Tuesday, December 23, 2008

Have a very merry DDR Christmas!

Last year, I made a video of myself doing the Christmas- and Winter-themed dances from the video game series Dance Dance Revolution (DDR), and put it on my YouTube page. But back then, I didn't have a rockin' blog to link it from!

Since Christmas is going to hit soon, here's the video, the most viewed on my page:

Monday, December 22, 2008

A non-conspiratorial explanation of oil's price history

As you're probably aware, oil this year surged to $147 a barrel and then fell to, as of today, about $40 -- over a 2/3 drop in less than six months. And its peak was over a 100% increase from the previous year. With a lot of the decline shortly before the election, this roller-coaster ride has prompted quite a lot of conspiracy theories.

Well, recently on another (private) forum, I summarized the significant reasons why oil acted like that, without reference to any conspiracy. I'll repeat it here:

1) China was buying a lot of oil and stockpiling it. Unlike the general "growth in emerging markets", this actually came as a surprise to a lot of speculators, which is why it was such a fast rise instead of a gradual one since 2000. China was doing this in order to burn less coal and make the air cleaner for the Olympics. Now that that's over, a significant source of demand is gone.

2) Because of the credit crunch, speculators were significantly less able to borrow and bid up the price of oil. Once it hit, they had to significantly unwind their positions.

(Now, I'm all for the right of people to make speculative purchases; however, what we had there was *far* from a free market. For one thing, the government's bailing out of banks that had hedge funds doing the speculating, eliminated the strong negative downside to hype-based, stupid speculation. Also, a lot of the *naked* shorts and longs were very corrupt where if one party lost money, the brokerage would act like it can't find the original contract and try to reverse the sale. Things like this artificially amplified the price premium due to hype [as opposed to rational estimations of future developments] and crowded out wiser investors.)

3) The global economic downturn significantly revised investors' estimates of future oil demand.

4) The president's, and then congress's, termination of the ban on offshore drilling also significantly changed expectations about future oil availability. These helped prod oil down.

Friday, December 12, 2008

Setting externalities straight: the elephant in the room

A recent comment on Megan McArdle's blog gave me a chance to explain (again) what I think is wrong with "glibertarian" (glib libertarian) solutions to the problem of externalities.

Basically, I think that when people complain about negative externalities, what they are really complaining about is a negative externality that they also find morally objectionable, but for well-grounded, intuitive, practical reasons. To suggest that the victim of such shenanigans should have to pay off the wrongdoer, thus misses the point. That is exactly the reasoning I elaborate on in the comments section of that post.

So, to the discussion. Jim Glass said:

... *if* transaction costs were zero *then* "externality problems" like pollution would be bargained away in the market, but these problems aren't bargained away in the market, *thus* transaction costs are large -- and should get a lot more attention from economists and other social planners than they do.

So I responded:

Jim_Glass: actually, as I said above, I think the problem people intuitively have with this Coasean reasoning is that it's not true, even in the pure case of no transaction costs.

Think about it this way: what if while you were sleeping I came close to your window -- though still outside your property, and revved my motorcycle loud enough to keep you from sleeping. And let's say that, because of some technicality, there's no law or property right you can invoke to make me stop.

Would you seriously try to pay me to go away, thinking, "hey, problem solved!" Hopefully, you're not that stupid. Because then you just created the incentive for people to extort more money out of you. Yet economists would pat themselves on the back and say, "See? Because of property rights, this so-called 'problem' has an efficient solution."

But it's a load of crap.

Now, as an economist, you might admit that, okay, sure, you suffered a bit -- you lost some of your consumer surplus. But that "doesn't matter" because it's "just" a transfer payment. You lost, and I gained. Only when there are are *no* gainers do we see an "inefficiency" and therefore a problem. Here, there is no problem.

Hell yes there is! A system in which people can extort money this way is a system in which people just don't make as big investments in property [which results in less wealth for everyone], knowing that that will just make them a better target for extortion. It's a systematic weakening of property rights.

So no, Jim_Glass, the appropriate solution is not to "get transaction costs to approach zero, and let bargaining take over." The appropriate solution is to require those who try this extortion to pay up for it!

Deliberately annoying people should *not* be a path to wealth. People see this intuitively. And for the exact same reason, the victims of global warming should *not* be the ones that have to buy out the polluters, even if the transaction costs would be zero.

The thing is, in these internet debates, people who object to e.g. pollution, are doing so in a way perfectly consistent with the basis I laid out -- yet rarely do the participants get around to identifying these underlying assumptions! Instead, they just throw the same non-responsive points at each other, and ultimately miss identifying the optimal solutions -- both in the moral and economic senses. I seem to be the only being in the world capable of actually seeing what the dispute is ultimately about.

So, again I have to ask: is the world insane, or just me?

Monday, December 8, 2008

Now I'm even famouser*!

Bob Murphy mentions me in a Buffalo News opinion piece. And promotes me to "financial commentator"!

For those of you who got here after wondering, "Huh? Who's Silas Barta?": welcome to my blog! Since you're probably not aware, Bob and I have had some pretty vicious disputes over the issues, so it's quite honorable of him to mention me. He said he felt he owed it to me because I originally suggested the point to him.

Don't worry though, I'll be back criticizing him in no time at all! Like, what's with the sudden reversal of his position on not making conditional endorsements of government intervention "because it might confuse the readers"? More on that later.

*Not actually a valid conjugation in proper English

Sunday, November 30, 2008

Inflationary product debasement turns tragic

Previously, I had highlighted the problems in inflation measures that don't take into account when a product is debased in order to hide its true cost. Well, another case of that has come up in the news: the FDA melamine regulations permitting trace amounts of the stuff in baby formula. From the beginning:

This weekend, I saw a news story on TV where a doctor was explaining that, while melamine is most likely safe in these trace amounts, it "has no business being in baby formula" because there's no benefit to the baby, there's a risk of harm, and you just don't need it to make formula.

My immediate reaction was: Okay, if it's so bad, there must be some reason producers would want to include it. After all, businesses don't e.g. pollute just for fun; they do it because that improves product quality and/or cost -- er, at least it appears that way to the most highly-visible parties.

As the story continued, the doctor answered my question by saying that it's included in order to fool the tests used to determine protein content. I don't remember the channel, but I found a San Francisco Gate story substantiating that claim:

Melamine contamination became major news when it was discovered that China was adding it to milk to disguise test results that measure protein levels. Since the chemical was found in infant formula in September, it has sickened some 50,000 Chinese infants and killed 4.

So there's our answer! They use melamine instead of the good stuff in order to pass some protein measurement test. And they only use melamine because it's cheaper, or else what's the point? But, that test has a "blind spot" that will give a "pass" rating to baby formula that only achieved that rating by compromising the "design constraints" of baby formula! So it fits into my template of "compensate for inflation by debasing the product instead of raising the price".

Now, it certainly doesn't take a bout of inflation to make people try to get "something for nothing". But it's a very plausible suspect for why it wasn't tried before.

Of course this is not to take away from the culpability of those who conjure up such unethical policies. And, to some extent, you have to understand the position they're in: when consumers reward those who can keep the visible price low, while ignoring the other costs thereby incurred ... well, don't be surprised when they're all too willing to oblige :-/

Monday, November 24, 2008

A Big-Three-Bailout argument that just might work...

When they couldn't convince anyone they had a clue what they were doing, the Big Three resorted to doom-and-gloom about all the spillover damage onto poor, innocent workers that would ensue if they failed. But even that isn't working. Maybe it's too abstract? Not enough emotional appeal?

Don't worry, Silas X to the rescue! In this video, I show them how to really win over the hearts and minds of our elected representatives!

Wednesday, November 19, 2008

My plan to destroy the universe won't work

And I'll bet you're relieved!

Maybe a little background is in order.

A question of interest to philosophers and theoretical physicists is whether or not the universe is just a simulation running on some computer, one level up. (See e.g. Nick Bostrom's Simulation Argument.) Of course, many ridicule this idea as being non-falsifiable and thus non-scientific.

Not so fast! I said. Of course it's falsifiable. Here's how: if the universe is a simulation, then its programmers probably try to economize on computational resources (computing cycles, memory, disc space, time, etc). And to do that, they will make the program reveal to "us" (the conscious entities) the minimum required to make everything appear "believable". That in turn, means that as long as we "wouldn't know the difference" if some physical process developed in a way contradicting the rest of our observations, the simulator won't bother to churn through the calculations needed to make the process match up with known universal laws. In other words: "If we're not looking, why bother making sure something's there?"

