So why do families in poor underdeveloped countries have lots and lots of kids? Well, the customary answer is that kids provide for you in the future, and you need lots and lots of them because not many of them are going to live.

My friend suggested that utility was increasing in the number of kids you had. I counterproposed that children were a form of contractual enforcement; that the more kids you had, the greater the costs of either party ditching the other. However, if you think about this enough, it doesn't really make sense.

Someone suggested that utility was actually decreasing in kids over time. So, new kids equals higher utility. Maybe.

We had the brilliant idea that there was a increasing return to scale or some type of skilled labor complementarity at work here... it just gets easier to make 'em, darn it!

The discussion turned from production of kids to naturally... trading children... I'll give you little Tommy here for your Timmy plus three marbles and a cupcake...Why don't we see this? (Bsides all the ethical and moral dilemmas that brings up) The fact that we don't observe this happening says that there is some type of inefficiency screwing up the market mechanism.

After thinking awhile we finally think we got it. It's similar to another problem involving cars and dealerships and why cars depreciate instantly once they're off the lot. Drumroll please... the Lemon Problem. The kid might be a lemon, and you'd be stuck.

Porn With a Purpose

Two European eco-crusaders are taking their love of nature to the extreme by running a porn site to raise money for the cause. "Everyone must try to create something good using what they have," said Tommy Hol Ellingsen, half of the provocative pair. "We had nothing, just our bodies." The site features hard-core videos of the eco-hippies (and their crunchy companions) getting nasty in a Norwegian clear-cut and other locales. But it also dishes out raw facts about environmental destruction. And talk about going green -- the couple has raised almost $100,000 by selling site memberships. Now the problem is finding nonprofit groups who aren't spooked by the money's illicit provenance. "What is morality when people are destroying the world?" asks Ellingsen, who calls some green groups "too boring."-- Lewis Wallace

I am wondering what they mean by "crunchy."

Courtesy of Wired News

Games with Funny Names

Shall We Play A Game? How about this one?

Up Against the Wall Motherfucker: This game took as its subject the student riots at Columbia University and was originally published in the 11 March 1969 number of the Connection, a supplement to the Columbia Daily Spectator, near the date of the first anniversary of the riots. Jim Dunnigan, then aged 25 and described in the game's "designer's notes" as a history major in the School of General Studies, had already designed 1914 and Confrontation and was at the time working on Origins of World War II, but was asked to take time out to work on this design.The game is for two players, Radicals and Administration. The map features eleven tracks for each of the political subgroups in the game (e.g. Black Students, Moderate Strikers, Alumni, Harlem Community). The objective for the players is to have the most influence, determined by the positions of markers on these tracks, for their side by the end of the twelfth turn. During a turn, players deploy abstracted units representing their political leverage onto the tracks to 'attack' the other player's units (as tokens, Dunnigan suggests small pieces of paper coloured red or marijuana seeds for the Radicals, and blue bits of paper or capsules of Seconal for the Administration) and so move the markers towards their 'end' of the tracks. The 24 Contingency Cards add some randomness by taking or giving units of wherewithal to one player or another.

Or the ever so pleasant nuclear war?

Nuclear War: A comical cataclysmic card game for 2-6 players of all ages. A humorous confrontation between touchy world powers as each player attempts to sway his opponents' populations with diplomacy, propaganda, and finally nuclear weaponry. Little old ladies defect in electric cars and the dread SUPERGERM spreads devastation! Takes about 10 minutes to learn and about 30 minutes to play. Invented by Doug Malewicki in 1965, this game has remained popular for over 20 years. Anyone who ever had to participate in a "civil defense drill" by hiding under his or her desk in grade school, or ever had a bomb shelter in the back yard should play this game. One of the few games where it is possible to have no winners (often everybody loses!). You have to play it to believe it. This game's a blast!

And this post wouldn't be complete without the token crazy economist game: Fuck Your Buddy:

Here's a description from another site:
One interesting tidbit from the book by Sylvia Nasar, A Beautiful Mind, is from when Nash was a graduate student at Princeton in 1950. Students Nash, Shapely, Shubik, and McCarthy, along with another student named Mel Hauser, invented a game involving coalitions and double-crosses. Nash called the game-which was later published under the name ["So Long, Sucker"]-Fuck Your Buddy. The game is played with a pile of different-colored poker chips. Nash and the others crafted a complicated set of rules designed to force players to join forces with one another to advance, but ultimately to double-cross one another in order to win. The point of the game was to produce psychological mayhem, and apparently it often did. McCarthy remembers losing his temper after Nash cold-bloodedly dumped him on the second-to-last round, and Nash was absolutely astonished that McCarthy could get so emotional. "But I didn't need you anymore," Nash kept saying, over and over.

