Tag Archives: Finance

Downturn Cuts Exercise

By Robin Hanson · September 16, 2011 8:00 am · Comments (26)

It turns out that death rates fall during recessions. I posted in January on how some had speculated that people eat better during recessions, but in fact people seem to eat worse food. Now I can report that people also get less exercise during recessions:

Recreational exercise tends to increase as employment decreases. In addition, we also find that individuals substitute into television watching, sleeping, childcare, and housework. However, this increase in exercise as well as other activities does not compensate for the decrease in work-related exertion due to job-loss. Thus total physical exertion, which prior studies have not analyzed, declines. These behavioral effects are strongest among low-educated males. (more)

The healthy-recession puzzle deepens.

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Firms Fight Risk

By Robin Hanson · September 12, 2011 9:00 am · Comments (4)

To increase efforts to dealt with catastrophic risks, shift responsibility from individuals to firms:

Corporate demand for catastrophe coverage is actually more price inelastic than the demand for non-catastrophe coverage. … A 10% increase in price will reduce quantity of terrorism coverage by only 2.42% whereas it will reduce the quantity of property coverage by 2.91%. This result is in contrast to the findings with respect to individual insurance choices in laboratory experiments and empirical studies on homeowners insurance. …

The majority of homeowners do not purchase catastrophic coverage voluntarily and those cases that do obtain some coverage, exhibit a very elastic demand. … Typically, individuals either ignore those low-probability risks (optimism) or over-estimate them by focusing on possible outcomes without paying much attention to the likelihood of them happening (availability bias). Such bimodal distributions of behavior were also shown experimentally … analyzing actual long-term care insurance decisions by individuals. … Individuals tend to largely neglect risks with a very low probability. However, once a low-probability event takes place, the risk is back in their attention and individuals tend to overinsure against this risk. …

Even when the cost of insurance is subsidized, many people located in high risk areas
still do not purchase coverage. … Even those homeowners who purchased insurance against catastrophe risks (hurricane) exhibited a more price elastic demand for catastrophic risks than for non-catastrophe risks (fire). A related finding is that many individuals are willing to pay significantly more for non-catastrophe insurance than for catastrophe insurance. (more)

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Regulating Gossip

By Robin Hanson · July 17, 2011 11:35 am · Comments (22)

Did you know that people gossip about you? You don’t know who they are, or what they say, and sometimes they say things that (you think) are not true. Important decisions, like whether you get invited to parties, recommended for jobs, or even married, hang on such gossip. Yet there is almost no regulation of it! Government officials don’t track it, or check it for accuracy. There are no standards for what sources people can use in gossip, or how they state their opinions. You aren’t even notified when people gossip about you. Gossip is a virtually impenetrable system in which people, particularly the most vulnerable, have little insight into the forces shaping their welfare. We must have reform!

Sound over the top? Consider:

Information … comes from thousands of everyday transactions that many people do not realize are being tracked: auto warranties, cellphone bills and magazine subscriptions. It includes purchases of prepaid cards and visits to payday lenders and rent-to-own furniture stores. It knows whether your checks have cleared and scours public records for mentions of your name. Pulled together, the data follow the life of your wallet far beyond what exists in the country’s three main credit bureaus. [Firms sell] that information for a profit to lenders, landlords and even health-care providers. …

Who is worthy of credit? The answer increasingly lies in the “fourth bureau” — companies such as L2C that deal in personal data once deemed unreliable. … Federal regulations do not always require companies to disclose when they share your financial history or with whom, and there is no way to opt out when they do. No standard exists for what types of data should be included in the fourth bureau or how it should be used. No one is even tracking the accuracy of these reports. That has created a virtually impenetrable system in which consumers, particularly the most vulnerable, have little insight into the forces shaping their financial futures. (more)

The consequences of ordinary gossip are just as big as with firm gossip on customer finance. And it would be possible to have stronger regulations on ordinary gossip. Yes such regulations couldn’t be perfectly enforced, but then neither can regulations on firm finance gossip. The main reason we don’t have such regulations is that people dislike them. The same people who may well support more regulation on firm gossip on your finances. Why?

It seems to come down to the usual: we are more willing to regulate firms than individuals, and to regulate activity where money is involved than other activity.

