Saturday, March 31, 2012

Econometric Warriors of Truth

One of the most interesting aspects of Jared Diamond’s work is the fact that there has been no attempt at finding THE truth to THE question of economic growth or collapse. He freely admits that he will not do that and points to multiple sources of causality.

It is unclear to me why economists and econometricians persist on attempting to find THE ultimate cause of some question such as financial crises. Part of the reason they have embraced randomized trials is because they divine that they can finally grasp the answer in their hands instead of exploring the deeper questions of multiple causes or intermediate outcomes that may affect the final outcome of interest.

What is even more surprising from my naive point of view is that while they have become obsessed with exogeneity and strength of their instruments they have moved away from goodness of fit statistics and analysis of variance. What does an econometric model really say when an instrument is strongly exogenous with a large t-statistic but the fit of the model is low? Even more so, what if the variance explained by the instrument is even lower? And to sound even more radical, I am surprised that few have adopted MIMIC models. Is this perhaps because (gasp) it smacks too much of structural equations without microfoundations?

In their pursuit for their idealized version of truth, economists and econometricians have perhaps more than ever acquired an extreme form of tunnel vision are unable to see the forest for the trees.

Saturday, March 24, 2012

The efficient market strikes back?

The Atlantic reported on the tripling of the stock price of Etch-a-Sketch parent company after a gaffe by presidential candidate Mitt Romney. Here’s the play by play:

There it is, quietly moving between $4.00 per share and $4.25 per share for the past two months and then bam! Romney adviser Eric Fehrnstrom makes the gaffe of the month: "I think you hit a reset button for the fall campaign. Everything changes. It's almost like an Etch A Sketch. You can kind of shake it up and restart."

In the 12 hours after that comment, Ohio Art's price tripled to just above $12.00 a share. To give you an idea of how insane that is, consider that over the past three years, the stock has strictly traded in a band between $2.50 and $4.00 a share.

Efficient marketers of different stripes would need to respond to this somehow. One might say that because markets are efficient we would see the stock price fall back down to its historical values. The skeptic in me would say that if markets are efficient then this shouldn’t have happened in the first place. The conspiracy theorist would say that maybe the Romney is financing his campaign by talking it up and then shorting the stock later. If an economist really believed in efficient markets, would he also have to believe in conspiracy theories?

When someone says the worst is over

It’s time to believe that it’s just beginning.

According to the ECB, the worst of the sovereign debt crisis is over.

“The worst is over, but there are still risks,” Draghi was quoted as saying. “The situation has stabilized. The important indicators for the euro zone, like inflation, current account and above all the budget deficits, are better than, for example, in the United States.”

Investor confidence has returned and “the ball is now with governments,” Draghi said, according to Bild. “They must sustainably secure the euro zone against crises.”

But according to MR, the Spanish 10-year yield is still high and that one measure of the Portugese deficit has been higher than expected but investors appear to be as confident as Draghi.

Portugal's core public deficit nearly tripled in the first two months of 2012, showing a deepening economic slump is denting tax collection and stoking concerns the country may miss its budget targets and follow Greece in requiring more rescue funds.

The gap widened to 799 million euros ($1.06 billion) from 274 million euros a year earlier, when the deficit had slumped by more than 70 percent, the finance ministry's budget office said on Tuesday.

But, investors appeared to shrug off the numbers and bought 1.99 billion euros in Treasury bills on Wednesday at the lowest yield levels since late 2010, before the country resorted to a 78-billion-euro EU/IMF bailout in May last year.

According to the NYT, the worst for Greece might still be yet to come.

… even after the new relief, Greece is still expected to be saddled with a ratio of debt to gross domestic product of 151 percent in 2012, and 149 percent in 2013. These debt levels remain the highest in Europe. The Greek economy remains in a wretched state — it shrank by 7.5 percent in the fourth quarter. And youth unemployment, at 51 percent, is now officially the highest in Europe. So it is by no means clear that Athens will be able to generate the cash to service its remaining debt.

“Greece is staring at decades of interest payments to the official sector,” said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute. “They traded their ability to write down debt to private sector creditors for low-interest-rate official sector loans that cannot be reduced.”

The Atlantic believes that kicking the can down the road is the best strategy since it worked the last time.