And finally, if you REALLY want to be popular, try the Dollar Auction (by Shubik, one of the guys mentioned above) Also has information on Fuck your Buddy

A Little Knowledge is a Dangerous Thing

Wired News Again:

In 1933, Herbert Hoover vacated the White House and took up permanent residence in the annals of cluelessness. During his one term, the stock market crashed and the United States slid into the Great Depression. But, as history has it, Hoover looked on blithely and did little. Some scholars have argued that this portrait of the president is unfair - that if he was indeed clueless, it wasn't entirely his fault. Back then, the US didn't track many of the vital signs it now uses to monitor our economic health. For example, the federal government didn't begin trying to measure unemployment until 1930. As Stanford University's David Kennedy puts it, Hoover didn't realize he was flying into an economic storm because "he was flying by the wrong instruments."

The main point of this article is that President Hoover din't know what the heck he was doing, because at that time, the study economics was truly in the boonies. He didn't realize he he was flying into an economic storm because he didn't have the right instruments, indicators, or smart economists telling him what to do.

Consequently, the Great Depression happened, where everything sucked for a long time until the first world war. Everyone was depressed, and prozac hadn't been invented yet.

However, this horrible horrible situation might just happen again:

Since the time of Adam Smith, we've used the wealth of nations as a proxy for the well-being of nations. We measure whether life is getting better by checking whether the good numbers (GDP, personal incomes, and so on) are going up and the bad numbers (unemployment, inflation, and so on) are going down. However, over the past half century, something strange has happened. The US's per capita GDP - the value of all the goods and services a nation produces divided by its population - has nearly tripled, but American well-being hasn't budged. We've grown almost three times richer but not one jot happier. There's ample evidence that in all postindustrial societies, material wealth and broader happiness are no longer closely in sync...That's why two prominent social scientists, Ed Diener of the University of Illinois and Martin E. P. Seligman of the University of Pennsylvania, have proposed creating a national index of well-being.

All we need to do is collect the data. For instance, we can now tabulate how much cell phone sales add to GDP. But have these phones made us more stressed out because we can no longer elude our evil boss or annoying brother-in-law? Or have they made us feel more secure because we know we can call for help if we're stranded? Let's ask. Some people wring their hands over how much the US spends on health care. But what if we measured to what extent new drugs and medical technologies improved the quality of people's lives? Maybe the expense would look like a bargain. Assemble measures like these into a national well-being index and, in tandem with revamped economic indicators, it could generate a higher-res picture of the national condition.

The first question i have is: you may not be happy if you get what you want, but will you be happy if you don't get what you want?

The second question i have is: i think an indicator for happiness is silly, not to mention impossible to implement. I can just imaging reporting to the president, "Mr. President, people's happiness levels are down from a month ago. More people were unable to elude their evil boss, although less people reported being stressed out by phones. If we leave out the eluding the evil boss sector, happiness levels are up." This isn't a question is it?

The main gist is, economics is a study of relative happiness. If you get more stuff, you will be relatively happier. If you get less, you will become more unhappy. It does not guarantee absolute happiness. Our national indicators are there to study the aggregate ability of the people to get more stuff. They are relatively more happy. Imagine if God just dumped everyone here onto the moon, where there's no stuff (or air). They would be relatively unhappy. Simple.

The article concludes with an ominous warning to the president:

Without some new measurements - of both the modern economy and the modern predicament - you may find yourself drifting, Hoover-like, into unexpected airspace and onto the least flattering pages of history.

At least the president wouldn't have to worry about drifting hoover-like through unexpected airspace when he's in space. har har har.