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Selection Is Slow

By Robin Hanson · June 25, 2011 3:25 pm · Comments (6)

If you imagine that a 25% cost advantage would let your firm quickly displace all rivals, think again. Yes more efficient firms and plants eventually displace less efficient ones, but it is easy to overestimate the strength and speed of this effect. For example, in a US manufacturing industry with five plants in use, the best plant will typically produce about twice as much with the same inputs (including materials, land, labor, etc.) as the worst plant. In India and China, it will make five times as much:

[The median] four digit SIC industr[y] in the U.S. manufacturing sector [has] a TFP ratio of … 1.92. … This … says … the plant at the 90th percentile of the productivity distribution makes almost twice as much output with the same measured inputs as the 10th percentile plant. Note that this is the average 90–10 range; … several industries see much larger productivity differences among their producers. U.S. manufacturing is … if anything … small relative to the productivity variation observed elsewhere. … [Researchers] find even larger productivity differences in China and India, with average 90–10 TFP ratios over 5:1.

These figures are for revenue-based productivity measures; i.e., where output is measured using plant revenues (deflated across years using industry-specific price indexes). TFP measures that use physical quantities as output measures rather than revenues actually exhibit even more variation than do revenue-based measures as documented. …

Another robust finding in the literature—virtually invariant to country, time period, or industry—is that higher productivity producers are more likely to survive than their less efficient industry competitors. …

Aggregate productivity growth in the U.S. retail sector is almost exclusively through the exit of less efficient single-store firms and by their replacement with more efficient national chain store affiliates. … Why is within-store productivity growth so small on average in retail, but not manufacturing? (more)

Yes, some of these large differences may be due to unmeasured quality differences.

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Dreamtime Finance

By Robin Hanson · June 11, 2011 9:45 pm · Comments (24)

In 1956, John Kelly introduced his “Kelly criteria” betting strategy: bet on each possible outcome in proportion to (your estimate of) that outcome’s chances of winning, regardless of the (fair) odds for betting. More generally, a Kelly rule invests in each possible asset in proportion to its expected future payout, regardless of current asset prices. For example, if you estimate land will be worth 30% of world wealth in the distant future, you put 30% of your investments into land today, regardless of today’s land prices.

It turns out that the Kelly rule is close to the optimal long run investment plan, i.e., the one that would win an evolutionary competition. The exact best strategy would consider current prices and expected future price trajectories and carefully choose investments to max expected growth, i.e., the expected log of a distant future portfolio. But Kelly’s rule is far simpler, gets better than average growth regardless of state, time, or prices, and approaches the exact best strategy as good strategies come to dominate prices. In fact:

A stock market is evolutionary stable if and only if stocks are [price] evaluated by [Kelly rule] expected relative dividends. Any other market can be invaded in the sense that there is a portfolio rule that, when introduced on the market with arbitrarily small initial wealth, increases its market share at the incumbent’s expense. (more)

(More on evolutionary finance here, here, here, here; see especially this review.) We’ve had big financial markets for at least a century. Has that been long enough for near-optimal strategies to dominate? Not remotely. John Cochrane explains just how bad things are:

We thought returns were uncorrelated over time, so variation in price-dividend ratios was due to variation in expected cash flows. Now it seems all price-dividend variation corresponds to discount-rate variation. We thought that the cross-section of expected returns came from the CAPM. Now we have a zoo of new factors. … For stocks, bonds, credit spreads, foreign exchange, sovereign debt and houses, a yield or valuation ratio translates one-for-one to expected excess returns, and does not forecast the cash flow or price change we may have expected. In each case our view of the facts have changed 100% since the 1970s. …

All of these facts and theories are really about discount rates … and risk premiums. None are fundamentally about slow or imperfect diffusion of cash-flow information, i.e. informational “inefficiency.” Informational efficiency isn’t wrong or disproved. Efficiency basically won, and we moved on. When we see information, it is quickly incorporated in asset prices. … Informational efficiency is much easier for markets and models to obtain than wide risk sharing or desegmentation, which is perhaps why it holds more broadly. (more)

Got that? Finance prices today do a great job of aggregating info – relative prices between similar assets are great predictors of relative payouts. But when it comes to broad price aggregates, such as stocks in general or land in general, price changes basically reflect crazily-changing values. While in markets dominated by near-optimal traders, prices would only change when expected future payouts changed, in fact aggregate prices changes have almost no relation to matching future payouts changes. For example, land prices change plenty (as in the recent real estate bubble), but aggregate land price changes say almost nothing about future land rents.