And that tells us how to test the Simulation Hypothesis: have everyone set up as much measurement equipment as they can, and therefore observe as much as they can. This will force the simulator do many more calculations than it would otherwise have to, since now it has to keep consistent with that many more observations. The programmers then have to devote an ever-increasing amount of resources to keep it running, which will eventually force them to "cut corners" in implementing the laws of physics, revealing violation of Standard Model physics, or ... um, make them pull the plug on our existence.

Hence, my "plan to destroy the universe".

Now, the good news: the plan wouldn't work, based on what we already know about how the universe would react to such a "hypermeasurement" scenario! And the reason is shocking: because we can't actually increase our total knowledge.

"What in the hay-ll? I did me some book-larnin' not but three yurs ago!"

Sorry, that was Cletus, our resident country bumpkin.

Well, I'll need to some more background now to justify that claim. First, I want to point you to a post on OvercomingBias.com that introduced me to a lot about what I'll discuss here: Engines of Cognition.

Now, consider the 2nd law of thermodynamics. There are many ways to express it, but a simpler way is: "The amount of disorder ('entropy') in the universe must always increase." Sure, you can increase the order any one specific place -- say, when you form crystals -- but it will always be counterbalanced by an increase in disorder somewhere else. The most common application of this law is in heat engines (such as the one in your car): when you burn fuel to turn your engine and thus your tires, you are extracting a kind of order: the useful mechanical "work" (as it is called in physics) of a spinning engine. However, to do so, you burn fuel and transfer heat to the environment, which, when tabulated, generates entropy/disorder exceeding that which you destroyed in extracting mechanical work from the system to drive.

Now, here's the kicker: there are deep parallels between the concept of entropy in thermodynamics, and the concept called "entropy" in information theory. In the latter, it refers (roughly) to the uncertainty one has about the content of a message before reading it. Any knowledge that some kinds of messages are more likely than others therefore reduces that "entropy". Similarly, entropy is at a maximum when all messages are equally likely.

And the truly mind-blowing part is that the connection between the two kinds of entropy is so deep that entropy in the information-theoretic sense affects entropy in the thermodynamic sense. (This is going somewhere, just be patient.) In short, if you are able to reduce your uncertainty (information-theoretic entropy) about the "message" contained in the molecules of a system, that knowledge can actually be exploited to reduce the thermodynamic entropy of the system and thereby extract useful work! (For reference, and early exploration of this idea is called the Maxwell's Demon thought experiment, and a hypothetical engine that extracts work this way is the Szilard engine.)

But this hypothetical capability of decreasing the entropy of a system does not actually contradict the 2nd Law, which, you'll remember, says that total entropy must increase. Rather, for reasons I won't go into, this acquisition of knowledge itself is limited by the 2nd Law. Just as the extraction of "organized" mechanical work from fuel requires the generation somewhere else, of at least as much counterbalancing disorganization, so too does the collection of information that could permit extraction of the same work without the fuel require a counterbalancing loss of information somewhere else, i.e. increased uncertainty.

This principle reveals a fundamental limit that your brain (in a deep sense, a "cognitive engine") faces: in order to learn something true about your environment (whether via the senses or inferences), you must sacrifice knowledge somewhere else. Fortunately, nothing requires you to care much about that lost knowledge, which takes the form of "lost certainty about aggregate statistical properties of thermodynamic variables".

Now, back to the main point: from the perspective of hypothetical beings running the universe's simulator, my idea to gather more measurements has no impact. Any time we make a measurement, we are gathering knowledge, which must therefore correspond to lost knowledge somewhere else. So, far from threatening the computer's ability to simulate our universe, all our measurements will (amazingly) decrease the computational resources the simulator requires.

Which neatly returns the Simulation Hypothesis to non-falsifiability, and assures us that even if people acted on my idea, we're still safe and sound. Alternatively, it reveals the universe's programmers to be really, really clever :-)

Sunday, November 16, 2008

Yay! I'm famous now!

Because of my earlier criticism of Peter McCluskey's poorly-designed plan to learn the market's estimation of how the party of the next president will impact oil prices and interest rates, I actually got linked by someone I don't already know! (Someone who, by the way, didn't quite take me seriously the first time around.)

Peter McCluskey, for his part, now mourns the failure of his plan.

Friday, November 14, 2008

"Cynical comment left elsewhere" of the day

I've been pretty fed up with the combined favoritism and outright stupidity in the financial system these days. This has led me to guess that any exchange involving a promise from a large, old (and therefore probably protected at all costs by our Overlords in Washington) corporation is going to, less and less often, be treated as something they have to *sigh* actually honor. With Sears and K-Mart reinstituting layaway (in which you make installment payments and then, after the last, receive the product), I figured this would be just another promise you can't trust anymore.

Well, a former happy customer of layaway services, calling herself "Princess of Swords", didn't seem to notice this trend and so disputed my prediction in a discussion on a Megan McArdle post. (UPDATE: previous link was to the wrong site.) Here, I post my response, in which you'll start to understand the basis for my pessimism:


Princess_of_Swords: Thanks for taking the time to detail your experience with the intricacies and standard practices prevailing with respect to layaway at the time you availed yourself of it.

Now I'm going to explain to you how it works in the real world.

In the real world, an obligation no longer means anything.

-GM was obligated to pay pensions. They didn't even bother to internally classify them on the same level as a bond, until forced to by law.

-Insurance companies are obligated to pay when disaster strikes. They fight as hard as they can to avoid paying, even for plain vanilla cases.

-Individual consumers buy things on credit, deferring the first payment for a long while. They are routinely caught not having saved for that big first payment.

-Securities brokers engage in naked short-selling of stocks, which obligates them to produce actual ownership of that stock at a later date. Yet as we've seen recently, they've ended up flooding the market with fake stocks and then casually aver that they "can't locate your stocks" and offer to reverse your purchase as if it were no big deal.

-Gift card issuers are unilaterally stealing money from gift card owners on the grounds that "they need it" because they're in financial trouble, despite having obligated themselves to treat the gift cards as equivalent to cash.

-AIG got a massive bailout from the Fed, but, we were assured, they would be obligated to pay a hefty penalty interest rate and start immediately and orderly unwinding their enterprise. Well, the Fed went back and cut their payments in exchange for nothing, thus debasing the Fed's assets (and thus the dollar). And AIG has done virtually nothing to liquidate its assets.

You get the point. I just don't care how you think things used to work back then. We are in a new world, where only us responsible commoners have to keep our word.

Thursday, November 13, 2008

And even *more* GM ROFLcopters!

This is too rich. Daniel Gross of Slate writes in defense of propping up the Big Three automakers. But since Slate recently started putting links in the middle of articles instead of at the end, we see that right in the MIDDLE, they post a link to Gross's previous article from '03 where he REJECTED the claim that the auto industry was doomed. Check out these gems:

"...the Big Three enjoy remarkably large market caps: $21.5 billion for GM [now under a tenth of that -- SB].... Throw in all the money that has been lent to the companies, and you have to come to the conclusion that either there's an awful lot of stupid money invested in the survival of the U.S. auto industry or the declinists are mere alarmists."

"...the Big Three are unlikely to seal their own near-term doom for the sake of short-term labor peace. It's safe to assume that the companies will gain the upper hand in negotiations ..."

Yeah, why would unions shoot themselves in the foot? And why would GM have anything but a long-term perspective?

"Ford, as Moneybox has described it, is a profitable bank lashed to an unprofitable carmaker."

Now, without the profitable part!

"...it's hard to go out of business when you have a great deal of brand equity, ready access to the capital markets, and the potential to print money when you have the right product mix at the right economic climate."

I really have to hand it to Slate: highlighting an author's unflattering earlier work is quite a selfless, helpful act!

(Cross posted at the ever-more-foot-in-mouth Megan McArdle's blog.)

ROFL = rolling on floor laughing
ROFLcopter = internet meme alluding to mechanization of this phenomenon

Wednesday, November 12, 2008

GM outdoes itself again

Finally, mainstream investors are wising up to the completely ridiculous assumptions you have to make to justify investing in General Motors. A Deutsche Bank analyst has finally set a target price of GM stock at $0. But here's what will really refuel your ROFLcopter:

GM bonds maturing in less than 3 years now yield SEVENTY-****ING-FIVE PERCENT!!!!!!

(Scroll down to "Last Sale" at the bottom. Thanks to rluser at Marginal revolution for pointing me to a free bond price site.)

The time it takes for investors to Set Things Straight is way too long.

