A few more links

1. Robin Hanson examines why betting isn't more common.  All of these issues he brings up seem relevant, but the introduction of money into the equation seeming rude and highlighting power differences outside the conversation is probably the most important.  Maybe that's why my friends won't make many bets with me... or maybe that's why I don't have more friends.

2. This ghost city, an attempt to replicate Manhattan, in China will be relatively easy to find, or at least recognize.  The story is funny because it combines many of the common worries about China: It covers their over investment in real estate, willingness to directly copy the west and the increasing problem of bad debt.

3. An interesting perspective on the pre-access to consumer confidence survey data provided by Reuters.  In the end, what Reuters is doing is just selling private research. If providing early access to market moving research is disallowed completely that will have some very strange repercussions.  And traders not involved in the HFT game should know enough not to be trading during this time period anyway. (Unfortunately, when I looked at execution algorithms provided by major I-banks they didn't specifically step away from the market, but they would usually stop trading when volume dried up as they often do before economic releases.)

4. Matthew Yglesias almost endorses mercantilism.  The idea that when it comes to mercantilistic policies the public choice critique is generally better than the Ricardian/comparative advantage critique is an important one.


Standard and Poor's is going for an interesting defense.

S&P said in its request to dismiss the case that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.

And yet rating agencies are still a key part of financial regulations

Avoid Texas?

A lot of people have been talking about moving from California to Texas due to an increasingly unfavorable policy regime in California. But they are forgetting about one of the very unfavorable regulatory regimes in Texas - their friendliness to IP lawsuits.

Patent lawsuits are rife in East Texas.  At first it was just one or two particularly friendly judges, but over time the perception has been that juries are even more favorable to plaintiffs - perhaps because they realize that their local economy is supported by the large amount of patent lawsuits filed in their district.

Companies should make every effort to avoid doing business in places where the litigation environment is unfavorable. It might be hard to avoid patent lawsuits by avoiding doing business in the state, because apparently all it takes is for companies to register in the state and courts may justify the location based on that alone. The American Invents Act might have helped solve this problem already by splitting up joinder lawsuits where one patent troll sues everyone at once so the defenders can have more of a say in the location of the trial.

So boycotting Texas probably wouldn't do much to stop patent trolls. But it would have been funny if it could have potentially helped.

End of Google Reader Link Day

1. Why Youtube isn't the best long term partner for content creators.

2. Reynold's Law - or why subsidizing status markers is a bad idea.

3. Robin Hanson's musings on Orson Scott Card's theory of what makes a story. I've always prefered stories that focus on the milieu more than the character centric stories found throughout the fiction section in bookstores everywhere so I like his theory that the general preference for character centric stories is just an accident of the current environment and will shift as society changes. 

4. Goodbye google reader.  There are other RSS readers, and hopefully one of them will have the ability to search through RSS feeds that I have read. This is very useful as there are many occasions when I remember I found a piece of information from a feed but have forgotten which one.

Interesting Links

1. The Supreme Court ruling on patenting genes will need to address these issues again.

2. Reputation management backfiring, or don't annoy that kid in college who went on to become a journalist... especially if you are spending an estimated $300,000 on reputation management. 

4. The lump of labor fallacy is gaining traction again.  Good thing there are companies like Task Rabbit that are developing other ways for less skilled labor to more easily add value.  And while there are people whose lifetime earnings will be significantly lower due the recession, if policies don't get worse the main long run permanent labor dislocation from the recent stagnation can be limited to the people who chose to go disability. Even this is relatively small compared to the total population - the change was from 7.1 million people in 2007 to just over 8.8 million today.

PayPal Incentives

I'm not sure which people at PayPal are going to take the blame for this little fiasco, but it would be interesting to know what they were thinking.

A 17-year-old German student found a significant security vulnerability on PayPal’s website, and when he revealed the issue to the company, expected to be rewarded.

But PayPal refused to pay Robert Kugler a Bug Bounty, telling him he was too young to participate in the company’s program that rewards people who find glitches in the system. TechWeek Europe reported that Paypal defended its actions in not paying the bounty because of Kugler’s age and because the bug had already been found.

First of all, they are generating bad press over a topic tangentially related to their existing PR problem of being seen as a company that refuses to pay people money they are owed. But perhaps more importantly, while the bug in this case may not have been critical PayPal is signaling to other hackers that they are not necessarily reliable in their bug bounty program when there are plenty of other people out there willing to buy information on PayPal's bugs.

