tag:unpleasantfacts.com,2013:/posts Unpleasant Facts and Other Musings 2014-04-03T23:07:18Z tag:unpleasantfacts.com,2013:Post/672615 2014-04-03T23:07:17Z 2014-04-03T23:07:18Z Simple Truths about High Frequency Trading The interest in High Frequency Trading, of HFT for short, comes from how it combines finance, technology and secrecy. The press around the subject has increased dramatically as Michael Lewis has been promoting his new book on the topic, Flash Boys.  A chapter appeared in the NYTimes that is well worth the read. Discussions around the issue made CNBC's daytime market coverage look very similar to Fox News (because of the yelling and screaming, not because of any right wing agenda).  In the midst of this uproar, the high frequency trading firm Virtu has delayed their IPO.

Michael Lewis is a good author, but he likes to tell narrative stories with good guys and bad guys. And as Tyler Cowen once said, "As a simple rule of thumb, just imagine every time you’re telling a good vs. evil story, you’re basically lowering your IQ by ten points or more."  So without getting into some of the more esoteric details, what's really going on?

1. The market has always needed intermediaries, the people who help connect buyers and sellers when they don't want to buy and sell at exactly the same time. These intermediaries need to make money. Without some money being paid to liquidity providers there will be no liquidity.

2. As floor traders have been replaced by computers running algorithms, spreads have narrowed. Investors spend significantly less money getting into and out of positions compared to 10 or 15 years ago.

3. HFT firms attempt to front run large traders. Any market intermediary needs to try to get out of the way of big buyers after the shares they have offered to buy or sell have been taken because if they didn't they would go out of business very quickly. But HFT set ups allow them to pretend there is are more shares available to be bought or sold in the market than there actually is which can be quite frustrating for those trying to execute large trades.

4. Googling "backing away" shows that intermediaries have been causing issues well before they consisted of the population labelled as "high frequency traders".

5. The ones losing the most money from high frequency traders are those attempting to trade large amounts of stock on the market. These are institutions such as mutual funds, pension funds and hedge funds.

6. While the situation remains annoying to institutions, HFT volumes and profits have actually been falling over the past few years. 

Wall Street rips people off all the time, but there seems to be more of an outrage when the people making money are outsiders and the people losing money are closer to being insiders. 

HFT firms have been the best customers of many of the exchanges - they pay high fees to get their servers situated next to the exchange and provide large amounts of volume to the exchange. In an effort to increase their profits from HFT traders many of the exchanges have implemented some trading rules that benefit HFTs at the expense of other traders on the exchange. Michael Lewis's story explains how some large institutional traders have figured out how they are being taken advantage of and are turning to people such as the IEX Group (The "good guys" in his book) in order to trade without having to worry about people gaming the system. 

Exchanges are going to have to reevaluate their own systems and make them more favorable to institutions that engage in relatively simplistic trading if they want to be profitable in the long run. (Part of this also involves setting up incentives for market makers which reduce the probability of future flash crashes, but that's a much more complicated subject).

If you are a retail investor, the hubbub over HFT shouldn't matter that much to you. You are getting better execution than you ever did under a system managed by human market makers. HFT traders are small parasites that have outcompeted bigger parasites. Overall they've been a net benefit to the ecosystem.  

And it is worth keeping in mind that the impact of HFT firms is small compared to other financial players. The only surprising thing about revelations that many large banks have been manipulating numbers they trade in both the interest rate and foreign exchange markets is that they finally got caught. And the additional 0.1% market impact that HFT firms might cause on large trades is very small when compared to the 5.1% average commission that Real Estate brokers take in on every transaction they make.  The HFT story is smaller than it looks. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/668975 2014-03-28T18:24:11Z 2014-03-28T18:24:13Z Thoughts on Current Events Facebook continues shopping with its overvalued stock: 

Facebook most recently bought Oculus Rift. The key here is that the purchase of both WhatsApp and Oculus Rift only make sense if Facebook plans on eventually ignoring the wishes of the founders. WhatsApp founders don't want ads and Oculus Rift founders don't want Facebook integration. It doesn't have to happen now, but if Facebook doesn't decide to spin out those companies then in three to five years there is no way that Facebook integration and ads aren't on both of those products.  Facebook is an important stock to watch, as any long term underperformance would be a strong signal that investors are falling out of love with tech.

Corrupt US Politicians:

 Leland Yee, the Californian State Senator who was in the running to be California's next Secretary of State, is really corrupt. The surprising part about the corruption is the small scale nature of it. Campaign debt of less than $75,000 was apparently enough to get him to participate in a gun running scheme. This might have been the tip of the iceberg and he could have been making a lot more money, but if corruption occurs for such low amounts of money then this is one of the best arguments for libertarianism I've seen in a long time. Corrupt politicians do less damage when they have less power.

Putin and Crimea:

The interesting thing about Russia's takeover of Crimea is that given Crimea's history and large russian population, Russia could have taken it back without force if they wanted to. One way to interpret this situation is that when their puppet, Viktor Yanukovych, got overthrown Putin wanted to make a statement. Others say that Putin is creating an "us versus them" situation to distract from the corruption that is being revealed about the set up for the Sochi Olympics. However, given that both Russia and the rest of the world would face short term pain if the situation escalated further it is unlikely to do so in the near term.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/668147 2014-03-27T01:09:46Z 2014-03-27T01:09:47Z Too Good to Question The Federal Reserver Bank of New York posted about their study that confirms many people's biases about moral hazard and large financial institutions. The question is "Do “Too-Big-to-Fail” Banks Take On More Risk?" and the answer is yes.  The basic idea is that higher government support leads to riskier loan portfolios, which indicates to many people that Too Big To Fail (TBTF) banks were abusing their positions by loading up on risk.

I'm sure TBTF banks have taken on more risk - I believe moral hazard exists in the financial system. But I am not sure this study should give anyone more confidence on this issue.

After controlling for many variables, the study found that on average eight months after an increase in the perceived government support as measured by Fitch's "Support Rating Floor" the bank would have more impaired loans around eight months later (and vice versa). 

This is using data from March 2007 through August 2013, so the time period covered both the financial crisis and the european sovereign debt crisis. Given that, which explanation is more likely?

1. The average bank goes out and makes riskier loans after getting government support.

2. A negative economic shock created a scenario where government indicated support rating floors are needed. Banks who more obviously needed help got it first. Because problems in banks balance sheets show up slowly, it took a while for the banks that got support to admit that more of their loans were impaired. Support goes away when it isn't needed and slowly the loans are found to be performing better.

3. Only after a bank is assured that it is getting more government support (this happens only after the support has been promised for some time) do the banks feel comfortable marking down part of their loan portfolio. 

4. Banks that take over ailing financial institutions become TBTF and get boosts in support levels. After taking over troubled institutions, they find that many of those loans end up impaired.

The analysis controlled for quarter year fixed effects among other things, so the simplistic "Oh they were just pricing in the timeline of the crisis" argument doesn't quite work.  But even so points 2, 3 and 4 seem far more likely than the first scenario. In their paper the NY Fed researchers claim that because tier 1 capital ratios didn't decrease then their interpretation of moral hazard is more likely to be correct, but this doesn't account for the capital raising that occurred during the crisis.