Friday, November 7, 2008

Well, I guess I don't count as a libertarian anymore

Yesterday I was kicked off the private LibertarianForum Google Group and mailing list. The reason was that I had the audacity to remind other libertarians of the responsibility side of liberty (with respect to global warming), and for pointing out flaws in really stupid arguments against intellectual property (and, conversely, explaining how an IP-free system is vulnerable to Mises's economic calculation critique). The proverbial last straw was a discussion sparked by someone linking this TokyoTom post about Bob Murphy finally admitting, after being dragged kicking and screaming, to admit he misled readers in his op-ed, though of course he's not going to actually say it where any victims of his deception are going to see it.

The head of the list claimed that he was deluged with requests from people who were asking me to be removed, and who apparently lacked the guts and the brains to actually explain where my points were in error. I'm not going to name any names.[1]

Naturally, people are going to claim that, oh, it wasn't what I said, but my rudeness. This is ridiculous -- it's standard practice on the LibertarianForum list to use the exact same tone I did, as even my detractors readily admitted. A more plausible claim would be that the people there didn't like being uncomfortably reminded of the implications of their stated (though certainly not actual!) beliefs.

So why the title of this post then? I believe, after all, everything I did before. But look at it this way: time and time again, I see people nominally also "libertarian" reveal themselves to have been coming from completely different premises. I never imagined that I would see, for example, Bob Murphy take the attitude of, "Oh, did I destroy your land with my CO2 emissions? I got it! Here's the solution! Fix it your own damn self!" (Yeah, way to preach responsibility and universal adherence to basic morality there...)

There's only so many times I can see cases like that before the self-appellation "libertarian" obscures more than it clarifies.

So what to call myself now? One good option is Birchian, after Paul Birch (a former Anti-State Forum contributor), since I've been seeing my views more and more resemble his, especially in terms of focusing on whether the victims of one's actions have been adequately compensated.

Alternatively, I could -- gasp! -- call myself a mutualist as per the philosophy of Kevin Carson, my former nemesis. (As recently as July of this year he quipped that I couldn't grasp an argument even with velcro-covered mittens!) The reason for that term would again be because of my focus on the extent to which nominally "libertarian"-favored activities are in fact predicated on the state stepping in an exempting certain groups from having to actually bear its true cost.

Before inferring too much from this post, I ask that you heed this caution: There is a big difference between "Problem X is often overstated in an attempt to give politicians more power" and "Problem X doesn't exist." I certainly sympathize with those who have seen so many phony environmentalist rationalizations for statist measures that are thinly-veiled attempts to shut down markets, that they hear about Problem X and immediately view it as the former. But ask yourselves: has the tide turned to the point where it's more common to see anti-environmentalist arguments as thinly veiled attempts to shove onto other people, costs that the arguer should be bearing?

[1] Since a lot of you might be sketchy on terminology, a so-called "name" is a label used to refer to a specific instance of a proper noun. An example of a name might be Brad Edmonds or Max Chiz.

Tuesday, October 28, 2008

Yes I'm still around

And, inspired from a different context, I drew this comic about the current credit crisis corruption.

Tuesday, September 23, 2008

Rewriting history and science and history of science

Joe Biden tells us how it was in the good ol' days (via Megan McArdle via Jesse Walker and Stuart Buck):

"Part of what being a leader does is to instill confidence is to demonstrate what he or she knows what they are talking about and to communicating to people ... this is how we can fix this," Biden said. "When the stock market crashed, Franklin Roosevelt got on the television and didn't just talk about the princes of greed. He said, 'look, here's what happened.'"

Hey, don't laugh! In 80 years, VP candidates will claim that right after 9/11, Barack Obama heroically uplinked to NeuralNet and metacommunicated the full extent of the situation.

Well, I guess the crisis is over now

Warren Buffett is buying into Goldman Sachs, on very favorable terms -- 10% "perpetual preferred shares" plus the right to buy the stock cheaper than it currently is. This will signal that Goldman Sachs is sound, which will then provide a basis for trusting one party, which can then establish a basis for trusting their counterparties, until everyone can trust each other and the crisis can be averted -- for now -- long enough for me to dump the rest of my US shares on idiots -- without a massive government bailout. Hooray!

Alright, maybe a bit too optimistic.

Yeah, I know some of you are waiting for me to joke about how "Buffett has gold man-sacks" ... not gonna happen. This is a family blog. Hi Mom! :-)

Friday, September 19, 2008

Time to review the Put-Call Parity Theorem

With the SEC's recent move to ban short-selling of politically-important securities, it's time to review the beautiful Put-Call Parity Theorem to understand the futility of doing so. Here's my phrasing and elegant explanation of it:

B(t,$X) = S + P(t,$X) - C(t,$X)

B is the value of a bond maturing at time t for $X.
S is the value of some asset, it doesn't matter which.
P is the value of right to sell the above asset at time t for $X. (In financial terminology, a put option dated at t with a strike price of $X.)
C is the value of the right to buy the above asset at time for $X. (In financial terminology, a call option dated at t with a strike price of $X.)

In this sign convention, negative means the counterparty to the security, so for example, if the bond term were negative, it would refer to the value to the borrower on that loan, while the negative call option refers to the person having the obligation to sell at $X to the call owner.

So, the equation means that, for some time t and some money amount $X, a bond maturing at t for $X is equal in value to some asset, plus the right to sell the asset at time t for $X, plus the obligation to sell it at time t for $X.

Proof: the left-hand side of the equation is worth $X at time t. The right-hand side is also worth $X at time t because if S were worth less than $X, the holder of the put could sell it for $X, while if it were worth more, the holder of the call could buy it for less. Q.E.D.

Note that if you find a case where the two sides are not equal, you profit through arbitrage buy buying the cheaper side and selling the more expensive side. In a discussion a few years ago, Gene Callahan claimed this was how he made money. You also might be interested to know that this theorem -- though of course it wasn't referred to in such terms -- was historically used to circumvent financial regulations such as bans on usury, since through clever rearrangement of the equation you can recreate any financial security. Here is a neat paper on that history.

Anyway, the point to remember is, let's say I want to take a short position in a stock. That would be represented by "-S" in the above equation. But let's say you found out that was banned! No problem. Just rearrange the equation! With the function arguments suppressed:

-S = -B + P - C

So, borrow money, buy a put, and write (sell) a call. Problem solved! (Except for the cost of fending off the SEC guy giving you an intimidating stare, of course.)

Verb regularization sighted

You may have heard of the paper published about a year ago modeling when and why verbs regularize, that is, stop having irregular past tenses. (take->took is irregular, while jump->jumped is not) The basic idea is that the less frequently a verb is used, especially its past tense forms, the quicker speakers are to stop using the irregular form. Which makes sense, because those verbs are much easier for people to forget, and much easier for editors not to notice.

Well, in all the turmoil of this week's financial markets, what catches my attention the most? This:

Lending has grinded to a virtual standstill in the wake of the bankruptcy of Lehman Brothers... [emphasis mine]

Now, maybe I've been living in a cave, but that's the first time I'd seen "grinded" instead of "ground" for the past tense in writing. Looks like that one's on the way out!

Oh, and I hope you got out of U.S. stocks and own some gold.

UPDATE: What a crock! They fundamentally revised the article at the link, removing even the sentence that I quoted. I didn't know I was linking to the Department of History Alteration or whatever Orwellian agency it is...

Arnold Kling asks for crisis joke, Silas delivers

In a great post on the current financial market issues, Arnold Kling says:
The guys who got it right on low-down-payment mortgage are the Freddie Mac folks that [ousted Freddie Mac CEO Richard] Syron ignored. (There has got to be a siren-Syron pun in their somewhere, but I'm missing it.)

Oh, that's easy: "In America, it's dangerous for you to ignore a siren. In Soviet Amerika, it's dangerous for Syron to ignore YOU."

I can't post it in his comments section for obvious reasons. If one of you would point him here, that would be rockin'.

Tuesday, September 16, 2008

How come I never caught this before?

"Power corrupts" -- LORD Acton.

Uh huh. Thanks for the tip. Perhaps His Lordship was trying to pull an Epimenides paradox on us?

Full quote: "Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."

Wasn't Lord Acton so great?

I know, I know, British peerage system, he doesn't actually gain much power by being 22nd Earl of Halfingwaysshireford, blah blah blah ...

Wednesday, September 10, 2008

So I was right again. Now, let's fix inflation measures.

There's a story on CNN Money today about shrinking and degrading products in response to inflation. Unfortunately, it doesn't give more than passing mention to the real stickler in inflation, the "degrading" part, which is harder for measurers to notice.

