Friday, May 17, 2019

"Consumer testimonials are not reliable scientific evidence"--FTC

...In the initial immersion week of classes, a Luke Froeb-led lecture and discussion touched on a project at work and changed his decision making process. When he returned to the office, he changed course on how he was putting a bid proposal together. The revised bid added $400,000 to the bottom line, far more than the investment Vulcan was making in his Executive MBA degree. ... After just one class, Vulcan’s MBA investment was in the black,” he recalls with a chuckle.  (link)

Consumer testimonials that mention a number are one of the most effective forms of advertising for two reasons:
  1. People read the testimonial and think that they can do better than whoever gave the testimonial, a form of "availability bias";
  2. People do not understand that testimonials are drawn from a selected sample.  

These ads are so powerful and effective that the FTC requires a disclaimer to accompany them.  So here it is:
 “... testimonials are based on the experiences of a few people and you are not likely to have similar results."

I hope this disclaimer can undo the misperceptions may have been given to potential consumers of a Vanderbilt education.

Greedy capitalists save lives in Africa

Venture backed is saving lives in Africa by using Unmanned Aerial Vehicles (UAVs) to deliver blood to African hospitals that can’t stock all the necessary blood types. They have two bases which cover a 100 mile flight range and a drop zone the size of only two parking spots. The drones are pre-programmed, and fly 65 mph which results in 15-20 minute average delivery times.

Sunday, May 12, 2019

Lectures and books don't work; try this instead

Books and lectures are remarkably bad at conveying information.  Try this instead:
If pressed, many lecturers would offer a more plausible cognitive model: understanding actually comes after the lecture, when attendees solve problem sets, write essays, etc. ... Listeners’ attention wanders after a few minutes, so wouldn’t we want to interleave the problem-solving sessions with the lecture?... to understand something, you must actively engage with it.

Thursday, May 9, 2019

Wednesday, May 8, 2019

Concentration Increasing?

There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.

But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing). 
Perhaps the antitrust bureaucrats can go back to their naps.

Hat tip: The Grumpy Economist

Addicts respond to incentives

Great post from

I always get excited when people surprise me by acting against their self interest.  In this case, when Purdue Pharma replaced their OxyContin drug with a new, anti-abuse version that was more difficult to turn into an injectable, demand fell precipitously.

The addicts whose demand fell were aided and abetted by about 40% of physicians, who switched patients to more easily abused opiates.

BRAVO to Purdue Pharma!

Self promotion

Economics Blogs 2019

Why don't insurers try to mitigate risk?

Allison Shrager's terrific book, An Economist Walks into a Brothel, contains all sorts of innovative risk mitigation strategies pursued by people in all walks of life (see earlier blog post, How are Jet Skis like Financial Derivatives).  So why don't insurance companies spend more time figuring out how to mitigate risk?

The answer is simple:  Risk mitigation is not a source of "sustainable competitive advantage:"
Argument #4: mitigation is easy to copy. Underwriting risk selection is much less tangible and secrets can be a protected source of advantage. People can reverse engineer a dongle but not underwriting strategy. Once copied mitigation provides a one-off benefit to the market, changing the rate level but not the profit level (bit of a negative inventive because lower claims means lower premium and so less float!).

 Instead, insurers spend most of their time classifying risks (classification strategies are proprietary) which offers the benefits of diversification:

Argument #3: Improved classification allows for stratification and so diversification. Insurers are diversifiers. If you can segregate genuinely distinct classes of risk, portfolio volatility will drop.

Friday, May 3, 2019

Marketing in China is different [updated]

Article documenting US/Chinese differences in marketing:
  • China merchants have access to consumers over many different media:
  • ... most notably, Baidu, Alibaba, and Tencent, which together are known by the acronym BAT. To put this in a Western context, imagine if Amazon, Bank of America, Google, Facebook, Activision Blizzard, CNN, and ESPN were all owned by one company. That’s essentially how the big conglomerates work in China, with the BAT companies controlling most of the digital content across industries. 
    [This kind of consolidation allows for data collection that most westerners would find objectionable; but consolidation makes it possible for cross-platform programs to engage consumers seamlessly on a variety of media.]
  • Chinese companies have low discount rates
  • “Chinese companies have a growth mindset,” explained Hai Ye, a partner at McKinsey & Company. “Many of them can tolerate relatively low profitability in order to scale up quickly. This difference—driving market share versus bottom-line profit—gives the Chinese companies an advantage because they are willing to make big investments and take short-term losses to achieve long-term dominance.”

  • Speed-to-market is a huge priority:
  • Danielle Jin of Visa recalled how she approached her job when she worked as a marketer in the U.S. consumer packaged goods industry. “We would sit down with Walmart one to two years in advance and think about what seasonal promotion we would want to have,” she said. “We would have a thought-out calendar that centered primarily on price promotions—a system and process created over decades that was based on a somewhat rigid planning process.” By contrast, she explained, “a marketer with a Chinese mindset would talk about creating seamless content that cut across multiple platforms and was temporally relevant" [weeks, not years].