Consider the case of Greece's recent default. Markets shrugged off the 74 percent writedown on Greece's privately held debt, because there had been plenty of time to prepare for it. Even the payouts on the much-hyped credit default swaps on Greek debt turned out to be a relative non-event.

In other words, the can-kicking worked! If Greece had defaulted like this two years ago, when its debt problems first roiled markets, the result likely would have been panic. Today, it elicited more headlines than actual worries.

The lesson is clear: Greece and Germany should keep kicking that can!

The Atlantic article then outlines a proposal for Greece to leave the Euro, and according to Columbia University professor David Beim it should be accompanied with debt forgiveness.

My thought is to give the stressed Eurozone members true debt relief — comprehensive debt reduction that could let them restart their economies, but on one condition: those that get such relief must leave the euro. That condition gives them a reason not to ask for it; every country would want a debt reduction unless there was a penalty, and this would be the penalty, which would slow down contagion.

I don’t think this is an unreasonable condition. Greece should never have been in the euro in the first place. Its businesses are now being crushed under a wave of cheap imports because its currency is overvalued. Re-establishing the drachma would be messy and expensive, but less messy and less expensive than staying in the straitjacket of the euro.

My head aches. Previous thoughts on Greece here.
 However we slice it, the future of Europe will probably be like the lost decade of Japan.

Social media as a weapon of mass confusion

Maybe social media can’t become a weapon of mass hysteria, but perhaps it could become a weapon of mass confusion. The BBC points to the source of confusion:

Have you heard? There's been a coup in China! Tanks have been spotted on the streets of Beijing and other cities! Shots were fired near the Communist Party's leadership compound!

OK, before you get too agitated, there is no coup. To be more exact, as far as we know there has been no attempted coup.

To be completely correct we should say we do not know what's going on. The fact is there is no evidence of a coup. But it is a subject that has obsessed many in China this week.

Welcome to the weird and wonderful world of reporting on China in the past few days. Coup rumours ricocheted back and forth, most over the internet, but some were picked up by western newspapers. China's microblogs were awash with speculation. Hard facts were non-existent.

In a situation where news is censored, blacked out, or when we are overtaken by events. Fortunately, the last has not happened in China - yet.

Friday, March 23, 2012

Reading Jared Diamond

Enjoyed Guns, Germs and Steel a little more than Collapse - perhaps because I had read about the theories of societal collapse in Easter Island at various magazines before this. What was most impressive was his ability to absorb the material from various disparate fields and pull them together into a coherent thesis. The books gave me some new found respect for archaeologists as a synthesizer of information.

In these two books, Diamond has captured the essence of what liberal arts colleges would like their graduates to be - someone who has gone through a liberal arts program can immerse themselves in any complex subject and yet be able to connect different dots into a neat intelligible package that a lay audience can relate to.

At the back of mind while reading these books however, were these thoughts coming from the comments on Andrew Gelman’s post on Freakonomics:

I’m reminded of my reaction to Charles Murray’s book of a few decades ago, “Losing Ground.” He looked at crime policy, education policy, welfare policy, poverty policy, etc., in that book. I thought he was right on in the other fields, but in criminal justice (my field) I felt he misused the data and got it wrong. I then found out that people in the poverty field at the University of Wisconsin felt that he had done a useful job on all areas he looked at except poverty, where he misused the data and got it wrong.

That reminds me of a story someone told about Immanuel Velikovsky’s “Worlds in Collision”. They thought the astrophysics, history, etc. was really interesting, but the chemistry was crap – hydrocarbons falling out of the sky, turning to carbohydrates, and becoming the manna that fed the Israelites in the desert! Then they talked to a colleague, who was an astrophysicist, who said the astrophysics was terrible, but he thought the history and the manna stuff was really interesting. So they went off to talk to a historian, who said…

In the end, does this mean that a liberal arts major is someone who knows (or thinks he knows) a lot about everything but everything he knows is wrong?

Can waiters be replaced?

I was amused and gratified at the same time to read this:

My name is Katie. I went to Dartmouth, and I am a waitress.

I was lucky. I started waitressing in high school, but after college I moved to New Orleans and worked at the Besh Restaurant group, which for three days sequestered its staff for an "Excellence in Service" seminar taught by Eric Weiss. It started with a group of waiters and waitresses standing around banquet trays covered with spoons, matchbooks, limes, and pens of various varieties. We were told to study what we saw, return to our seats and write down everything we could remember: good memories could make us excellent servers.