Consumers are discovering more air in their bag of chips, fewer sheets of paper towels on the roll, thinner garbage bags and even smaller squares of toilet paper. (emphasis mine)

You don't say! I've been noticing this for a while, and haven't been convinced the BEA and BLS capture the impact. When you pay the same for a debased product, that is price inflation, and precisely what you need to measure. But like the fool who won't search for his keys outside of the light, the BEA and BLS don't do the lab testing necessary to incorporate critical quality-related aspects of products.

In my personal experience, I have noticed cereal boxes and paper cups as being flimsier and thus harder to hold -- about as big an inconvenience as you can tag onto such a simple, trivial product. Soda bottles also had confoundingly irritating changes: in addition to the 25% vending machine price increase, they shrunk the cap height beyond all reason so that it's nearly impossible to get a good enough grip to twist open with your hands. The fact that Coca-Cola even made this decision is a testimony to either a) the low quality of their engineering teams, or b) how desperately they needed to debase the product. Neither is encouraging. (To their credit, the caps have returned to "good enough", meaning they've hidden the price increase somewhere else.)

I should feel fortunate to live in a country where "difficulty in opening products" ranks highly enough to complain about. But that's also worrying: in a country with such enormous, overflowing wealth (which the US has, right?) shouldn't producers have kept such noticeable inconveniences out as a matter of course? Something's not right about that picture...

So, if you really want to measure inflation, you're going to have to track these very tricky quality changes. But there's an alternative: focus on measures were this quality debasement just isn't possible. As I'm sure I've argued here and on several boards by now, the ideal candidate is an insulin index which does the work of policing quality improvements for you. If you debase insulin, someone dies. The other benefits are:

-Steady, predictable demand
-Global market with many buyers
-Many inputs, so it's immune to any one specific input's volatility
-No transient intellectual property effects

Which probably accounts for why such information is so durn hard to find!

Second, in addition to capturing quality degradations, they need to fundamentally rework how luxury-type items are accounted for. Those typically "scale" with what other people have. Faster computers mean enabling nicer software, but they can also mean having to pay for hardware I don't need, as the older stuff isn't available, and my current one can't run the latest software that assumes I have a faster machine. And the value I can squeeze out of it doesn't increase one-to-one with the MegaHertz rating!

I absolutely accept that modern technologies have vastly expanded the entertainment and learning options available to me, but an inflation measure must at the same time account for when food and energy prices put the squeeze on me.

I'd be interested in transforming these ideas into an academic paper, except there are a few things ahead on that list...

Monday, September 8, 2008

Play-money arbitrage opportunity

Now this is weird: there's a play money contract on Intrade on whether Fannie Mae common stock will be under $1 per share on Jan 20, 2009. The market there is placing about a 14% chance of it happening.

But then when we look over at financial markets, we see puts on Fannie (the right to sell Fannie shares) trading at $1.60 for a stike price of $2.50 dated right near that. Do the math. To make a profit on the right to sell Fannie at $2.50 when you pay $1.60 for it, the shares must be under $1 at that time, so the financial markets are placing -- at least if my understanding of options is in order -- over a 100% chance on that same event.

If there were a real-money contract on this, it would be a nice arbitrage opportunity. I'll let you figure out what the trades would have to be.

As for me, I snagged 325 contracts, average price $1.21 (payoff is $10/contract if the event happens). All in play money, keep in mind.

UPDATE: Okay, my understanding of options isn't in order. But the point stands: the market places a "very high" chance of Fannie shares being under a dollar by innauguration day, while the play money prediction markets place a "pretty low" chance.

Thursday, September 4, 2008

The Bob Murphy and Gene Callahan problem

If you've read their post about banning me, you may have by now a one-sided view of the dispute. I will explain here why I make so many posts on their blog that they find annoying. (some links missing and I apologize)

1) I have called out Bob on his deception of readers. As Bob admits here, his shameful op-ed was written to convince the public that carbon caps are necessarily stupid, a position he rejects. Now, when you are so misleading -- basically trivializing the suffering of hundreds of millions of people to justify why your gas should be cheaper -- yes, it will make you livid when someone points this out in front of others, and Bob's desire to ban me is a predictable manifestation this effect.

2) I regularly call out Gene on his selective invocation of rules of civility. Hey: having a civilzed discussion is great. But here's how Gene defines "civility":

Acceptable behavior:
-Lying about what someone believes (geo-engineering thread)
-Lying about the economics and morality of tradeable pollution caps (the op-ed above)
-Assuming the worst possible interpretation of any argument someone makes. (The discussion on the iMac and the "He must own the place" thread)
-Personal attacks, when Gene or Bob is making them. (apple thread and recent posts resulting in the ban consideration)

Non-acceptable behavior:
-Personal attacks, when Silas makes them.
-Asking for clarification (iMac thread)
-Suggesting that someone did in fact read a blog post just before submitting a full essay on it (in the case of Bryan Caplan's challenge)
-Mentioning that someone should have known something, given his job. (geo-engineering thread)
-Mentioning that someone know about the philosophy of others, given his job. (same)

Note here: Bob and Gene have repeatedly claimed that even when I do have a valid point, they dislike my posts because of the "tone". Well, I'll admit it: I do use a harsh tone, and I should. Their mistakes go well beyond the point where I can attribute it to mere stupidity or ignorance. They reflect a corrupted philosophy, one that says, "Whoa, you thought libertarians supported principled, private property rights? Hell no! We support cheap oil, first and foremost, even and especially if it permanently floods the residences of hundreds of millions of people. The right to slightly increased profits OBVIOUSLY supercedes the right not to have your homesteaded land permanently submerged."

When you have whored out your ideology, and so cheaply at that, a constant reminder from some, some ... nobody will put you into overdrive. It will cost you sleep. It will want you to shut up that voice in any way you can. Hence, the discussion of whether to ban me, which is where we are today.

I am appalled at the way libertarians have reacted to the global warming issue. While libertarians like Bob may have made valid cases why right now carbon caps can't be justified, in doing so, many of them have tipped their hands as to what philosophy they were really following the whole time -- and it's not pretty. If you were confused as to why I've been so harsh, you no longer are. And it is instances like these that give serious substantiation to the claims of those like Kevin Carson who say that many libertarians are more interested in shoving costs onto others than in seriously establishing principled private property rights.

In Bob's defense, he has written a paper on how a private law system would handle the current global warming evidence we've faced. I find it unacceptable (as I do Gene Callan's attempt to solve the economic calculation problem with protests), but we can save that for when it's publicly available. For now, I just want you to note Bob's prioritization: first, ridicule all attempts to define clear rights in the atmosphere. Then, much later, if ever, try to sort out what the libertarian position on atmospheric rights actually is. Oh, and support atmospheric socialism until a serious problem comes up.

Wednesday, August 27, 2008

How to get Silas interested in Barbie dolls

Because of that whole heterosexuality[1] thing, I've never been interested in Barbie dolls. But I have been interested in the path of American industry and innovation, and where that intersects with Barbie dolls, you've got me hooked.

The big story today is that Mattel, the maker of Barbie, won a smaller-than-expected judgment against MGA, maker of the rival Bratz dolls.

It's a sad story, MGA having to pay damages, but becoming all too common. As the author of the story, Charles Payne, puts it:

I write about the deteriorating competitive nature of American businesses... Mattel makes for a great case study in corporate compliancy and hubris. ... At some point, a bell has got to ring. Our largest businesses have to be willing to truly innovate, to find genuinely new ways to get things done. Wall Street was greedy and complacent, and couldn't back away from the trough of easy money.

What happened in this particular case was that a designer at Mattel came up with an idea for a new kind of doll. Mattel didn't like it, so he went to work for another company that was actually competent enough to see the merit therein, MGA. So then Mattel, seeing their stupidity play out in the Bratz dolls' success, sued on the grounds that well, since the designer developed it under them, some contract gives Mattel rights in it. Except that -- oops -- they couldn't substantiate a case against the designer, and dropped it.

So Mattel's attitude basically comes down to: we deserve all of the reward and none of the risk, and we'll sue you rather than produce innovative products. (For what it's worth, I volunteer at an intermediate school [4th-6th grade, 9-13 year olds], and I've only seen Bratz-themed products, never Barbie.) And keep in mind, it takes quite a bit of innovation and guts to compete with Barbie in the doll market, one in which the buyers want to have what all the other buyers already have. Let alone compete well!

Payne is right: more and more often we see such clowns in charge of big corporations. At American car companies who lose boatloads of money and are valued at a sliver of their foreign competition. ("Honda is an engineering company, GM is a marketing company.") At financial companies that made billions in bad loans based on questionable models. The list goes on and on. When will America get its competitive edge back?

