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.

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.

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.

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.

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. 

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.

" 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.

Indirect Spending and Uber's Self Interested Surges

The farther people get away from handing over cash, the less inclined they are to count their dollars closely.  Nowadays stores need to accept credit cards because very few people carry sufficient amounts of cash, but when stores started to accept credit cards and agreed to pay the fees it was because they realized that customers would buy a lot more when cash didn't change hands right away and utilizing a credit card was more convenient than offering and managing store credit. Academic studies have long found this to be the case as well. The introduction to a 2001 paper by Prelac and Simester, 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.

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.

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.

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.