bottom pissed off.
Mar 4, 2009
We were surprised we had not found that study yet, and yesterday, I found that some guys from Lausanne just did that. John Antonakis and Olaf Dalgas asked some swiss undergrads to choose among two candidates for french parliamentary election they did not know about on the basis of their look. In 70% of the cases, the chosen candidate was the actual one who had won the real election. Interestingly, when they asked children between 5 and 13 years old, the same question as a game (who should be the captain of the boat sailing from Troy to Ithaca), they got the same result. The conclusions seem to be that electoral decision maybe are "naive": not exactly driven by appearence, but maybe voters give too much weight to their "tastes". This is not surprising: as Bryan Caplan explains in his entertaining book, the belief that voters choose rationally their best candidate (and hence policies) on the basis of competence, it's simply a myth. But are these winning candidates better or also in terms of competence? There is some evidence on that but it seems that looking good does not correlate with competence...although anecdotal evidence may dismiss empirics...
The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.Krugman says the same thing and calls it “equilibrium decadence”. Here, Ugo summarises maverecon Buiter. He quotes "The manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. education". As Justin puts it, today’s macroeconomists write for other macroeconomists.
Can't believe that Blanchard, the IMF's chief economist, was saying the state of macro was good, juts before the crisis (in august 2008)... The link to his NBER working paper doesn't work anymore!!! I wonder why!
Despite this academic disaster, Justin is enthusiastic about economics in general, writing that his optimism comes from looking beyond macro. "As a whole, the economics profession has become more empirically grounded. New large datasets offer the prospect of truly understanding individual behavior in a way that paying lip service to “micro-founded models” doesn’t. Many are engaged in the tricky business of writing more psychologically grounded models that are closely tied to real human behavior. Computational advances allow us now to take differences in people, and how they respond, far more seriously..." And concludes that "formally elegant but empirically irrelevant macroeconomists had a much harder time getting hired this year." I guess the profession will evolve through natural selection then...
In other news, here's a well documented summary of currently rising trade protection by one of us.
Mar 3, 2009
Now guess in what country this story takes place!