  • Bottom Line: Certainly US marketers could learn a lot from China.  But it is not clear that these techniques would work in the US, for at least three reasons
    1. Privacy concerns would prevent much of the data collection and sharing that is prevalent in China.  
    2. Antitrust Laws would likely prevent the kind of media consolidation that makes much of this possible 
    3. Older (mature) firms in the US where the struggle is to steal share rather than grow the market, mean that speed and growth may not be as important as profit [think Prisoners' Pricing Dilemma] 
  • Up until the last few years, the cost of capital/ loans was low.  Competitors that couldn’t beat you on quality and profit margins would go for scale and top line numbers. This results in everyone going opting for the top line. Contributing to this are state owned enterprises who are in every industry and tasked with top line growth, not profit margins.
  • China is also really new at marketing. Most of the big sales companies are distributors who have only sold existing, western brands so they don’t have experience building brands themselves. If you think about the biggest Chinese brands, they are known for their size, not their crafty branding. 
  • There is also a thing in China about “face.”  You can call it honor, prestige, or ego. Whatever it is, the biggest is seen as the strongest. I am working on launching a brand in China right now and I just had dinner two nights ago with my friend / distributor. We both agree that we would prefer to launch in tier 2 & 3 cities and get a bigger margin than fight it out in the more competitive tier 1 cities and lose money. As a Chinese guy once told my dad, “Sometimes we save face, but lose ass.”

What do jet skis have in common with financial derivatives?

They are both safety devices:  just as jet ski's make it possible for surfers to ride 80-foot waves in relative safety, so too can financial derivatives make it possible for investors to make big investments by offloading some of the downside risk.

This analogy was taken from An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk. The best part about the book are the interviews with people like prostitutes, big wave surfers and professional photographers who discuss ways they manage risk:
In An Economist Walks into a Brothel, Schrager equips readers with five principles for dealing with risk, principles used by some of the world's most interesting risk takers. For instance, she interviews a professional poker player about how to stay rational when the stakes are high, a paparazzo in Manhattan about how to spot different kinds of risk, horse breeders in Kentucky about how to diversify risk and minimize losses, and a war general who led troops in Iraq about how to prepare for what we don't see coming.

It starts off slowly, but stick with it.  Highly recommended, and not just for finance students.

Reason podcast discussing book

Saturday, April 27, 2019

Did Trump's tariffs increase domestic employment?

President Trump campaigned on one issue, jobs.  His 25-50% tariffs on imported Washing Machines seemed to have induced the two biggest importers to speed up the construction of US Washing Machine plants (in SC and TN):
South Korea’s washing machine exporters to the US, Samsung Electronics and LG Electronics, on Wednesday said they will start operations of their new plants in the US as early as possible to minimize the possible impact of a likely sanction on their products.

Samsung and LG on Wednesday expressed concerns about the US International Trade Commission’s recommendation to the Donald Trump administration to impose a 50 percent tariff rate on large residential washer imports that exceeded a quota of 1.2 million units for a duration of three years in addition to the current rates of duty.
So, while the tariffs harm consumers with higher prices (for both washers and dryers), they have also increased domestic demand for labor, at least in this one industry.

Monday, April 22, 2019

Newsflash: Washers and Dryers are Strong Complements

A new NBER paper by Aaron B. Flaaen, Ali Hortaçsu, Felix Tintelnot estimates the effects of the 2018 50% tariff on washing machines. As expected, they found that domestic producers increased washer prices by about 12%. Interestingly though:
the price of dryers—a complementary good not subject to tariffs—increased by an equivalent amount.

Dryers were not directly affected by the tariffs. Indirectly though, domestic white goods producers were also able to increase the price of dryers due to their complementarity in demand. Evidently, customers are not willing to break up a set even for a 12% lower price on dryers

Thursday, April 18, 2019

Amazon fulfillment center tours

Went on a tour of an older sixth generation (no robots) Amazon fulfillment center in Chattanooga.   The infrastructure necessary to support Fulfillment by Amazon and Prime (two-day shipping, or two-hour in select areas) is impressive.  Here is what you see:

1. Where products enter the warehouse 
At the inbound dock, products get taken off trailers by forklift or manually built into pallets. Freight is separated between that coming from another Amazon facility and directly from a vendor, such as a seller using Fulfillment by Amazon (FBA). With FBA, small businesses store their products at fulfillment centers, and Amazon picks, packs, ships, and provides customer service, helping these businesses reach more customers. Half the items sold on are from small businesses and entrepreneurs
2. The stow process 
Instead of storing items as a retail store would—electronics on one aisle, books on another—all of the inventory at Amazon fulfillment centers is stowed randomly. Yellow, tiered "pods" stack bins full of unrelated items, all of them tracked by computers. This counterintuitive method actually makes it easier for associates to quickly pick and pack a wide variety of products. 
Robots ferry these pods to associates at stow stations based on product size, navigating 2D barcodes on the floor and yielding way to one another depending on which has more pressing business. The stower looks for suitable space for each item and stows it into the pod, making it available for purchase on 
3. Picking orders 
Pickers are like personal shoppers, plucking from hundreds of items a day to fulfill customer orders. When the order comes in, a robot brings pods full of items to associates working at pick stations. The picker reads the screen, retrieves the correct item from the bin, and places it into a yellow plastic box called a tote. 
The robots are incredibly smart, but they aren't competing for jobs—they're creating them at Amazon fulfillment centers. Transporting thousands of pods per floor with millions of products stowed inside, the robots enable more inventory to pass through a fulfillment center, which means more associates are needed for handling that inventory. Since 2012, Amazon has added tens of thousands of robots to its fulfillment centers, while also adding more than 300,000 full-time jobs globally. 
4. Quality assurance 
Different teams along the way ensure the fulfillment process runs smoothly. The Inventory Control and Quality Assurance team makes sure an item's physical location actually matches what's in the computer, tracking millions of units of inventory. The robots need support too, so Amnesty Floor Monitors make sure the floors are clear and reset the units when needed. Many other checks along the way verify the right product goes to the right place. 
Touring an Amazon fulfillment center, you witness firsthand a process that is constantly being fine-tuned. While associates once needed to hand-scan a bin location after stowing each item, for example, machine learning now enables the system to know automatically the location where the associate has placed the item. It's impossible to predict today what technological innovation you might witness in six months. 
5. Packing orders 
First, items that belong to different shipments are organized and scanned for accuracy. Then they're sent to the pack station, where the computer system recommends box sizes to associates, and a machine measures out the exact amount of tape needed. Many items are shipped in their original boxes, and Amazon works with vendors to reduce packaging. At this stage, there's no shipping label—machines handle that down the line, protecting the customer's privacy and keeping the process efficient. 
6. Shipping orders out 
Packed envelopes and boxes then race underneath the SLAM (Scan, Label, Apply, Manifest) machines, which deposit shipping labels with astonishing speed and, contrary to the name, a light touch. For quality control, the package is weighed to make sure the contents match the order. A shipping sorter reads package labels to determine where and how fast customer orders should be sent, serving as a kind of traffic conductor. 
Ready to roll, the packages are nudged from the conveyor down slides into the correct trailer based on shipping method, speed of delivery, and location. Each door at the shipping dock accommodates trailers from a variety of different carriers and locations.

Tuesday, April 16, 2019

What doesn't kill you makes you stronger

New research on the benefits of early career setbacks, from evidence on scientists whose grant applications were rejected:

 On one hand, it significantly increases attrition, ... Yet, despite an early setback, individuals with near misses systematically outperformed those with near wins in the longer run, as their publications in the next ten years garnered substantially higher impact. 


Thursday, April 11, 2019

Don't Panic: A Guide to Claims of Increasing Concentration

Don't Panic: A Guide to Claims of Increasing Concentration 

Vanderbilt Owen Graduate School of Management Research Paper No. 3156912

 Gregory J. Werden U.S. Department of Justice - Antitrust Division

 Luke M. Froeb Vanderbilt University - Owen Graduate School of Management

 Abstract: The Obama Administration’s Council of Economic Advisers expressed concern that competition was threatened by increasing industry concentration. Academics, commentators, and journalists have joined the chorus. But none demonstrated increasing concentration of meaningful markets, as are used in antitrust to assess the impact of mergers and trade restraints. The claims of increasing concentration are based on data that are far too aggregated. Market concentration can remain the same or decline despite increasing concentration for broad aggregates. Mergers have not increased concentration in airline and banking markets. Moreover, where market concentration has increased, that does not demonstrate a failure of antitrust law or its enforcement; market concentration naturally increases when the most innovative and efficient firms grow.

 Keywords: concentration, competition, antitrust, mergers

Inferring causality with double machine learning

Interview of Preston McAfee, former DOJ colleague, about how economists are helping Microsoft.  I particularly liked the description of the "double machine learning" they use to estimate the causal effect of price on quantity demanded, (the "price elasticity of demand").

In general, it is very hard to identify causal effects from non-experimental data because correlation is not causality.  Unless you run an experiment by randomly varying price, you cannot identify causality. 

Preston solves this problem by "creating" an experiment:
What we do is first we build a model of ourselves, of how we set our prices. So our first model is going to not predict demand; it's just going to predict what decision-makers were doing in the past. It incorporates everything we know: prices of competing products, news stories, and lots of other data. That's the first ML [machine learning]. We're not predicting what demand or sales will look like, we're just modeling how we behaved in the past. Then we look at deviations between what happened in the market and what the model says we would have done. For instance, if it predicted we would charge $1,110, but we actually charged $1,000, that $110 difference is an experiment. Those instances are like controlled experiments, and we use them in the second process of machine learning to predict the actual demand. In practice, this has worked astoundingly well.

