This article in the NYT challenges my biases:
For decades, psychologists have warned against giving children prizes or money for their performance in school. “Extrinsic” rewards, they say — a stuffed animal for a 4-year-old who learns her alphabet, cash for a good report card in middle or high school — can undermine the joy of learning for its own sake and can even lead to cheating.
But many economists and businesspeople disagree, and their views often prevail in the educational marketplace. Reward programs that pay students are under way in many cities. In some places, students can bring home hundreds of dollars for, say, taking an Advanced Placement course and scoring well on the exam.
I'm with the psychologists. Why?
1. Because this is something designed by economists - the same ones who brought us pay for performance and bonuses for financial executives. Sure, they will claim to be exculpable by saying incentives were badly designed because performance was badly mismeasured. If they are so convinced this works at each and every level then why don't they pay their own graduate students?
2. My reading is that the study is not very well designed in the following sense: Some economists will argue that it is not the grade on the test that should be the measure of performance but the long run life time income that the individual will earn. (This would be my measure of performance.) This measure is highly unrealistic but there are not enough efforts to create a better measure. Instead, economists are defaulting to the path of least resistance - grades, stock price index, whatever and these default measures do not measure what we are ultimately interested in.
3. The study does not "unpack" the relative importance of extrinsic and intrinsic rewards. In fact very little is being done in many economic studies to study the "black box" of what works.
I am skeptical but if the studies start to go down a different path that addresses #2 and #3 then I am willing to be convinced.
Update (5/28/09): This paper on paying people to lose weight versus posting a bond for losing weight may be relevant.
Obesity rates in the U.S. have doubled since 1980. Given the medical, social, and financial costs of obesity, a large percentage of Americans are attempting to lose weight at any given time but the vast majority of weight loss attempts fail. Researchers continue to search for safe and effective methods of weight loss, and this paper examines one promising method - offering financial rewards for weight loss. This paper studies data on 2,407 employees in 17 worksites who participated in a year-long worksite health promotion program that offered financial rewards for weight loss. The intervention varied by employer, in some cases offering steady quarterly rewards for weight loss and in other cases requiring participants to post a bond that would be refunded at year's end conditional on achieving certain weight loss goals. Still others received no financial incentives at all and serve as a control group. We examine the basic patterns of enrollment, attrition, and weight loss in these three groups. Weight loss is modest. After one year, it averages 1.4 pounds for those paid steady quarterly rewards and 3.6 pounds for those who posted a refundable bond, under the assumption that dropouts experienced no weight loss. Year-end attrition is as high as 76.4%, far higher than that for interventions designed and implemented by researchers.
Monday, May 18, 2009
Reporters living the subprime crisis
Henry Blodgett's Why Wall Street Always Blows It: Given his history as one of the analysts who pumped up tech stocks during the dot-com bubble I tend to take his stories with a grain of salt but this a fairly interesting read:
I experienced the next bubble differently—as a journalist and homeowner. Having already learned the most obvious lesson about bubbles, which is that you don’t want to get out too late, I now discovered something nearly as obvious: you don’t want to get out too early. Figuring that the roaring housing market was just another tech-stock bubble in the making, I rushed to sell my house in 2003—only to watch its price nearly double over the next three years. I also predicted the demise of the Manhattan real-estate market on the cover of New York magazine in 2005. Prices are finally falling now, in 2008, but they’re still well above where they were then.
... House prices, we are told by our helpful neighborhood real-estate agent, almost never go down. This sounds right, and they certainly didn’t go down in the stock-market crash. In fact, for as long as we can remember—about 10 years, in most cases—house prices haven’t gone down. (Wait, maybe there was a slight dip, after the 1987 stock-market crash, but looming larger in our memories is what’s happened since; everyone we know who’s bought a house since the early 1990s has made gobs of money.)
We consider following our agent’s advice, but then we decide against it. House prices have doubled since the mid-1990s; we’re not going to get burned again by buying at the top. So we decide to just stay in our rent-stabilized rabbit warren and wait for house prices to collapse.