Beyond the memory games, the course included pearls like: Don't ask table 51 if they would like "another" cocktail, ask if they would like a "fresh" cocktail—the former may make them feel like a boozehound. Don't assume the beautiful woman with the power broker at 22 is his wife. It could be his secretary—be discreet. Don't ask how "we" are doing this weekend—you will sound like a dope. Guests always have the right-of-way, then the food, then you—fade into the wall, kiddo! Don't walk too fast when seating guests—they might get lost. Try using thoughtful details to remember names, like Cowboy Curtis for the guy in boots and Labradorean Leslie for the lady with the dog sweater. And always, always, always read your guest.

The power broker may want you to sing, dance, and make him look like a big shot in front of his lady. But the boozehound wants you to cut the crap and pour the wine. According to Weiss, an excellent server knows the difference immediately.

… According to Weiss, sequence of service should include the following: within two minutes of sitting down, guests should be greeted with water. Drinks should arrive in five minutes—if you didn't order a fancy cocktail. If your liquor has been infused, cut the bar chef some slack. Appetizers should arrive in 10 minutes, and the next course in another 10. Dishes should be brought to the guest who ordered them and not auctioned off—this isn't Sotheby's. Dirty plates and silverware should be replaced, napkins refolded, and steak knives set. When servers are not busy, they should stand up straight and reside quietly in their sections.

At more casual spots where these orthodox white-tablecloth standards don't apply, the staff simply needs to be kind, genuine, and attentive. Many of the hipper restaurants seem to pick and choose which standards they adopt. I recently trailed a server at a popular Brooklyn restaurant, where I was told not to leave the cork on the table during wine service because "this is Williamsburg."  

... A veteran manager at a Michelin-starred Brooklyn establishment told me that he thinks we are missing the point. "At a trendy restaurant I am happy if I get what I order," he said, adding that the waitstaff at these places are usually hired for their beauty, not their frontal lobes.

I don’t know if it was the chirpy tone of the article or the seriousness in which she takes her job but I was gratified that there are people who can still take pride in what they do. And at the same time points to how, just maybe waiters cannot be replaced.

And then there is this:

It sort of looks like a small iPad, maybe a thick Kindle Fire. Presto is its name. The screen shows an animation that says, "Touch me!" with half a dozen different animations. It's a menu and a way to order food and a method for paying the check all in one. The Presto functions like a better, more responsive version of the touchscreen food ordering system on Virgin America.

With no instructions, I order the two items through the Presto. Beautifully lit photos let me see what I'm going to get. The UI is intuitive. Within 20 seconds, I've sent my order to the kitchen. Before we'd even finished eating, I swiped my card slightly awkwardly into the built-in payment slot, added a tip, and settled up. I would not say that this machine will blow your mind with its technical capabilities, but that's exactly the point: It just works.
"It costs about a dollar a day per table, it can even go lower depending on if you have sponsors involved because all the alcohol companies want to get involved," Suri says. "For that, they get about $6 a day per tablet in increased sales. That's extra desserts, appetizers, drinks. They get about another $5 in extra table turns. If you can fit in one more table per night, that's worth a lot of money....”

I watch as two women a few tables away poke and prod the machine. They seem to be enjoying or at least tolerating the interaction, but then a waiter arrives at their table and they order from him. ...

Margo Will and Lisa Jafferies are affable and willing to talk about their experience with the Presto. They were first-timers with the Presto.

"We started to order through it, even though we're so old," Jafferies laughs. "But then Josh, our waiter came up, and we just talked with him."

"But then we played a game on it," Will says, "And that was fun."

Both women agreed that the main advantage of the Presto was that the digital menu featured photographs and extended descriptions of the food items. They could really know what they were getting. "It's a good way to learn about what the food looks like," Will said. "It's visual."

They did worry, though, about the labor implications of the device: if you don't need waitstaff for taking orders, what do you really need them for? ...

I tried to present a more hopeful scenario. Perhaps the paperwork would get automated and then the servers could concentrate on knowing the food and wine better, solely doing the service and explanation without the hassle of keying in orders. The duo weren't buying it.

"I don't want people losing their jobs because of something like this," Jafferies says. "That's the main thing I think about. The bottom line for the restaurant could be that they don't have to staff as many people per schedule. So what happens to those people?"