Thinking of it from another perspective, it's likely that the age of the impaired assets are greater than eight months - the banks didn't rush out to make or buy bad loans just because they got some more perceived support. The relationship between changes in the support floor an subsequent changes in the bank's portfolio are both related to the bank being in trouble and this isn't adequately captured by the other variables. It is far from certain that the story played out as neatly as people would like it to play out.

There is moral hazard and many banks have abused their positions a TBTF, but studies that confirm everyone's biases should be examined even more closely than usual. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/667324 2014-03-25T02:01:00Z 2014-03-29T01:41:33Z 10,000 Hours of Non-Deliberate Practice Deliberate practice is a very important.  When learning a skill, breaking down ideas into small pieces and mastering those segments can lead to competency and expertise if the process is repeated properly over a long enough period of time. 

Many people will put in the hours but will not actively engage in practice. This phenomena is everywhere, but it is most easily found in video games.  One account of players actively not learning can be found in a blog about StarCraft 2 on TeamLiquid.  In this account, the author (a player who was ranked among the top 85% percentile of all players) plays a strategy that has a counter so simple an absolutely new player could easily be coached to beat it via simple instructions. Most people he starts out playing it against do beat him, so he soon ends up playing in a league with the bottom 35% of players. Soon he starts winning about 50% of his matches with a strategy that is very simple to beat.

The mindset of the players who have been playing for a long time and are still really bad at an activity is interesting. Some of them have played for many years, and perhaps if you include their original StarCraft experience they might soon be candidates for the 10,000 hours needed to develop true expertise. And yet this is a group of people who have put in tons of time but have remained generally incompetent. It doesn't make them stupid, but they are definitely suffering from some forms of cognitive bias. Besides the relative immaturity of the players involved (both the author and his opponents), a few things stand out:

1. The losing player blames the game, claiming imbalance where none exists.
2. They declare that the player was not playing fairly. In Starcraft, "cheese" is what other games call cheap.  In both cases, the player tries to add extra rules to the game that their opponent isn't necessarily going to follow. This is a little reminiscent of investors creating structured products and claiming that they never expected housing markets to be correlated on a national level during the 2008 financial crisis.
3. They don't look up how to beat the specific strategy and apply the technique. Even more surprising is that some of the players who lost to the author had actually read his blog in which he describes quite clearly how to defeat the strategy.
4. Perhaps the most important factor is that most of the players who have been stuck at their level for a long don't conceive their actions in clear and defined plans. They act on feelings and find it hard to explain why they did what they did when thinking about the game they just played.

The importance of a plan is learned in many ways, but I was first exposed to it through chess.  Middle game rule #1 of the Thirty Rules of Chess* is probably the most broadly applicable rules of the thirty rules.

M1. Have all your moves fit into definite plans.

Rules of Planning:
a) A plan must be suggested by some feature in the position.
b) A plan must be based on sound strategic principles.
c) A plan must be flexible,
d) Concrete and,
e) Short.

Evaluating a Position:
a) Material
b) Pawn structure
c) Piece mobility
d) King safety
e) Enemy threats

Without a clear reason behind actions, in a chess game, a video game or in any activity requiring strategy, there is little room for significant improvement. Playing without a plan or a way to determine whether you are doing well or not is just as bad. 

So if you want to avoid 10,000 hours of non-deliberate practice, making sure that actions are formulated around plans with ways to determine whether or not the plan worked is a necessary start. 


*Reuben Fine's 30 rules of chess aren't really rules - they are more like suggestions that should be followed about 80% of the time by the average club level player.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/666141 2014-03-20T22:17:53Z 2014-03-20T23:57:37Z Rent Seekers Fighting Back Rent Seeking is using political lobbying to increase one's share of existing wealth without creating additional wealth. In many cases, the rent seeker actively prevents new wealth from being created in order to protect their share. The obvious example of rent seekers are patent trolls, but more recently other rent seekers have been in the news.

Car dealerships are a great example of the rent seeking class. Politically influential on a local and state level, car dealerships have after a long history lobbied for and gotten laws that force manufacturers to sell through them rather than directly to the consumer. There isn't a Walmart or Costco of cars because of laws designed to protect dealerships. These laws prevent manufacturers from significantly changing the terms of their relationships with their dealers and requires that they use essentially the same business model that existed before the information age. The Big Three automakers don't just have to contend with a larger union workforce than foreign competitors, they also have to keep doing business through many more of their inefficient existing relationships thanks to car dealership franchise laws that force manufacturers to continue to renew their contracts with dealerships*. This legal monopoly that the dealers have results in a transfer of wealth from consumers and manufacturers to the dealerships. For more detail on this subject, see this paper State Franchise Laws, Dealer Terminations, and the Auto Crisis.

These rent seekers recently won a victory in New Jersey when Tesla's direct sales to consumers were banned. Tesla had no previous existing relationship with dealers, and the existing law does not have provisions to handle a car company selling directly to consumers without giving a cut to some politically connected middlemen so Tesla sales were banned in the state. The mentality of the rent seekers is captured perfectly in this article on The Verge.

"This Musk guy, he wants all the profits for himself," says Tom Dougherty, a 25-year veteran of the business who now works in sales at the BMW dealership in upscale Princeton, New Jersey. "They wanted to go direct, which means no sales force. That’s cutting out a lot of people. No way that’s gonna fly."

Go back to the definition of rent seeking - these dealers think it is perfectly normal for them to insert themselves into a transaction between two parties that have no relationship to them, Tesla and the consumer, and take a cut from that transaction. It would be more efficient in the long run to pay the dealerships and sales people to find new jobs than it would be to continue having them and any future employees muck up the automobile transaction process with their legally protected inefficient local monopolies.

Another group of rent seekers are the owners of taxi medallions. Taxi's are protected from the pressures of a competitive market by a policy that grants them a legal monopoly as long as they operate in a specific manner. Taxi's can't compete on price, and they lobby for restrictions in the number of medallions issued so they weren't forced to compete very much on service quality either. That changed when Uber, Lyft and Sidecar started turning anyone with a car and spare time into potential competitors to taxis.

But a few days ago taxi companies won a victory in Seattle when they restricted the above companies to only having 150 cars active at a time. This limitation will make it very difficult for consumers to efficiently use the services of these companies.

It's unfortunate that rent seekers are winning these battles - whenever rent seekers win it means that innovation is delayed and consumers are inconvenienced. All of this happens so that parasites like Tom at the dealership and taxi medallion owners can claim a share of wealth that they are only getting because better people are being kept from performing the same job. 


*Ironically, during the auto bailout bankruptcy reorganization many Republicans remained either blissfully or willfully ignorant about how car dealerships are inefficient legal monopolies backed by the government. Their continued existence has very little to do with free markets.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/664096 2014-03-15T09:31:14Z 2014-03-15T09:31:15Z Adult as a Term of Approval C.S. Lewis was a fantasy author, and he has a great quote regarding his critics who worried about adults liking stories that are considered childish. 

Critics who treat 'adult' as a term of approval, instead of as a merely descriptive term, cannot be adult themselves. To be concerned about being grown up, to admire the grown up because it is grown up, to blush at the suspicion of being childish; these things are the marks of childhood and adolescence. And in childhood and adolescence they are, in moderation, healthy symptoms. Young things ought to want to grow. But to carry on into middle life or even into early manhood this concern about being adult is a mark of really arrested development. When I was ten, I read fairy tales in secret and would have been ashamed if I had been found doing so. Now that I am fifty I read them openly. When I became a man I put away childish things, including the fear of childishness and the desire to be very grown up.

