Wednesday, September 30, 2009

Does optimisim lead to over-confidence

Or is it the other way around?

In a post on overconfidence:

What do the following high-profile disasters have in common: World War I, Vietnam, the war in Iraq, the collapse of the banking system, and underpreparedness for natural disasters such as Hurricane Katrina?

According to Dominic Johnson at the University of Edinburgh and his pal James Fowler at the University of California, San Diego, the answer is that they have all been blamed on the all-too-human condition of overconfidence.

The puzzle about overconfidence is its ubiquity. Many studies have shown that most people have an exaggerated sense of their own capabilities, an illusion that they have control over uncontrollable events and are invulnerable to risk. Most people, for example, believe they are above-average drivers, a statistical impossibility. We are all overconfident in one way or another.

It's a little puzzling why over-confidence is so common. Is it more common now than say two decades ago? In the 1990s there was a claim (which is probably still being claimed today) that (young) adults were prone to depression.

A popular self help book during the time was Martin Seligman's "Learned Optimism". In his book, Seligman documents the links between depression and overall well being and how pessimism can lead to debilitating depression and consequently poor health. In his book, he shows how optimism can be learned - the implication being that (in some circumstances), by taking control of events (or feeling that you have control over events) and letting go of others one learns optimism therefore building confidence. (This is basically the gist of the book.)

This all makes some sense but in the test in Chapter 3 of his book the following item (item 45):

You win the lottery.
A. It was pure chance
B. I picked the right numbers

If you selected A as the response to the statement it actually counted against you. (For more, see the book but it has to do with how you explain events to yourself and the type of explanation can affect your confidence and how you view how much control you have over the events.)

If we all started to think that we are good because we are all trying to avoid depression by acting and thinking optimistically then this could explain why over confidence is so common. Curiously, the book seems to claim the opposite - that there are more people who are depressed because they are pessimistic.

The current trend is continuing but under the different name of "Happiness" and "Resilience" and Seligman and University of Pennsylvania seems to have become the center of happiness research. See

Is there a suggestion that self-help in particular, learning optimism, having a positive mental attitude and taking charge of our lives (or at least feeling like we are taking charge) caused the financial crisis? It's just a thought - after all where does over confidence come from?

Economics of cloning

Skimmed two of Gilles St. Paul's papers on economics of human cloning:
1. "Economic Aspects of Human Cloning and Reprogenetics,"
2. "The Economics of Human Cloning"

The first is less technical and gives a wider discussion of various issues while the second is more technical and specific.

From the latter paper:
Within an overlapping generations model:

"Young agents have a fixed time endowment, which we normalize to one. We assume that there is a time cost b per child of raising children. People can raise children for themselves or clones of other people, acting as a surrogate mother. ... Therefore, there exists a threshold level of ability, ..., below which agents will entirely specialize in the production of clones, and above which they will entirely specialize in production."

I actually found the assumptions (and conclusions) counterintuitive only because in my mind cloning implies producing a replica of oneself at a pre-selected age e.g. at age 25 so that there isn't any time cost to raising clones.

Guess I've been watching too many bad sci-fi movies.

Tuesday, September 22, 2009

Pricing new products

In pricing an item, this expert advised, you ought to double your manufacturing costs. Olsen and Anderson didn't know their manufacturing cost, so they guessed a figure and doubled it. Then they realized they might have to sell the modules through sales representatives, so they tacked on another 15 percent.

From "The Ultimate Entrepreneur: The Story of Ken Olsen and Digital Equipment Corporation".

A similar pricing story is also in "CEO" by Sandra Kurtzig founder of now defunct ASK.

Monday, September 21, 2009

Elaboration of failure to predict crisis

I'd have to agree with MR:

Some economists are trying to get macroeconomics off the hook by arguing that by their very nature crises are unpredictable. Thus David Levine aggressively argues that "our models don't just fail to predict the timing of financial crises - they say that we cannot." ...

If you play Russian Roulette with 1 bullet and 100 chambers in your pistol, I can't predict when the crisis will occur. If you play with 10 bullets, I still can't predict when the crisis will occur but I can say with certainty that the risk has increased by a factor of ten. Analogously, nothing in modern economics makes it theoretically impossible to forecast that greater leverage and higher than normal price to rental rates, to name just two possibilities, increase the probability of crisis. Nor does modern theory make it theoretically impossible to forecast that conditions are such that if a crisis does occur it will be a big one. ...