…  It is impossible to ignore that this technology threatens a job class, which through its flexibility and unusual hours, has supported many people trying to pull themselves up through school or a creative career.

But the employees that remain, ..., are actually better off. Their data shows that after their tablets are deployed, the staff's per-night tips tend to go up both because servers cover more tables but also because, for whatever reason, people tip better through the machine than they do otherwise.  

Signs of globalization?

From NYT:
“I knew I wanted to serve food that would taste authentic,” said Mr. Kansagra, who opened three franchised sandwich shops before turning his attention to Indian fast food in 2009. “I also knew that if I wanted to get American customers, the food did not necessarily have to be authentic.”

Some inspiration for these chains-in-the-making came from the subcontinent. Jumbo King, based in Mumbai, now serves potato croquettes on hamburger-style buns at more than 40 fast-food outlets. Kati Zone, based in Bangalore, dishes up variants on Mexican quesadillas called “cheeserias” as well as masala-dusted French fries.

Many ... newfangled foods are being built on bases of relatively authentic Indian flatbreads.

Merzi, one of these nascent chains, serves roti wraps, stuffed with “tandisserie” chicken, at its Washington prototype. (The menu translates the term as “tandoori-seasoned chicken cooked rotisserie style.”) Veda, with three locations in Toronto, recently introduced rice-and-butter-chicken-stuffed “curritos,” which translate as curried burrito-style wraps.

From Florida:
The images of Zimmerman — not just his face, but the words used to describe him — can confound and confuse. Why are they calling him white, wondered Paul Ebert, the Prince William County commonwealth’s attorney who knew Zimmerman’s mother, Gladys, from her days as an interpreter at the county courthouse. Zimmerman’s mother, Ebert knew, was Peruvian, and he thought of her as Hispanic.

Looking at Zimmerman’s photograph made Darren Soto, a Florida state legislator, think he might be Latino. But he just as easily might have been Italian or French, he thought. “It’s all over the place in Florida,” said Soto, who represents a statehouse district in Orlando, a 20-minute drive from the gated subdivision in Sanford where Martin died. “You have people with Anglo first and last names who speak perfect Spanish and are from Puerto Rico. And you’ve got a third- or fourth-generation Joey Gonzalez from Tampa who can’t speak a word of Spanish.”

Thursday, March 22, 2012

This is not my father’s Kuznets Curve

I was surprised to read this:

Futurist John Smart, president and founder of the Acceleration Studies Foundation, recalled an insight of economist Simon Kuznets about evolution of technology effects known as the Kuznets curve: “First-generation tech usually causes ‘net negative’ social effects; second-generation ‘net neutral’ effects; by the third generation of tech—once the tech is smart enough, and we've got the interface right, and it begins to reinforce the best behaviors—we finally get to ‘net positive’ effects,” he noted.

The Kuznets Curve and its close cousin the environmental Kuznets Curve, usually says that as a country grows, inequality (environmental pollution) will first increase and then decrease. I suppose that in layman’s terms all its really saying is that things will get worse before they get better which is what John Smart might be trying to say.

What I didn't know about Brady Bonds

I had earlier quipped that a Brady Bonds type situation might have helped Greece. My statement revealed how little I understood about Brady Bonds. In fact, I realized after reading Partnoy’s Fiasco that they are not bonds at all - but derivatives. As Partnoy writes:

In the late 1980s U.S. Treasury Secretary Nicholas Brady authored a plan to mix this crap [third world denominated debt] together with valuable U.S. bonds and create a more attractive paté of restructured Third World debt that, it was hoped, someone would buy.

As noted by Partnoy, this was marketed as emerging markets debt and provided the inspiration and foundation for other derivatives which converted foreign denominated debt (either public or private) into U.S. dollar paying “bonds”. The amount of U.S. securities thrown into the structure provided the basis for a AAA rating from the agencies. These derivatives were then sold as “bonds” and allowed pension and insurance funds that were barred from making foreign currency bets to actually make such bets (whether willingly or unwillingly). Everyone was happy as long as these bonds didn’t “explode” and returned the high yields that were promised.

This sample chapter from a credit derivatives book states that Brady bonds are de facto a credit default swap with the US government as the CDS seller.