In other words, by predicting how price was normally set in the past, the Microsoft economists create a "control group" to which they compare current prices.  The difference is the "experiment" that they use to identify causality.

BOTTOM LINE:  study econometrics!

Wednesday, April 10, 2019

New Harmony and the results of socialism

Each year, I begin teaching capitalism to our executive MBA's at the conference center in historic New Harmony, site of a failed socialist experiment.  The irony is funny (other posts on the topic seem convincing), but it is important to remember our history, lest we repeat it.
The term “socialism” was coined by followers of Robert Owen (1771-1858), whom Karl Marx would label a “utopian socialist.” In 1825 Owen founded New Harmony, an Indiana commune, to demonstrate the superiority of what was first called the “social system.” The same year, Owen explained his experiment to a joint session of Congress attended by Supreme Court justices, President James Monroe and President-elect John Quincy Adams. Although Owen poured his fortune into it, New Harmony collapsed in disarray and recrimination within two years.

Owen’s son Robert Dale Owen salvaged the community by implementing what he called “a policy the very reverse” of socialism: “giving each respectable citizen every facility and encouragement to become (what every adult ought to be) a landed proprietor.”

Undeterred, others founded some 40 to 50 similar communes during the 19th century, and all collapsed quickly. New Harmony’s two years proved to be their median lifespan.

Most telling is that the one socialist experiment which succeeded was abandoned because its people realized, collectively, that they could be much better off on on their own.
Successful socialism has been created in only one place on earth, the kibbutzim of Israel. They were democratic and egalitarian; sharing possessions, meals, even child rearing. But once the Jewish state was securely on its feet, kibbutzniks chose to switch to private enterprise. Socialism, they learned to their surprise, was not a happy way to live.

Thursday, April 4, 2019

What is organizational culture? Netflix has its answer.
  1. encourage independent decision-making by employees
  2. share information openly, broadly, and deliberately
  3. are extraordinarily candid with each other
  4. keep only our highly effective people
  5. avoid rules

We can put this "culture" into the taxonomy of our textbook (decision rights, performance metrics, reward schemes):
  1. Decision rights are decentralized (employees have tremendous freedom)
    • There are virtually no spending controls or contract signing controls. Each employee is expected to seek advice and perspective as appropriate. “Use good judgment” is our core precept.
    • Our policy for travel, entertainment, gifts, and other expenses is 5 words long: “act in Netflix’s best interest.” We also avoid the compliance departments that most companies have to enforce their policies.
    • Our vacation policy is “take vacation.” We don’t have any rules or forms around how many weeks per year. Frankly, we intermix work and personal time quite a bit, doing email at odd hours, taking off weekday afternoons for kids’ games, etc. Our leaders make sure they set good examples by taking vacations, often coming back with fresh ideas, and encourage the rest of the team to do the same.
    • Our parental leave policy is: “take care of your baby and yourself.” New parents generally take 4-8 months.
    • Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.

  2. Subjective performance metrics designed to identify the highest performer
    • We focus on managers’ judgment through the “keeper test” for each of their people: if one of the members of the team was thinking of leaving for another firm, would the manager try hard to keep them from leaving? Those who do not pass the keeper test (i.e. their manager would not fight to keep them) are promptly and respectfully given a generous severance package so we can find someone for that position that makes us an even better dream team.

  3. Rewards are set at the highest industry level (which includes a "risk premium" to compensate employees for the risk of getting fired
    • To help us attract and retain stunning colleagues, we pay employees at the top of their personal market. We make a good-faith estimate of the highest compensation each employee could make at peer firms, and pay them that maximum. Typically, we calibrate to market once a year. We do not think of these as “raises” and there is no raise pool to divide up. The market for talent is what it is. We avoid the model of “2% raise for adequate, 4% raise for great”. Some employees’ market value will rapidly rise (due both to their performance and to a shortage of talent in their areas) while other employees may be flat year-to-year, despite doing great work. At all times, we aim to pay all of our people at the top of their personal market.

Tuesday, April 2, 2019

How does Walmart compete with Amazon? (II)

Earlier we blogged that Walmart was acquiring firms that would speed development of:
1. an "artificial intelligence system that could someday power an automated personal-shopping service;" and 
2. autonomous cargo vans for home grocery delivery.

Now we learn that Walmart announced the first fruits of their partnership with Google:

Beginning this month, customers can say, 'Hey Google, talk to Walmart' and the Google Assistant will add items directly to their Walmart Grocery cart. Best of all, customers can be extra confident that we can quickly and accurately identify the items they are asking for with the help of information from their prior purchases with us. The more you use it, the better we’ll get.