By the way, for happiness, here is a helpful link

Borrowing Constraints

Hard times have hit Ephraim, Utah, thanks to the collapse of the local bank, destroyed after a cashier embezzled $5 million and a polygamist Mormon sect defaulted on a pile of loans. For years, the Bank of Ephraim profited by providing the sect high-interest loans on a series of dicey operations, such as a watermelon farm with no melon plants. Unbeknown to bank managers, members of the fundamentalist sect had vowed to borrow as much money as possible to prepare for the end of the world. The sect's reclusive leader, Warren Jeffs, takes a share of members' business profits. He is buying ranches in Colorado and Texas; authorities believe he may be planning a getaway. Wired.com

Polygamy, fugitive and watermelons. What's there not to like... Interestingly enough, this little reflects a little thorn in the side of economists known as the final period problem. Specifically, before The-Final-Period, when you're going to DIE, you will paa-rty-like-craa-zy. In order to party-like-crazy, you will borrow-like-crazy. Well, since everyone is doing this, and everyone knows everyone's doing this, no one will lend to you. This also has side-effect that no one will trade with you, and also, that you CANNOT party-like-crazy.

So how do we fix it? We put in borrowing constraints, which have the unintuitive result that they only bind on rich people... why? cuz when you're rich, you can run away with everything you've borrowed cuz you never ever have to borrow again.

There are other fixes that can be done, but it's always hanging ominously in the background.

And so that's why we use assumptions! "What problem? There is no problem. PARTY TIME"

Testing, Testing One Two Three

Has it been so long? I remember when blogs were just starting to happen, and this new interface on blogger is just so much better!

Fun with numbers

So this happened in class...

Professor: Substituting in these historical values into the model will predict a risk free real return of 5% a year. Unfortunately, in the real world the risk free return has historically been 1%.

Student (raising hand): Philosophically speaking, if this had been physics and they had predicted a gravitational constant 5 times larger than reality, they would have trashed their model. Why are we learning this?

Professor: Well it needs tweaking.

Piled Higher and Deeper

My roommate is in the Masters of Education program here at UCLA, and from what he tells me, it's not really worth much. Two days ago, they played a game where they had to chose one of four animals by going to a corner of the room. Then they had to say how they were like the animal, and how they could interact with all the other animals. Today they made a poster of their feelings. Imagine teaching a group of inner city gangsters how to paint by numbers.

The REALLY BIG THEME of UCLA is this idea of social justice. When asked to define it, the faculty immediately refer you to antiracism and multiculturalism.

One sad thing, due to the number of very angry individuals in his class, he couldn't empirically point out that 1) The class is ethnically composed of approximately 50% caucasian and 50% asian and 2) The class is approximately 15% male.

A militia is good and all but...

An article proposing that, in the new world of terrorism, a democratic militia would prove much more useful than old central-government-type armed forces. It's a patriotic little piece, which I like (patriotic), but then it goes further to question whether such armed forces are even necessary in such a world (after all, they didn't stop the terrorist attacks)... and that's when the my ears perked up. .

My thesis, in response to this article, would be that this "democratic militia," which Ms. Scarry refers to in such positive tones, has only, and can only work under the circumstances that such terrorist attacks entail. It would be suicide for a nation to believe that these circumstances apply generally, and it wouldn't be cost effective to align our national forces towards these circumstances.

It is true, that "to date, this egalitarian model of defense is the only one that has worked against aerial terrorism on American soil," for Sept. 11 and Dec. 22, 2001, but Ms. Scarry herself limits the scenario of these terrorists attacks to an "aerial" situation using as justification two examples. It is ludicrious to use, as justification for the disbandment of a centralized defense, two constrained examples that occur in the span of one year. Terrorists do not only attack using airplanes. They can also attack using suicide bombers as well as other methods. The results of a citizenry in stopping suicide bombers would be approximately equal to soldiers stopping a suicide bomber: a lot of dead people. Except well trained soldiers have a better chance of stopping a bomber at a distance, than citizenry.

In addition to this, there is an entire section of the article devoted to Flight 93, and the collective actions that they took, which is used to justify how the current strategic thinking of "speed" in any conflict today is unimportant. On the contrary, I would argue that it is still entirely relevant. How many airplanes crashed into the world trade center before the citizenry reacted? While the citizenry did realize the gravity of the situation, and appropriately responded -- the pentagon had responded as well. They had sent jets up with orders to shoot down passenger planes. The emphasis on the timing which the citizenry reacted is inappropriate; it seems that the ulterior motive of Ms. Scarry is to criticize the the centralization of power by pointing out to their results: The pentagon would have sent a passenger plane down in flames, while the reaction of the citizenry had at least the possiblity that the plane might be saved. It seems that both types of armed response, centralized and democratic, occurred within a reasonable time frame. The novelty of the attack also probably contributed to the slowness of the Pentagon in formulating a response; if those had been nuclear missiles from Russia, our response would have been swift and assured.