Wednesday, March 21, 2012

Character revelation

Two books that I really enjoyed were Kazuo Ishiguro’s Remains of the Day and Iris Murdoch’s The Sea, The Sea - the former more than the latter. In both books, the characters’ character as it were are revealed over the course of the books and since they are in the first person narrative, the personality of the narrator is also revealed. In this sense it was page turning because I enjoyed most the character development that was in these books.

I was expecting something similar from Lionel Shriver’s We Have to Talk About Kevin but was disappointed. The narrator didn’t really come off as someone with a superiority complex - perhaps the voice didn’t work to this effect - it took Kevin to reveal to me that his mom had one in an accusation. I was also expecting some evolution in the personalities of Eva and Kevin but right off the bat they were created as rigid unchanging characters which was disappointing to me only because I was expecting some nuance and gray areas as well as some moral ambiguity in the entire story. I was expecting something like this: Eva who didn’t want to be a mother to Kevin grows to love him while Kevin who was born ‘difficult’ rather than ‘evil’ develops attachment difficulties attaching to someone despite the warmth of the family. Overall, the sense was that all the characters were somehow caricatures.

What do thieves turn to in a cashless economy

Sweden is trumpeting that its decline in crime is a result of becoming a cashless society. (HT: MR which indicates that this is not unexpected.)  Curiously WaPo also points to an unprecedented (my word) rise in crime - thieves are turning to electronics and Tide detergent. (See also here for more on how Tide detergent is becoming an alternate currency nationally.) I would label the latter events as something that is also not unexpected.

Tuesday, March 20, 2012

Hand-to-mouth consumption, habit persistence and bubbles

My first and only introduction to this class of agents was Campbell and Mankiw and Phillipe Weil’s paper. I haven’t followed the literature since then - assumption of hand-to-mouth consumption was in some ways frowned upon back when I was in graduate school since it lacked ‘microfoundations’. Likewise, habit persistence was introduced via Constantinedes in an econometrics class and then forgotten.

There was little resolution at the time what the fraction of hand-to-mouth-consumers was - Cambell and Mankiw assumed 50%. Yet the low saving rate would imply naively that most (if not all) consumers are hand to mouth. Coupled with the story on how even 1 percenters are hand-to-mouth and even the Federal Reserve Bank of St. Louis president is a hand-to-mouth consumer this proportion might even be close to the truth. This is the point made by Kaplan and Violante in their paper on the effects of the fiscal stimulus.

Habit persistence then implies that bubbles also have real effects via consumption. In particular, all agents view bubbles in a rational manner (i.e. assumes that bubbles cause a permanent rise in permanent income) and adjust their consumption accordingly by consuming entirely out of their income. If a large part of the rise in perceived permanent income is spent on durable consumption - e.g. houses, tuition for private schools, etc. then bubbles are inefficient in that consumers spend ‘too much’.

Monday, March 19, 2012

Construction jobs

Consider the following costs (some are estimates of our projects) which of course does not accrue to all the workers:
1. A gallon of premium paint - $50 per gallon
2. Replace brick work on stoop (not even the entire stoop - just about 50 or so loose bricks) - $2,000
3. Replace cross-hatching below our deck - $3,500 (perimeter of about 50 feet)
4. Convert a garage into a mudroom - $30,000.

If it weren’t for the subprime mess I would have considered construction jobs to be ‘good’ jobs in the sense that they are pretty much non-offshore-able and that they pay pretty decent wages - especially here in metro DC. They aren’t immune to competition from migrant workers but all in all I would consider them ‘middle-income’ jobs. They’re not middle-income in Washington, DC itself but out in the exurbs where most of the workers seem to commute from they probably would be.

Yet the workers are hurting because of the drop in construction work. How much of this is caused by the misallocation of resources due to the subprime bubble? I would guess that before the bubble the workers had a decent idea how to ride the ups and downs of the cyclical nature of the industry but the bubble shifted their expectations (and spending) upward thereby coming back down to earth has been difficult. 

The 'real' effects are the higher expectations that translate into consumption - habit persistence or hand-to-mouth consumption must play a large role in order for bubbles to have large real effects.

Talking and writing

Andrew Gelman wonders why no one exclaims with a ‘Why!’ anymore. I concur that it mostly has to do with talking versus writing. Likewise, I would write ‘concur’ but would say ‘agree’. One word that has been striking me in the face is raconteur. I first encountered this in Emily Fox Gordon’s Book of Days: Personal essays. She points out that these aren’t memoirs or autobiography and again, I concur. I enjoyed them and I can see why they won’t work as blog posts since there are many blog posts that can work as personal essays as well, especially those in Happiness Project.

