A rule for everything

China's new standing committee is trying to change its image. Along with a ban of red carpets and fawning state media write ups they have instituted a new rule on speeches.

The updated rules also ban dull, long speeches and fawning write-ups in the state newspapers, as the party tries to reshape its image.

Emphasis added. This seems silly but apparently the origin of this rule comes from how at meetings Chinese official would speak in monotone for hours. Maybe being able to take up more time than other officials was part of the status games they played. So it sounds like this will be a positive influence until the rule is used to punish people who gave speeches with unfavorable substance. But it also demonstrates just how strange things are over there that there had to be a specific policy shift to bring about this change.

Falken on Taleb

Taleb, author of Fooled by Randomness and The Black Swan, has a new book out about a term he's coined called anti-fragility. The idea is that insitutions should benefit from mishandling rather than be harmed by it.  At first I thought this was a word coined because using the word "adaptive" sounds too normal until it occured to me that new terms were also useful for authors who want to group a lot of not quite related concepts under one roof. He recently published an editorial in the WSJ promoting the concept and his book. 
 
Some of the anti-fragile industries he mentions favorably are the airline and restaurant industry due to their ability to handle failure. A world full of anti-fragile institutions like these would become poor quite quickly. Maybe anti-fragile economies already are poor, as a society without complex systems that rely on each other can only produce so much wealth. Or perhaps our current society is actually already quite adaptable, as despite many different crisis over the past 5 years life has gone on normally for the majority of the developed world.
 
But rather than expand my view on his op ed, I would direct the reader towards Falkenblog's take on Taleb's new book. Before diving in, it's important for those unfamiliar with Nassim Taleb to note that he is quite arrogant, and therefore doesn't deserve to be handled with kid gloves.
 
Here are some of the more amusing excerpts:
 
"He doesn't identify key attributes of attractive, risky (oops, antifragile!) opportunities, just implies they are the ones that unlike options and lottery tickets, work well. In fact, he's anti-theory, so one supposedly finds them by random sampling (aka 'trial and error'). That's a strategy statistically proven to underperform, catering to the biases most investors have, why both day trading bucket shops thrive and  low volatility investing works. As a self-help book it's like someone saying you should eat more sugar, a strategy many will find highly convenient."
 
 "Another key to understanding Taleb is that he has a French post-modern tendency to write to impress rather than explain. He provides hundreds of loosely related anecdotes, reminding me of the Talmud quote that 'when a debater’s point is not impressive, he brings forth many arguments.'  I actually agree with a lot of Taleb, such as the intractability of risk because it is endogenous, and I think he's vaguely libertarian, but he says so many inconsistent things that doesn't mean much (when he's right it's probably a good example of the Gettier problem)."

"The fund Universa, of which he is affiliated, states that it is no longer merely long volatility or gamma, but timing when to be long volatility or gamma. I'm sure all those investors who jumped in Universa circa 2009 would be surprised to know that's the strategy, but as part of management, he benefits from the gamma resulting from the asset management fees from investors fooled by randomness. He does have an excuse here, as he did write a book on that, so it's not like they weren't warned."
 
Falkenstein goes on to note how well Taleb and his fans react to criticism. It will be interesting to see what type of blowback he gets from his review.

Btw, if you found that review fun, Eric Falkenstein has many previous takes on Taleb that are equally amusing.
 
 
"He inverts the observation that geniuses are often misunderstood to the insight that misunderstood people are geniuses, and critics of such people are imbeciles who don’t even have the taste to appreciate genius."
 
"I suspect that Taleb dreams of someday winning the Nobel Prize in Economics for his popularization of Rietz’s peso problem  (1988), fat tailed distributions (Mandelbroit 1963), or Knightian uncertainty (1921) , at which point he would refuse it and then raise his stature above all those before him. Alas, as defective as the econ Nobel is, it ain't the Peace Prize. He has not added any new significant idea to any of these richly researched threads, rather merely tries to convince readers he and his followers are the only ones in the world who really understand them."
 