This seems like a good example of Hal Varian's thesis (Hal is chief economist at Google) that the Tech Giants are being drawn into competition with one another:

Consider today’s leading tech companies: Google, Amazon, Facebook, Microsoft and Apple. They are not stuck in silos or hemmed in by a single business model. Instead, they compete intensely among themselves. For consumers this boils down to tangible benefits: products and services are better, faster and cheaper than ever before. 
...Entering a new market in the online world is far easier than in the offline world, since the necessary assets — hardware, software, and motivated employees — are readily available. But if companies can switch to new products quickly, so can their customers. You do not even have to walk across the street to switch between Lyft and Uber, or Google and Bing. Competition is a click away, so competitive advantage can erode quickly.

In this case, Google's search expertise allows Walmart to better compete with Amazon's in online retail and distribution.

Blogging Disclosure:  the author has done consulting for some of the tech giants.

Price discrimination Saves Lives!

Great post from Marginal Revolution on how drug companies enforce price discrimination against richer countries:

[Patient IDs] will be used to put an identifying barcode on the bottles they receive with their name and other info. Not only can the code be used to guarantee only residents of the country get the drugs…the provisions require that patients then return a bottle to get a new bottle and allows them to get only one bottle of their prescription at a time, even though allowing them to get multiple bottles could “ease the burden on patients and health providers,”

Although groups like Médecins Sans Frontières are outraged by these restrictions, what they don't realize is that the alternative is one world price, and it would be a lot closer to the $85,000 US price than to the $1,000 price in Egypt and India.  In other words, Price Discrimination Saves Lives!

Saturday, March 30, 2019

Thursday, March 28, 2019

Moving assets to higher valued uses: airline flight attendants

United Flight Attendants are "renting out their seniority" by bidding for lucrative and fun international trips, and then selling the trip assignments for $200 to more junior flight attendants:
Flight attendants who bid for a trip and are assigned that trip have a property right in the trip. But they’re not supposed to use their seniority to gain desirable trips and then sell those trips, they’re supposed to fly the trips themselves and trade only when scheduling presents a problem. In other words they only get a partial property right and there’s not supposed to be a secondary market.

However, a secondary market may be efficient from the airline's point of view:

From a customer service standpoint I prefer more junior – less jaundiced – crew working the ‘best’ flights and indeed working long haul business class. Assigning customer service duties to an airline’s most profitable customers based primarily on being around the longest makes little sense for a business.

Monday, March 25, 2019

Mobile assets will move to more they are more highly valued

Looks like this is happening in the SF Bay Area:

Despite a booming economy, pleasant climate and natural treasures, nearly two-thirds of Bay Area residents say the quality of life here has gotten worse in the last five years, according to a new poll. 
They cite a litany of reasons: high housing prices, traffic jams, the cost of living and homelessness. It’s so bad that about 44 percent say they are likely to move out of the Bay Area in the next few years, with 6 percent saying they have definite plans to leave this year.

BOTTOM LINE:  In equilibrium, a mobile asset has to be indifferent about where it is used; otherwise, it will move

Friday, March 22, 2019

California's restrictive zoning is a big problem, but not the only one

driving up the price of housing to $570K (1 million in the Bay Area), twice the national average.

Insurers Scouring Social Media

I sure am glad my insurance company never knew about some of the stupid and dangerous stuff I did when I was younger. But for the lack of online social media at the time, they would have. Because that is exactly the kind of stuff people post to Facebook, Instagram, etc. And insurers are taking notice.
"We're going through a period now where most life insurers are exploring using all types of data, not just data they get directly from the customer proactively, but other external sources of data—social media being a big one," said Ari Libarikian, a senior partner at McKinsey & Co. in New York.

This sets up another case of efficiency versus privacy. States are now setting the rules on what information is permissible to use. New York state appears to be requiring that insurers prove that any social-media data used in underwriting is actuarially justified, logical for use and doesn't unfairly discriminate against certain customers. I have long claimed that the main reason people value privacy is so that they can engage in moral hazard and adverse selection.

How does Walmart compete with Amazon?

Walmart's sales are three times those of Amazon, but lacks many of Amazon's technological capabilities.  To catch up, it is investing (losing money) to acquire the data necessary to train an AI shopping system:
Walmart is using Jetblack’s army of human agents to train an artificial intelligence system that could someday power an automated personal-shopping service, preparing Walmart for a time when the search bar disappears and more shopping is done through voice-activated devices, said Jetblack CEO Jenny Fleiss.

In addition,
Walmart bought India’s biggest e-commerce site. It has been buying up small online retailers including men’s apparel company Bonobos and is testing autonomous cargo vans for home grocery delivery in places such as Surprise, Ariz.

Thursday, March 21, 2019

Engagement rings as compensation

Study of women and men about the size of engagement rings they would accept or buy for a potential mate:

  • The results indicate that men would get bigger, costlier rocks if they were to be paired with an attractive woman. 
  •  In their turn, women would want larger rings if their partners weren’t so good-looking. 
  • Interestingly, women who thought themselves physically attractive were more likely to expect and get more expensive rings, no matter what their partners’ looks.