I don't know, but in the mean time, I'll make sure my money with those who deserve it. Today, I finally took the plunge and cast my vote of no confidence in the future of American business (and inability to pay back debts) by shifting my S&P 500 investments to an international stock mutual fund.

[1] Not that the opposite would constitute a valid basis for criticism.

Tuesday, August 26, 2008

Setting scarcity straight, once and for all

In case you haven't been following, Bob Murphy wrote a shameful op-ed on the proposed Cap-and-Trade scheme, which prompted quite a bit of criticism from me and "TokyoTom" (good summary). If Bob were merely claiming that politicians screw things up, none of us would have objected. Unfortunately, he said a lot more than that. The focus of this post will be on his claim that carbon emission caps "don't reflect scarcity".

Now, as you see in the exchange, Bob tries to claim that what he really meant was that if the carbon cap were too low, or somehow not correct, that wouldn't reflect scarcity, but otherwise it would. If you follow the exchange, you'll see how I showed that there is no possible way, based on the phrasing of his argument, that he could claim the op-ed meant that. Nevertheless, he has repeatedly gotten considerably sympathy from others (not me) with this last-ditch attempt to salvage himself from having to apologize for his op-ed, by arguing that, so long as government doesn't precisely set the cap to what the perfect, pure, austere free market would, the cap still would not reflect scarcity and he was technically correct.[1] I will now show how even this claim is wrong, by starting from a simple case, and working up to the claim Bob made.

Economic scarcity refers to the situation where "not all of society's goals can be pursued at the same time; trade-offs are made of one good against others." Now, let's see where this takes us.

Problem #1: I want to hit Bob. Bob does not want me to hit him. Does scarcity exist?

Answer: Yes, because it's impossible to satisfy the social goals of both me hitting Bob and Bob not being hit by me.

Problem #2: I attempt to hit Bob. Bob retreats to his house and locks himself inside. I attempt to bypass the locks. Does the difficulty of getting to Bob reflect scarcity?

Answer: Yes. Since my goal comes at the cost of Bob's, Bob will take measures to ensure I do not reach mine. The lock, a manifestation of Bob's desire not to be hit, therefore reflects scarcity.

Problem #3: Having such difficulty getting past Bob's locks, I instead try to act out my anger against him by sending 100 locusts down his chimney. I would have sent more, but my insurer restricted me to having only 100 locusts at any given time. Does this restriction on my ability to carry locusts reflect scarcity?

Answer: Yes. In deciding the max it will allow me to carry while maintaining coverage, the insurer must consider how badly I can hurt others with a given number of locusts, since hurting others can cause me to be liable for damage. The limit, being a mechanism by which the conflict with the desires of others not to be hurt manifests, therefore reflects scarcity.

Bonus answer: Note that locusts are not guaranteed to hurt Bob, but the more I send, the more likely that is. So the limit on how many locusts I can have only reduces the harm to Bob in a probabilistic sense. However, the limit still reflects scarcity.

Problem #4: Same situation, but in an alternate universe. There is an intrusive government that passes laws in an attempt to minimize conflict between its subjects and thus maximize its looting; insurers of the type above don't exist. It has decreed that people may own 146 locusts, but no more. In trying to buy more than 146 locusts, a red flag goes up, and I am prevented from buying any more. Does this difficulty in buying locusts reflect scarcity?

Answer: Of course. Whatever criticism of government you might make, its decrees ultimately rule in favor of some goals and against some others. Therefore, when it hinders one goal (such a stopping locust attacks) in preference to another (such as the goals of locust-lovers in keeping collections), this is a manifestation of scarcity.

Problem #5: What if the government's limit were 23 instead? Or 100? Or 0?

Answer: Yes, it still would reflect scarcity. No matter how closely or poorly it approximates what limits would result from market processes, the above reasoning applies.

Problem #6: Scientists reveal that emitting substance X increases the probability of catastrophic damage. The governments of the world then place an overall emission cap of C. As a result of the cap, the price of doing things that result in X emission goes up. Do the higher prices from the cap reflect scarcity?

Answer: Yes, for the same reasons as in #4: the higher prices ultimately result from the (probabilistic) conflict with the goals of others. Yep, even substance X is CO2.

Problem #7: If Bob responded to the above line of reasoning (about scarcity) by saying that the proposed scheme is not a Blicknorg [2], is that responsive?

Answer: Don't be ridiculous; that's just changing the topic.

Long story short, the caps do reflect scarcity.

[1] And how would you ever learn what cap a free market would set? Why, you first have to price all resources, including and especially the atmosphere. Anyone want to take a wild, wild guess as to the ratio of the words that Bob has spent:

a) advocating that atmospheric property rights be clearly delineated,
to the words Bob has spent
b) demanding that government NEVER do a SINGLE thing to in any way define such rights?

I'll give you a hint: it's somewhere between "zero" and "can I have what you're smoking?"

[2] Actually, in the discussion, what Bob actually tried to do to refute the solid argument that caps would reflect scarcity, was claim that the caps are not a "market solution", rather than a Blicknorg. However, since he refused to ever clarify what exactly that meant, despite being asked several times, he might as well have said Blicknorg.

Sunday, August 24, 2008

I got a kitty!

Yesterday I adopted a kitten at a Humane Society shelter. She's 6-8 months old, and I haven't given her a name yet, but I'm thinking of going with "Cordie" because of her fondness for cords. Pic:

Commence cooing. No, I don't know how to get the orientation right.

After I took her home, she wouldn't let me come near her, but within a few hours let me hold her and pet her. By about midday today she already made it to the "wants to bother me all the time" stage :-)

Wish me luck in this pet-parenting adventure!

Friday, August 22, 2008

Hee hee hee! ur so clev4r!

Well, Bob Murphy bites the bullet. I argue (in an unproductive email exchange series) that government enforcement of atmospheric property rights, while not optimal, is just as tolerable as government's enforcement of its minarchist authority (police, courts, army), such as when it detains killers. In other words, where are the outraged libertarian articles about how government police will evict someone for failure to honor a mortgage?

Well, Bob took it as a sign to show off his look-smart-to-a-sophomore-girl case for legalizing murder

So imagine we're initially in a free society, and then you hear that the government is moving in to town in order to monopolize civil society's possible responses to murderers. Are you going to feel safe to walk the streets now? Are you confident that a serial killer will be stopped as quickly as humanly possible? [emphasis added]

Right, assume the opposite of the current problem.

Bob must have missed, in any case, that I compared the carbon caps to the existence of a ban on murder, not the current enforcement methods. But no need to be rigorous when riding that bronco for all it's worth, eh?

And for anyone interested, I actually made the point Bob is responding to back in early June.

Quoting my comment at length:

...While a valid complaint, I honestly don't see how it's different from government's enforcement of other rights. Most libertarians, for example, have no problem with government enforcing (at least some of the existing) land titles, excluding murderers from interaction with the rest of us, putting out fires, etc., at least until private alternatives are [established]. The libertarian position is more like, "Hey, that would be a lot more efficient if done by privately-run organizations," rather than "Putting out fires is immoral." We should likewise view enforcement of the atmospheric property rights: yes, government will botch it horribly, but it's preferable to the tragedy of commons resulting from ZERO property rights.

But I don't see anyone here following this chain of reasoning. All I see (here and on a mailing list) is poorly thought out schemes: oh, we should give anyone a veto over any harmful emission; or we should never allow any [veto of pollution].

I'm very interested in learning where I'm wrong, but if even Bob_Murphy can't grasp basic issues like why carbon emission capacity is scarce, I'm not sure anyone here is even prepared to make the point.


So folks, if you want to know why I don't think Bob is taking this issue seriously, look no further than this. With one witty remark, he'll obviate about a month of discussion because of a premise assumption he never corrected when I made explicit, nor in any of the other discussion that implicitly depended on it.

His IER hit piece therefore was not really arguing, "Hey, politicians won't get the cap right because of political considerations." It was arguing:

"Government shouldn't do anything [so far so good--SB], and there's no point in even talking about why one government policy is better than another. If failure to define atmosphere rights (because politicians botch it and the free market is squelched) results in catastrophic damage to the earth's climate or even human existence ... so be it!"

I can understand why Bob had to obscure his real position for IER.

Ready to take the plunge and side with Bob? Just see if you can say this with a straight face:

How could the government continue to prosecute anything else, if people could say, "C'mon, murder is legal, and yet very few people do it. It would wreck your credit score! Who the heck wants that?!"