In searching for the context of the quote, I came across the excellent essay On Three Ways of Writing for Children. Towards the end he makes the point about how realistic fantasies can be much more dangerous than obvious fantasies.

The dangerous fantasy is always superficially realistic. The real victim of wishful reverie does not batten on the Odyssey, The Tempest, or The Worm Ouroboros: he (or she) prefers stories about millionaires, irresistible beauties, posh hotels, palm beaches and bedroom scenes—things that really might happen, that ought to happen, that would have happened if the reader had had a fair chance. For, as I say, there are two kinds of longing. The one is an askesis, a spiritual exercise, and the other is a disease. 

In other words, 50 Shades of Grey represents a far more dangerous fantasy than Game of Thrones. And C.S. Lewis was saying this before the time of reality TV.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/663210 2014-03-12T21:20:48Z 2014-03-29T01:44:09Z Assorted Links 1. Counterintuitively, test prep actually helps minorities.  Perhaps a less politically correct interpretation of SAT research more generally is that it highlights how general intelligence factors and conscientiousness are heritable. These traits are correlated with both higher income and outperformance on standardized tests. 

2. Rent seekers win a round in New Jersey. If there is economic activity going on around automobiles in New Jersey, the dealerships want their cut even though they aren't adding any value. Many of these dealership owners are presumably Republicans, so this is an example of rent seekers in the "free market" party winning a round.

3. Technological adaptation favors the very young.

4. Risk aversion or approval seeking behavior by college women. The politically correct explanation is that it is the males who are overconfident. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/661039 2014-03-05T21:39:09Z 2014-03-05T21:39:10Z Random Links 1. Tracking the Ukrainian conflict - live. (Hat Tip: Garry)  The best way to pressure Russia seems to be to use the Magnitsky Act against any high profile Russians affiliated with Russia's invasion. Additionally, here are some interesting thoughts on how much US credibility actually matters in foreign affairs.

2. The perils of excess information.

"Once an experienced analyst has the minimum information necessary to make an informed judgment, obtaining additional information generally does not improve the accuracy of his or her estimates. Additional information does, however, lead the analyst to become more confident in the judgment, to the point of overconfidence."

This creates an interesting problem for asset managers who should know all of the risks to their portfolio but for whom overconfidence can be quite dangerous.

3. The French do seem to be more forgiving of personal indiscretions. After this poll I could see DSK entering politics yet again.

4. Scott Sumner on Abenomics
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/657978 2014-02-25T04:41:42Z 2014-02-25T04:41:44Z Finance Related Links 1. A valuation expert thinks about What's App from a valuation and from a trading perspective

Damodaran's trading perspective of looking at cost per user sounds plausible, but I wonder if the calculation was as simple as "Facebook messenger is going to be worth X% of the company in the future. Buying Whatsapp at least doubles Facebook's chance of dominating the message space, and X > 22% so it is worth paying almost 11% of the company for Whatsapp."  Also, from a valuation perspective Facebook doesn't have to monetize users more than 1 dollar a year in the short term, they can keep Whatsapp's promise to be ad free for 5 years and only later start aggressively monetizing a greater user base.

2. Warren Buffet talks about some of his real estate investments

He's trying to teach the idea of margin of safety, a long term perspective and investing in what you know, but it's interesting that in doing so he is highlighting investments that definitely underperformed Berkshire's book value as a whole. The farm is worth 5 times the amount it was bought in 1986, Berkshire stock is up over 5000% since 1987.  The actual calculation is more complicated than that since the farm gave off earnings in the meantime, but the difference is still quite notable.

3. MTGOX, the original bitcoin exchange, is down right now

It could be that they are insolvent or they are just particularly incompetent, but it is probably a combination of both.  The coins on the exchange, which could not leave MTGOX custody, were trading at less than 30% of the value of bitcoin on other exchanges.  It would be amusing, but highly illegal, if they were actually buying these discounted coins and arbitraging the difference on other exchanges to make it back to solvency.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/656145 2014-02-20T00:55:02Z 2014-02-20T00:55:03Z Facebook is Buying Continued Relevance When Facebook was going public they bought Instagram for around a billion dollars. Instagram was succeeding at something Facebook was trying to do - get teens to engage with a photo-sharing and social network app on mobile. Facebook paid about 1% of its market capitalization to own this emerging company. Later data revealed that it was definitely a good move - people really like Instagram.
   
More recently, they paid a lot more for Whatsapp, a messaging app founded in 2009. They paid $16 billion, or $19 billion dollars when restricted shares that will paid out as retention bonuses are included. That works out to over 10% of Facebook's current market capitalization.  Whatsapp was starting to beat Facebook in the messaging space - in most of the developed world outside of Japan and Korea Facebook and Whatsapp are the number one and number two messaging apps (It's unclear if counting Apple's iMessage as a separate app would change the math significantly).

There is no question that owning the messaging and mobile photo sharing spaces is what Facebook needs to do. And the mobile messaging space in particular appears to be very profitable. Line has been monetizing their user base quite well recently. But the big question is whether or not these nascent competitors that Facebook bought will continue to dominate the market for the foreseeable future.  

Zynga tried to implement the strategy that Facebook is applying when they bought Omgpop, the company behind the popular app Draw Something. Zynga wanted to get a foothold in the mobile gaming space but found out that success was not repeatable. While the analogy is worrying considering Zynga's subsequent troubles, Facebook is in a signficantly better position. With Whatsapp the network effects are stronger and there is no pressure for Whatsapp to create any other hits - they just have to outcompete other messaging apps and monetize their current business. 

But if consumers move on to other methods of communication in a few years, Facebook will have to buy the new competitor in the space if they are unable to innovate successfully. The social space is adapting to new technologies and is changing much more quickly than other areas. If Facebook needs to continue to buy competitors to keep their mindshare with consumers constant they will dilute their shareholders before they are able to deliver significant value. They might also start to attract the attention of the FTC.

One thing that this acquisition highlights is just how technology companies are threatened by the changing technology landscape. An investor who is bullish on technological innovation should be wary when buying the current technological incumbents - these incumbents risk either be outcompeted by new entrants or having to buy them at inflated prices.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/654748 2014-02-14T19:50:26Z 2014-02-14T19:54:20Z Any press is good press, right? The current story with Under Armour and the US Olympic speed skating team could test that hypothesis. There is a lot of speculation about whether or not the suits, which have vents that might be making them less aerodynamic, are holding the team back from winning the medals they were expected to win.

Under Armour, the only thing holding the US Olympic speed skating team back.

I'm guessing that wasn't the message the marketing executives were going for when they decided to sponsor the speed skating team. In actuality it should probably work out okay for them since their name is being mentioned in a lot of places. Also, the product that isn't working optimally, olympic speed skating suits, isn't something that is or could generate significant earnings for the company. This doesn't seem to be anything like the Lulu Lemon bend over test situation where consumers were starting to notice their favorite brand was declining in quality. As strange as it might sound, this is probably a case where Under Armour does a little bit of damage control and benefits from the free press. It will be interesting to look at this issue again in a year or so and see if there was any noticeable impact.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/651428 2014-02-07T00:07:04Z 2014-02-07T08:49:11Z Russians officials are bad at propaganda The sorry state of the hotels the media are staying in at Sochi have themselves become a major story of the Sochi Olympics. It's a sad story because the hotels were probably fully funded, and it is likely that the extreme level of corruption innate in the workings of Russian government and business led to their current incomplete and dilapidated state.