The size of the engagement ring looks like compensation paid by the husband to a wife for the relatively unpleasant task of marriage.  See related post, Why Men Pay to Stay Married.  


Wednesday, March 20, 2019

How Video Games are Saving Venezuelans

The economy of Venezuela is in shambles. It is hard to find work and if you do, the hyperinflation makes your earnings worth next to nothing. Looking for work that will earn hard currency, some Venezuelans are turning to 'gold farming.' In many video games, 'gold farmers' undertake the repetitive tasks that earn them the in-game currency, usually gold, that they can then sell to other gamers for hard cash.

For Venezuelans, this has two huge advantages. First, you do not need to be hired. You simply need an internet connection. Second, you sell gold for more stable dollars or bitcoins and not Venezuelan Bolivars. The game of choice seems to be Runescape, because it is free-to-play and because it requires minimal bandwidth. There is so much Venezuelan gold farming that their recent power outages caused the price of one Runescape in-game item to plummet.
In October last year Amazon gave away a discounted Runescape signup and more than two-thirds of the registrants stemmed from Venezuela. 29-year-old Efrain Peña explained to Bloomberg in December 2017 that he played the game to support his wife and child. “We’ve never made this much before,” Peña described.

Tuesday, March 12, 2019

What happens when you reduce policing?

NY Times on the incentives facing police in Baltimore.  The article noted that targeted policing, a type of statistical discrimination, was found to be illegal by a Justice Department report:
The report concluded that the police ... frequently patted down or frisked people “without identifying necessary grounds to believe that the person is armed and dangerous.” 

A former police chief said that the resulting consent decree prohibiting such statistical discrimination has made it more difficult for police to deter crime:
The decree’s demands had made it too difficult for officers to clear drug corners, he said. He was hearing from his former colleagues that loiterers were already reciting the limits it imposed on the officers to them on patrol, mockingly. ...

“What do you think happens when these guys see the cops not getting out of their car?” Barksdale said. ... “Look at the number of bodies,” he said. “We’re losing horribly in Baltimore City.”


Thursday, March 7, 2019

What two questions should you ask on your first date?

I am reading the book Dataclysm, written by an economist who founded OK Cupid, a dating site.

The book offers lots of dating advice, like if you and your date answer these two questions the same way, you have a much better chance of ending up together:

  • Do you like scary movies? 
  • Have you ever traveled to another country alone?

The book also claims to have a very good predictor of whether you and your partner will last based on the importance each other to your networks of facebook friends (link here, but the web app does not appear to be working. If anyone finds a working link, please post it in the comments!):
...based on counting the number of times a person and her spouse functioned as the bridge between disjointed parts of their network as a couple

I prefer “assimilation” because I think that better captures the upshot: High assimilated people have a unique role as a couple within their mutual network. Highly assimilated couples function – the two people together – as the bond between otherwise unconnected cliques. They are the special glue in a given spread of dots, and furthermore, they’re a glue like epoxy: it takes both ingredients to make the thing hold together.

Another interesting tidbit came from the "Crazy Blind Dating App" (since defunct)
A couple of years ago, ...OKCupid removed all profiles photos from the website for a few hours. ...While the app itself lasted only a few months, it still managed to serve blind dates to about 10,000 people. How did they feel about those blind dates? They loved them! Users, both male and female, reported having a great time, regardless of the other person’s attractiveness. 

Similarly, the success of the blind dates did not depend on political persuasion, or any of the other features selected by users to screen potential dates.  It is almost as if the users don't know what they want, which is disturbing to economists who typically assume otherwise.

BOTTOM LINE:  OK, but not as good as Everybody Lies mostly because Dataclysm spends too much time telling readers how to think, rather than showing them what they found.  Like Everybody Lies, the book was disappointing in that it doesn't explore the hypothesis of statistical discrimination, e.g., like that uncovered by Airbnb and Uber.

Wednesday, March 6, 2019

Free Online Course: Econometrics

Do criminals respond to incentives?

In Oakland they do.
Operation Ceasefire is an expansive strategy that requires cooperation between law enforcement, prosecutors, human services, community groups, faith-based organizations and, crucially, people who are involved in violent crime. Law-enforcement investigators gather intelligence about groups of people who may be involved in violent crime or are at risk of committing a violent crime. Those people are called to a meeting, where they’re offered social services and support. 
If they don’t take the help and do commit a violent crime, they’re told that police are watching, and they’ll be swiftly arrested and prosecuted.

The result has been a 32% drop in shootings.


Monday, March 4, 2019

What makes CEO's different?

They know how to play cooperatively in games like the Prisoners' dilemma, where there is a tension between cooperation (I get a smaller slice of a bigger pie) and competition (I get a bigger slice of a smaller pie).

BOTTOM LINE:  CEO's "cooperate more, play less hawkish and thereby earn much more than the control group."