New name for blog?

When I started this blog, I gave a name intended to represent the general theme of the blog. I figured that sooner or later as it took on a character, I'd be giving it a new one. So is it that time? One good candidate I thought of would be "Scarce Bengal", an unusual combination of words that reflects a major issue that's been around since before the blog started. Here's why it would be a good name for the blog:

1) The unique word combo.

2) It is a reference to my long-held dissatisfaction with Bob Murphy for casually dismissing huge classes of people (one of them Bengals) as basically "not counting" for purposes of determining whether there is scarcity. Did the price of your fresh, clean oil go up because governments restricted the total consumption in order to keep countries from flooding? Well guess what? That higher price, according to Bob, doesn't reflect scarcity!

3) Its initials match my initials.

4) I have a cute Mii caricature of a friend of mine who is a Bengal (i.e. person from Bangladesh).

Tuesday, August 19, 2008

GM attempts to boost sales by losing (some of) the weasels

So CNN's Money reports that GM is trying its employee discounts for everyone program again. What this means is that it will give everyone, not just its employees, their cars at n% under the MSRP. More importantly, that in turn means that so long as program exists, everyone gets the same price. The article in fact notes that this converts their retail outlets into "no-haggle" operations of the kind used by GM's own Saturn brand. (Toyota's Scion does the same thing.)

This has long been something I've wanted car manufacturers to do. Not the discount necessarily, but ensuring that everyone pays the same price for the same car. Car salesmen have a well-earned reputation for using every legislative and psychological trick to gore you for as much as they can on any purchase. And it is this fear of being "played" that led me (and undoubtedly lots of othes) to put off buying a car. Who wants to go through that? Half the dealerships I went to left me wanting to vomit at their vileness.

Think about that for a minute. As an automaker, you use advanced technology most can only dream of. You have enormous, well-capitalized facilities for training, for testing, for building. You accomodate thousands (if not millions!) of design constraints. And what do you depend on for your cash flow? What barrier must your ultimate customers bypass to have a chance to give you money?

"So what kind of monthly payment were you looking for? ... Uh huh, up to ...?"
"Now, we're going to see what kind of financing deal we can get for you, okay? If you could just stay for a few minutes, in case the bank wants to talk to you. It'll just be a few minutes, I promise."
"Oh, yeah, those guys just need a few more minutes to look at your car, so we can give you the best deal, it won't be much longer. Now, which option did you want to go with?"
"Oh, just one more thing before you drive off, we'll need you to talk to our finance department about extended warranties, which I never mentioned before today."
"Internet sales department: please call Lisa at ..." (!!!)
"Okay sure, but I've never used SYNC ..."

Who enjoys dealing with that? Not me. While obviously I'm not one of the geniuses currently in charge of a large corporation, I strongly suspect that they would realize greater sales and a more liquid auto market if they could just signal their commitment to fair dealing and ditch some very useless middlemen (who these days usually know less than the customer about the car) by using this sales model. Certainly, there's something to be said for squeezing out the consumer surplus from less savvy buyers. But it kind of defeats the purpose when the real impact is to get most people to just say, "You know what? **** it. I'm just not going to bother." (Discretion like that would have been welcome in the recent real estate bubble.)

(Of course, the real reason such garbage can persist is that the retail car sales lobby has, in every state, been successful at severely restricting retail car sales, including internet sales, thereby killing the kind of competition that would eliminate vile sales tactics. Also, not suprisingly, this doesn't stop people like Malcom Gladwell from using instances of this vileness (like race/sex discrimination) as an indictment of free markets.)

So keep it up, GM: maybe you'll be able to chug along an extra six months, more than enough for your shareholders to dump their take on some idiot.

Saturday, August 16, 2008

Thursday, August 14, 2008

So why are libertarians such socialists about the atmosphere?

Why do libertarians seem to demand that there be private property, and well-defined, tradeable rights in each and every resource in existence ... except the atmosphere?

Sure, global warming alarmism could be complete B/S. Fine. But there could one day be an atmospheric global tort whose harm profile is isomorphic to that of greenhouse gas emission (as claimed by the climate science community). Shouldn't a consistent, coherent philosophy have a clear answer, directly implied from the principles its proponents claim to hold? So why does the only existing answer seem to be

NEVER, NEVER should there be private property in atmosphere, and I will do whatever it takes to rationalize why this resource should forever remain an abused, unowned tragedy.

I have the right, the inalienable right, to cheap oil, and if you thought libertarianism was supposed to be about principled, private property rights, you can just wake up from your goddamn fantasy and get with the program!

Of course, there is the the Pigou Club, whose attitude is only a bit less excusable:

Are you getting victimized by greenhouse gases? Aww, you poor thing! Hey! Polluters! Give me money! Oh, what you lookin' at me like that for? Better move to high land, bro, you ain't gettin' no bling.

EDIT: some goofs.

So why aren't you shorting GM, liar?

With all my doomsaying about GM, all my warnings about the emptiness of their warranties, shouldn't I be taking action based on this certainty? Well, good point. In strategizing about the implications of my pessimism for my next portfolio decisions, I forgot to include GM, mainly because I associate "short-selling" with "risking being screwed by a dead cat bounce.

But you don't have to do it that way. Instead, I can just buy some long-term, far-out-of-the-money puts. Check out this list for GM options expiring in January '08. My eyes are on the $2.50. Bonus: I can dump the options if some news temporarily makes the value surge.

Another bonus from using this method: No ill will from my brother :-P

Tuesday, August 12, 2008

Your taste for alcoholic beverages is a lie

UPDATE: I perform this blog post on my YouTube site.

I've previously blogged about my non-addiction to alcohol, and inability to taste its greatness. It has long perplexed me how people can get so hyped up about how this or that beer or wine has this or that subtlety in its taste that makes it so enjoyable and the best drink you could ever possibly have. And, at the same time, I have accepted, with open arms, the claim that certain people like alcohol because of its psychoactive effects, like "relaxation" and drunkenness.

I've long held the theory that people only make these claims about the super-awesome taste of alcoholic beverages as a pretense for their desire to get drunk (or relaxed, etc.), and I've been roundly ridiculed for it. However, unlike socially-mandated beliefs that people readily admit are garbage in private, people actually claim, in private, to enjoy the taste of their favorite alcoholic drinks and, amazingly, retain that belief to arbitrarily deep levels of "belief in belief" recursion. They see no sense in which they are faking.

But now, I have cracked the code. I know how to get people to recognize their own self-deception about the supposed greatness of the taste of their favorite wine or beer. It goes like this: if you genuinely enjoy the taste of your favorite alcoholic drink, then you should still want to drink it more than any cheapo kiddie drink, even if all it has is the taste -- that is, if it no longer had the psychoactive effects.

So, I did a quick sample among the co-workers of mine who have claimed to, like, seriously, I promise, be wine or beer connoisseurs and are perplexed at how there could be no alcoholic beverages that I like the taste of. I asked them the following question:

Assume that alcoholic drinks had no psychoactive effects whatsoever: that they don't make you relax, or open up, or get drunk, anything like that. And assume no drink has any impact on your body either, including health (such as making you fat). That is, assume all that there is to a drink is its taste. Then, comparing on taste only, would you rather have your favorite alcoholic drink, or a milkshake?

Every single one of them preferred the milkshake -- even the one beating down the door to get me to start liking wine. And I strongly suspect (and would like to test) that this holds across the general population as well.

The upshot is that I'm right: that the whole practice of rating and having a taste for alcholic drinks is one big sham, and people have extraordinary abilities to deceive themselves on the issue -- they are completely oblivious to the lie they are telling, well beyond the obliviousness they can show on any other issue.

So what would make people put on such an act? Simple: they need a rationale to convince legislatures not to ban alcoholic drinks, as they ban every single other mind-altering substance. They need to show how it's a "tradition", how it's "cultured", how it's a fundamental part of our society, how oh oh oh, I just gotta have my glass of wine with dinner, it's just so mature of me. And the crazy thing is, from my perspective, they don't even need these rationales. As I see it, your decision to drink alcohol is between you and your god (or Dionysus, as the case may be). Even if the most extreme claims about the dangers of drugs are correct, that would at best justify restricting their use to highly monitored "padded room" equivalents in which such consumption can take place, not outright banning.

And to top it all of, I bet the response I'm going to get to this post is a big, "Duh. Now shut up about it."

So, I find myself asking this question yet again: is the world crazy, or just me?

This joke actually came to me in a dream

"Political speeches are like yodeling: the point is to sound really nice, not to convey actual meaning."