What makes this story even more of a tragicomedy is how Russian officials have responded to these stories. The WSJ article on this, titled Russian Officials Fire Back, is quite peculiar.

First, Dmitry Kozak, the deputy prime minister in charge of Olympic preparations implied that foreign journalists are making the whole thing up out of bias against Russia. Not only that, but he has proof they are making up stories because they have surveillance video from the hotel rooms which show journalists doing things that would destroy the showers before they take pictures to post online.  When asked directly about surveillance video (which he implied was aimed at the showers of the visiting media) he was pulled away by an aide who apparently realized that their boss was going down a path where he was admitting to much worse wrongdoing in order to cover up general incompetence. 

In a later press conference, Kozak said something un-ironically that is quite scary.

"The realization of such a project is an enormous victory for the entire country," he said. "As we say in Russia, victors don't get blamed."

In the West there is also a saying, "Winners write the history books." But when it is said by a prospective winner they are admitting that they are being evil but will be able to cover up their misdeeds due to the lack of influence of the losers. Apparently in Russia, government officials still take the attitude that they won't be held accountable as long as they achieve certain primary goals. 

And with the exception of Vladamir Putin's spokesman, who shows up at the end of the article, none of the officials quoted seem to worry about sounding like corrupt despots who think they can change reality just by lying enough.

If it is this bad when the world spotlight is shining brightly on Russia, it's scary to think about how corrupt and broken things are on a day to day basis.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/649878 2014-02-04T01:13:37Z 2014-02-04T01:13:38Z Negative EV Superbowl Betting Bloomberg had an article before the big game on how amateurs and professional bet on the Superbowl.  Amateurs like lottery ticket type payouts - bets that pay off in low probability situations. The two trades highlighted in the article were "Will there be a safety" and "Will there be overtime?" 

Thanks to the first play of the game, amateurs made out well if they bet the first score would be a safety (or even if there would be a safety at all). But it was yet another game without any overtime. The amateurs pushed the overtime odds from a 13 to 1 payout to a 6 to 1 payout - and despite a small point spread it didn't even come close to paying off.

In general, the favorite trades of retail "investors" are either even odds or ones in which they risk a little capital to make a lot. In general, risking a lot of capital to make a little bit just doesn't seem fun or safe - even when the probabilities are in the investor's favor.  It's also a lot more fun to make or even read about high payoff bets than it is to look at all of the bets that didn't pan out. 

And while these bets are often negative expected value, they can sometimes make money. Plus, having money riding on random events can turn a boring game into something interesting. So while retail bettors are going to lose money on average, maybe the bets aren't negative expected value after accounting for psychic benefits.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/645762 2014-01-24T22:47:07Z 2014-01-24T22:47:08Z Some Links, Some Comments 1. The Cult of Overwork by JamesSurowieki. It's interesting to note that overwork generates cognitive dissonance where employees will be more dedicated to their job after working long hours because their actions indicate that they have been dedicated. Cialdini calls this form of influence "commitment and consistency."

2. NFL treats is cheerleaders quite badly if they are thought of as employees. If instead the NFL made clear that cheerleaders were joining an elite club and not a job, it would be interesting to see if the quality of cheerleaders fell significantly.

3. Some historically bad forecasts. It's interesting to note that Samuelson wasn't alone in his bullishness on the U.S.S.R. - most economists after World War 2 believed that planned economies, which could generate far more savings and investment, would win out in the end.

4. The Bill Gates 2014 letter. It's an interesting read that highlights some of the good that foreign aid does, but it is obviously biased in favor of what Mr. Gates has been spending billions of dollars on. One amusing part is in which Bill Gates uses the general population's cognitive bias of anchoring as a rhetorical flourish: 

"When pollsters ask Americans what share of the budget goes to aid, the average response is “25 percent.” When asked how much the government should spend, people tend to say “10 percent.” I suspect you would get similar results in the United Kingdom, Germany, and elsewhere." 

The actual amount is below 1%, and if Americans knew this they still might think it should be slightly lower. The 10% figure was only mentioned because it was within an order of magnitude of the erroneous 25% estimate. While foreign aid definitely saves lives in the short term, the letter definitely overstates their positive long term impact.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/641977 2014-01-15T00:18:46Z 2014-01-15T16:45:15Z A Ballsy Strategy Step 1: Create a portfolio of 25 companies to hold for the year. Make it public.

Step 2: Create a fund around this portfolio of 25 companies - companies that will not change. The fund will be equal weighted.

Step 3: Charge investors 3.5% for the privilege of investing in this fund, because buying 25 equally weighted stocks and holding them for a year is really hard

Step 4: Wait and see if anyone chases the -3.5% underperformance. Sell them all of the other high fee products you can! (Step 4 is speculative)

Outside observers: Wonder who would actually invest in this fund. Check to see if those investors are managing their own money or are pretending to act as fiduciaries.

I'm not using the company or fund name in this post. I'm not sure if the actual fund will be equal weighted and exposed to the same 25 stocks throughout the year, but that is what the news stories suggest. Even if it was a harder strategy to replicate, 3.5% in fees is a high cost for any long only US equity strategy.  And there are many funds that charge really high fees for simplistic strategies - the difference is they usually aren't mentioned in top Bloomberg stories.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/641279 2014-01-13T11:26:37Z 2014-01-13T11:26:38Z Cocktail Signaling in Vietnam Those who are used to Western style cocktails and prefer to drink their alcohol in the form of cocktails should tread carefully in Vietnam. A general rule of thumb is that drinks will be worse than you expect them, regardless of the venue. Even in the States, a bar with live music, a dance floor or other entertainment expected to have worse then average drinks. But in Vietnam, even a nice hotel bar with a long cocktail menu will mess up anything more complicated than a rum and coke - and that's if they have rum in the first place, more often than not they'd only be serving whiskey or vodka.

This should be expected - in a country with a GDP per capita of under 2000 US dollars, liquor from the Western world is an expensive luxury. Those in a position to afford the liquor will be more likely to drink it straight, and have an expensive bottle to signal how wealthy they are to their friends. One of the principles involved in finding good food, taken from Tyler Cowen, is that the quality food rises or falls to meet the quality demanded by the consumers. Expecting to find good cocktails in a place where no one drinks them is akin to hoping to find good Chinese food in a community with no Chinese residents. 

And even in the United States, appreciation for well made cocktails only really heated up in the past decade or two. Vietnam's cocktails might most closely resemble those made in the US in the 80's, "...when artificial flavoring and sweeteners were introduced, and fresh squeezed juices and class liquors deemed "our Grandfather's booze" were pushed to the side."

