Friday, June 26, 2009
Get to work Batman!
My home state of Michigan is struggling badly. My visits home show the decline but I didn't realize it was as bad as it is. I just read that unemployment there is 14.1%. Holy crap! It's a beautiful state and the people are really nice. What a shame this is happening.
You can't use the word in the definition
I am reading this book called "The Origin of Wealth" and in it the author traces through the history of traditional economics. He criticizes traditional economics because he thinks that the model of a rational actor is flawed. He says that the agents in that model (us) are assumed to think about every possible scenario before making a decision and one would always make the economically optimal decision.
I think the above is intuitively obvious but, to belabor the point, I will reiterate an example he cites. Let's say you were on a plane seated next to a banker and a rich woman. The woman, being a fan of behavioral economics, decides to conduct a study on human rationality and proposes a deal. She will give both you and the banker $10,000 under the following conditions: the banker decides how to split up the money and you decide whether to take the deal. If you refuse, then both of you get nothing. So the banker, being the greedy banker, proposes that you get $10 and he gets the rest. What should you do? Well, in purely economic terms you should take the money because $10 is more than you had before. Low and behold, people don't take the money. Why? Because they are irrational agents.
What is rationality? If rationality is something that exists outside of human beings then we can say in absolute terms that we are irrational. But, if rationality is a quality of human beings then how can you say that the exercise of that quality is irrational? You can't. I believe rationality is an inherent human quality. To say that the universe, or a dog, is rational is nonsense for precisely this reason. Only people can be rational or irrational.
It is a mistake to translate economic optimality with human optimality and to call the difference irrational. Economics, is about the latter not the former.
I think the above is intuitively obvious but, to belabor the point, I will reiterate an example he cites. Let's say you were on a plane seated next to a banker and a rich woman. The woman, being a fan of behavioral economics, decides to conduct a study on human rationality and proposes a deal. She will give both you and the banker $10,000 under the following conditions: the banker decides how to split up the money and you decide whether to take the deal. If you refuse, then both of you get nothing. So the banker, being the greedy banker, proposes that you get $10 and he gets the rest. What should you do? Well, in purely economic terms you should take the money because $10 is more than you had before. Low and behold, people don't take the money. Why? Because they are irrational agents.
What is rationality? If rationality is something that exists outside of human beings then we can say in absolute terms that we are irrational. But, if rationality is a quality of human beings then how can you say that the exercise of that quality is irrational? You can't. I believe rationality is an inherent human quality. To say that the universe, or a dog, is rational is nonsense for precisely this reason. Only people can be rational or irrational.
It is a mistake to translate economic optimality with human optimality and to call the difference irrational. Economics, is about the latter not the former.
Wednesday, June 24, 2009
If I have to say it, you wouldn't understand
This blog is degenerating a bit into my personal tastes so I thought I would amuse myself with yet another pat on the back. I was surfing the internet for ideas on my math helper program. One thing I would like to do, is be able to predict which problems a person will have trouble with. Let's say a student has trouble adding 6+7, then it logically follows they would have trouble following 16+7. One possible solution is to try to encode aspects of the problem, such as the operands and operator. We would then put the problems into a database and try to find links between them. This seems exceptionally difficult. I then turned to the web and asked, "how does NetFlix do this type of thing?" Shortening the story, they have this public prize for algorithms to predict movie ratings of people. One of the algorithms used is called Singular Value Decomposition and the basic idea is to discover the encodings I mentioned above from the results of the data. This led me to an article in the New York Times where the aforementioned pat on the back comes in.