I will focus now on what I believe is the main weakness of a democratic response. Consider for now, what would have happened, if those passengers had taken a vote, and decided on majority rule to not rush the terrorists?

The constitution is an excellent document, because it not only allows for the decentralization of power, but also because it requires it where it is most needed. The majority vote issue, that underlies what occured on flight 93, but doesn't appear in Ms. Scarry's article, is precisely the reason for a strong federal government in charge of the armed forces. The constitution was written because the Articles of Confederation were too loose: each state retained too much individual power; consequently, against an intelligent aggressor with a strategy of attacking individual states, the other states would not be required, nor would they have the incentives to support the individual. Once the individual fell, the aggressor could then embark on his next victim. In short, the centralization of the armed forces contractually forces collective defense for all states, instead of leaving states to individually fend for themselves.

This model is weak when applied to terrorist groups, because they are small and have no definite "nation," but history has a precedent. Terrorists actually resemble vikings during the feudal period. During that time, it was actually easier for individual nobles to defend his own fief from random raids, than a king with an army. But, as the technology changed, vikings became obsolete, fiefs consolidated into nations, and national standing armies were created. Vikings lacked the infrastructure to do any real damage, and it quickly became apparent that only nation states, with their armies, were dangerous.

What this means is that centralized forces evolved as an evolutionarily superior method to defeat and protect against nations and non-nations, i.e unorganized barbarians.

The existence of terrorist groups does not mean that the strategic climate of the world has changed. Nations still exist, and until they become the minority, and terrorist groups the majority (doubtful because in order to be effective, terroristst require infrastructure, making them easy targets for a standing army) the only appropriate way to deter these types of aggressors would be a centralized defense. Making national defense a democratic process carries with it a danger that your fellow citizen can chose to not defend you.

What kind of world power needs to show off?

The Chinese guided missile cruiser Qingdao recently completed a four month tour that highlights the growing power of china. But what is really interesting is a little comment that's hidden deep in the story:

Petty Officer Wei Ping said his favorite port stop was in Turkey.

"It was really a beautiful country, and we received a very warm welcome," Wei said. He said some crew members became seasick from never having been on the rolling open ocean.

Question: Assuming for such an important tour, that the ship was staffed with competant crew members, why did they get sea sick?

Answer: They are competant, but they've never been out on the ocean before, duh.

Here's another link with respective naval projection power. It's pretty old (1996) but it should suffice. I make the assumption that an aircraft carrier is a good example of projection power. Although it does say that Thailand has an aircraft carrier, it's also the smallest carrier on the list with a displacement of 11,500 tons, slightly larger than an Aegis Cruiser (9400 tons). We can see here, that not only does the U.S have more aircraft carriers than any other country, they also displace more, and carry more aircraft.

Buttons

Our entering economics graduate class has 38 people. Roughly 1/3 of them are from the Asia, 1/3 of them are from South America, 1/4 of them are from the U.S and the rest are from Europe and other places. There's a common trend among econ programs, and most graduate programs in general, to have a lot of foreign students, and very few domestic students. Many people have speculated on the reasons, but nevertheless, this situation leads to very interesting results, for instance recently some chinese students were protesting at the U.S embassy because they weren't being granted visas to come here. On one hand, the world thinks the U.S is a bully of other nations, but at the same time, they all want to come over here to study... then go back and teach what they've learned here. There are two ways this could be interpreted: 1) it could be very very bad for us or 2) it could be very very good for us. It depends on whether or not you believe the American message is subversive (freedoms and such, ya know), or not. I'm not too concerned about South America or Europe, because they don't have this nationalistic-world-domination-superiority complex, but China, in particular, used to be very powerful, and would very much like to see that again. So now what? Well, I don't know. I just trust that George Bush keeps us on top of the food chain.