Reinhart & Rogoff Irony

The Reinhart & Rogoff saga continues.

One point that hasn't been addressed: Outside of the issue about the significance of the data errors, the main complaint seems to be that Reinhart & Rogoff didn't do enough to clarify that the correlation between high levels of sovereign debt and low growth was not necessarily causal. Countries often had debt because they had low growth, the high debt isn't necessarily the cause behind low growth.

Critics of Reinhart & Rogoff then go on to point out that this paper was a major driver behind the austerity movement because politicians supporting austerity often cited this study. I'm not sure if people making these claims really think that Paul Ryan would be okay with budget deficit without being able to talk about a 90% level in debt/GDP, but it's funny that they are making the same mistake they accuse Reinhart & Rogoff of making.

Rationality improvements in the 3rd millenium

The question is simple - what are the biggest ways that people in society are acting more rationally since the start of the third millenium?

1. A/B Testing - Testing two products and seeing which one people like better has been around since New Coke improperly replaced Coca Cola Classic.  What is different in the third millenium is that with so much business being done online it's both easier and cheaper to test various options against each other. Different pages for customer check out, different email marketing campaigns and many other approaches can be tested against each other randomly, quickly and cheaply. Zynga is well known for doing heavy A/B testing in its monetization, retention and recruitment of online casual gamers (unfortunately for them what worked best was some variation of massively spamming online friends or their own Facebook wall in order to receive power ups in game, which Facebook cut down on). At the very least, randomized controlled trials are gaining a much stronger foot in the business community than every before.

2. Rationality communities and rationality materials have spread a lot thanks to the internet. We have websites like overcomingbias.comlesswrong.com and lists of common biases at the tip of our fingertips.  Before the access to the type of material on these sites was restricted to academia, libraries and some relatively specific social groups. Finding books on rationality has also never been easier.

3. Smart phones have rendered debates about most facts relatively useless. If people are wondering who was actually president was in 1969 it's really easy to figure out in a few seconds.  Before ubiquitous access to the internet (Google and Wikipedia), people who disagreed about common factual matters would have to share related facts ("Don't you remember that Nixon called Buzz Aldrin and Neil Armstrong while they were on the moon? The moon landing was also in 1969.") and hope that they could come to a common world view through agreement on peripheral facts. That process has been largely replaced by the internet giving everyone access to most common facts.

4. Scholarly research is more available than ever before. Anyone searching for articles will find that there are still many pay walls, but there is progress being made to open up research access to the general public. However, until old papers like JSTOR also open up the references to older papers in newly published work will still leave those without access behind the pay-wall in the relative dark.

5. Prediction markets. People have started trusting prediction markets more than most experts, though there have been a few exceptions.  Idea futures and expansions on them such as state contingent idea futures has been a pet idea of Robin Hanson for some time.  Regulators haven't been too friendly and/or the market place isn't quite liquid enough for most markets, so while it is interesting that there are places out there which curates an active market for people who want to put their money where their mouth is, a lot more would have to happen on this front for it to be truly significant. 

6. Much better analytical tools. I may be a bit biased for even including this idea on the list, but with AI largely disappointing (though many people are now finding a tool like Siri useful), the ability for people to utilize computers in their analysis has vastly increased in the past decade.  With the evolution of tools such as Palantir, it is becoming much easier to look through the connections between large amounts of data.

7. Better ways to organize and present information. Wikipedia, reddit-type threaded message boards and task organizers like Asana and programming version control such as git have been quite useful. Blogs by experts are also very interesting, and their ability to crowd-source their readership for ideas/answers/corrections should not be underweighted. The investors in Quora certainly think this space is valuable. There are enough ideas in here that it could have been at least a few points on the list.

There have also been ways in which rationality has decreased - more and more of public, private and scientific life is becoming politicized. But reviewing the above list makes me a bit optimistic. While not the most important, I think that the rise of A/B testing is probably the most underrated trend, while #3 and #7 should have the widest impact.

Hat tip: Kevin Simler for some of the ideas mentioned above

The SF Fed whiffs it

The Federal Reserve Bank of San Francisco published a letter that tries to look at whether or not regulation and taxes are impacting state level employment. (Hat Tip: MFK)

To look at whether or not regulation and taxes are an issue, they use state level data from the National Federation of Independent Businesses (NFIB) monthly small business surveys and correlate it to state level unemployment. The source they linked to didn't seem to contain the state level data they were given, so unfortunately I am confined to critiquing their economic letter rather than improving upon it.