"Interestingly, the Netflix Prize competitors do not know anything about the demographics of the customers whose taste they’re trying to predict. The teams sometimes argue on the discussion board about whether their predictions would be better if they knew that customer No. 465 is, for example, a 23-year-old woman in Arizona. Yet most of the leading teams say that personal information is not very useful, because it’s too crude. As one team pointed out to me, the fact that I’m a 40-year-old West Village resident is not very predictive. There’s little reason to think the other 40-year-old men on my block enjoy the same movies as I do. In contrast, the Netflix data are much more rich in meaning. When I tell Netflix that I think Woody Allen’s black comedy “Match Point” deserves three stars but the Joss Whedon sci-fi film “Serenity” is a five-star masterpiece, this reveals quite a lot about my taste. Indeed, Reed Hastings told me that even though Netflix has a good deal of demographic information about its users, the company does not currently use it much to generate movie recommendations; merely knowing who people are, paradoxically, isn’t very predictive of their movie tastes." (emphasis mine)
"Interestingly, the Netflix Prize competitors do not know anything about the demographics of the customers whose taste they’re trying to predict. The teams sometimes argue on the discussion board about whether their predictions would be better if they knew that customer No. 465 is, for example, a 23-year-old woman in Arizona. Yet most of the leading teams say that personal information is not very useful, because it’s too crude. As one team pointed out to me, the fact that I’m a 40-year-old West Village resident is not very predictive. There’s little reason to think the other 40-year-old men on my block enjoy the same movies as I do. In contrast, the Netflix data are much more rich in meaning. When I tell Netflix that I think Woody Allen’s black comedy “Match Point” deserves three stars but the Joss Whedon sci-fi film “Serenity” is a five-star masterpiece, this reveals quite a lot about my taste. Indeed, Reed Hastings told me that even though Netflix has a good deal of demographic information about its users, the company does not currently use it much to generate movie recommendations; merely knowing who people are, paradoxically, isn’t very predictive of their movie tastes." (emphasis mine)
Is there an echo in here?
In today's Wall Street Journal, Robert Reich writes an op-ed arguing for the public health option. The essence of his argument is that the government can be the model of efficiency the private sector apparently lacks.
"If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine."
I have just one word for Mr. Reich:
de-lu-sion n. - a persistent false psychotic belief that is maintained despite indisputable evidence to the contrary
"If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine."
I have just one word for Mr. Reich:
de-lu-sion n. - a persistent false psychotic belief that is maintained despite indisputable evidence to the contrary
Monday, June 22, 2009
Anti-trust gone awry
Today I got an email from Senator Herb Kohl of Wisconsin. I don't know how I arrived on his mailing list but the idiocy in the message gave me a few clues. One statement for Mr. Kohl, mail a letter if cell phones are so bad. Enjoy!
(Mr. Kohl's email)
Rising Text Message Prices With more than 270 million subscribers, cell phones are a vital means of communications for the vast majority of Americans. The enormous growth in the use of cell phones means that maintaining competition in this industry is more important than ever.
Cell phones enable instantaneous communications for millions wherever they are located, whether at work, at home, away from home, in their car, or anywhere in between. Many Americans – over 20% -- have now discarded traditional land line phones and depend entirely on cell phones. The ease, convenience, and universal nature of today’s cell phone service would have been unimaginable just two decades ago.
For many years as this industry developed, it was a competition success story – with many rivals and vigorous price competition. In recent years, however, the picture has changed. Consolidation has left this industry highly concentrated. Four national carriers now control over 90% of the cell phone market. AT&T and Verizon combine to have a market share of 60%. Consumers’ choices have become quite limited, and price wars seem to be a thing of the past. American consumers pay more for wireless phone service than most other developed nations – an average of $506 per year in 2007.
Nowhere is the changed market for cell phones more noticeable than in text message service. These short, instant messages delivered via cell phones have become enormously popular. In 2008, more than one trillion text messages were sent, more than triple the number just two years before. As their popularity has grown, so has the price charged on a per message basis.
From 2006 to 2008, the price of sending and receiving a text message among the four largest cell phone carriers increased by 100% -- from 10 to 20 cents per message. The four companies increased their text messaging prices in two steps -- first from 10 to 15 cents, and then from 15 to 20 cents -- within months or weeks of each other. These lockstep price increases occurred despite the fact that the cost to the phone companies to carry text messages is minimal – estimated to be less than a penny per message – and has not increased.
Last week, I convened a hearing on this issue at the Antitrust Subcommittee, which included two top company executives, to try and get to the bottom of this. At the hearing, the phone companies defended these price increases by asserting that they have not been coordinated in any respect. They also pointed out that the majority of cell phone customers do not pay for text messages on a per message basis, but instead buy plans for “buckets” of text messages, typically starting at $5 for 200 messages. But is this simply a method to force consumers into expensive plans they would not have needed if the per message rate hadn’t gone up?
Nonetheless, these sharp price increases raise concerns. Are these price increases the result of a lack of competition in a highly concentrated market? Will consumers continue to see similar price increases for this and many other wireless services that they have come to increasingly depend on, such as internet connections and basic voice service? Do text message price increases represent a canary in the coal minefor the state of competition in the cell phone industry as a whole?
The concentrated nature of today’s cell phone market should make us wary of other challenges to competition in this industry. It is imperative that we work to remove undue barriers to competition to ensure consumers the best rates and services.