Unfortunately, they don’t. A year later, they’ve risen at least another 10 percent. By 2006, we’re walking past neighborhood houses that we could have bought for about half as much four years ago; we wave to happy new neighbors who are already deep in the money. One neighbor has “unlocked the value in his house” by taking out a cheap home-equity loan, and he’s using the proceeds to build a swimming pool. He is also doing well, along with two visionary friends, by buying and flipping other houses—so well, in fact, that he’s considering quitting his job and becoming a full-time real-estate developer. After four years of resistance, we finally concede—houses might be a good investment after all—and call our neighborhood real-estate agent. She’s jammed (and driving a new BMW), but she agrees to fit us in.
By the spring of 2007, we’ve finally caught up to the market reality, and our luck finally changes: We make an instant, aggressive bid on a huge house, with almost no money down. And we get it! We’re finally members of the ownership society.
You know the rest. Eighteen months later, our down payment has been wiped out and we owe more on the house than it’s worth. We’re still able to make the payments, but our mortgage rate is about to reset. And we’ve already heard rumors about coming layoffs at our jobs. How on Earth did we get into this mess?
The exact answer is different in every case, of course. But let’s round up the usual suspects:
• The predatory mortgage broker? Well, we’re certainly not happy with the bastard, given that he sold us a loan that is now a ticking time bomb. But we did ask him to show us a range of options, and he didn’t make us pick this one. We picked it because it had the lowest payment.
• Our sleazy real-estate agent? We’re not speaking to her anymore, either (and we’re secretly stoked that her BMW just got repossessed), but again, she didn’t lie to us. She just kept saying that houses are usually a good investment. And she is, after all, a saleswoman; that was never very hard to figure out.
• Wall Street fat cats? Boy, do we hate those guys, especially now that our tax dollars are bailing them out. But we didn’t complain when our lender asked for such a small down payment without bothering to check how much money we made. At the time, we thought that was pretty great.
• The SEC? We’re furious that our government let this happen to us, and we’re sure someone is to blame. We’re not really sure who that someone is, though. Whoever is responsible for making sure that something like this never happens to us, we guess.
• Alan “The Maestro” Greenspan? We’re pissed at him too. If he hadn’t been out there saying everything was fine, we might have believed that economist who said it wasn’t.
• Bad advice? Hell, yes, we got bad advice. Our real-estate agent. That mortgage guy. Our neighbor. Greenspan. The media. They all gave us horrendous advice. We should have just waited for the market to crash. But everyone said it was different this time.
And more recently, Ed Andrews' My Personal Credit Crisis:
If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.
But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived.
... As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were “Alt-A” customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses.
I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me.
Bob called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.”
What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.
“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.”
You had to admire this muscular logic. My lenders weren’t assuming that I was an angel. They were betting that a default would be more painful to me than to them. If I wanted to take a risk, for whatever reason, they were not going to second-guess me. ... But given my actual income after alimony and child support, I couldn’t possibly have qualified for a standard mortgage. Bob’s plan was to write a “stated-income loan,” or “liar’s loan,” so that I wouldn’t have to give the game away by producing paychecks or tax returns. Unfortunately, Bob’s plan hit a snag a few days later. “Ed, the underwriters say that your name is on another mortgage,” he told me. “That means you’re carrying too much debt.”
Bob didn’t get flustered. If Plan A didn’t work, he would simply move down another step on the ladder of credibility. Instead of “stating” my income without documenting it, I would take out a “no ratio” mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.
I experienced the next bubble differently—as a journalist and homeowner. Having already learned the most obvious lesson about bubbles, which is that you don’t want to get out too late, I now discovered something nearly as obvious: you don’t want to get out too early. Figuring that the roaring housing market was just another tech-stock bubble in the making, I rushed to sell my house in 2003—only to watch its price nearly double over the next three years. I also predicted the demise of the Manhattan real-estate market on the cover of New York magazine in 2005. Prices are finally falling now, in 2008, but they’re still well above where they were then.