Still, there are some places that put effort into making cocktails according to modern Western sensibilities. Hiring a bartender who actually knows what they are doing and providing them with fresh ingredients is relatively expensive compared a getting bartender whose comparative advantage is just their foreign language skills and giving them off the shelf mixers, so the bar wouldn't just lay out another cocktail menu and expect people to know that their cocktails are going to be good. They show that they have some really interesting stuff going on.
The above bar, Angelina, is attached to one of the most expensive hotels in Hanoi. They have a few very involved cocktails on the front of their menu that cost between 150% to 200% the price of the rest of their drinks. When ordered by someone not sitting at the bar, the waiter will invite them to the bar to look at how these cocktails are made (it's a drink and a show). These drinks are relatively labor intensive and the process is relatively complicated - and sometimes dry ice is added around the drink for no reason at all. The final result is a drink that both costs and tastes like it was made in NYC. The important thing is that the other cocktails at this bar are also made very well. By showing that they are serious about cocktails the customers can order the cheaper classic drinks off of the menu without worrying that about being stuck with a random green sickly sweet concoction. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/641271 2014-01-13T09:58:24Z 2014-01-13T09:58:26Z Regarding the Seahawks Restricted Ticket Sales There is some controversy around the way the Seahawks are selling tickets to the AFC title game. They aren't letting fans from the state of their opponents, the 49ers, buy tickets. They are only being sold locally.

"...fans wanting to cheer on the Niners in the January 19th NFC Championship Game in Seattle will not be able to buy tickets through the Seahawks, as the team is restricting sales to only zip codes in Washington, Oregon, Montana, Idaho, Alaska, Hawaii, and parts of Canada."

This ticket ban is aimed at keeping both distant ticket scalpers and opposing fans out of the ticket buying process. The tickets would sell out either way, so this is unlikely to impact the Seahawks organization financially - if anything the slight increase in home field advantage that this generates helps raise their longterm value. What the restriction really does is gives more consumer surplus to Seahawks fans. People who buy tickets are getting something worth much more than face value, as suggested by the inflated price of tickets on secondary markets, so keeping tickets local means more Seahawks fans will benefit.

One of the big selling points that sports teams arguing for stadium subsidies use is that it brings in tourists for local businesses. Seattle's stadium, CenturyLink Field, was publicly funded after a long debate. And this game will surely bring in fans from outside of Seattle, but there is no question that making the visiting team's fans buy tickets on the secondary market will mean fewer visitors. It will be interesting to see if this gets brought up the next time an owner threatens to leave a city without public funding (especially if the Seahawks need a new stadium at some point in the next few decades).

Unfortunately that probably won't be the case - there has been agreement among economists that subsidies are a waste of public money for some time, and yet subsidies persist almost every time a team threatens to leave a city without a team. Maybe proponents of public funding for stadiums should just come out and admit that the subsidy is for local sports fans and isn't about economic development.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/640989 2014-01-12T13:50:45Z 2014-01-13T00:08:23Z Indirect Spending and Uber's Self Interested Surges Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay, lays out some of the history.

"Since the 1970's there has been growing evidence supporting the frequently heard conjecture that credit cards encourage spending. For example, it is known that peoplewho own more credit cards make larger purchases per department store visit (Hirschman  1979), and that restaurant tips are larger when payment is by card (Feinberg 1986). There  is also evidence that credit card users are more likely to underestimate or forget the amount spent on recent purchases (Soman 1999). Perhaps the most compelling evidence, however, is that offered in an experimental analysis of the effect by Feinberg (1986). In that investigation participants were asked how much they would be willing to spend for various consumer products in a setting where credit card paraphernalia ostensibly unrelated to the task were displayed on the experimental desk. He found that by so decorating the experimental setting, he could boost hypothetical willingness-to-pay estimates by 50± 200%, relative to the estimates of a control group. We refer to this increase as the credit card premium."

If the mechanism for increasing the willingness to pay isn't liquidity but the indirect nature of the transaction, then making the transaction even more indirect should increase the willingness to pay even more. It's a large part of why subscription models and cellphone based payment systems are so popular these days. Consumers like the convenience and companies like the additional spending. The most talked about startup taking advantage of indirect spending is Uber, in which consumers just call a car on their phone and don't have to deal with inputting their credit card after the first time. They don't even have to look at the final price of the service as they leave the car if they don't want to look at their phone - the bill still settles.

However, things sometimes come to a head when the indirect spending is so high that consumers feel ripped off afterwards. Uber calls their prices during periods when supply is low relative to demand "surge pricing."  After NYE and a few snowstorms, times when prices need to rise for supply to meet demand, the consumer hangover has been enough to generate articles about the issue in the NYT  (Hat Tip: Huey K), among other places. Uber's justification is that without their dynamic pricing there would be shortages. But as the NYT mentions, an entity moving pricing up and down to accommodate demand in real time is very different from facilitating a real market where the bidding price of the consumers and the asking price of drivers are transparent to each other. Exposing just how much a price increase brings in new drivers would go a long way towards reducing consumer anger over high prices.

And given that Uber takes a 20% cut of their 7x surge prices (Lyft's cut remains the same when they raise prices), they are anything but a disinterested broker trying to optimize supply and demand - surges mean profits. The combination of consumers being disconnected from the payment process and pseudo monopoly pricing power is a dangerous one, as many people have found out the day after NYE. Frequent users of Uber should hope that competitors such as Lyft remain viable in the face of Uber's price cuts to their discount service. It would be interesting to see how profitable a business utilizing convenient indirect payments could get in the absence of effective competition.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/636858 2014-01-02T09:44:12Z 2014-01-02T09:44:13Z NFL Ticket Demand Probably Didn't Fall I noticed a story about NFL playoff tickets today. Some of the games are in danger of not selling out and this would result in local TV blackouts for the broadcast of the games. The story is being sold as if demand for NFL tickets is down.

"It would be a tremendous embarrassment to the league to have three of four playoff games blacked out locally, and likely, the tickets will get sold somehow to avoid that scenario. But there's a bigger issue here. Is this the most stark example that NFL fans aren't too excited to go to games anymore?"

But that story is wrong. What is really happening is that the NFL forecasted demand incorrectly. They are charging much higher prices for the tickets - tickets for the wildcard game that isn't selling out are priced higher than their divisional championship game in 2012. So the demand didn't necessarily fall, but the price point did rise and we are seeing that fewer tickets are sold as a result of this.

The headline should read "NFL teams mis-forecast ticket demand and may need to lower prices to sell all of the tickets on time*." But that doesn't make as a good a story.


*For most products it makes sense to keep the price level high enough so that there is supply left over because prices low enough to sell out don't maximize revenue. In general, if a good sells out it means it was priced too low. But for NFL games there are additional consequences to not selling out, from local blackouts of the game to negative signaling about the popularity of the teams playing.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/636435 2014-01-01T05:20:36Z 2014-01-01T05:20:38Z The Cost of Dining Out in Japan - A Recent Tourist's Perspective
I was only in Tokyo for five days, but one thing really stands out to me: it's pretty cheap to eat as a tourist in Japan these days.  We've had really good meals for relatively small amounts of money. A sushi dinner that included tons of toro, ikura, uni and eating until we were full ran well under $40 per person. A yakitori dinner that included drinks only cost $25 per person when in the US something similar with smaller portions was over $80 each. This food was in found in Tokyo, but in areas where less tourists and expats are found such as Naka Meguro, Nishi Shinjuku and surprisingly in Asakusa (which is high up on the list of tourist destinations, though the sushi found there was far away from the temples).

There are a few reasons why the food was so cheap.

1. The currency. Since Shinzo Abe most recently came to power promising an escape from deflation, the yen has been selling off verses the dollar. If the yen were still at 80 prices would be about 30% higher from my perspective and things would not feel quite as cheap.