I’ve talked before about how our era is a rare extreme “dreamtime,” with fast change and behavior quite out of equilibrium with evolutionary selection pressures. We not only have dreamtime fertility, i.e., far fewer kids per couple than selection would favor, we also have crazy-price dreamtime finance. This allows a relatively clear prediction of the future: finance will eventually “equilibrate.” Either the world will coordinate to block the creation of investment funds following near Kelly rules that reinvest most gains, or financial prices will eventually come to be dominated by such near-Kelly funds.

Once dominated by near-Kelly funds, finance prices will no longer suffer huge crazy booms and busts, like the recent dotcom boom or real-estate crash. Furthermore, interest rates should fall dramatically — future returns will no longer be discounted intrinsically, but only for opportunity cost reasons.

Apparently many funds today do now follow near Kelly rules:

The claim has been made that well-known successful investors including Warren Buffett and Bill Gross use Kelly methods. (more)

So the main barrier seems to be fund ability and inclination to reinvest most gains. As I wrote a year ago:

Many folks would be willing to create trusts that accumulated funds long after their death and then paid distant descendants (perhaps indirectly) to do things like remember their ancestor’s name, pray to his gods, etc. Unless stolen, such funds would eventually come to dominate the world economy and dramatically lower interest rates. With lower interest rates … businesses and governments would have far stronger incentives to attend to the interests of distant future folks, such as via global warming policies. But we in fact refuse to enforce a great many such long term deals. (more)

In a large decentralized world, however, I doubt this barrier will stand. Nor can I see why it should. I for one welcome our new financial overlords. Seriously.

I wonder if anyone could estimate how long it should take Buffett/Gross size Kelly funds to dominate finance prices. More Kelly rule details from that review: Continue reading "Dreamtime Finance" »

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Congress Sells Secrets?

By Robin Hanson · June 11, 2011 3:35 pm · Comments (13)

Compared to ordinary investors, US Congress members get huge returns on their investments, presumably via their inside line on upcoming government actions. In particular, Congress gets inside info on upcoming US-backed coups, and someone has been trading lots on that info. Gee I wonder who …

Researchers examined 16,000 common stock transactions made by … 300 House representatives from 1985 to 2001, and found … portfolios based on congressional trades beating the market by about 6 percent annually. … A study of senators … five years ago found members of the higher chamber even better at beating the market — outperforming it by about 10 percent. … Members of Congress … [can legally] trade on non-public information. (more)

We estimate the impact of coups and top-secret coup authorizations on asset prices of partially nationalized multinational companies that stood to benefit from US-backed coups. Stock returns of highly exposed firms reacted to coup authorizations classified as top-secret. The average cumulative abnormal return to a coup authorization was 9% over 4 days for a fully nationalized company, rising to more than 13% over sixteen days. Pre-coup authorizations accounted for a larger share of stock price increases than the actual coup events themselves. (more)

We let Congress profit from insider trading that would be illegal for corporate executives. Even so, I doubt it is legal to trade stocks using top-secret info on planned coups, thereby leaking that info to the world. But I’ll bet Congress has been doing a big share of that leaking – who else has access to that info and needn’t fear prosecution for such misdeeds?

Good thing we are cracking down on insider trading by CEOs …

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Who Watches Watchers?

By Robin Hanson · June 9, 2011 9:00 pm · Comments (32)

James Surowiecki says U.S. voters should support a new Consumer Financial Protection Bureau (C.F.P.B.) because consumers make finance mistakes:

Many Americans are ill informed about financial products. … You might think that businesses offering better products would have an incentive to make sure that potential customers were able to distinguish between ripoffs and good deals, but … there’s “a limit to how much explaining a creditor can do before losing the attention of its customers.” … Warren … talked to a number of banks about introducing a credit card with a higher up-front interest rate but lower penalty fees—a cost-effective arrangement for many people. But … there was no way to convince consumers that it was a good deal. In a world where marketing is all about the lowest teaser A.P.R., … you end up with a race to the bottom. …

The C.F.P.B. hopes to change this, largely by insuring that consumers will be told the true terms of a deal, in a simple and clear fashion. … Some bankers … maintain that the C.F.P.B. will go too far and end up strangling financial innovation. But, over the past century or so, new regulatory initiatives have inevitably been greeted with predictions of doom from the very businesses they eventually helped. … History suggests that business doesn’t always know what’s good for it. (more)

Let’s see, banks offer bad products, because many consumers are too lazy to notice and choose good products. So voters should empower regulators to make rules banning bad products, or at least overly hidden products. But isn’t it also possible that regulators might offer bad regulations, because voters are too lazy to notice and choose politicians who support good regulations? Why would voters pay more attention to choosing regulators than banking customers pay in choosing banks? And if voters pay less attention, how does adding this extra layer of choice improve the overall situation?