Another thing that I find disturbing about China is this disjoint between the government and the people. Obviously we realize it, and the Chinese realize it to -academically. The way that they look on our system of government is through their own experience; sure they can say that their government is corrupt and inefficient and smushes some freedoms, but at the same time, they're accustomed to it. The government distracts them by raising their patriotic fervor through censored news items about things like Taiwan (it used to belong to us, so it still belongs to us. A simple argument for simple people) and airplanes (it crashed our fighter! never mind that it was over international waters and besides, imagine a turtle swerving into a hare... ) and they're fine with things that wouldn't be fine in this country AND they don't really understand the way that power is derived from the people here. We can argue all day about whether or not the politicians in Washington represent us adequately, but the truth of the matter is, we can sure pull them out of Washington if we didn't like them. It's very true, our government is of the people, for the people and by the people.

When the U.S government acts, it's with the support of the people. When the Chinese government acts, they can also claim it's with the support of the people. The difference is, our citizenry is much better informed than their citizenry (back to the censorship issue again.)

What I like to think is that these aspects of our country are inherently required in order to run a first class economy. The free exchange of ideas without fear of government intervention promotes cussedness and disrespect for authority.

There was one international person in our homework study group who had been a lecturer for Beijing University for quite some time before coming here to study. He's very very intelligent, and funny! but that's besides the point. The rest of us are domestic students, with all of them being much more intelligent than me, but during that particular time we had this problem that couldn't be solved using the method that they taught us in the book (A difference equation problem.. them again). So we're ripping our hair out when all of a sudden, somebody comes up with a brilliant idea that solves it, using a method that gives an answer but was still kind of iffy... and all of us examined it quickly and decided that that was the solution. And our international friend said, "I have to ask the professor."

"What's the matter, is it wrong?"

"No, it's right, but I have to ask the professor before I put it down."

I was floored. He may not be representative of people from China, but as an academic, he had to be willing to stand on his own two feet - his attitude should have been to the professor: screw your opinion! prove me wrong! especially since he had looked at it and thought it was right.

As a side note, in my naivety I had said difference equations weren't cool. Eh. We learned you could do markov chains with them which are very important in finance. (What I would like to see are differential markov chains but i'm sure some math guy has already done that.)

Sundry Items

Today i learned how to solve linear difference equations. For all of you that say "huh?," yup, I said that too. Apparently there is such a thing as discrete time differential equations -- sort of like the riemann sum of differential equations. The only thing that seems to be useful about it is that it's a recursive relationship infinite series sort of thing. You have a rabbit population of two and bam! take n = 100 years, and you have a population of fifteen million trilligazillion. You can also compute the stability of such a series, does it go to infinity, or does food run out and population growth fluctuate? And you do it all in matrix form (if you're smart) or algebra (if you're not) to convert it from said recursive form, and into something that looks like an exponetial, thereby defeating the one cool thing about it.

So much for that one cool thing.

REAL differential equations are so much prettier to work with, once again, contrast riemann with calculus, plus you can also do lots of stuff with it, like, calculate the stability of systems in matrix form with differential equations, as i learned to my chagrin in my engineering class. Turns out you're not allowed to blow stuff up, even if it's on your homework.

The international students have to take an english test next tuesday. Because of that, the regular class got moved to the discussion section's time and the discussion section got canceled.. Nobody liked the discussion section, during one of my lunches, someone called it a negative externality, which in econ-speak is a polite way of refering to taxes, inefficient government funded programs, and more recently, the Taliban, and what we did to them. Basically, the class is like a movie, except in French (or a language you don't understand), with an econ grad student as the hero. And we watch and watch as he monkeys around on the board, trying to derive an equation using The-Very-Hard-Method or even worse, using The-Two-Very-Hard-Methods, just because he's the hero and can.

Most of our lunches are spent in idyll fantasie speculating about the serious things in life. We chat about wonderful things ranging from like, "what would happen if we stole all the money in the Fed computers" to "what would happen if we stole all the money in the world." Before you snicker, dear reader, these are very serious questions warranting serious answers. You see, in the first case, you would have to ration out the money very carefully if you wanted to preserve the value of your money, but in the second case you wouldn't be able to do even that because you have all the money in the world. The moment you spent your first dollar, your money decreases in value, since someone else has a dollar to compete with you. These two examples aren't even similar because in the first place, you may very well be stealing money that doesn't physically exist yet (it's still in the Fed computers... by the way, taking a million or a trillion dollars is just a matter of punching in a couple more zeros), thereby increasing the money supply, whereas in the second case it would SEEM that there are no effects because no money is being created but somehow it does...yes, very serious questions indeed.