2. I live in SF. San Francisco is getting more expensive every year as businesses cater to many newly affluence workers that are less price sensitive than other parts of the world. Combined with supply constraints and higher labor costs this means SF meals get expensive quite quickly. Meals also feel cheaper when we don't have to pay for service separately

3. I'm comparing medium to high end SF restaurants to average/low end Japanese restaurants. I'm mistaking authenticity for quality and comparing apples to oranges. This is entirely possible but judging by both food quality and services the Japanese restaurants are winning.

4. Japan's high prices are found in consumer staples and real estate. By staying outside the most popular destinations we've avoided the real estate issues. Outside of the high cost areas the only surprisingly high prices we saw were in the occasional purchase of consumer non-durables. These are caused by regulations which generally prevent big box retailers from entering the market and driving down prices.

Towards the end of the trip we did find some expensive restaurants. A meal at a random Udon shop in a Ginza mall was significantly more expensive than a comparable meal in SF. We also managed to find some expensive steak at a very good little steak house, which was good enough to justify its high price. Sushi at the Tsukiji Fish market was as expensive as it was in SF and the quality was similar or worse (We were comparing it to a great experience the day before in Asakusa), but we've been told that we went to the wrong sushi place at the market. We also managed to find some bad value Japanese food in an alley famous for its yakitori. The proprietress decided that us being foreign meant that we wanted our grilled skewers drenched in teriyaki sauce, so it's hard to tell if this area would have had good food at reasonable prices if we had been able to effectively communicated.

But in general, the low prices and high quality food were found by eating local styles of food in areas away from those frequented by tourists or expats. Traveling to Tokyo and trying to eat American style food and staying in Ginza or Roppongi would probably be a way to increase costs with the main benefits being more english language menus. 

With inflation picking up in Japan, now might be a good time to book a trip. Just make sure you eat in the right areas of Tokyo.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/631203 2013-12-17T00:10:06Z 2013-12-17T00:10:07Z The Lucas Critique and Patents The Lucas Critique is the idea that when policy targets a variable that is supposed to be correlated with a desired outcome, that variable will become decoupled from the desired outcome. That is because by targeting the variable the rules of the game have changed, and with new incentives the variable may no longer be tied to the same causal chains. This critique was originally applied to large scale macroeconomic models that relied on extrapolating observed relationships after one variable is manipulated via policy, but the critique applies more generally as well.

I've posted before about today's disconnect between innovation and patents, but I didn't realize how directly the Lucas Critique applies. Policy was actually set up to increase patents in an attempt to revitalize the economy. Gordon Crovitz explains in his WSJ column: (Hat tip: MR)

Today's patent mess can be traced to a miscalculation by Jimmy Carter, who thought granting more patents would help overcome economic stagnation. In 1979, his Domestic Policy Review on Industrial Innovation proposed a new Federal Circuit Court of Appeals, which Congress created in 1982. Its first judge explained: "The court was formed for one need, to recover the value of the patent system as an incentive to industry."

At the time, policy advisors believed that patents were correlated to economic productivity. This set the stage for today's world, where the correlation between patents and productivity might now be negative. That's because so many of today's patents end up functioning as primarily as a tax on the companies who are moving into new markets. Google spent billions of dollars buying Motorola for its patents to protect its Android ecosystem so it would be armed in the patent wars. Money is being spent on patent portfolios, patents which often describe absolutely trivial ideas, when this money could otherwise be spent on real research (or at least buying companies that did real research and have a functioning product to show for it). 

From 2007 to 2011, the CBO found that 89% of the increase in patent lawsuits come from software patents. A recent bill by the House of Representatives targets patent trolls (20% of the lawsuits come from non-practicing entities), but after IBM and Microsoft lobbied to protect software patents the bill does little to stop the patent arms race between large corporations.

The Supreme Court is hearing CLS Bank v. Alice Corp soon, a case about whether a computerized escrow process is patentable. Reform seems very unlikely to happen congress right now, but it will be interesting to see what comes out of the Supreme Court.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/629262 2013-12-11T18:13:37Z 2013-12-11T18:21:39Z Truth in Nigerian Chain Letters? Nigeria is looking for $50 billion dollars in missing oil cash. Apparently someone at the Nigerian National Petroleum Corp misplaced the cash.

"The NNPC failed to remit to the government 76 percent of oil revenue earned from January 2012 to July 2013"

Not all of it is missing oil money. Some of the money is missing because oil was exchanged directly for refined product. And even if that is the case it's still likely that some of the refined product was itself stolen from the government. But even though there are probably quite a few Nigerians with this misplaced money, it's pretty unlikely that they need access to a random US bank account. I'm pretty sure they've already figured out how to get it out of the country on their own.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/626368 2013-12-04T06:10:15Z 2013-12-04T06:10:16Z A Protest That Encourages the First Mover Most protests against the government are costly and dangerous things. Protesting involves leaving work in the middle of the day (a population with a low employment to population jobs makes protests more likely for numerous reasons) to go to a city center and face off against police who are armed and have the existing regime backing them up. It's particularly dangerous to be among the first protestors entering this situation, because the police are much more likely to arrest a small group of initial protestors whereas it is logistically difficult to do the same thing to a large mob.

Given these constraints, it's a wonder that significant protests against the powers that be get started at all.  A small group with a special combination of courage and foolhardiness, combined with a focal point that will assure marginal potential protestors that they won't be the only ones, is generally needed to get the ball rolling.

Recently, large amounts of protestors have taken to the streets in Kiev, where the Ukrainian people are upset that their President Viktor Yanukovych is so far in the pocket of Putin that he blocked an EU free trade deal favored by many. (It might be that Yanukovych gave in to Russian pressure because he worried a recession induced by Russian sanctions would lose him the election in 2015, but the result is the same.) In this case the focal point wasn't just Yanukovych's rejection of an EU trade deal, but the brutal way the police broke up the initial protest composed of those first movers.

What's interesting is that there is an idea is floating around for an additional method of protest that encourages Ukrainians to join the protest and join noe. The strategy is simple: Encourage people to move their money out of the overvalued and pegged Ukrainian hryvnia into other currencies. Even better is taking the money out the banking system entirely.  If enough people do either of these actions, the Ukrainian Central Bank will struggle to hold up the banking system. Even if they only change currencies, Ukraine will be forced to weaken their currency as their reserves are low and they are running a current account deficit. This is a really interesting strategy for the following reasons:

1. Symbolically, it has citizens protesting an economic injustice with micro-economic sanctions of their own.

2. Unlike most forms of economic protest, it imparts potential benefits to participants outside of just increasing the chance that their demands will be met. Protests are usually relatively dangerous, but in this case it might be the only way to be safe.

3. It encourages the first movers, as the sooner the currency is converted to a more stable currency the less they risk from devaluation. And if enough people withdraw their deposits then a bank holiday might be declared in which those slow to join in will lose access to their money.

4. If it causes a devaluation then Yanukovych is more likely to lose the next election. 

The potential for turmoil already has Ukraine's Central Bank Governor scrambling, he released a message to the public telling them not to withdraw deposits and vowing that he would do everything needed to ensure stability.