HT:  marginal revolution

Saturday, March 2, 2019

Did Warren Buffett finally read Chapter 9?

He is applying the "indifference principle" to criticize high tax states with unfunded pensions.  From Zero Hedge:

“If I were relocating into some state that had a huge unfunded pension liability, I’m walking into liabilities. . . And those are big numbers. Really big numbers. . . They will come after corporations. They will come after individuals. . . They’re going to have to raise a lot of money.”
BOTTOM LINE:  A mobile asset, like labor, will move to where it can earn the most.  Consequently, young, wealthy, and productive people will be drawn to states like Tennessee, Texas and Florida (which have low income taxes and relatively healthy pensions).  

Thursday, February 28, 2019

Successful economists do not need to self-symbolize typing their names in a larger font, bold, capitalized, italic, or underlined, on their resume's.  The hypothesis that
success is positively correlated with goal completion and should reduce the need to self-symbolize.

finds support in the data.

HT: Marginal revolution (link)

PS.  For those of your curious about whether I self-symbolize (practice conjugating this verb!), my resume is here.

Wednesday, February 20, 2019

Venezuelan incentives

The collapse of Venezuela illustrates the power of incentives, albeit in a negative way.  When the daughter of the former president is one of the richest people in the country, it is a sign that the wrong activities are rewarded. From Tyler Cowen:

By boosting government spending so quickly, the Venezuelan government was sending a message that the key to future riches is courting government favor, not starting new businesses.

Particularly by nationalizing its major export industry, the Venezuelan experiment illustrates the attenuated incentives inherent in socialism:

[Exports]... bring in foreign exchange, provide contacts to foreign markets, and force parts of the economy to learn how to compete with the very best foreign companies. Yet over 90 percent of Venezuela’s exports are oil, and those resources are owned and controlled by the government. For this all-important growth driver, Venezuela comes pretty close to full socialism — to its detriment.

Monday, February 18, 2019

Charlie Munger on why rich people are valuable to a city

From Market Watch:  After Amazon decided to nix its planned HQ2 in New York, with its promise of high paying jobs, Charlie Munger (Warren Buffet's partner) commented on the loss:
“They’re old. They keep your hospitals busy. They don’t burden your schools, the police department, your prisons. They give a lot. Who wouldn’t want rich people?" 
The nonagenarian’s comments come as IncAMZN, -0.91% announced on Thursday that it was canceling plans to build its New York City headquarters in Long Island City, and wouldn’t be seeking a replacement venue.

Sunday, February 17, 2019

Bidding advice from an unlikely source

In a first-price auction where the low bid wins, bidders face a tradeoff: a lower bid increases the probability of winning, but reduces profit if they win. In Rising Strong (p. 187), Brene Brown, a professor of social work, identifies five psychological traps that distort how bidders view the tradeoff, which can lead to suboptimal bidding.
  1. Emotional blinders:  when bidders become "so emotionally invested in working with a client" that they bid too aggressively (too low). 

  2. The loss leader:  an aggressive (low) bid on this project "will lead to future work that ... will eventually offset the loss."

  3.  Uncharted territory: If bidding on a project in a new area, you don't know what you don't know, and will likely win only if you under-estimate costs and bid too low. 

  4. Win at any cost:  when a bidder becomes addicted to the thrill of winning rather than maximizing profit, the bidder will bid too aggressively (too low). 

  5. Defensive pricing:  a bidder may bid too low in order to protect a relationship with an existing client by making it difficult for others to win.

The main point of Brown's book is to present her "rising strong" algorithm on how to grow from conflict.    The bidding advice was lagniappe (Louisiana slang), at least to me.  

Friday, February 15, 2019

Dolphin Incentive System

Even Dolphins will game an imperfect reward system.

I think of this is less an indictment of capitalism and more an indictment of a poorly thought out incentive system.

Wednesday, February 13, 2019

Statistical and taste-based discrimination against (lonely) men in online markets

New working paper documents discrimination against men:
We find that women sell baseball cards for a higher price and greater profit on eBay compared to men.

Interestingly, the paper finds both statistical and taste-based discrimination:
...the reason for a higher price appears to be at least partially based on statistical discrimination, with respondents believing that female sellers were more likely to handle the card carefully and promptly mail it after purchase and less likely to present problems in completing the transaction. Part of the discrimination may also be taste–based. In the eBay experiment, women obtained higher prices and profits even for cards that had been professionally graded, where the quality of the card should not have been in doubt. And MTurk respondents were also more likely to want to meet the female sellers in person and believed they were attractive.

How Airbnb fights racial discrimination

HBR article documents that discrimination exists:
The sharing economy has a discrimination problem. Studies have shown that the sharing economy isn’t as open as we think: People of color are discriminated against on platforms such as Airbnb, Uber, and Lyft. A study of ride-hailing platforms found that black passengers were subjected to longer wait times and higher cancelation rates than white passengers. A study of Airbnb found that guests with African-American-sounding names were 16% less likely to be accepted by hosts than guests with white-sounding names.