Senator Kohl’s statement at the Antitrust Subcommittee hearing can be found at:
http://www.youtube.com/watch?v=YBjaXtot6a0&feature=channel_page
(Mr. Kohl's email)
Rising Text Message Prices With more than 270 million subscribers, cell phones are a vital means of communications for the vast majority of Americans. The enormous growth in the use of cell phones means that maintaining competition in this industry is more important than ever.
Cell phones enable instantaneous communications for millions wherever they are located, whether at work, at home, away from home, in their car, or anywhere in between. Many Americans – over 20% -- have now discarded traditional land line phones and depend entirely on cell phones. The ease, convenience, and universal nature of today’s cell phone service would have been unimaginable just two decades ago.
For many years as this industry developed, it was a competition success story – with many rivals and vigorous price competition. In recent years, however, the picture has changed. Consolidation has left this industry highly concentrated. Four national carriers now control over 90% of the cell phone market. AT&T and Verizon combine to have a market share of 60%. Consumers’ choices have become quite limited, and price wars seem to be a thing of the past. American consumers pay more for wireless phone service than most other developed nations – an average of $506 per year in 2007.
Nowhere is the changed market for cell phones more noticeable than in text message service. These short, instant messages delivered via cell phones have become enormously popular. In 2008, more than one trillion text messages were sent, more than triple the number just two years before. As their popularity has grown, so has the price charged on a per message basis.
From 2006 to 2008, the price of sending and receiving a text message among the four largest cell phone carriers increased by 100% -- from 10 to 20 cents per message. The four companies increased their text messaging prices in two steps -- first from 10 to 15 cents, and then from 15 to 20 cents -- within months or weeks of each other. These lockstep price increases occurred despite the fact that the cost to the phone companies to carry text messages is minimal – estimated to be less than a penny per message – and has not increased.
Last week, I convened a hearing on this issue at the Antitrust Subcommittee, which included two top company executives, to try and get to the bottom of this. At the hearing, the phone companies defended these price increases by asserting that they have not been coordinated in any respect. They also pointed out that the majority of cell phone customers do not pay for text messages on a per message basis, but instead buy plans for “buckets” of text messages, typically starting at $5 for 200 messages. But is this simply a method to force consumers into expensive plans they would not have needed if the per message rate hadn’t gone up?
Nonetheless, these sharp price increases raise concerns. Are these price increases the result of a lack of competition in a highly concentrated market? Will consumers continue to see similar price increases for this and many other wireless services that they have come to increasingly depend on, such as internet connections and basic voice service? Do text message price increases represent a canary in the coal minefor the state of competition in the cell phone industry as a whole?
The concentrated nature of today’s cell phone market should make us wary of other challenges to competition in this industry. It is imperative that we work to remove undue barriers to competition to ensure consumers the best rates and services.
Senator Kohl’s statement at the Antitrust Subcommittee hearing can be found at:
http://www.youtube.com/watch?v=YBjaXtot6a0&feature=channel_page
Friday, June 19, 2009
E-Trade is a good buy now
I was miserably wrong in my analysis of E-Trade originally (really just wrong in my assessment of the mortgage trouble) and I have paid a pretty penny but I think if there was ever a time to purchase this stock it is now.
The biggest issue with e-trade has and still is it's mortgages, specifically the HELOCS. I believe there are two positive things to consider. First, they have already written off a boatload of the loan losses and second they have provisioned like crazy. I don't know how much more severe the loan losses will be but I would say that it is statistically likely to be far less severe than about one year ago. We also have some confirmation of this based on available loan data.
Finally, the current price is overly pessimistic in my opinion and doesn't value the new likelihood of survival.
The biggest issue with e-trade has and still is it's mortgages, specifically the HELOCS. I believe there are two positive things to consider. First, they have already written off a boatload of the loan losses and second they have provisioned like crazy. I don't know how much more severe the loan losses will be but I would say that it is statistically likely to be far less severe than about one year ago. We also have some confirmation of this based on available loan data.
Finally, the current price is overly pessimistic in my opinion and doesn't value the new likelihood of survival.
For Whom Universal Health Care Tolls
All this debate about universal health care has got me thinking, who doesn't have health insurance? There are two groups of people that don't have health insurance: those that can't afford it and those that can. To those that can I say buy it. This leaves the country with the problem of those that can't afford it. Presumably they can't afford it because it is too expensive relative to their income. These people then should be on medicaid or some other form of assistance already out there. That emptiness you hear is the sound of the people who are unable to have health insurance. The reality is they shouldn't exist and we shouldn't propose vast government action to help those that don't help themselves.