You might argue that when choosing their votes, ignorant voters can rely on interest groups and better informed elites, who share their interests. But banking customers could also rely on interest groups and informed elites in deciding where to bank. Yes, banks often try to create and buy off apparently independent groups and elites that pretend to offer neutral informed advice, to fool uninformed customers into buying bad products. But the same thing can happen at the political level – how can voters know which organized groups and elites are actually informed and share their interests?

It would seem that any process that ignorant voters could use to decide who to trust on regulations could also be used by ignorant consumers to decide which banks to patronize. Since banking consumers have far stronger incentives to choose well on banks than voters have to choose well on politicians, how can it help to replace a possibly quite severe ignorant banking consumer problem with an even more severe ignorant voter problem?

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Our Worthy Overlords

By Robin Hanson · February 17, 2011 10:40 am · Comments (61)

If there must be rich folks, what would you want them to be like? You might want:

  • They mostly work, instead of living lives of leisure.
  • They or their parents are mostly self made, vs. coming from long rich families. You probably sympathize more with parents wanting to help their kids than their great-great-grandkids.
  • They compete fiercely for positions in orgs that themselves compete strongly globally, assuring you their wealth isn’t from local insider clubs.
  • They don’t promote national conflicts or wars, but instead look to what’s good for the world.
  • They give most of their wealth away, to especially innovative and socially valuable charities.

In the January Atlantic, Chrystia Freeland says that that is exactly the sort of elites we now have! Yet Freeland seems more inclined to scold than to celebrate:

Today’s super-rich are … more hardworking and meritocratic, but less connected to the nations that granted them opportunity—and the countrymen they are leaving ever further behind. … [A rich guy] argued that the hollowing-out of the American middle class didn’t really matter. … “If the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade.” … [Another said,] “It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.” … [Regarding] the financial crisis, … the real cuplrit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. …

Someone will have to pay for the improved public education and social safety net the American middle class will need in order to navigate the wrenching transformations of the global economy. (That’s not to mention the small matter of the budget deficit.) Inevitably, a lot of that money will have to come from the wealthy. … If the plutocrats’ opposition to increases in their taxes and tighter regulation of their economic activities is understandable, it is also a mistake. The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda. … In the long run, super-elites have two ways to survive: by suppressing dissent or by sharing their wealth. … Let us hope the plutocrats aren’t already too isolated to recognize this.

It doesn’t seem to matter to Freeland how deservingly the rich obtain or spend their wealth; they still must be taxed to help average Americans, even if that slows the lifting of Chinese and Indians out of poverty. It isn’t clear why she recommends the rich eagerly submit to such taxation; she suggests taxation will happen whether they like it or not. Why fear “populism” beyond its taxation? The point seems more to scold the rich, in order to reassure the rest of us that we are justified in taxing them.

How many elites are we talking about? The top 1% of households worldwide, ~37 million of them, are each at least half-millionaires, and hold ~40% of world wealth. “Thirty millionaire” households number ~100,000 (0.03% of world), and ~800 billionaires hold ~1% of world wealth (2.4 of 195T$). I’d guess Freeland’s cutoff for “elite” is somewhere in this 30M$ to 1B$ range.

Me, I celebrate these new worthier elites. We aren’t obviously justified in taking their wealth, however convenient that might be, and they might manage to avoid such takings via international competition to attract them. The US seems a bit too arrogantly unaware that we compete on this and many other margins.

If you resent this level of concentration, by new elites more confident and justified in their sense of superiority, you may really hate the new world of emulations, which I guess will arrive within roughly a century or so. After all, you may take some comfort from the fact that our elites’ fractional genetic influence on future generations is vastly smaller than their wealth faction. I doubt the top 1% in wealth has more than 2% of the grandkids, and it may be less than 1%.

But in the em transition, profit-driven scanning and copying may result in many trillions of ems who are mostly copies of the thosand most capable and adaptable humans. Members of our very capable and productive social elites should be prime candidates for profit-driven consideration, and they may in addition pay out of their own deep pockets. The vast majority (99+%) of our progeny may descend from a thousand or so (<0.0002%) of the very elite humans living at the time the em transition.