Thus the "we could not have predicted the crisis even in theory" argument is a weak defense--even with rational-actor, rational-expectations models there are plenty of senses in which economists could have better predicted the crisis and, although this is yet to be seen, perhaps they could and will do even better with other sorts of models.

David Levine's argument is as follows:

Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I'd sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week - why it would drop by 10% right now. This common sense is the heart of rational expectations models. So the correct conclusion is that our - and your - inability to predict the crisis confirms our theories.

However, this "model" assumes that everyone plays by the following rules:
1. Homogeneous expectations - everyone's belief is the same.
2. Common knowledge - everyone knows that everyone will act on this belief.

1. Heterogenous expectations around the mean.
2. Common knowledge - everyone knows that even if the expectation has some error, everyone will act on this belief.

So, what does it mean to be able to predict a crisis? It would be something like this: In the next 3 months the probability of a financial crisis has increased from 0.5 to 0.6 for instance. Predicting the crisis would not only mean this conditional probability (within a short time frame - less than a year but more than a month) it would also spell out the way the crisis would unfold.

It is the latter point that economics failed. While there were a lot of doomsayers who portended the crisis they focused on 1) global economic imbalances (mostly academic economists is my guess), 2) the housing bubble. Not a single economist was able to put a probability or a window in which this would occur and no one predicted the spectacular collapse of the financial industry.

If no economist was able to predict the chain of events (much less the likelihood of collapse), then can we really say that all crises are the same?

Sunday, September 20, 2009

Follow up on resource curse at the individual level

From an old post, here is more evidence (without data, HT: MR):

Professional Athletes and the Prevalence of Bankruptcy
This news is about
NBA players and bankruptcy is from a few years ago. Now comes even worse news regarding NFL players and bankrupt.
The 78 percent number (i.e., 78% of NFL players go bankrupt within two years of
retirement) is buoyed by the fact that the average NFL career lasts just three
years. So, figure a player gets drafted in 2009, signs for the minimum and lasts
three years in the league: He will have earned about $1.2 million in salary.
Factor in taxes, cost of living and the misguided belief that there will be more
years and bigger paydays down the road, and it becomes a lot easier to see how
so many players struggle with money after their careers end.

Saturday, September 19, 2009

Insights on travel while trying to get to the Antartica

From T+L:

At a time when the earth’s fragile environment is under siege, when ice shelves are famously collapsing, there was something reassuring, too, about the dwarfing scale of the whiteness. It is true that global warming will create cold as well as heat as it changes the weather patterns of the world, but at some level all of us had come here fearful of the greening of Antarctica, and what we found was implacable frozen serenity, in which we were only a new crew of insignificant trespassers. Hoping that we would stay the course and break through to the continent, we were still awestruck and humbled by the majesty around us, and while we prayed the thick ice would vanish out of our ship’s course, we hoped it would not vanish from the earth.

Spoiler: The group never made it to Shackleton's Hut or the Antartica because the ice was too thick.

It is true in general, but especially true of travel, that people are thrilled with anything extra and distraught about anything expected and missed. You may never have heard of the pudding-toed tree chameleon or the Cloister Court of St. Yvette, but when your guide tells you that you’ve been privileged with a rare sighting of the lizard, or that you are catching the cloister open at the whim of the nuns, you are elated. When the opposite happens, you feel not just disappointed but betrayed. You curse yourself for having spent so much money on an experience you’re not having; you imagine the missing experience as nirvana.

Thursday, September 17, 2009

What does rejecting the null imply?

1. Test the null that two alternatives are the same (i.e. the mean difference is zero)
2. If the null is not rejected this does not imply that we accept the null that the two alternatives are the same. All we can say is that the two alternatives are not different, which is not the same thing as saying that it is the same. This is the conservative interpretation that was drilled into us in graduate school. (Splitting hairs or angels dancing on a pin?)
3. If the null is rejected, then we can say that the two alternatives are different. In fact, we can say that the two alternatives are not the same. But, can we conclude that one is better than the other, i.e. if the mean difference is positive?

This is what I am wrestling with when reading:
Early Education Policy Alternatives: Comparing Quality and Outcomes of Head Start and State Prekindergarten by Gary T Henry, Craig S Gordon and Dana K Rickman

In the paper, I conclude that the quality difference between state pre kindergarten programs are Head Start programs are different, i.e. we can reject the null that they are the same. (See paper for various measures of qualities and outcomes. For instance, kids in pre kindergarten do better in standardized tests a couple of years later than Head Start kids, Head Start centers/programs do not have as many teachers with BA as state pre-K programs, etc.)