... House prices, we are told by our helpful neighborhood real-estate agent, almost never go down. This sounds right, and they certainly didn’t go down in the stock-market crash. In fact, for as long as we can remember—about 10 years, in most cases—house prices haven’t gone down. (Wait, maybe there was a slight dip, after the 1987 stock-market crash, but looming larger in our memories is what’s happened since; everyone we know who’s bought a house since the early 1990s has made gobs of money.)
We consider following our agent’s advice, but then we decide against it. House prices have doubled since the mid-1990s; we’re not going to get burned again by buying at the top. So we decide to just stay in our rent-stabilized rabbit warren and wait for house prices to collapse.
Unfortunately, they don’t. A year later, they’ve risen at least another 10 percent. By 2006, we’re walking past neighborhood houses that we could have bought for about half as much four years ago; we wave to happy new neighbors who are already deep in the money. One neighbor has “unlocked the value in his house” by taking out a cheap home-equity loan, and he’s using the proceeds to build a swimming pool. He is also doing well, along with two visionary friends, by buying and flipping other houses—so well, in fact, that he’s considering quitting his job and becoming a full-time real-estate developer. After four years of resistance, we finally concede—houses might be a good investment after all—and call our neighborhood real-estate agent. She’s jammed (and driving a new BMW), but she agrees to fit us in.
By the spring of 2007, we’ve finally caught up to the market reality, and our luck finally changes: We make an instant, aggressive bid on a huge house, with almost no money down. And we get it! We’re finally members of the ownership society.
You know the rest. Eighteen months later, our down payment has been wiped out and we owe more on the house than it’s worth. We’re still able to make the payments, but our mortgage rate is about to reset. And we’ve already heard rumors about coming layoffs at our jobs. How on Earth did we get into this mess?
The exact answer is different in every case, of course. But let’s round up the usual suspects:
• The predatory mortgage broker? Well, we’re certainly not happy with the bastard, given that he sold us a loan that is now a ticking time bomb. But we did ask him to show us a range of options, and he didn’t make us pick this one. We picked it because it had the lowest payment.
• Our sleazy real-estate agent? We’re not speaking to her anymore, either (and we’re secretly stoked that her BMW just got repossessed), but again, she didn’t lie to us. She just kept saying that houses are usually a good investment. And she is, after all, a saleswoman; that was never very hard to figure out.
• Wall Street fat cats? Boy, do we hate those guys, especially now that our tax dollars are bailing them out. But we didn’t complain when our lender asked for such a small down payment without bothering to check how much money we made. At the time, we thought that was pretty great.
• The SEC? We’re furious that our government let this happen to us, and we’re sure someone is to blame. We’re not really sure who that someone is, though. Whoever is responsible for making sure that something like this never happens to us, we guess.
• Alan “The Maestro” Greenspan? We’re pissed at him too. If he hadn’t been out there saying everything was fine, we might have believed that economist who said it wasn’t.
• Bad advice? Hell, yes, we got bad advice. Our real-estate agent. That mortgage guy. Our neighbor. Greenspan. The media. They all gave us horrendous advice. We should have just waited for the market to crash. But everyone said it was different this time.
And more recently, Ed Andrews' My Personal Credit Crisis:
If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.
But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others — borrowers, lenders and the Wall Street dealmakers behind them — I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived.
... As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were “Alt-A” customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses.
I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me.
Bob called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.”
What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, Bob figured, it was my job to decide whether I could afford it. His job was to make it happen.
“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.”
You had to admire this muscular logic. My lenders weren’t assuming that I was an angel. They were betting that a default would be more painful to me than to them. If I wanted to take a risk, for whatever reason, they were not going to second-guess me. ... But given my actual income after alimony and child support, I couldn’t possibly have qualified for a standard mortgage. Bob’s plan was to write a “stated-income loan,” or “liar’s loan,” so that I wouldn’t have to give the game away by producing paychecks or tax returns. Unfortunately, Bob’s plan hit a snag a few days later. “Ed, the underwriters say that your name is on another mortgage,” he told me. “That means you’re carrying too much debt.”