Like all protests, the government has numerous ways of fighting back against this type of move. Figureheads with too much to lose should still be reluctant to join in. And additional capital controls can be imposed once the problem becomes obvious. But the overall lesson of finding ways to make it not just morally right, but safe and prudent for people to join a protest is an idea that more first mover protestors should think through.

It will be interesting to see how the situation in Ukraine develops. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/626014 2013-12-03T07:50:51Z 2013-12-03T07:57:41Z A Chart of Misallocated Capital Italy's productivity.  In Italy, total factor productivity has actually fallen over the decade of the 2000s. One of the contributing factors is that there has been investment growth in sectors with falling productivity, rather than investment growth in sectors with higher productivity. 

"Investment and TFP Growth, Italy vs. Germany (1995-2006; 2 digit manufacturing sectors)"
In this chart, Italy's manufacturing sectoral investments are contrasted with Germany's. In Germany, many of the sectors seeing higher productivity growth often receive more investment. Not all sectors require additional investment just because their productivity is rising. Competitors outside the country might outcompete local producers even when productivity is improving or rising productivity might mean that the total demand for the product is taken care of by current producers. But it's instructive to note that there is widespread acceptance that Germany is the healthy economy while Italy is quite unhealthy.

This misallocation of capital is correlated to Italy's inability to incorporate information and communications technology into their businesses the way the United States and other countries have done over the past few decades. Inefficient management practices, such as a focus on tenure and equality over performance based metrics, which have been found to hinder technological adaptation, are more common in Italy than in comparable Eurozone countries.

But this ineffective economy also provides a great answer to those who wonder why capital allocation is important in the first place. When the normal capital allocation process breaks down we will see scenarios like the above chart, magnified significantly. The capital allocation process can break down for many reasons, ranging from group think and herd behavior to government regulations favoring the less productive sectors.  But in either case, it will generate a scenario like the above chart where less efficient sectors are getting unproductive investments at the expense of more productive sectors.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/623437 2013-11-26T00:54:09Z 2013-11-26T00:54:10Z Assorted Links 1. Think tanks, charities and other non-profits need to be more aggressive in combating internal theft/fraud/embezzlement. As long as employees know that the worst case scenario of stealing is that they will have to pay back the money then stealing will be a positive expected value move for those with the opportunity and a lack of morals.

2. Arnold Kling talks about "The Great Factor Price Equalization" in which we are given one of the better explanations for wage stagnation in the developed world.  If it's the second time I've linked to this article it is because it is important. This link was inspired by a really bad article from the CEPR on a similar topic - except the CEPR's economist writes in a such a way to indicate that they believe that an increase in supply should lead to an increase in price. 

3. Beer goggles just got more dangerous. I'm sure comedians will come up with better jokes than that. Referencing this chart, we see that weight limitations mean that plan B does not work among about 25% of white US 30 year olds.

4. Politics is not about policy, and other views from Robin Hanson. This link deserves its own post but is very much worth reading.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/622350 2013-11-22T11:53:28Z 2013-11-22T11:56:07Z Paying with Time With the holiday shopping season coming up, it's a good time to remind everyone that widely known good deals often have extra costs due to so many people trying to take advantage of them at once. Sometimes the cost is something we are willing to pay - for many cyber deals you just have to be one of the first X customers to buy a good that is on clearance.  This may involve getting ready at a certain time and expending effort to be among the first in line, but the non-monetary cost is generally reasonable if the deal is good enough. But the most common mistake people make is not accounting properly for time spent. The time spent waiting in line, an activity that few claim to enjoy, acts as a large increase in the price of the goods being sold.

When a fast food restaurant like Chipotle or KFC announce they are giving up free food, lines form around the bloc. People will wait over an hour in line to get food that sells at retail value for less than half of one hour's wage. 

And the people camping outside of Best Buy a week before Thanksgiving aren't very likely to find deals that save them more than a thousand dollars.

Going to the mall on Black Friday involves many of these types of transactions, as the extra long lines capture most of the consumer surplus that might be gained from the larger than average sales.

What drives these behaviors?

1. Some people are relatively irrational and either don't consciously value their time or act on the basis of inertia and once they've gone.

2. Some people enjoy the process of waiting in line and getting deals that aren't available to others. This certainly seems to be the case for those camping outside of stores a week before Black Friday.

3. Some people are constrained in the amount they can work, so spending a significant amount of leisure time to save a little more money makes economic sense. Even for those with continuous earnings potential, the next marginal hour of work is likely to be at least slightly less productive than the previous hour of work. (Incidentally, this is why European productivity numbers compare favorably with the US - their shorter work weeks help them prioritize.)

4. Some people enjoy tradition.

People who go for reasons number two, three or four are reasonable. But it is worth rethinking the assumptions as it is likely that there are many people in category 1 who go shopping on days like Black Friday even though they should know better. So before you go shopping and end up waiting in different lines on Black Friday, make sure that you know the true cost of the items you are purchasing. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/620874 2013-11-18T19:25:06Z 2013-11-18T19:30:27Z D(x) Liar's Dice Liar's Dice with large groups of people. My group plays the elimination variant, not the drinking one. I recently got another pound of dice from Chessex - but this time I opted for the assorted set. Instead of getting just six sided dice, it comes with d4, d6, d8, d10, d12 and d20. I want to play Liar's Dice with these dice too.

Proposed game: D(x) Liar's Dice (Or Nerdy Liar's Dice).

Each person starts with a full set - (d4, d6, d8, d10, d12, d20). It works like liar's poker, where if someone says "three 4s" they are guessing that between everyone, there are at least three 4s on the table. The next person can either call "three 5s" "three 6s" "four anything" or "bullshit" - in a call of bullshit the dice are revealed and the person who is wrong gives up a dice and it goes until only one player has dice left.

You still only call out a certain number of dice showing numbers between 1 and 6. D4 and D6 work as expected - the number on the dice is the number used. For the other dice it is pretty intuitive. Primes are 1, everything else consists of their factors excluding the number 1:

7 is 1
8 is 4 or 2
9 is 3
10 is 5 or 2
11 is 1
12 is 6, 4, 3 and 2
13 is 1
14 is 2 or 1 (The 7 counts as a 1 in this case unless 1's are wild)
15 is 5 or 3
16 is 4 or 2
17 is 1
18 is 6, 3 or 2
19 is 1
20 is 5, 4 or 2

When playing with wilds, 1's are also wild unless they are called by anyone (if the second person can call 1's then the first person bid too low), so anyone can say "four 1's" if that is a legal bid and then ones are no longer wild. In liar's dice with d6 it doesn't matter which dice you give up, but in this game there is some strategy behind whether you want the potential wilds or you want to keep your d4.

This variation should make the strategy more interesting than traditional liar's dice, because now it is actually less safe to move up from 2 to 3 or from 4 to 5, while in the classical game it was always optimal to make slightly aggressive bids of the number of 4's and 5's so people would bid that there are the same number of 5's or 6's on the table rather than having to call bullshit. Now no number is safe, though bidding a slightly aggressive number of 3's to let the person after you bid the same number of 4's or a higher number of 2's seems like a decent strategy.

This game definitely needs some tweaking and play testing - maybe it should be played with more D20s and less D8s. Maybe dice should be drafted or handed out randomly to allow for asymmetric play. 