In fact the differences are positive on the side of state pre-K programs but instead of concluding that these programs are better than Head Start, the authors choose to word it as follows (from the abstract, emphasis mine):

The two groups were statistically similar at the beginning of their preschool year on three of four direct assessments (p less than 0.05), but by the beginning of kindergarten the children attending the state prekindergarten program posted higher developmental outcomes on five of six direct assessments (p less than 0.05) and 14 of 17 ratings by kindergarten teachers (p less than 0.05). This study indicates that economically disadvantaged children who attended Georgia's universal prekindergarten entered kindergarten at least as well prepared as similar children who attended the Head Start program.

Can we not conclude that kids entering state pre-K programs are better off than Head Start kids? Or, that Head Start kids are worse off than prekindergarten kids?

Thursday, September 10, 2009

Definition of a bistro

From T+L:

To qualify, the locality must have a population of less than 2,000 (“off the map,” it obviously can’t have a tourist office), and the bistro must be the village’s sole business, or at least just one of a few (the others can be butcher’s shops or boulangeries but not bistros). Owners sign an annually renewable contract, agreeing to attend training classes and regular meetings at which experts deliver talks on olive oil, say, or how to cook wild field greens. According to the Bistrot de Pays charter, they also pledge to play ambassador by furnishing guides and brochures and being knowledgeable enough about points of interest in their area to answer tourists’ questions.

Members are asked to sell postcards, newspapers, and regional food products; hold periodic events like concerts and boules tournaments to bring villagers together; and use ingredients and serve dishes identified with the locale. If at lunch you eat a goat cheese made nearby and want to visit the producer, your waiter should know if this is possible and, if it is, how to arrange it. In the absence of a full or set menu at specific hours, a casse-croûte, or snack, of local foodstuffs like charcuterie is available throughout the day.

Ideally, the bistro should be open year-round and operate as a place where fresh bread is dropped off daily and sold. Beyond bringing the community a notch closer to self-sufficiency, the symbolism is powerful: a village that can offer its people bread controls its destiny. If the bistro has no grocery component, the deal is that residents can buy or borrow staples like flour and butter from the kitchen. This feature is particularly geared to elderly inhabitants who may be village-bound or have no way of getting to a supermarket.

Sunday, September 6, 2009

Do CEOs matter

I concur with this Atlantic article that CEOs do not matter much and when they matter they destroy value more than create it. Moreover, the business press adulations of CEOs is much too short sighted. A CEO who turns around a company in 4-or-5 years has proven nothing much more than the fact that he is a turn around artist, not a leader who can guide the company through good and bad times. The tenure of a CEO matters before he is given all kinds of accolades. The yardstick to be used is a CEO who can successfully guide a company through at least 2 business cycles which means a tenure of at least 15-20 years. By this measure, neither Lee Iacoca, Jack Welch nor Lou Gerstner meet this criteria.

James March, a management professor at Stanford, goes so far as to say that in any well-run company that’s conscientious about grooming its managers, candidates for the top job are so similar in their education, skills, and psychology as to be virtually interchangeable. All that matters is that someone be in charge. “Management may be extremely difficult and important even though managers are indistinguishable,” he writes. “It is hard to tell the difference between two different light bulbs also; but if you take all the light bulbs away, it is difficult to read in the dark.”

And from Jeff Immelt, current CEO of GE:
“Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.”

A more nuanced view is here which tends toward the argument that CEOs do not matter much but they do matter. Thus the fact the CEOs should be rewarded based on performance is very much in conflict with the evidence.

What happens in a culinary tour

Tuesday morning finds us standing at attention in our embroidered aprons at the handsome kitchen of La Mirande, a luxurious hotel in the heart of Avignon. This is a master class with the husky, mustachioed Christian Étienne, one of Avignon's top chefs. Dessert today is a labor-intensive gratin of grapes and pine nuts in a sabayon sauce, and we set to work peeling and seeding 14 pounds of grapes. Have you ever tried to peel and seed even a single grape? We are galley slaves.

This is from A Cooking Tour In Provence by Linda Dannenberg on Carole Peck's Culinary Tour of Provence. Also,
We're dining at Chez Bob, a famously funky, beloved restaurant on the mosquito-infested plains. (Never go to the Camargue without slathering on mosquito repellent. The mosquitoes here are as vicious as piranhas.)