For instance, at a wedding she congratulates a relative for being such an excellent raconteur. It would be a strange to say to someone, “Excellent raconteuring, dude!”

I encountered the word again in Roger Lowenstein’s When Genius Failed although I thought the word was overused. At least twice he described someone as a raconteur. Another tired phrase in the book was ‘swing for the fences’.

Friday, March 16, 2012

GS, Investment Banking and financial WMD

The blogosphere and the media are all agog over this NYT opinion piece of why some investment banker is leaving Goldman Sachs. (Other NYT coverage here.) I believe that there has been no real moral shift at GS - he calls it a “decline in moral fiber”. Coming off of reading two books on the investment banking industry in the 90s it strikes me that investment banking then is no different than it is now.

In Roger Lowenstein’s When Genius Failed, GS comes off badly. First, it  was alleged that even as they were trying to find a buyer for LTCM, their unprecedented access to LTCM’s trading positions allowed them to dump their own positions ahead of LTCM in case LTCM failed. Second, while participating in the bail out of LTCM, GS was also acting as a banker for Warren Buffet, throwing in a proposal at the last minute after the Fed meeting that Buffet would buy up LTCM. In general, my impression of GS was that while nothing that they have done cannot be explained by rational profit maximization they were in it for themselves rather than saving the financial system (if they actually believed in systemic risk). I have said this elsewhere in this blog but I don’t believe that systemic risk by itself would have irreparably harmed the economy and especially now given that the investment banks themselves already seem to believe that this is the case. I refer to the fact that GS was willing to jeopardize the trust of other investment banks by double dealing given that the agreement to bail out LTCM was already tenuous. (Read the chapter on the bail out and see if you get the same impression). 

Recall also that GS allegedly participated in hiding the extent of financial problems in Greece.

Frank Partnoy’s F.I.A.S.C.O. was a hoot. It was more enjoyable than Liar’s Poker especially his description of some of the deals that they put together to get a AAA rating and then to sell these derivatives as “bonds”. Partnoy left Morgan Stanley after 3 years, compared to this NYT opinion piece banker who stayed for 12 years! My reading from both these books is that atmosphere in investment banking has not changed all that much. The only thing I was surprised about was that GS bankers only wanted to rip their clients off versus MS bankers who wanted to “rip their faces off” and “go out and kill someone” with their deals. In Partnoy’s time the deals investment banks were responsible for led to the derivatives disasters in Orange County, Procter and Gamble and so on.

If derivatives are indeed the financial weapons of mass destruction then investment bankers are committing financial genocide and for this they should stand trial for crimes against the economic community.

Friday, March 9, 2012

What I should be entitled to

A free e-book (or the option to purchase one for 0.99) when I already own a hard copy. Due to a misprint, the book I’m currently reading is missing 50 pages! Since I bought from Borders a while ago, trying to return it was not an option. I’ve been having to endure Google’s dozen or so page limit per day to try to get through the 50 pages. Yuck!

Thursday, March 8, 2012

Guns and crime analysis rethought

After posting on Lott’s analysis I’ve come to the conclusion that without accounting for trends in crime the estimated effects may in fact be biased. Like Lott, I don’t believe that including quadratic or cubic terms is the way to go either. The charts in his book “More Guns Less Crime” practically scream out ‘event study’ but this was not the approach used perhaps because event studies seem mainly limited to finance.

Briefly as I vaguely remember it, we are interested in how stock prices of a firm respond to an announcement where the date of the announcement is known. In order to isolate the effects of the announcement on the firm the stock price is corrected using time series regression to remove industry or overall stock price effects.

It is unclear to me at this point how an event study can be implemented in Lott’s analysis but I think that the overall trend in crime needs to be taken into account. Since the analysis is at either the state or at the county level and the passage of the law/date of concealed carry law is at a state level, the county/state level crime rates (i.e. robbery, murder, etc.) need to be isolated from the overall trends. The only way to do this perhaps is to regress the state/county level crime rates on the national (or regional) crime rates (and it is unclear whether it is essential to match types of crime at the state/county level to its corresponding type at the national level) and extract the residuals from the regressions.