I haven't posted for some time. Been kinda busy, moving into the new apartment, adjusting to school, dsl doesn't work yet, plus -- a dearth of material to work with, but that'll probably change once i settle down to my routine and start actively looking for stuff...

Rick Young, Coffee Czar

Rick Young up at Berkeley is proposing politically correct coffee that should bring us closer to solving the problems of this world. He wants to make it mandatory to sell only organic, fair-trade or shade-grown coffee. However, what we have right now is working just fine, and if it wasn't, what he proposes wouldn’t work, and in fact, would have just the opposite effect.

Young uses the argument that we must pay for the externalities that are caused by overzealous coffee farmers. It doesn’t make any sense, because what he’s proposing to do, subsidize them by giving them money, actually would cause them to become even more zealous than they are (if they were ever zealous in the first place). A normal market mechanism prevents this excess through lowered prices, so that farmers, vigorously doing cost-benefit calculations in their heads, say “ah screw it! I’m gonna grow cocaine. It pays more.” or "ah rayos! mejor cresco cocaina. Paga mejor." The article states, that the market price of coffee is currently at record lows, and from that, we can infer that the supply of coffee will soon decrease. A better measure, if Young really wants to help the environment, would be to tax the coffee, and directly use the money, keeping it independent of the coffee supply, instead of worrying about whether giving that money to farmers causes them to grow even more coffee. It also doesn’t matter whether you tax the consumers or producers, because the shifts in consumer demand or producer supply from either tax would lead to the same result.

But I suspect Young wouldn’t want to tax the farmers.

The thing that Young doesn't realize is that mandatory subsidization to a producer for his product traditionally results in an overproduction of that product along with a corresponding decrease in demand for that product. It’s in any first year economics textbook. In this case, the subsidy would be in the form of the extra dollar (or so) per pound paid to the growers of coffee. One example of such a subsidy is the inflated price for oil that countries pay to OPEC. The natural incentive of a cartel member, the coffee farmer, and the oil rich country, is to take advantage of those inflated prices by overproducing; but the resulting excess would naturally bring prices down, contrary to the cartel's wishes. In order to prevent this, OPEC has to give production quotas to each of its member nations, which I suspect the International Fair Trade Coffee Register would have to do. However, even artifically high oil prices fluctuate depending on conditions – they’re not fixed – and what happens as a result is that, if oil prices decrease, member nations MUST produce more oil in order to take in the same amount of money. This lowers prices more. Needless to say, OPEC is not as effective as it used to be (or cartels in general).

The only justification for Young’s argument is that the extra dollar isn’t actually a subsidy – that it is a fair market price for organically grown coffee. Well, that can make sense. You have a market for normal coffee and a market for organic coffee. Stick a tax on the normal coffee, and watch those farmers instantly convert to organic coffee growers or people to organic coffee drinkers. And they still have a choice as to whether they’re willing or not to pay the extra expense. It’s better than offering them organic coffee or no coffee.

However, that’s examine his justification a little bit more:

“People should pay a price for their coffee that reflects the larger costs, like polluting water and cutting trees,” Mr Young says. “Prices now are artificially low because they don't take into account all the externalities.”

This would make sense if the water the farmers were polluting and the trees they were cutting down were say, government property that was set aside for unregulated usage. A competitive market CAN lead to excess resource exploitation IF the land were public. For example, over-fishing can occur as fishermen try to beat others in catching the most fish to sell, or over logging, or a million other things. But to reiterate, the solution to this would be a tax, instead of a subsidy, and the implementer of this tax should be the government. Not some little guy in Berkeley or another country’s government.

The story suddenly changes when the land becomes private property. The rational farmer, doing his cost-benefit calculations, takes into account the benefit of the trees, as well as the costs of cutting tem down. If the costs outweigh the benefits, he’s either not going to cut them down, or if he does, he’s sure as heck going to make someone else pay for it; he’s going to pass the costs down right to the consumer. If this were the case for coffee, the externalities are already priced in, and we’re already paying for them.

Of Markets and morality...

TED KOPPEL "...as you describe it, it [the market] is, of course, a game in which there are real consequences. When you bet and you win, that's good for you, it's bad for those against whom you have bet. There are always losers in this kind of a game."