But also more pleasant sounding:

Days pass in a mellow haze of sunshine and sated appetites. We drift down every morning for a breakfast of breads and croissants from the boulangerie, with jams, fruit salad, and fresh orange juice that sustain us until lunch. We have a cooking class with Jérôme Laurent, a fine local chef who owns Le Cilantro, one of the contemporary bistros in Arles; a wine tasting at Château Grand Callemand, a small, start-up winery rather far afield in the Luberon; and a casual cooking lesson with Carole as she prepares a succulent roast turkey leg stuffed with mustard and herbs for our brunch by the courtyard pool. One afternoon we visit La Bambouseraie, exotic bamboo gardens in Anduze, and later have a demonstration class and a marvelous meal a short drive away at the Michelin-starred Les Demeures du Ranquet, a dreamy country inn with aromatic herb gardens and lavender fields. We watch as the radiant blond chef-owner, Anne Majourel, who sports a cheeky white crew cap, prepares our basil-themed dinner: every course, including a dessert of roast figs with olive oil ice cream and strawberry-basil sauce, stars the iconic Mediterranean herb.

Competition breeds trust

This is according to authors of the VoxEU article:

A simple barometer for the state of a culture that has been the focus of much of the new empirical work is the “trust” question – “Do you think that most people can be trusted or that you can’t be too careful in dealing with people?” We investigate how answers to this question, asked for over thirty years in the US General Social Survey (GSS), vary with differences in competition across US states. Since many other things also vary across states, our strategy is to examine an episode where competition changed and track the ensuing changes in trust it caused. We examine the differential timing of financial deregulation across states between 1978 and 1993. As Black and Strahan (2002) argue, this deregulation intensified competition by making it easier for start-up firms to obtain credit. By looking at the number of start-ups and matching them to trust levels, we can see what effect increased competitive entry had on trust.

This seemed to be a strange way to establish causation yet by taking two independent measurements a causal link can be established.

Competition allows for more startups and hence more alternatives to a consumer. Consider the case of a widget maker trying to find a supplier for raw-widgets. Prior to competition he may have been beholden to maybe one or two suppliers. He may also feel that he could not trust them since they would have the power to raise prices.

With more competition he can breathe a little easier. Thus he can "trust" his supplier to be honest. Yet what kind of trust is this? Now suppliers feel that the widget maker can jerk them around by switching from one to another. For lack of any better term we can refer to this as "adversarial trust" similar to the oft-quoted "trust but verify".

Now consider again the case before competition where trust is established via a working relationship that perhaps even leads to the widget maker and suppliers opening up each others books to one another. Is this type of trust different from one derived from competition? This is the kind of trust that sounds similar to cooperation between Japanese manufacturers and their suppliers.

While the study may be able to show conclusively that "trust" can be achieved through competition it does not really get at the question that really matters:
In manufacturing, does it lead to more efficient producers?
In a country does it lead to higher productivity growth?

The kind of trust through competition may not lead to the promised land of economic growth.


A fascinating article on music in Mali in CN Traveler.

To an out-sider, the social details appear fantastically arcane, and I tried to keep a running tally in my notes: "Blacksmiths (including ironworkers) can marry only potters, but have close relations with Fulani, who are cattle herders"; "weavers always married to dyers"; "leather makers entitled to repair calabashes"; "all Bozo are fishermen"; "griots were once hunters, though both hunters and griots now deny it." I kept this going for a week, then surrendered to befuddlement. ...

Though the country is officially Muslim, there is no prohibition against following other religions or practices. I had also begun to notice a vagueness bordering on the elusive whenever I asked Malians simple biographical questions about age or birthplace or their children's names. In a people so unfailingly polite and hospitable, it was a glaring anomaly. Little by little, I began to grasp that animism is less nostalgic folklore than a fully operational belief system that ascribes supernatural meaning to every aspect of daily life. Magical stories of river gods, supernatural visitations, and miraculous medicinal cures conjure a world of benevolent spirit allies. But in the shadows, and seemingly more potent, lurks the persistent threat of misfortune in the form of curses, spells, and sorcerer's vendettas. Sharing even minor personal details can give an enemy the necessary opening to put a curse on you. ...