I'm probably going to need more dice.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/619901 2013-11-15T22:50:00Z 2013-11-16T19:28:44Z Are Walmart and McDonald's Welfare Queens? Barry Ritholtz, the man behind the Big Picture trading blog, has a column on Bloomberg View where he chastises Walmart and McDonald's for their large number of workers on welfare.  It's titled, How McDonald's and Wal-Mart Became Welfare Queens. He gets right to the point.

"According to one study, American fast food workers receive more than $7 billion dollars in public assistance. As it turns out, McDonald's has a “McResource” line that helps employees and their families enroll in various state and local assistance programs. It exploded into the public when a recording of the McResource line advocated that full-time employees sign up for food stamps and welfare.

Wal-Mart, the nation’s largest private sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida Congressman Alan Grayson, in many states, Wal-Mart employees are the largest groupof Medicaid recipients. They are also the single biggest group of food stamp recipients. Wal-mart’s "associates" are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies."

Ritholtz highlights three different possible solutions to the scenario that highlight the extent to which McDonalds and Walmart are abusing the system.

1. Raising the minimum wage.

2. Taxing companies for any public assistance their employees need.

3. Implement a guaranteed basic income for all adults like is currently proposed in Switzerland.  

(It seems appropriate to note that while basic income replacing welfare is an interesting theory, the proposal on Switzerland's ballot is absurdly high, as they are attempting to guarantee income equivalent to $67,000 a year for a married couple.)

The first solution references a long running debate among economists. If wages are forced significantly higher, it's likely that some current employees will be better off and a lot of potential future employees will be never be hired. Automated cashiers are basically a solved problem, and it's no coincidence that McDonalds are rolling them out in Europe where labor costs are higher before we see them here in the United States. Walmart also has cashiers that could be replaced if costs were higher.  It's a little ironic that people complain more about Walmart and McDonalds hiring cheap workers than they do about Amazon, which bought the robotic company Kiva Systems in order to reduce their need for human workers. If labor costs get high enough, Walmart might start to look at this type of automation more seriously.

The second solution jumps out as being immediately farcical. Before jumping to tax companies that employ anyone needing assistance we should stop and think about what that would mean for the hiring prospects of anyone that looks like they require this assistance. This is an example of the type of regulation that actively hurts those who it is designed to protect.

The third solution, which Ritholtz acknowledge as extreme, is interesting in theory. A guaranteed basic income, properly designed, is not very different from a negative income tax or our current Earned Income Tax Credit.  Negative income taxes theoretically work quite well, their main downside being that they lead to high marginal tax rates and reduce the ability of a society to be open to poor immigrants. The main problem with guaranteed income plans comes with the exceptions - the income is designed to replace welfare but there are always some groups that are seen as slightly more deserving and the process will inevitably allocate them a little more than others. This turns what was supposed to be a simple catch all program into one that merely magnifies the current problems of the welfare state. 

Thinking about whether or not Walmart and McDonald's are abusing the current system is an interesting question. But when we look at proposals to fix the problems it becomes apparent that the alternative to paying a lot of workers a bit of money could lead to these companies investing more in capital and paying fewer workers. 

Without employment opportunities at Walmart and McDonald's and other similar work places, many of these workers would have no jobs at all. The government would then have to pay out even more benefits to support people with no other incomes. It's not like they are perfect corporate citizens, McDonald's and Walmart have lobbied federal, state and local government for various rules that help them and hurt their competitors while they take advantage of every tax break they can. 

It's reasonable to think that many of the tax loopholes used by these companies should be closed and the various laws their lobbyists helped tweak before passage should be repealed. But the fact that McDonald's and Walmart employ low skill labor and pay them at the levels dictated by supply and demand is not something that should be held against them. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/618193 2013-11-11T11:17:41Z 2013-11-11T11:17:42Z Useful and Wasteful Signaling One of the goals of this blog is to make sure that I never run for office in the future.  That said, a recent Talking Points Memo by McMillan Cottom, Why Do Poor People 'Waste' Money On Luxury Goods?, looks at an interesting topic. (Hat tip: Gene Z)

"I learned, watching my mother, that there was a price we had to pay to signal to gatekeepers that we were worthy of engaging. It meant dressing well and speaking well. It might not work. It likely wouldn't work but on the off chance that it would, you had to try."

Owning a nice outfit for job interviews or general interaction with the outside world can vastly improve the results. That's why the phrase "dress for success" is generally accepted as common knowledge. And it is a particularly useful strategy for groups that are likely to be discriminated against in everyday interactions. 

However, the point doesn't actually counter the normal critiques of wasteful signaling spending by the poor.  When people discuss the wasteful spending, it isn't about buying a nice suit. They are usually geared towards behavior such as spending more money on large jewelry or flashy footwear.

For those looking for some hard data on this, the 2012 Federal Reserve's Consumer Expenditure Survey found that African Americans had after tax incomes almost 30% lower than Whites and Asians yet spent almost 25% more per year on footwear. On an absolute basis, the only category of people to spend more on footwear were Asians, yet they still spent a significantly lower amount of their total after tax income.

The spending on footwear and jewelry and other such items is still signaling, but unlike buying a nice suit this is signaling at the in-group. The people who respond positively to these signals are generally in similar cultural and social circles. Buying suits or outfits to fit in at a common work environment is signaling an outside group and potentially changing their view in an important way.  Signaling outside groups can be a productive behavior, and if enough people do it then it can change people's perspectives and reduce the need to signal in the long run.  

On the other hand, signaling to inside groups is very wasteful. Everyone is wasting resources in an attempt to establish relative status positions. This type of behavior should not be encouraged unless there are other significant benefits from signaling behavior. An example of a signal that could be useful is parents bragging about their children's educational achievements* or people exercising and eating healthy to be in the best shape.  In the long run, this is much more productive than trying to wear nicer clothes or drive nicer cars. 

Cottom ends their piece with a plea for people to be more understanding of signaling by poor people.

"You have no idea what you would do if you were poor until you are poor. And not intermittently poor or formerly not-poor, but born poor, expected to be poor and treated by bureaucracies, gatekeepers and well-meaning respectability authorities as inherently poor. Then, and only then, will you understand the relative value of a ridiculous status symbol to someone who intuits that they cannot afford to not have it."

It is true that most of us (I'm making demographic assumptions about my 15 known readers here) aren't in a position to understand what poor people go through. But overall the piece lacks an understanding that there are important differences between useful and wasteful signaling. The useful signal helps correct an incorrect view held by others. The wasteful signal is spending limited resources on playing in-group status games with no long term benefits.


*To an extent. Our current obsession with college degrees regardless of the cost or usefulness of the major is actually one of society's current problems.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/616239 2013-11-05T20:42:37Z 2013-11-05T20:42:37Z Anecdotes about Russian Drinking 1. Beer has only recently been labeled as an alcoholic beverage.

2. The etymology of vodka is very closely related to slavic the word for water.

3. "Russia’s official addiction expert, who in the past, according to Heidi Brown, has advised Russians who like to drink a lot with dinner to open their windows a bit in order to get less drunk..." (Hat tip: MR) The rest of the article discusses why Alcoholic Anonymous is not popular in Russia. One of the major reasons is that excessive drinking is not seen as problematic unless/until it causes a person to end up homeless in a ditch.

Less funny is this chart of male and female life expectancy, which shows some of the impact the drinking culture has on life expectancy:
The difference between male and female life expectancy was over 11 years in 2011, the largest difference in the world.
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Jeff Lonsdale