As an aside, this is the reason we are seeing the debate shift from universal coverage to affordable care. The liberals are smart and have figured out what I have said above and know they can't win that argument. They have shifted the argument to say that health care costs too much EVEN FOR THOSE THAT HAVE IT and government is needed to reign in these costs. Very sly on their part.
As an aside, this is the reason we are seeing the debate shift from universal coverage to affordable care. The liberals are smart and have figured out what I have said above and know they can't win that argument. They have shifted the argument to say that health care costs too much EVEN FOR THOSE THAT HAVE IT and government is needed to reign in these costs. Very sly on their part.
Reality Bites
From the Wall Street Journal on June 12, 2009:
http://online.wsj.com/article/SB124476804026308603.html
"...Health-care spending has outpaced the rise in all other consumer spending by nearly a factor of three since 1980, increasing to 18% of GDP in 2009 from 9% of GDP. This disturbing trend will not change regardless of who pays these costs -- government or the private sector..."
This is flat out wrong and the implicit assumption needs to be rejected. That disturbing trend from 9% of GDP to 18% cannot continue because people will make a choice between the costs and benefits of health care at a certain price. It is the rejection of the notion of constraints which underlies the whole health care debate. There is a limit to how much people will pay for health care; the only "crisis" is trying to contort reality as if that limit didn't exist.
http://online.wsj.com/article/SB124476804026308603.html
"...Health-care spending has outpaced the rise in all other consumer spending by nearly a factor of three since 1980, increasing to 18% of GDP in 2009 from 9% of GDP. This disturbing trend will not change regardless of who pays these costs -- government or the private sector..."
This is flat out wrong and the implicit assumption needs to be rejected. That disturbing trend from 9% of GDP to 18% cannot continue because people will make a choice between the costs and benefits of health care at a certain price. It is the rejection of the notion of constraints which underlies the whole health care debate. There is a limit to how much people will pay for health care; the only "crisis" is trying to contort reality as if that limit didn't exist.
Wednesday, June 17, 2009
Sick Care
Listening to c-span I hear a senator talking about health care. One of the big points everyone is trying to make is that we need to focus on "wellness", i.e. preventative care. The statistic the senator cited was that 95% of care is in response to sickness and 5% is for preventative care. I believe the senator hasn't thougt through his statements. To me the ratio makes sense and there is a hidden danger in advocating "wellness" willy nilly as if it had no cost whatsoever.
First, most people go to the doctor when they are sick. It's not fun to go to the doctor, so we usually wait until the benefit (feeling better) outweighs the cost (the doctor's bedside manner). Therefore it makes sense that we would overwhelmingly go see the doctor when we are sick versus when we are well.
Secondly, there is a cost to "wellness". The idea is that if you get screened sooner then you will be able to prevent disease or treat it earlier which will save money. I don't believe this is correct. First, we will all get sick and die and the majority of health care costs are for end of life care. Even with wellness you are going to die once and only once and logically it follows that that cost must remain the same. In fact one could argue that it would go up because you would have received less care with a later screening.
Lastly, "wellness" is really code for lifestyle. As far as I know, there is no pill out there to make you super healthy. If you are healthy, your healthy and all the visits to the doctor won't make you any healthier. The costs to visit the doctor as a healthy person to find out that you are a stud is a waste of money. People can radically improve their health through simple lifestyle changes which no health care system can dictate.
Hmmmm, on second thought maybe it can?
First, most people go to the doctor when they are sick. It's not fun to go to the doctor, so we usually wait until the benefit (feeling better) outweighs the cost (the doctor's bedside manner). Therefore it makes sense that we would overwhelmingly go see the doctor when we are sick versus when we are well.
Secondly, there is a cost to "wellness". The idea is that if you get screened sooner then you will be able to prevent disease or treat it earlier which will save money. I don't believe this is correct. First, we will all get sick and die and the majority of health care costs are for end of life care. Even with wellness you are going to die once and only once and logically it follows that that cost must remain the same. In fact one could argue that it would go up because you would have received less care with a later screening.
Lastly, "wellness" is really code for lifestyle. As far as I know, there is no pill out there to make you super healthy. If you are healthy, your healthy and all the visits to the doctor won't make you any healthier. The costs to visit the doctor as a healthy person to find out that you are a stud is a waste of money. People can radically improve their health through simple lifestyle changes which no health care system can dictate.
Hmmmm, on second thought maybe it can?
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