Wow, and out-of-the-box ideas like that are actually common in my dreams. Weird.

The die is cast: Party at Dave and Buster's on Saturday

Well, I've finalized the reservations for Dave and Buster's this Saturday (8/16/08) at 8pm in Austin. We'll have two hours of free play on the hyperbowl machine and free food, drinks, and game play for everyone. Hope to see you there! Unfortunately, if you check out the poll, the only people who seem to read this blog are far away or terrorists. Go fig.

(On a side note, do not detonate yourself in an attempt to kill others. Plz.)

How to get women into video games: a suggestion

Tyler Cowen's post about what makes a game good got me to thinking about why there has long existed a difference in popularity of video/computer games between men and women, and what it would take to change that.

(Digression: of course, the Wii has made a lot of progress, and I've known women who started playing because of their brothers, but hasn't had the kind of addictive capacity it's had for men).

So see if my thinking is right here: a game becomes addicting because it stimulates your brain in a way that you want to get more of it. So, if games have historically appealed to males and not females, it must be because they have historically challenged a part of the brain that is more pronounced for men than women. Fortunately, brain researchers know exactly which areas these are: women have a more pronounced Broca's area and Wernicke's area, which are vital for the use and processing of language (damage to them can cause inability to coherently use language), while men have more pronounced brain areas for detecting motion (more specific names forthcoming).

So, for games to appeal to women in the same way that they have appealed to men, they would have to require you to notice and respond to subtleties of language -- perhaps you'd need to be able to infer mood, deception, hesitation, etc. from others' speech in order to advance. In other words, situate you in the middle of a Jane Austen novel in which you have to navigate human interaction with something like the same complexity that exists in human interaction.

And in fact, it does appear to me as if that attribute has been lacking in any game that's not online, and probably because it's so hard to program.

Just a thought.

Sunday, August 10, 2008

Silas experimentally tests "wisdom of crowds" effect

In case you hadn't heard of it, James Surowiecki has gathered a substantial amount of evidence supporting the "Wisdom of Crowds" Hypothesis, which says, basically, that if you can aggregate the independent guesses of large numbers of people, they will average out to be the correct answer, even though the individual guesses will tend to be far off. Surowiecki found confirmation of this hypothesis in such varied cases as guessing the beans in a jar, the weight of a bull, and the location of a missing submarine.

Well, just for kicks, I went out and did my own experiment to see if could replicate his results. When I went out for a night on the town last Friday (8/08/08), I asked the people I talked to how much they thought I weighed. Here's what I looked like, so you can make a guess and tell how far off you would have been:

To help them make their best guess, I allowed them to see me without the blazer and from different angles, and to, ahem, touch me. To adhere to the protocols necessary to find wisdom in crowds, I made sure they didn't discuss guesses with each other until they submitted them, and that they made the guesses anonymously (by writing it town and putting it in a plastic bag out of my view). I excluded non-numerical entries such as "Fuck U".

The results? After collecting 16 entries at two venues, here is what I got (and this will be expressed in terms that conceal my weight and their guesses, which will be revealed in a later post):

The average (mean) of their guesses was off by 3.6%.
The average error (mean error) of all the guesses was 10.3%.
The median guess was off by 6.3%

This is pretty much consistent with the Wisdom of Crowds phenomenon: the average of the guesses was much more accurate than most of the individual guesses, and the median guess. It probably would have been even better if I had collected a bigger sample.

Pretty neat, huh?

Thursday, August 7, 2008

Non-existent positive real interest rate spotted!

Dismissing the harm of inflation again, Bryan Caplan confidently announces that it's already priced into interest rates, so it doesn't eat away your savings!

Since most inflation is anticipated, I don't see that it does transfer much; instead, it's built into raises and interest rates.

Oh really now? I'm interested in learning where I can store my money at low risk such that its real after-tax return is positive. Two-year treasuries are yielding 2.45%, much lower than you'd need to beat inflation and taxes. Vanguard's Prime Money Market Fund is yielding 2.19%. (I was going to quote the after-tax return they give, but they seem to have either removed that section, or they never post it for money market funds. My rough calculations show that even if you left your money alone for the last ten years, the nominal ROR at a tax rate of 25% would be ~2.5%.)

Hey, I'm a big saver, but the market -- well, whatever's left of it -- is telling me not to.

Update on non-pizza pizza party

Alright, I've talked with an event planner at Dave and Buster's, and I've reserved the "Hyperbowl" table, one that puts us near a type of bowling game. I'm now working out the appetizer trays and game credits for the guests. Plus, it looks like some of the people that can't make it are going to be able to make it, so I have attendance at about 8 at this point. Remember: Saturday, August 16, 8pm Dave and Busters, Northern corner of 183 and Mopac, Austin, Texas.

Now here's the kicker

Do I say that too much?

Tuesday, August 5, 2008

Silas the Doomsayer: The scenario I worry about

At some point, the developed world is f'ed, unless they start on a politically unpopular course. On what do I base my particular doomsaying? Thought you'd never ask.

It's the entitlement explosion crisis. (Post will be light on links, but I'll substantiate this later.) Governments have promised huge benefits, such as pension and health care for the elderly, that they cannot possibly finance. These obligations aren't counted in national debt figures, but are enormous and would made developed countries look a lot further in the red than the currently are.

Now, I'm sure you've heard the figures about how, oh, this entitlement program will be running a deficit in this year, it's trush fund will be exhausted in this year ... the problem is that the crisis will have to hit before those times, and with less warning, because of a dangerous (positive) feedback loop:

At some point, governments realize, gosh, we can't pay for what we've promised. So, they somehow suck more out of the productive class: higher taxes, worse government services, inflation ... it doesn't really matter which route. Then, some of those workers, probably those with the most mobility, say, "Hey -- this is stupid. I can just move to $SAFE_HAVEN, and have a much higher after-tax real income." So, he moves. And so do others in that situation.

Uh oh! Now that's a smaller groupe to gore to pay for the obligations! So, they have to do it again: gore them at an even higher rate, cut benefits, etc. Then more workers are in a position that they're better off by fleeing. Then you need a higher tax rate until there's no one left to gore and those expecting payments, or still working are left "holding the bag" -- they're very little wealth to go around.

We've already seen miniature versions of this happening at corporations that tried run their own little entitlement system: they realized, all to late, that no one has to give them anything: they can go "work" for others who won't ravage their pay to cover other people's entitlements. Some view the USA as being different in that, gosh, you kinda don't have a choice ... but you do, just as people had a choice not to help fund GM's welfare system, and they exercised that option, despite such a scenario seeming impossible.

Needless to say, I don't want to be the one holding the bag.

Here's the kicker, though: none of the financial markets in these countries seem to have price in this near-inevitability. So are they insane, or am I insane? And to where would I flee? So far, it looks like Singapore, China, and Australia are the only developed or near-developed countries protected from this upcoming crisis.

PS: Cheer up! Don't forget about the pizza party! Eat, drink, and be merry, for tomorrow we will sure have outrageous entitlement taxes.

Monday, August 4, 2008

Profit opportunities for Silas: oil and GM

Back to the two most frequently discussed topics on this blog.

First, let's talk about oil. Though by the end of the day, this may change, the spot price temporarily went below $120. Time to strike when the iron is hot? If I bought the double-oil-return ETF discussed last week (DXO), and it were to return to its previous high, that would be a nice 46% return. (Btw, y'all oil options traders are accurately factoring oil's massive volatility into the implied volatility term in your options pricing, right? Okay, just checking.)

Second, let's talk about GM. I have been claiming, since studying GM's history back in '05, that a bankruptcy was near, and so my brother and I have been discussing an even odds bet that would pay off if bankruptcy happened, or some other even of equivalent lameness, such as: defaulting on any bond, PBGC takeover of legacy obligations, refusal to pay legacy obligations, or government bailout. I'm not sure if we ever agreed to a bet value and a time frame, but a few weeks ago I emailed my brother some news about GM, and he reiterated his position that there would be no bankruptcy, so if we haven't agreed to something, I could still get an even odds bet in.

While I did post some news about GM's lameness last Friday, I have some more. Here's a Reuter's article detailing GM's rising defaulting insurance premiums and falling bond prices. Right now, you must pay 47% of the amount insured, so $47 to insure $100 of debt. And you know what? Most people, facing that much to insure something, just don't buy it, and bear the risk themselves. Heck, that's what hospitals do for their liability insurance, which can get that high.