 
"For someone advocating doubt and criticizing expert and 'regular' people’s overconfidence and arrogance, Taleb’s writings are filled with certainty, anger, and immodesty, having the Godelian impossibility of someone shouting 'I am the most humble!'"
 
 
"For example, last week in Bloomberg he noted that “Recent events have proved that all risk management was wrong.” Such nuanced insights are usually confined to bigots discussing ethnic rivals."

An outdated lottery heuristic

In January the people behind Powerball implemented an idea: Double the price of the Powerball ticket to generate bigger jackpots.  That strategy is paying off now, with the Powerball Jackpot near $500 million dollars and people are getting very excited about it. But it's important to note that this lottery is farther from positive expected value than the Mega Millions jackpot was.  That's because the price is raised to 2 dollars a ticket, so a "1 in 175 million" means that the jackpot needs to be doubled until it gets closer to the almost positive expected value seen in March of this year.

This marketing gimmick is interesting, since it plays on two factors:

1. The chance to win a large amount of money is seen as very interesting by many people.

2. There was a heuristic widely used by people that when a jackpot got to be a certain size it was positive expected value (before taking into account the lump sum payment, taxes and the chance to split the pot) to play the lottery.

By doubling the price of the Powerball ticket they have effectively short circuited a widely used heuristic. People didn't notice this time, but maybe those who pay attention to the math behind the lottery will learn to wait until the jackpot hits a billion dollars before getting excited about Powerball again. Even then, it would still be excitement about a slightly negative expected value.

Disclosure: I currently have no positions in lottery tickets.

Prediction: Obama or Chaos

When I say that it is either Obama or chaos I don't mean that a Romney victory would mean chaos. Rather, that with Obama ahead in most polls in the key swing states most of the scenarios that would give these states to Romney will be chaotic. If the vote is within 200,000 or so in Ohio, the recount won't even start until November 17 when the 200,000 provisional ballots (absentee voters who decided that they wanted to vote in a polling place) are counted. 

Whether or not the vote is close depends on many things - there is a good chance that polls have been overestimating the likelihood of younger democratic leaning voters making it to the polls. On top of this, with high pressure "ground game" and massive text messages many potential voters in swing states have been so inundated with election ads that they could very easily have taken to habitually lying to those who are asking them about whether and when they vote.  It's also possible that there will be more unlikely but registered voters who get dragged to the polls almost against their will, but with early voting many of those who don't feel like voting can lie about having voted already. One additional wrinkle is there are supposedly internal Romney polls that indicate that he is winning in Ohio, but his team has a massive incentive to lie about being ahead in order to encourage their supporters to go out and vote - on net people like to be part of the winning team.

For those of you looking to track the election results tonight, http://www.realclearpolitics.com/ has done well in the past. But it would probably be more productive to spend your time seeing Wreck it Ralph. It's a good movie and stressing out over voting results isn't going to change anything. 

The capital gains tax increase and Buffett's book

To most people who look closely, it's very obvious that when Warren Buffett proposes an inheritance tax that he is advocating for policies that helps his company. He isn't planning on giving very much of his money away in a manner than can be taxed by the inheritance tax and he runs a businesses that benefits from the tax. One way he benefits from an inheritence tax is through his life insurance companies, which benefit from the tax because their policies can be used to transfer wealth while avoiding some of these taxes. Buffett's company is also in the business of buying businesses, and when smaller businesses must be sold to pay the inheritance tax after the death of a founder the companies who systematically acquire these businesses from forced sellers end up profiting. 

It turns out that a rising capital gains tax can have a similar effect on bringing bargain businesses to market. With a capital gains tax hike coming up, a lot of businesses owners are looking to sell, including some big names. In the US, corporations see no difference on capital gains and ordinary income so a capital gains tax hike won't impact his company negatively. Many non-profits are also exempt from the capital gains tax.

Most people running a business in the business of buying businesses would not benefit from a capital gains tax hike, regardless of the deals that became available to them from people looking to sell quickly. But because Warren Buffett is donating the majority of assets to charity, when he advocates for a higher capital gains tax he is also advocating for something that will help his business with little negative impact to himself or the causes that he is supporting.

