Sunday, October 30, 2016
How information moves markets: Hilary futures crash
Friday, October 28, 2016
Cross your fingers: Nashville's risky pension portfolio
In the past, when Nashville's pension fund earned more than required to fund the pensions, the politicians spent the surplus; but when it came up short, they did not fund the difference. This lead to systematic underfunding. Then the State passed a law to force Nashville and Memphis to fund their pensions.
Now, we learn that Nashville is investing in risky assets to reach its targeted 7.5% return:
So how is it doing?
Keep your fingers crossed!
HT: Preston
Now, we learn that Nashville is investing in risky assets to reach its targeted 7.5% return:
Since the 2008 financial crisis, Nashville’s pension managers have been shifting taxpayer money into junk bonds, hedge funds, troubled mortgages, private equity funds and other alternatives to conservative stocks and bonds. If successful, these “alternative investments” can earn greater profits, but they also demand high fees and carry the risk of heavy losses.
So how is it doing?
Nashville's investments have shown mixed results. After taking out fees, the city’s fund grew by 4.7 percent a year since 2008, on average, while the Standard & Poors 500 gained 6.6 percent.
Keep your fingers crossed!
HT: Preston
Thursday, October 27, 2016
Coal comeback
In the graph above, we see a slight increase in quantity, which represents a dramatic change form the downward trend in demand. As a result, railroad stocks are up as railroads and barges are the only way to move coal.
HT: FT
Before you answer, make sure you understand the question!
Take the following quiz:
1. A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost? ____cents
2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? _____minutes
3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? _____days
Each of these questions has an obvious answer that is wrong. However, if you take one minute to think about the questions--BEFORE YOU ANSWER--you will come to the correct, less obvious answer. Over the years, I have found that those who can answer these questions tend to do very well in my economics classes.
MORAL: before answering the question, spend a minute or two thinking about what the question is.
=================ANSWERS=================
Question 1: Though the quick intuitive answer is 10 cents, a moment's reflection leads to the realization that 10 cents is not a full dollar less than $1.00. (If you're sleepy: 10 cents is 90 cents less than $1.00.) The accurate solution can be reached through a little 8th grade algebra:
If the cost of the ball is x, the cost of the bat is x + 1.
x + (x+1) = 1.10
2x +1 = 1.10
2x = 0.10
x = 0.05, or 5 cents
Answer: the ball costs 5 cents and the bat costs $1.05, for a total of $1.10.
Question 2: Your brain screams at you that the answer must be 100, because your intuitive side sees the 5-5-5 pattern in the first example, and 100-100-100 just looks right. But if it takes 5 minutes for 5 machines to make 5 widgets, it doesn't take 20 times as long for 20 times as many machines to make 20 times the widgets. It will take the same 5 minutes for 100 machines to make 100 widgets, and it will take 5 minutes for 1000 machines to make 1000 widgets, and so on, because each machine spits out one widget every five minutes. That is the rate of widget production for the machines, and it doesn't change no matter how many machines you are running at once.
Answer: it would take 5 minutes for 100 machines to make 100 widgets.
Question 3: This trick here is that the lily pads grow at an exponential rate, not an arithmetic rate. On the day before the 48th day, the pond was only half-covered in lily pads; the day before that, one-quarter covered; the day before that, one-eighth covered; the day before that, one-sixteenth covered. Go back two weeks from the 48th day (day 34) and you will be hard-pressed to find any lily pads on the lake. It will be only 1/16,384 covered on that day. This means only .006% of the surface will be covered by a lily pad. Imagine how powerful a microscope you'd need to detect any lily paddage at all on day 1.
Answer: the pond will be half-covered in lily pads on the 47th day.
HT: Big Thinking
Saturday, October 22, 2016
How do you estimate the competitive effects of hospital mergers?
The answer in a report by two middling economists:
In the graph above, the two merging hospital systems are denoted by red and blue, while the non merging firms are denoted in yellow. The circles are centered on zip codes and denote the number of patients who go to each hostpital system. Using these data, the economists estimated a "gravity choice" model that showed
- ... the merged hospitals are each other’s closest competitors. If Wellmont were to close, 75 percent of its patients would go to a Mountain States hospital. Similarly, if Mountain States were to close, 72 percent of its patients would go to a Wellmont facility.
These data are used to determine how much price would rise following the merger.
Follow the Merger's progress through the regulatory process at the Johnson City Press. UPDATE: the parties realized that the report would have lead the FTC to challenge the merger (and likely win) so the parties asked the state legislatures of VA and TN to regulate the merger so they could reduce costs (by closing competing hospitals) without the risk to consumers of rising prices. Presumably the state regulation would keep prices low in lieu of competition between the two systems.
Follow the Merger's progress through the regulatory process at the Johnson City Press. UPDATE: the parties realized that the report would have lead the FTC to challenge the merger (and likely win) so the parties asked the state legislatures of VA and TN to regulate the merger so they could reduce costs (by closing competing hospitals) without the risk to consumers of rising prices. Presumably the state regulation would keep prices low in lieu of competition between the two systems.
Friday, October 21, 2016
Thursday, October 20, 2016
When do managers care about their competitors' profitability?
When stocks are commonly owned by big institutional shareholders, these big shareholders reward managers for industry performance, rather than individual company performance, as that maximizes the value of their portfolio:
See our earlier blog post on How to decrease industry rivalry.
... in industries with high common ownership, top managers receive almost twice as much pay for the good performance of their competitors as managers do in industries with low common ownership. This effect is even more pronounced for CEOs alone. Essentially, CEOs are rewarded more for the good performance of their competitors than they are for the performance of the company they run.
See our earlier blog post on How to decrease industry rivalry.
Wednesday, October 19, 2016
Texas Physicians Threatened by TeleMedicine
It seems that the Texas Medical Board had tried to keep
patient care via the Internet from competing with traditional medicine. As
reported by the Texas
Standard, they required physicians to meet with patients in person before
they were allowed to treat them remotely. Since 35 rural Texas counties have no physicians at all, this regulatory entry barrier all but kills the main
benefit of telemedicine. Even in urban areas, telemedicine would likely
generate serious competition to traditional health care providers.
This requirement primarily affected Teladoc, a company based here in North Texas. But Teledoc sued that the requirement violated antitrust laws and won in lower court. The Texas Medical Board appealed but recently dropped their appeal, perhaps because Teledoc was backed up by the FTC and DOJ. Since the Texas Medical Board is made up of incumbent physicians, this is not unlike the teeth whitening case in North Carolina.
This requirement primarily affected Teladoc, a company based here in North Texas. But Teledoc sued that the requirement violated antitrust laws and won in lower court. The Texas Medical Board appealed but recently dropped their appeal, perhaps because Teledoc was backed up by the FTC and DOJ. Since the Texas Medical Board is made up of incumbent physicians, this is not unlike the teeth whitening case in North Carolina.
REPOST: sunk-cost fallacy in real estate
Tuesday, August 24, 2010
Sunk-cost fallacy in real estate
In the post below this one, we show that the housing market can have excess supply. This post shows that it is due to thereluctance of homeowners to sell at a loss, a version of the sunk cost fallacy.
Two homeowners, with identical houses, will list the houses at different prices, depending on what they paid for the house because of what psychologists call "loss aversion." Unfortunately for these loss-averse sellers, buyers don't suffer from similar delusions,
Two homeowners, with identical houses, will list the houses at different prices, depending on what they paid for the house because of what psychologists call "loss aversion." Unfortunately for these loss-averse sellers, buyers don't suffer from similar delusions,
Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay.
Note that this reluctance is similar to the reluctance of businesses to pull the plug.
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