Candidates Kasich and Rubio playing "chicken"

The NY Times uses game theory to analyze the Republican Primary.  Here are the payoffs:

Although Mr. Rubio is the obvious establishment favorite, leading Mr. Kasich in national polls, prediction markets and delegate math, the two are splitting some votes. To have his best chance against Donald Trump and Ted Cruz, Mr. Rubio needs Mr. Kasich to drop out. The longer both candidates remain in the race, the worse it is for both of them. It’s safe to assume neither would like to see Mr. Trump get the nomination.

So Rubio and Kasich would like the other to drop out ("swerve") while they contest the nomination ("go straight"), and each would hate to see Trump win the nomination (they "crash" if each goes "straight"). And both dropping out would likely lead to a Trump victory.

Here are three obvious strategies: commitments, promises, and threats. Here is the obvious promise:

...Mr. Rubio could offer Mr. Kasich [to pick him as a running mate] in exchange for dropping out — provided he becomes the nominee, of course. (A simple Google search of “Rubio Kasich side deals” produces no shortage of opinions on the matter.)

HT:  David

Why do movie theatres charge the same prices for good and bad movies?

An interesting post from our friends at Marginal Revolution, who come up with at least five possible explanations.  My favorite is that it would require higher policing costs as people would buy cheap ticket and then sneak into the more expensive movies.  I suspect that the most likely answer is that once a movie theatre realizes demand is low, they cannot lower the price to reflect demand because doing so would create incentives for patrons to wait past opening week, and then buy a discounted ticket.

Would Warren Buffett buy ever buy an IPO?

Initial Public Offerings are plagued by adverse selection:

The new-issue market...is ruled by controlling stockholders and corporations, who can usually select the timing of offerings or, if the market looks unfavorable, can avoid an offering altogether.  Understandably,these sellers are not going to offer any bargains...Indeed, ... selling shareholders are often motivated to unload only when they feel the market is overpaying. 

--Warren Buffett's Chairman's Letter, in Berkshire Hathaway Report, quoted in Jonathan Shayne and Larry Soderquist, Inefficiency in the Market for Initial Public Offerings, Vanderbilt Law Review, 1995.

In other words, controlling stockholders have private information that indicates the true value of the company.   They sell only when smaller shareholders are offering too much.

Why are real interest rates so low?

Real interest rates (the nominal interest rate minus the inflation rate) have fallen about 450 basis points (4.5%) since 1985.

If we model real interest rates as the "price" of saving, then we can examine changes in the demand for saving and the supply of saving to see whether we can  account for the shift.  The demand for saving is determined by everyone who wants to borrow now (to invest), and the supply of saving is determined by everyone who wants to save now (to consume later).

The supply of savings has increased "due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets." On the demand side, "desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates."

In other words more people want to save (increase in supply) but fewer investors want to invest (decrease in demand).  Both result in a lower "price" of saving.

Because the return to saving is lower, savers should expect to earn less.  This has enormous implications for the defined-benefit pension plans that characterize government pensions.  In particular, these pension assume that they will earn 7-8% (nominal), and make payouts based on this assumption.  If pension funds earn less, then there will not be enough money to go around when the pensioners eventually retire.

Why are landlocked countries poorer?

Because trade is more difficult than to countries located on a body of water.  It is as if landlocked countries pay a higher tariff (tax), and as we all know, taxes destroy wealth by deterring wealth creating transactions.

Dispatches from Venezuela: Price controls destroy wealth, and lives

In Venezuela, stories of economic meltdown, as the socialist policies of President Maduro have had there predictable effects:

 CARACAS, Venezuela—In a hospital in the far west of this beleaguered country, the economic crisis took a grim toll in the past week: Six infants died because there wasn’t enough medicine or functioning respirators.

 Here in the capital, the crisis has turned ordinary life into an ordeal for nearly everyone. Chronic power outages have prompted the government to begin rationing electricity, darkening shopping malls. Homes and apartments regularly suffer water shortages.

....

The National Assembly, now controlled by the opposition, declared a food emergency on Thursday—an attempt to spur the government of President Nicolás Maduro to, among other things, ease price controls that have created shortages of everything from medicine to meat.

 “The people are being left without the ability to feed themselves,” said lawmaker Omar Barboza.

How do all the roses get to us on Valentine's day?

Start with the problem: Then hear the answer:

Gaming Target's Incentive Compensation Scheme

Canadian Business has a long and thorough article about Target's failed entry into Canada. Highly recommended. Buried inside is this little vignette.

A small group of employees also made an alarming discovery that helped explain why certain items appeared to be in stock at headquarters but were actually missing from stores. Within the chain’s replenishment system was a feature that notified the distribution centres to ship more product when a store runs out. Some of the business analysts responsible for this function, however, were turning it off—purposely. Business analysts (who were young and fresh out of school, remember) were judged based on the percentage of their products that were in stock at any given time, and a low percentage would result in a phone call from a vice-president demanding an explanation. But by flipping the auto-replenishment switch off, the system wouldn’t report an item as out of stock, so the analyst’s numbers would look good on paper. “They figured out how to game the system,” says a former employee. “They didn’t want to get in trouble and they didn’t really understand the implications.” Two people involved in the discovery allow that human error may have been a component, too. Like SAP, the replenishment software was brand new to Target, and the company didn’t fully understand how to use it. When Schindele was told of the problem, he ordered the function to be fully activated, which revealed for the first time the company’s pitifully low in-stock percentages. From there, a team built a tool that reported when the system was turned on or off, and determined whether there was a legitimate reason for it to be turned off, such as if the item was seasonal. Access to the controls was taken away from the analysts, depending on the product.

Sometimes, it is difficult to get the metrics right.

Precise Bids

New research from Keloharju and Hukkanen has one clear piece of advice: "When Negotiating a Price, Never Bid with a Round Number." The argument is that a round number signals that you have no clue what the true value is. A more precises bid indicates that you have done your homework and have a more precise estimate of the underlying value of the object. As a consequence, your counter-party is more likely to accept your bid. The graph reports the returns as a based on round number bids or not.

Another study by Jerez-Fernandez, Angulo, and Oppenheimer based on the TV show The Price Is Right examined the guesses contestants made for the market price of consumer products. Audience suggestions for bids ending in zero were least likely to be chosen.

what makes us rich?

Its the incentives, stupid.