It also lists the prices of GM bonds, but strangely, Reuters prefers to list the cents on the dollar (click on "first vlog post") price, and never the yields, neither the current yield, nor the yield to maturiy. But my own calculations give about 12% current yields for short term bonds and 18% for long term bonds based on the numbers there

But strangely, the prices of GM bonds that I found on my Scottrade account gave a different story. (I can't seem to find a free no-hassle source for bond prices I can link.) I don't remember the current yield, but it listed GM bonds maturing in December of this year as trading with 9.3% yield-to-maturity, and bonds maturing in 2011 -- 3 years from now! -- as paying, and make sure you're sitting down, 29% YtM. Twenty-nine percent!!! There are banana republics right now that pay lower interest on their debt! There are reckless shoppers right now with lower credit card interest rates!

Yay! One month blog anniversary! ~Pizza Party!~

So, I made it one month without abandoning this blog! Yaaaaaaaaaaaaaay! And, I got plenty of great comments from people -- including from one of my favorite bloggers, Robin Hanson -- and lots of participants on my poll. All in all, a GREAT first month for my third attempt at blogging. Readers, give yourselves a pat on the back for all your love and support you've given me!

As a celebration of this success, I'm hosting a pizza party at the Dave & Buster's in Austin, Texas on Saturday, August 16th, starting at 8pm, and ending whenever you leave or get kicked out. (It's at 9333 Research Blvd, or, for normal people, the northeast corner of the 183/Mopac intersection.) That's next week, on Saturday. "Wait wait wait, do you mean THIS COMING Saturday, or NEXT WEEK, on Saturday?" Next week, on Saturday. "Oh, okay, thanks, you were unclear before." [1]

So, if you've read this, and plan to be in Austin, Texas that day, you're legally obligated to stop by. Please RSVP by email or in the comments. But if you forget to, don't be afraid to come anyway. There will be non-pizza options if you, like me, don't eat pizza.

[1] Sadly, this is isomorphic to a conversation I've actually had.

Friday, August 1, 2008

Why I can't stop laughing at GM

Because they just posted a large quarterly loss.

...greater than their entire market capitalization. (market cap being ~$6.5 billion)

...by more than a factor of two.

...for a second time.

...in under a year. (check the Q3 2007 column)

Did I mention their uncovered obligation to contribute $46 billion (7 times their market cap) to cover legacy costs?

And the steadily high cost of fuel scaring people away from their only profitable line of cars and forcing them to close plants (though this post will NOT get the oil label, since I think we all know they would be f'd even if magic fairies gave everyone free oil)?

And how they're so desperate they may even sell Hummer -- when its value is at a historical low?

And the subprime mortgage crisis ripping up its other formerly-profitable arm, GMAC?

And how they think dumping the brains behind the cars is the way out, since they can't touch unionized factory workers?


Okay, okay, I can breathe again. Ah, that felt good. Now, for part that will scare the hell out of you:

First, given all the costs GM has to cover, there are only two reasons anyone would pay a positive price for GM shares:

a) because they can turn around and sell it to another sucker on its next upswing, and

b) because expect GM to be able to stiff their pensioners -- not have to pay the full legacy costs, courtesy of a lenient bankruptcy court judge (oh, no, no, can't think about bankruptcy of GM, can we now?) and an undercapitalized Pension Benefit Guarantee Corporation.

And second? GM is listed on the bluest-of-blue-chip Dow Jones Industrial Index.

I think I'm going to cry now.

Thursday, July 31, 2008

I just don't get no respect -- about prediction markets

You've heard of prediction markets like InTrade, right? Basically, like gambling, but on real-world non-sporting events, so as to aggregate the market's knowledge about the future, and reward those who know and "share" their knowledge. GMU professor Robin Hanson did a lot of the work in formulating them and encouraging their development.

Now, if only he could recognize the insights of others.

Back in January, his blog posted Peter McCluskey's idea to use prediction markets to unveil another kind of information: how a presidential candidate impacts prices in financial markets, such as oil futures, government bond yields, etc. And how does he propose to do it? The prediction market would host a bet on a measure of their correlation. Which measure? The (modified) ratio of how much the candidate's contract price (i.e. market's estimate of chances of winning) changes to how much the financial security's price changes ... on election day. ( a so-called "shock response future")

Great idea, I thought -- but wrong measure. Election day by itself is unreliable. After all, more than just the election will influence the financial security's price that day. Plus, the market has already largely incorporated the influence of whoever's expected to win except in very close races. Worse, it's way too easy to manipulate: want to "prove" Democrats make interest rates low? Eat a loss by buying treasuries at an absurd price at a critical time, just like that gentleman who ate a loss on oil just to be the first to buy oil at $100/barrel.

So, I told them exactly that and suggested a better measure: don't just look at election day: measure the correlation all the way up through election season. Find how often e.g. oil's price goes up as a Democrat's chances of winning go up, and look at how closely they track each other, each day or week. That's far more robust against manipulation, and extracts much more relevant information. Yet arguing the point with McCluskey and Hanson was like talking to a wall: they were responding to distortions of my idea that seemed to have only a partial understanding of it. For example, Hanson argued that no, no, no, silly: we need a metric available before the election ... which mine is. No no no, Hanson really meant something completely different from what he actually said.

Well, McCluskey went ahead and launched his inferior futures market on the InTrade site. And, just two days ago, Hal Finney launched a celebration of those futures markets' "success" with a blog post that developed the implications of the prices those contracts traded at. Major posters gave McCluskey a good pat on the back.

(Re-)Enter Silas.

I remarked that I had suggested a better metric on the earlier thread, and asked if the people there would be more interested in a futures market for my idea. A few were, and one major poster reluctantly admitted that I had a better metric and deserved acknowledgement.

A major implication of my criticism, let's not forget, was that too many other forces impact a financial security's price on any given day (including election day) and the market has already incorporated most of the impact of whose expected to win (or, of course, Senate/House elections could impact as well...). This means we should expect the market McCluskey made to be rather useless -- traders will view the correlation on just election day, as effectively random -- a 50/50 chance either way. And what do we see? Yep: "49.9-50.1" -- or an implied 50/50 chance.

As Finney sheepishly avers: "These values are so close to the 50% mark that it appears that the markets do not expect any significant movement in oil prices or interest rates on election day, that can be attributed to developing information about which party will win. As critics have noted, this could be because they don't see much effect of political parties on these values, or else because they expect that the election day results will be a foregone conclusion and there will be no surprises in that regard."

Or, reading between the lines, despite all the kudos we're giving McCluskey, he created a market that provides completely useless information, even though I told him long before how to make it useful.

Hanson tried to save face by replying again, so I had to gently correct his misguided attempt to trivialize my insights. Okay, not so gentle -- but when you're so wrong, and for such wrong reasons, why do you expect a huge amount of respect right back? Especially when you're the one always complaining about how stupid it is that you have to gain social status just to get people to listent to your good ideas!

What's especially interesting is when Hanson alleges that, duh, of course he had considered my idea. It's just an obvious variation! And yeah, in a way it kind of is. But judge his attempts at response for yourself -- are those the remarks of someone who has considered the idea and rejected it? Would he constantly respond to misunderstandings of the idea? Make so many misstatements about it? Not notice his true complaints applying to his own idea?

Furthermore, even if he does think the election day correlation is so much more important, why didn't he suggest the further "obvious" variation of simply increasing election day's weighting in the correlation, which would still retain the measure's robustness against noise and manipulation?

His latest response to my damaging criticisms? Silence. A wise, wise choice.

Will they go ahead and belatedly implement my idea before I go ahead myself with it? It will be very, very funny when they do.

Wednesday, July 30, 2008

And to *double* the stakes on oil ...

Well, a little googling got me a blog post from Pacific Park Financial that lists leveraged oil ETFs, which they warn as being "not meant for buying-n-holding; rather, they are meant for making a calculated bet and exiting when you've reached your profit target or stop-loss." (emphasis mine)

A calculated bet? Oh, we can do that.

The one I'd be interested in here is DXO, which makes a leveraged long bet on oil, attempting to replicate 2x the gain/loss of oil. Unfortunately, it hasn't been around long (just over a month), but this chart, which I hope you can see okay, shows it neatly getting double the return on the security OIL.

If oil (no caps) merely returns to what it was three weeks ago, that's a nice 30% return for me. But of course, the whole point of the bet was that fate doesn't work like that, and my bad luck will thus drop oil's price even more forcefully.

Perhaps with a li'l work, I can find a different oil ETF that amplifies the return, but has a longer history. Or, switch gears entirely and try to use my luck to bring down an entire commodity index, rather than just oil.

Stay tuned. (archaic expression from they days of radio when they wanted you not to tune to a different station)