Bob didn’t get flustered. If Plan A didn’t work, he would simply move down another step on the ladder of credibility. Instead of “stating” my income without documenting it, I would take out a “no ratio” mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.
What I've been reading
1. Robert Kaplan's Hog Pilots, Blue Water Grunts - enjoyable. I agree that these are dedicated men and women who are doing a tremendous job with what they have. There was a nagging feeling however that Kaplan was holding back on some of his feelings. There was a scene where he described the triumphant scene at a base he was at when Bush beat Kerry - he felt lonely. He also describes why the grunts tend to lean Republican or at least share some the outlook of Bush especially with regards to the war on terror. Along the way, he notes the role of contractors and how they leave a smaller footprint than a regular military deployment. Also interesting was the military outlook with regard to China and how they are preparing for it. All in all it was an insightful read.
2. Anthony Holden's Big Deal: A Year as a Professional Poker Player was fairly entertaining although it tended to drag a bit in parts. I was quickly lost in the poker jargon right away but it reminded that the best analogy to sunk costs and marginal costs was perhaps the pot (sunk) and the bids (marginal). Yes, we do have to spend money to make money.
3. Edward Scharff's Worldly Power: The Making of The Wall Street Journal (out of print, unfortunately) was an extremley enjoyable book which documents the rise of the Wall Street Journal from a trade sheet that was always viewed as being a little shady to its rise as a newspaper with over 2 million subscribers in the late 1980s. He describes well, the origins of WSJ's conservative outlook - not Ivy League types but Midwestern DePauw graduates who were suspicious of the East coast elites and tended to hire from the midwest.
Most enjoyable were the quotes of various writings from the early editors and writers of the WSJ such as Barney Kilgore who fills at least half of the book and his successor Warren Phillips. He also describes the irony of the 70s when its conservative outlook (support of the Vietnam War and Nixon) was at odds with those of most of its liberal writers. For most of its existence (in the book) WSJ repoters were paid much lower than those at other newspapers such as the NYT and continued to lose talent because of this.
The tension between the Dow Jones wire service and the newspaper itself as well as its desire to become a general newspaper versus a business newspaper were the underlying currents in the WSJ which I imagine continues today. Given the current state of the WSJ and print newspapers in general, this book should be updated and would probably be popular.
2. Anthony Holden's Big Deal: A Year as a Professional Poker Player was fairly entertaining although it tended to drag a bit in parts. I was quickly lost in the poker jargon right away but it reminded that the best analogy to sunk costs and marginal costs was perhaps the pot (sunk) and the bids (marginal). Yes, we do have to spend money to make money.
3. Edward Scharff's Worldly Power: The Making of The Wall Street Journal (out of print, unfortunately) was an extremley enjoyable book which documents the rise of the Wall Street Journal from a trade sheet that was always viewed as being a little shady to its rise as a newspaper with over 2 million subscribers in the late 1980s. He describes well, the origins of WSJ's conservative outlook - not Ivy League types but Midwestern DePauw graduates who were suspicious of the East coast elites and tended to hire from the midwest.
Most enjoyable were the quotes of various writings from the early editors and writers of the WSJ such as Barney Kilgore who fills at least half of the book and his successor Warren Phillips. He also describes the irony of the 70s when its conservative outlook (support of the Vietnam War and Nixon) was at odds with those of most of its liberal writers. For most of its existence (in the book) WSJ repoters were paid much lower than those at other newspapers such as the NYT and continued to lose talent because of this.
The tension between the Dow Jones wire service and the newspaper itself as well as its desire to become a general newspaper versus a business newspaper were the underlying currents in the WSJ which I imagine continues today. Given the current state of the WSJ and print newspapers in general, this book should be updated and would probably be popular.
Monday, May 4, 2009
Dislocated shoulder
Slipped and fell down the stairs about 2 months ago and dislocated my shoulder.