GEORGE SOROS "No. See, it's not a zero - sum game. It's very important to realize..."

TED KOPPEL "Well, it's not zero - sum in terms of investors. But, for example, when you bet against the British pound, that was not good for the British economy."

GEORGE SOROS "Well, it happened to be quite good for the British economy. It was not, let's say, good for the British treasury because they were on the other side of the trade...It's not - your gain is not necessarily somebody else's loss."

Later discussing Malaysia:

TED KOPPEL "Because - I mean put it in easily understandable terms. I mean if you could have profited by destroying Malaysia's currency, would you have shrunk from that?"

GEORGE SOROS "Not necessarily because that would have been an unintended consequence of my action. And it's not my job as a participant to calculate the consequences. This is what a market is. That's the nature of a market. So I'm a participant in the market."
Copyright © ABC News ."

This interview is a little old, but still worthy of discussion. Background: the price of the British pound was being maintained using buying operations from the Bank of England, even as speculators, most notably George Soros, sold it. The Bank of England eventually gave up, the price broke badly, and Soros cleaned up four billion dollars. Obviously, if he hadn’t made so much money, he wouldn’t have ended up arguing with Koppel about the morality of his actions -- but what’s done is done -- and provides fodder for this little analytical foray!

Cosmetically, Koppel wipes the floor with Soros. He’s able to portray Soros as a person who destroys lives and economies without a second thought, as well as simplify, beyond belief, something that should not be simplified.

What Soros does, as a money manager, is to buy undervalued assets, and sell overvalued assets. This is arbitrage in its most general form. Notice that, by definition, a successful money manager, performs arbitrage, because he buys undervalued assets before they rise in price, and sell overvalued assets before they fall, equilibrating price to value by his actions. And this is what a market is and does. Soros’ argues that he is merely a extension of the market, that the market mechanism works through hundreds of participants like him, and that there is no morality in a mechanism.

It's probably right before this thought that Koppel falls off the ride.

Again, by definition, a SUCCESSFUL money manager fundamentally has an information difference, which allows him to buy assets before they rise, or sell assets before they fall. Without an information advantage, he would be gambling, and in the long run, should perform just as well as an index would. That informational difference is where Koppel’s argument is from. A better formulation of his argument would be that Soros is ripping people off (to put it bluntly) when he conducts his trades, because he happens to know more than they do. When the British pound fell, it happened to be good for the economy (according to Soros) as their currency was returned to par– but it was bad because Soros was taking advantage of the Bank of England (according to Koppel).

However, let’s just assume Koppel’s premise. If we generalize, we realize that informational differences exist as a necessary condition of our society. The corporation is able to gain market share from a competitor because of its’ innovation. The information difference between students allows them to be ranked and curved. In short, these differences are what we use to gauge merit. The only way we can say this method is not valid is if the information were gained through unscrupulous ways, i.e, cheating, corporate espionage, or insider information. However, the type of information that Soros had, was not insider information: no one can tell you if the pound were about the be devalued.

And keep in mind that the Bank of England was not exactly informationally disadvantaged.

What’s strange though, is that people who disparage money making through this informational difference, at the same time also disparage day trading because of its gambling qualities. The two thoughts can't mutually exist.

Medical Malpractice ain't easy

"Advocates of reducing the amount insurers have to pay for medical mistakes often cite California as a model. In the 1970's, California set a ceiling of $250,000 for jury awards for pain and suffering, and malpractice insurance prices have not soared there. But Harvey Rosenfeld of the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif., says patients have suffered. Because of the cap on payouts, he said, many lawyers refuse to represent malpractice victims, making it difficult for them to pursue claims."

Hmm... let's start from the beginning... imagine that one day, John Smith (that would be you), were injured as a result of medical malpractice: a surgeon accidently left his spatula in your stomach and you experienced pain and suffering as said spatula passed out. After hiring a lawyer and submiting this case to a jury of your peers, they awarded you a monetary value, which would be paid by said surgeon's insurance carrier.