On the way up, we'd been listening to his cassettes of Malian music, so I wanted to know how he reconciled his distaste for griots with a liking for their music. He picked out a handful of the cassettes and slammed them down on the armrest, one by one. "Pas griot!" "Pas griot!" "Pas griot!" He wasn't wrong. Not all of Mali's musicians were born to the griot caste. Both Salif Keïta and Ali Farka Touré came from higher classes and initially met with outrage when they became musicians. ... But griots are more than an alien underclass. They preside at weddings and child-naming ceremonies, have wealthy patrons whose praises they are enlisted to sing, are the keepers of cultural history, and even hold government positions. Somewhere between sorcerers and artists, liars and truth tellers, they're a social adhesive that seems designed not to stick. ...

One does not arrive in Timbuktu with great ceremony. The town's port is silted up and impassable, so we disembarked downriver and drove in on sand-strewn streets that declare the circling, encroaching presence of the Sahara. Now a World Heritage Site, modern Timbuktu is part museum, part atmospheric end-of-the-world euphoria. The restored mosques and madrassas recall Timbuktu's provenance as a sixteenth-century hub of Islamic scholarship. But Main Street hummed with glamorous young women dressed in brightly patterned boubous and Tuareg nomads swaddled in cerulean blue. And everywhere were intrepid-looking Europeans, besuited in safari jackets and explorer hats, loading up Land Rovers and SUVs with tents, mattresses, water coolers, and food supplies for the ride out to Essakane, where the Festival au Désert would shortly take place. ...

But hardship is part of the festival's legend. Now in its eighth year, it began as a cultural solution to the long-simmering feud between the Tuaregs, the Saharan nomads who have occupied the desert for two millennia, and the Malian government. A brewing civil war made the area a no-go throughout the early nineties, and despite a peace accord in 1996, travel advisories continue to discourage tourism. The festival has been vital in bringing foreigners back, with its irresistible invitation to three days of Saharan magic, world music, and cross-cultural community—the only place in the world where Robert Plant can share a bill with West African griots and Tuareg bluesmen. Last year's festival entered legend as the coronation of the Tuareg band Tinariwen, Mali's latest superstar export, whose impeccable rebel credentials start with their formation in a militia training camp in Libya. I'd seen them play in New York a few weeks earlier, and they didn't disappoint. Performing in a sepulchral half-light and dressed in Berber costume, they came across as a revolutionary combination of Ali Farka Touré and Jimi Hendrix. ...

I crawled out of my tent at dawn to behold a bizarre sight. A dozen of my campmates were up on the dunes, performing tai chi and sun salutations; the peddlers were at their side, trying to talk them into buying jeweled daggers and tribal headdresses.

Physical therapy

In an earlier post about my dislocated shoulder I had wondered about the efficacy of electrical stimulus therapy. Shifting to physical therapy, my thoughts are that the 15 minutes of time that was allotted was well worth it, if nothing else, it served as a enforcement device for making sure the patient completes their exercises.

PT also seemed like a pretty satisfying occupation - directly helps those in treatment, but at the same time seemed like a rigorous job which required standing and helping with patients for an extended period of time depending on how busy they were. Where I was they were extremely busy. A general description from the Occupational Outlook Handbook are here with earnings information as follows:
Median annual earnings of physical therapists were $66,200 in May 2006. The middle 50 percent earned between $55,030 and $78,080. The lowest 10 percent earned less than $46,510, and the highest 10 percent earned more than $94,810.

Median annual earnings in the industries employing the largest numbers of physical therapists in May 2006 were:
Home health care services $70,920
Nursing care facilities 68,650
General medical and surgical hospitals 66,630
Offices of physicians 65,900
Offices of physical, occupational and speech therapists, and audiologists 65,150

Some other stats from the Occupational Outlook Handbook puzzled me:
Metropolitan areas with the highest concentration of workers in this occupation are:
1. Sherman-Denison, TX
2. Missoula, MT
3. Waterbury, CT
4. Jackson, TN
5. Cumberland, MD-WV

Are there sports teams in these areas or more rehab clinics?

And what about these stats on earnings? Supply or demand?

Top paying metropolitan areas for this occupation:



Hourly mean wage

Annual mean wage

Percent of MSA employment






Island, FL





Ana-Anaheim-Irvine, CA Metropolitan Division





Francisco-San Mateo-Redwood City, CA Metropolitan Division










Tuesday, September 1, 2009

School's in

And traffic seems to be 3x worse than usual. Any serious attempts to address traffic congestion really needs to take schools into account. Too may private schools? Not enough school buses? Not enough children taking school buses? Cancel schools?