This article suggests that this is statistical rather than taste-driven discrimination,
...if a host believes that African-Americans as a demographic group have higher incarceration and crime rates, the host will associate a prospective African-American guest with lower quality.

In other words, without information about guest quality, the "hosts may use race to infer quality."

Such statistical discrimination has a relatively easy fix, give the hosts more information about guests.  The authors ran an experiment that did this:
When a guest did not have any review information on their profile page, white guests had a much higher acceptance rate (48%) than black guests (29%). However, once each guest had at least one positive review, the acceptance rates became almost identical: 56% and 58%, respectively. 

 To fight statistical discrimination, platform companies should: a credible, easy-to-use online reputation and communication system. Bringing information to light, rather than trying to hide it from users, is more likely to be a successful approach to tackling discrimination in the sharing economy.

Monday, February 11, 2019

What do restaurants have in common with airlines?

They both use revenue management (peak load, variable, or surge pricing) to maximize profit. 
On Super Bowl Sunday in 2014, Nick Kokonas, co-owner of Alinea, a molecular gastronomy restaurant in Chicago, sent out a tweet inviting diners who didn’t care about football to make a reservation for $165 that evening—about 35% off the normal price of dinner. He told Grub Street that they went from 30 reservations to 74 for the evening, traditionally the slowest of the year.

For some, saving $80 on a dining experience at the cost of watching the biggest football game of the year (while enjoying markedly less esoteric fare) might not be worth it. But diners eager to try a place with a hefty price stand to benefit, though they may not actually end up spending less.

Bob Bob Ricard, a high-end London restaurant, charges 25% less for its à la carte menu during off-peak times, with a 15% “mid-peak” discount. “When they come in on off-peak days, they’re not necessarily looking to spend less. They’re looking to get more for the full budget,” owner Leonid Shutov told NPR. “So our average checks have not changed in any meaningful way on those days because the customers are rewarding themselves with more special things—with a bit of caviar, with a little bit more Champagne than they may have had otherwise.”
HT: Justin

Monday, February 4, 2019

Evidence of loss aversion in Golf

Loss aversion refers to irrational decisions that are made to avoid perceived losses, rather than maximize expected value (which weights losses and gains equally).  This paper finds "that golfers are more likely to protect par (the number of strokes that an average highly-skilled player should take to complete a hole) than they are to make birdies (a score of one less than par)."

Note that such loss aversion requires a "target" like par, around which losses and gains are measured.  When par changes on a hole, e.g., from 5 to 4,  professional golfers are likely to make sure they make par, rather than take a chance on making a birdie, even when doing so would be optimal from an expected value point of view. 

Businesses react to consumer loss aversion, e.g., when companies frame variable pricing as a discount from a normally high price, rather than framing the exact same pricing as an increase from a normally low price. 

Monday, January 28, 2019

The opportunity cost of studying art

From the Economist: economists are paid a huge premium (100%) to compensate them for studying econ vs. art.  Or to turn it around, art majors forego about $50,000/year to study art.

Many gifted arts students would struggle to crunch numbers. But for those who can excel at both, the cost of sticking with the arts, in terms of forgone wages, is steep. Cambridge creative-arts students have a-level scores close to those of economics students at Warwick, but earn about half as much. That is tantamount to giving up an annuity worth £500,000.

Who can afford such indulgence? The answer is Oxbridge students, who often have rich parents. At most universities, students in courses that lead to high-paying jobs, such as economics and medicine, tend to come from wealthier families, partly because such applicants are more likely to have the examination scores necessary to be accepted. At Oxbridge, however, no such correlation exists. History and philosophy students there come from richer parts of Britain, on average, than their peers studying medicine do.

Wednesday, January 16, 2019

Why are baseball salaries falling?

Because the profitability of winning has fallen with increases in revenue sharing:

“If you’re at the top, and you’re going to have to share more of your revenue with low-revenue teams, then maybe you’re less willing to pay on hiring that new player,” Bradbury tells Deadspin. (Revenue sharing, in case you’re wondering, operates like a marginal tax even on low-income teams’ revenues, since the size of their checks dwindles for each additional dollar they earn themselves.

In fact, economists had predicted that salaries would eventually fall:

“A lot of us in academia wrote about that and actually told the players’ association that that was going to be the effect,” says Stanford sports economist Roger Noll. “And they didn’t really believe us, because they thought that salaries were driven simply by total income, not by the increment to income driven by a player.”


Tuesday, January 1, 2019

Risk/return tradeoff: investors compensating for holding risky local Chinese debt

The gap between rates on Chinese national borrowing (16% debt/income ratio) and local borrowing (150% debt to income ratio) is getting bigger as investors demand a higher return for holding the riskier debt. (Source:  WSJ.)