Coincidentally, so did Anders Fogh Rasmussen:
At the Second Forum of the Alliance of Civilizations in Istanbul Turkey got its revenge by the fall of the new NATO secretary-general Anders Fogh Rasmussen that resulted in a dislocated shoulder.He had apparently tripped down the stairs of his Istanbul hotel where he was staying in the middle of the night as he waited for his appointment to Nato to be confirmed, and dislocated his shoulder. Dubbed Denmark’s Tony Blair, he seldom put a foot wrong as prime minister, despite facing crises such as the Iraq war and the outcry over blasphemous cartoons of the Prophet. Then on the eve of his greatest triumph he slipped on a hotel stair.
Click through the link to see the picture. My shoulder brace did not even look close to his. It's nice to be in good company. Or maybe not.
Coincidentally, so did Anders Fogh Rasmussen:
At the Second Forum of the Alliance of Civilizations in Istanbul Turkey got its revenge by the fall of the new NATO secretary-general Anders Fogh Rasmussen that resulted in a dislocated shoulder.He had apparently tripped down the stairs of his Istanbul hotel where he was staying in the middle of the night as he waited for his appointment to Nato to be confirmed, and dislocated his shoulder. Dubbed Denmark’s Tony Blair, he seldom put a foot wrong as prime minister, despite facing crises such as the Iraq war and the outcry over blasphemous cartoons of the Prophet. Then on the eve of his greatest triumph he slipped on a hotel stair.
Click through the link to see the picture. My shoulder brace did not even look close to his. It's nice to be in good company. Or maybe not.
FIOS redux
After about one month of FIOS our phone stopped working but the Internet access continued to work. So I tried to contact Verizon through the web for service. After numerous attempts with no confirmation of receipt I ended up having to call them. To their credit they came the next day. The tech explained that when FIOS was installed the installer failed to disconnect the copper line which blew out. He disconnected it - and voila!
The only fly in the ointment is that if we tried to switch carriers, for instance, to ATT who leases the copper lines from Verizon - we can't because the copper line from our house to the pole is now blown. M thinks that this is all a conspiracy by Verizon to keep its FIOS customers.
The only fly in the ointment is that if we tried to switch carriers, for instance, to ATT who leases the copper lines from Verizon - we can't because the copper line from our house to the pole is now blown. M thinks that this is all a conspiracy by Verizon to keep its FIOS customers.
Monday, April 27, 2009
To Prius or not
Test drove a Prius last week and it was nice. Unfortunately, it was more car than I wanted, i.e. it came with options that I was not interested in (backup camera, smart key, iPod connection, better sound system) which drove the MSRP to over $24K. The dealer offered $22K but I walked away from that deal. It was $2-3K more than I wanted to pay. The base model would have been fine which would have probably been offered a $20K but the dealer said that those models are only available to rental agencies. Huh?
Tuesday, April 21, 2009
Reading Piketty Saez
A while back (before the financial crisis), there was a lot of discussion on income inequality on MR which cited the paper Income Inequality in the United States: 1913-1998. After having read it (finally!) - with annual updates available from Prof. Saez's website - I was still trying to grasp how the authors made their calculations. It would have been great if they had made the raw data and computations available.
My first impression had been that they had access to all IRS tax returns which would have made this the definitive work on income inequality. But they did not and made inferences based on aggregate data which leaves room for quibbles.
"Using the published information on composition of income by brackets and a simple linear interpolation method, we decompose the amount of income for each fractile into five components: salaries and wages, dividends, interest income, rents and royalties, and business income. We use the same methodology to compute top wage shares using published tables classifying tax returns by size of salaries and wages."
It is sometimes said that regressions is what we do when we don't know what else to do. The same could be said for linear interpolation.
My first impression had been that they had access to all IRS tax returns which would have made this the definitive work on income inequality. But they did not and made inferences based on aggregate data which leaves room for quibbles.
"Using the published information on composition of income by brackets and a simple linear interpolation method, we decompose the amount of income for each fractile into five components: salaries and wages, dividends, interest income, rents and royalties, and business income. We use the same methodology to compute top wage shares using published tables classifying tax returns by size of salaries and wages."
It is sometimes said that regressions is what we do when we don't know what else to do. The same could be said for linear interpolation.
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