This scenario belies a very intricate equilibrium. Each entity has different incentives under the system, with the result that the payment cap becomes the linchpin that holds it together (abeit not very well). John Smith has two incentives, 1) to inflate his pain and suffering and 2) To file as many claims as he can, because he would not have to pay attorney fees unless he won. The Lawyer makes money either way; generally, he has the incentive to facilitate the lawsuit because he makes more money if he wins. The insurance company charges Mr. Surgeon an insurance premium, based on whether Mr. Surgeon has a prediliction towards leaving spatulas in patients. However, they have an incentive to overprice the premiums, because heck, they can lose an infinite amount of money. Finally, Mr. Surgeon has the incentive to not leave spatulas in John, so that he can keep his premiums down.

In an ideal world, everything would be hunky dory, but let's look at this in pseudo-mathematical terms: John, if he lost, would lose a little time (with a monetary value placed on it of course), but has the possibilty of (almost) infinite gain, if he won. Sort of like a free lottery ticket. The lawyers and the insurance companies make money either way the case goes*. They want MORE cases. And the surgeon faces the possibility of an infinite loss, in the form of insurance premiums. What he does is attempt to balance that, by changing John a heckuva lot of money for surgery, and making him sign a contract that limits that liablity. But these things, in excess, also give him incentives to leave spatulas in John (because John is only worth so much eh)

What the payment cap does is 1) Limit John's potential lottery ticket by capping it, 2) By capping it, it also gives him less of an incentive to play the lottery i.e sue, because he has to balance it with the loss he might incur. 3) It also limits the incentive of the lawyer to play the lottery, because now he has to balance his wins with his losses. 4) It keeps premiums in check, because using the payment cap and some statistics, a surgeon can calculate how much he should be paying as a premium. 5) Using these same premiums, the surgeon can decide how much he should charge John vis-a-vis how much he needs to charge John to stay in business.

But, there are negatives: Some valid cases would not be tried because they are too minor and some rewards may be too small because of the cap. Whether this is fair or not depends on your point of view. However, keep in mind that because the $250,000 cap was decided by a legislature, we can be sure that it was the proper utilitarian result of a cost-benefit calculation done by society. Yup, several million Californians have balanced the gains and losses of the cap effects.

*lawyers have different incentives, depending on whether they are paid a lump sum, or on a percentage basis, but that doesn't change this much.

Corporate Harassment

The Big Corporation harassing the little guy Except the corporation is a bunch of sea islanders, and the little guy is Ted Turner.

Instapundit comments: “Turner has surrendered his claim to the land on St. Helena Island, owned by descendants of Gullah slaves, that he was attempting to claim,” and then adds some distinctly anti-Ted comments, “Good move, Ted. But then, when InstaPundit and Michael Moore unite in a good cause, the result is well-nigh irresistible.”” Yep, Ted is bad.

However, the last time I checked, nobody knew exactly who owned what, and part of this whole lawyer ruckus was to decide this business (innocent until proven guilty and all that). Of course the issue is settled now, Ted 0, Sea Islanders 1, and Turner is seen as a robber baron. But consider this: would the public have felt the same way about this issue if Ted Turner had not been a billionaire, and the Lands End Woodlands Company was the one with several million dollars worth of assets?

Well, obviously not. So where does the outrage come from? Both of these parties have motives for the land, with Turner perhaps having the more better incentives regarding land usage: he can afford to set aside the land for conservation, while the islanders have the incentive to use the land for commercial purposes. Looking from a land-usage point of view, Turner wins (at least, his incentives are better). So methinks, that the outrage comes from Turner having much more money than the islanders, but keep in mind that the islanders aren’t exactly starving either. If we accept this premise, it’s easy to backtrack up the logic ladder to justify things like welfare for anyone that doesn’t have the same wealth distribution as say, Ted.

Imagine if someone owned an acre of land. When does he cross the public’s perception of being a bad guy? When he owns ten acres? Twenty? Two hundred million?* Similarly, when does a corporation become a defender-of-the little guy? When it’s nonprofit? When it represents sea islanders? Keep in mind that the islanders probably formed this corporation in order to contractually keep each other from welching and selling out their individual pieces of land. In short, they’re a cartel. Just multiply the size of this group by several hundred, and you would have a cartel truly worthy of being broken up by the Justice Department.

*when the marginal increase of land ownage by Turner equals the marginal externality Turner imposes, but then, land ownage is discrete, whereas perceptions are likely continuous. Then where would we all be? (Not reading this probably).

Q: Why did the robot cross the roab?
A: Because it was carbon bonded to the chicken.

Q: Why did the chicken cross the road?
A: To get to the other side.