The residuals would then be used as the dependent variable in the analysis that are in Lott’s book.

Wednesday, March 7, 2012

Some business reading

  1. Competing for the Future by C.K.Prahalad and Gary Hamel - This was a total waste of time. I skimmed most of it and for the most part it reads like a self-help book for managers. It’s full of exhortations and buzzwords. At least economists can claim to do it with models. If the 1970 census occupation codes were still in effect I would categorize management consultants here.
  2. Commitment by Pankaj Ghemawat - I wanted to like this book but in the end it still sounded as though ‘commitment’ is nothing more than a ‘success factor’ even though he goes through at length to say it is not. In the end a lot of the ideas may have been displaced by ‘real options’ approach.
  3. Built to Last - I wanted to hate this book but found it more interesting than not. It eschews a lot of the management fads and incredibly claims that firms need to take the long view and not pay too much attention to its stock price! What a sacrilege! It also claims that firms and its leaders hold true to its principles whatever they may be! Is this some kind of desiderata for companies? In any case I wonder about the inclusion of Hewlett Packard, Sony and Citicorp. As they say, only time will tell.

Miscellaneous roundup

  1. Courtland Milloy of WaPo makes the case for concealed carry after a fatal stabbing. The comments are similar to the ones I’ve made. It makes most sense if the assailant always carries a knife but the potential victim always carries a gun.
  1. The way out of the mess in Greece might have been some Brady bonds type approach of a debt swap. Little did I know that a large chunk of the debt was held by Greeks. I see no way out.

Tuesday, March 6, 2012

Guns and crime redux

I suppose this might be a reason why gun control advocates think that more guns equals more crime:

In the aftermath of a deadly shooting outside a party at a Southeast Washington apartment building, investigators searched for evidence that would positively identify one of their top suspects. But they never found it, and nobody came forward to name him.

As a result, authorities say, police couldn’t obtain the arrest warrant they needed to get the suspect, Orlando Carter, off the street. Days later, according to prosecutors, Carter drove a rented minivan while three of his friends opened fire on another group.  

But Orlando Carter had been recognized at the party. Instead of telling authorities, Andre Morgan testified last week, he planned to avenge his dead friend — and is now charged with plotting to kill Orlando Carter.
Morgan, 21, testified that he was outside the apartment after the party with his friend Jordan Howe, 20, on March 22, when he saw Orlando Carter arrive in a car and hand a gun to his brother Sanquan Carter, 21.

Angry after Sanquan’s gold-colored bracelet disappeared, authorities say, the brothers and another man began shooting at the crowd. Howe was killed, and two others were hurt.

Morgan never planned to tell police, he testified. Instead, he told the jury, his first thought as he held Howe after the shooting was: “Kill Sanquan and Orlando.”

People familiar with the case say Morgan and several friends then planned an attack on Orlando Carter the next day — an attack Orlando Carter survived.

Authorities said Orlando Carter then orchestrated further retribution: a March 30 drive-by shooting in the 4000 block of South Capitol Street SE that targeted mourners who had attended Howe’s funeral. The drive-by, and the killing of a 17-year-old during a robbery minutes earlier, left another four dead and six injured.  

Monday, March 5, 2012

The FDA and drug discovery

The FDA has often been blamed for slowing the process of drug development. (An overview here.) There are plenty of problems with the FDA in its current form but this was a different take on the the problems confronting drug discovery:

“All of the 20,000 or so drug products that have ever been approved by the U.S. Food and Drug Administration interact with just two percent of the proteins found in human cells,” he [Brent Stockwell] writes in The Quest for the Cure. “This means the vast majority of proteins in our cells — many of which, in theory, can modulate disease processes — have never been targeted before with a drug.”

Many scientists, he says, have taken this as evidence that these harmful proteins yet to be penetrated by drugs cannot be stopped. Pharmaceutical companies have also succumbed to this viewpoint, he says, shifting their priorities away from the discovery of new drugs in favor of finding new applications for existing ones.

“Pharmaceutical companies face tough economic questions,” Stockwell says. “Should they spend their money going after proteins considered to be the most elusive? Or should they focus, perhaps, on fine-tuning their existing drugs in order to discover new clinical applications for them or to improve them just enough so that they can be marketed as new products?”