If you want to look at the only interesting part of their paper, look at this following chart:

It turns out that places with large amounts of household debt relative to income in 2006 ran into problems with sales during the economic crisis. By backing up their previous research with the small business survey, the authors try to show the usefulness of the NFIB survey and imply that because they can't find the same data relationship between business leaders' changing worries about regulation and unemployment that there must not be a significant impact from those regulations.  However, their attempt runs into a few problems.

1. The study looks at percent change in unemployment in many cases - I'm sure North Dakota which has 3.2% unemployment (but it went up by over 10% in their scatterplot!) isn't actually the worst off as it implies in this chart

2. They are looking at the change in the percentage of businesses who are worried about regulation and taxes as their top concern. Again, this is a percent change in a percent - so a change from 10% to 15% of businesses worrying about regulation and taxes is more significant than a shift from 25% to 35%. They are also looking at the change from 2008 through 2011, which largely overlaps with the rise of the tea party. A survey question about sales being a problem isn't that political, but a survey question about taxes and regulation will be far more correlated to political shifts than the actual impact of those regulations.

If Amir Sufi and Atif Mian wanted to do an analysis regarding the impact of high taxes and regulation uncertainty that might look it was done by professors from Princeton University and the University of Chicago Booth School of Business how could they go about it?

First, they should control for potentially exogenous variables like the political shift that came with the rise of the tea party. There is a lot of poll data out there, so seeing which business leaders were complaining about regulation, adjusting for the change in political views of their state, could contain a lot more information.  They should also look to use poll data that ask specifically about state regulations, which is more likely to have a direct connection to state level unemployment. Without adjusting the data like this, it leads to silly inputs that show both California and Texans dealing with similar tax and regulation problems. 

Second, using percent changes of percentages can be very noisy. At the very least, differences in unemployment as opposed to percent changes in unemployment should be looked at alongside the absolute levels (which they did look at). 

Without at least these two steps, a single or multivariate regression wouldn't show any effect from regulations even if there was one. But on top of that, it should be noted that unemployment statistics don't tell the whole story. In Texas it's entirely possible that lower regulation did drive job growth, but the population growth that occurred alongside the job growth has kept the unemployment rate high and therefore this data wouldn't show up in their analysis.

There are lots of ways that this analysis could have been very interesting. It's too bad the authors didn't try them. At least they did provide another example of academics putting out bad arguments in an attempt to elevate the status of their previously published work.

Broken Incentives in US Nuclear Power Regulation

A nuclear powerplant at San Onofre was shut down a year ago after a slight radiation leakage.  Now it turns out that there are allegations that they were aware of potential concerns with the steam generators that broke but neglected to fix them because the fixes would have led to a more rigorous safety review.

Boxer's letter adds new weight to a longstanding — and unresolved — question at San Onofre. Did Edison modify the generators so extensively before they were installed that the company should have sought an amendment to its operating license, a process that can take months or even years?

Essentially the story is that the utility faced a cost benefit analysis that compared the cost of the following.

P = Reduced probability of steam generators breaking from potential modifications
C = Cost of steam generator breaking
S = Cost of additional safety modifications
L = Cost of Licensing from the NRC

And they decided that S + L > P*C so they shouldn't change anything about the design to reduce regulatory oversight. It turns out it was the wrong decision. 

Barbara Boxer's office is now alleging that they have proof that executives thought P was significant but believed that L was too high.  Senator Barbara Boxer's office broke this story and they seem to want to make L more mandatory so that the utility company would not have had to enter that variable into their cost benefit analysis. There is also a believe that L would lead to a further reduction in the probability of new machine parts breaking.

However, I haven't seen many people covering the story mention just how perverse these incentives are that safety modifications would have cost too much in licensing requirements to be implemented. In this regard maybe the US should look more to Japan and France's streamlined licensing and certification procedures rather than use any excuse of problems to hike costs for nuclear energy even further.  

It's too bad Japan's tsunami put people off nuclear power. Clean energy isn't perfectly safe. Take hydroelectric power, where a broken dam also has the potential to kill many people. But nuclear is scary and dams and floods are common so the opposition to dams is based more on environmental grounds and people living downriver while the opposition to nuclear power comes from across the country and is based largely on ignorance. When the costs of making any changes are high, the benefits of plants running newer technology are minimized. In Japan, the newer power plant that was closer to tsunami fared much better than Fukushima Daiichi plant.  We can see from San Onofre hints that under a system where any change is penalized with years of costly licensing review the chances of a disaster might actually go up, not down.