Outside of lobbyists and politicians, most people truly believe that the policies they advocate will be the best option for society. But it's interesting when it turns out that a high profile advocate proposing a policy which seem to cause them harm (and thus gives the advocate's arguments slightly more credibility) actually benefits from the policy. 

Quick overviews of a few topics

1. Understanding why the web can be very annoying. This runs from Facebook's fan pages having trouble reaching their users to the websites that break up stories into multiple pages in order to maximize ad impressions. All of this is correlated to those providing a free service making their service worse because they want to be paid a little bit more for their services. (Hat tip: MR)

2. Understanding the unrest in the middle east: There is a positive correlation between groups with high average IQs and how cooperative they are. There is a negative correlation between countries with high IQs and how religious they are. The middle east is full of countries with large youth bulges and bad economic policy that keeps these youths unemployed and looking for trouble.  Which of these factors are most important is an exercise that determines how politically correct the reader is.

3.  QE3. This issue isn't going to be cleared up in a few links. But there are a few things to keep in mind.

a. Members of the Federal Reserve really did shift their viewpoints on the proper roll of monetary policy - this new easing program wasn't just a reaction to bad economic data and the upcoming fiscal tightening. Those who follow the markets can work out their own implication from that.

b. It will be inflationary, but not as inflationary as some people think.

Key quote for those who think hyperinflation is around the corner:

"The Fed is buying bonds in the secondary market.
In contrast, during the German hyper-inflation, government tax revenue was as low as 1% of government spending – the rest of the spending was done by printing money with no intent to collect the taxes needed to pay for it."

4. Finally, despite what you might have read or been told, "dork" did not originally mean whale penis.

Pork Shortage?

A lot of people are worried about the upcoming pork shortage. The thesis is high corn prices have caused many farmers to kill their pigs, keeping prices low now but raising it in the future.
 
Yet, looking at the lean hog futures prices shows us that there isn't really a pressing need to open up the strategic pork reserve.  If you could afford pork three months ago then stop worrying. Pork prices aren't expected to rise much beyond that level.

Progress in North Korea?

More signs of progress are coming out of North Korea.

"Peasants will have incentive to grow more food. They can keep and sell in the market about 30-50 percent of their harvest depending on the region," said the source.

The question of whether or not they are following in China's footsteps leads to some interesting speculation.

North Korea was indeed trying to follow in the footsteps of China but was avoiding the phrase coined by Beijing because of an unfortunate quirk of the Korean language. "It won't be called 'reform and opening up' because it sounds like 'dog fart' in Korean," the source said.

Nonprofit Fraud

A recent story on Bloomberg.com highlights some pretty ridiculous charity fraud. Their investigation finds many cases where telemarketers, in this story the company InfoCision, are hired by a charity to raise money for a cause. The people donating are assured by people who pretend to be volunteers that the majority of the money is going directly to the charity but in reality over 80% of it (in some cases it looks like over 100% of it) goes to pay the telemarketers.  Charities raising money in this manner range from medical charities such as The American Cancer Society, March of Dimes, the Diabetes Associate to political groups like Citizens United.  

The charities are doing this in order to identify donors and volunteers that they can later on contact directly for support without giving the telemarketers a cut. But the initial cut isn't just from money raised directly by telemarketers, it's also taken from money raised by the volunteers recruited by telemarketers. And in the meantime donors are often told that over 70% of their money is going to the charity.

It’s an InfoCision filing with North Carolina that reveals that the Diabetes Association got just 22 percent of the money raised nationally by volunteers recruited by the telemarketer in 2011. That figure isn’t found in any public filing with the IRS.

So far, only Ohio has looked into this fraud and they settled with InfoCision for a nominal fee. This strategy of defrauding donors in order to find those willing to donate might work for charities in the medium run, but systematically defrauding new donors and lying to volunteers could impact their brand in the long run. 

Hopefully people who decide they want to donate will learn how to give well instead of funding telemarketers who disrupt everyone's dinner time. In the meantime, there is always the Do Not Call registry (which the founders of InfoCision lobbied against) - and if a friend asks for a donation for their favorite big name charity you'll want to check and see who recruited them to act as a fundraiser.