The age of big data

This is impressive:
This morning, if you opened your browser and went to, an amazing thing happened in the milliseconds between your click and when the news about North Korea and James Murdoch appeared on your screen. Data from this single visit was sent to 10 different companies, including Microsoft and Google subsidiaries, a gaggle of traffic-logging sites, and other, smaller ad firms. Nearly instantaneously, these companies can log your visit, place ads tailored for your eyes specifically, and add to the ever-growing online file about you.

Adnetik is a standard targeting company that uses real-time bidding. They can offer targeted ads based on how users act (behavioral), who they are (demographic), where they live (geographic), and who they seem like online (lookalike), as well as something they call "social proximity." They also give advertisers the ability to choose the types of sites on which their ads will run based on "parameters like publisher brand equity, contextual relevance to the advertiser, brand safety, level of ad clutter and content quality."  
Adnetik also offers a service called "retargeting" that another … company, AdRoll, specializes in. Here's how it works. Let's say you're an online shoe merchant. Someone comes to your store but doesn't purchase anything. While they're there, you drop a cookie on them. Thereafter you can target ads to them, knowing that they're at least mildly interested. Even better, you can drop cookies on everyone who comes to look at shoes and then watch to see who comes back to buy. Those people become your training data, and soon you're only "retargeting" those people with a data profile that indicates that they're likely to purchase something from you eventually. It's slick, especially if people don't notice that the pairs of shoes they found the willpower not to purchase just happen to be showing up on their favorite gardening sites.

AdExpose, now a comScore company, watches where and how ads are run to determine if their purchasers got their money's worth. "Up to 80% of interactive ads are sold and resold through third parties," they put it on their website. "This daisychaining brings down the value of online ads and advertisers don't always know where their ads have run." To solve that problem, AdExpose claims to provide independent verification of an ad's placement.
All three companies want to know as much about me and what's on my screen as they possibly can, although they have different reasons for their interest. None of them seem like evil companies, nor are they singular companies. Like much of this industry, they seem to believe in what they're doing. They deliver more relevant advertising to consumers and that makes more money for companies. They are simply tools to improve the grip strength of the invisible hand.

But not as impressive as this:
Andrew Pole had just started working as a statistician for Target in 2002, when two colleagues from the marketing department stopped by his desk to ask an odd question: “If we wanted to figure out if a customer is pregnant, even if she didn’t want us to know, can you do that? ”

… the marketers said they wanted to send specially designed ads to women in their second trimester, which is when most expectant mothers begin buying all sorts of new things, like prenatal vitamins and maternity clothing. “Can you give us a list?” the marketers asked.

The only problem is that identifying pregnant customers is harder than it sounds. Target has a baby-shower registry, and Pole started there, observing how shopping habits changed as a woman approached her due date, which women on the registry had willingly disclosed. He ran test after test, analyzing the data, and before long some useful patterns emerged. Lotions, for example. Lots of people buy lotion, but one of Pole’s colleagues noticed that women on the baby registry were buying larger quantities of unscented lotion around the beginning of their second trimester. Another analyst noted that sometime in the first 20 weeks, pregnant women loaded up on supplements like calcium, magnesium and zinc. Many shoppers purchase soap and cotton balls, but when someone suddenly starts buying lots of scent-free soap and extra-big bags of cotton balls, in addition to hand sanitizers and washcloths, it signals they could be getting close to their delivery date.

As Pole’s computers crawled through the data, he was able to identify about 25 products that, when analyzed together, allowed him to assign each shopper a “pregnancy prediction” score. More important, he could also estimate her due date to within a small window, so Target could send coupons timed to very specific stages of her pregnancy.        

I’m agnostic about some of these privacy concerns but I believe that consumers need to be aware of them. I also use four different browsers for different purposes (Opera, Chrome, Firefox and IE). All are set to delete cookies on exit - except for Chrome which I use solely on Google sites.

My response to cookies is that I find them more annoying than a breach of privacy. The Internet is so cool that all they can come up with is serving ads? Zuckerberg’s response when Eduardo Saverin wanted to have ad companies link up with Facebook was an emphatic no because Facebook was so cool. Look where Facebook is now - they may not be serving ads but they’re definitely trying to sell something.

If users were really upset about this one thing they might be able to do is to render their databases invalid. Deleting cookies is one way. Randomly clicking away at ads is another. Sometimes I amuse myself by responding to pop up surveys and giving responses that are way out of whack.