Of course if the vast majority of these ems are living near susistence level, you can’t really envy their individual wealth. But you might envy the overall wealth and influence of the total clan of descendants of each initial human. Just remember that you are descended genetically from distant ancestors who also had a quite disproportionate influence on future generations. In order for innovations to accumulate, the long run influence of whatever embodies innovations must be highly inequitable. And in the em revolution, where brains hold most innovations, a lot of history will be crammed in a rather short clock time.

More quotes from Freeland: Continue reading "Our Worthy Overlords" »

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Bungling Bounties

By Robin Hanson · November 17, 2010 7:15 pm · Comments (1)

Back on ’07 I posted on how the NSF thwarts Congress’ efforts to “pay for results” in research via prizes:

NSF pulled the usual agency trick of stalling until Congressional pressure faded. and those who get the usual money the usual way made sure the official recommendation was for no change in that; only a little money, and only new money, should go to new methods.

This week the NYT tells how the SEC thwarts Congress’ efforts to “pay for results” in law enforcement via bounties:

When insider-trading scandals plagued the financial markets in the late 1980s, lawmakers created a bounty program for whistle-blowers, allowing regulators to reward tipsters who uncovered evidence of manipulation. The effort largely failed, in part because the issue of whether to make a reward payment was left to the discretion of regulators. In 20 years, the program paid out a total of less than $160,000 to a handful of whistle-blowers.

Now, Congress and financial-market regulators are revamping a reward system for whistle-blowers, offering big payouts for tips about a host of securities and commodity law violations, to be doled out from a new $451 million fund. …

Already, business executives and trade groups are arguing that those lottery-size windfalls … will make it harder for companies to police themselves and will pit employees in search of a big payday against a company’s effort to make sure it is obeying the law. …

The proposed S.E.C. rules … exclude a large raft of people from receiving potential awards. Experience with other bounty programs shows that most whistle-blowers receive relatively small awards and that their lives are often made miserable as part of the experience. Other government agencies also have ramped up their whistle-blower bounties in recent years. The Internal Revenue Service whistle-blower program, revised as part of the 2006 Tax Relief Act, awards 15 percent to 30 percent of the proceeds it collects in enforcement actions worth more than $2 million, or in the case of individual taxpayers, $200,000 in gross income. The False Claims Act, a century-old law updated last year that rewards people who uncover fraud against the government, also can produce blockbuster awards. …

Part of the incentive for the new financial whistle-blower program was the failure of the S.E.C. to catch some of the most egregious wrongdoing that surfaced after the financial crisis of 2007 and 2008. … Staff had received numerous early warnings and detailed complaints about Mr. Madoff but had not performed a thorough investigation. …

The new programs … require the payment of 10 to 30 percent of the penalty or amount recovered when a whistle-blower’s tips provide the basis for a case involving violations of securities or commodities laws.

In drawing up its rules, the S.E.C. said it wanted to encourage employees to go first to their corporate compliance departments, offering potentially higher rewards for whistle-blowers who did so. … Employees who turned to corporate compliance officers … have often been fired. [HT Alex T.]

I don’t have high hopes as long as the S.E.C. designs the process, and decides who to prosecute when. Now if we move toward a full bounty system, where the bounty hunter could collect evidence, and then choose to prosecute the case, we’d see a much stronger deterrent. Which is of course why finance firms prefer the S.E.C. to retain full control.

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Disagreement Is Far

By Robin Hanson · August 13, 2010 10:20 am · Comments (1)

Key sources of disagreement among economic forecasters are identified by using data on … forecasters’ long- and short-run predictions of macroeconomic variables. Dispersion among forecasters is highest at long horizons where private information is of limited value and lower at short forecast horizons. Moreover, differences in views persist through time. Such differences in opinion cannot be explained by differences in information sets; our results indicate they stem from heterogeneity in priors or models. Differences in opinion move countercyclically, with heterogeneity being strongest during recessions where forecasters appear to place greater weight on their prior beliefs. (more)

These authors speak sloppily.  Their results suggest that disagreements on the state of the economy cannot be attributed much to differing “near” late-breaking info of the sort one usually feeds into models that predict the state of the economy.  But they could be due to differing “far” big-picture info of the sort that leads one to prefer some such models over others.  Disagreement is indeed far.

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