Mugabe caricature

Just doodling while writing my article on Zimbabwe:).......

News and Analysis: Issue 1

It would be fantastic if any of you can spare some time to write some short blurbs (100-150 words) on any of the following topics. Since we're only doing about an issue per term, it would be silly to just report the news from several weeks ago, so the best thing would be to write a short blurb (impartial!!) and then do a little "Tangent's Take" (can be in bullet points really... just economics-related questions to inspire discussion) on the news story.

Possible news stories (those shaded grey are covered!):

• WGA strike in the US and the power of unions/ distribution of content
• Gore and the Nobel Peace Prize
• Gore and venture capital in Silicon Valley
• the Nobel Prize for Economics going to mechanism design theory
• Coffee house discrimination findings
• UK house prices going down
• Northern Rock and what's going to happen now
• Gisele and the sliding US dollar (and cable reaching record levels!!)
• Something on the subprime issue... although really, the above three are all part of this
• Oil and commodity prices going crazy
• Chinese inflation
• What's going on in Pakistan (but please put an economics spin to it?)
• Rising rates of alcohol-related deaths and the possibility of higher taxes
• the Spice Girls reunion and how that will singlehandedly lead to peace on earth, just in time for the holiday season! (yeah...please, no)

Please just post your blurbs on here, so we can take stuff off this list as they come in.

How I Made My Millions

On 10th October, the English rock band Radiohead released their album ‘In Rainbows’. What was special about this was not the fact that it wasn’t a physical album, or that it scores a whopping 89 on Metacritic. No, the reason why ‘In Rainbows’ would be remembered in years to come is because of its peculiar delivery method: it was made available online at the album’s official website inrainbows.com, and downloaders are prompted to name their own price.

WWHD?
Let’s pause for a minute and ask ourselves that all time important question which may make or break (or neither?) Radiohead – what would homo economicus do? Putting the endless jokes about his names and caricatures (and doubtless, criticism) of our friend aside for the time being, we assume that he is a rational being, and wished to maximise his utility subject to the amount of resources he has. Let us now assume that HE can spend his money on two goods – Radiohead’s ‘In Rainbow’ and a composite (and one would assume, very heavy) basket of all other goods. One less dollar spent on Radiohead would mean one more dollar’s worth of all other goods; as more is better, and HE can pay nothing for the music, as a rational being, he would pay nothing.

No surprises
So did the ‘In Rainbows’ downloaders act like HE did, ie, did they all pay nothing? The answer, it should come as no surprise, is a no. A report released on 8 November by comScore, a company which measures the digital world, finds that worldwide, 38% chose to pay for the download. The percentages were higher in the UK and US, at 48% and 40% respectively.

Interesting too were the results of the amount spent on the downloads. For people who chose to pay, the average they spent per download was £2.93. In the US the figure was £3.94, and in the UK, £2.47, much lower than what one would be expected to pay for a CD at any high street store. We see HE at work here, even if not to our extreme conclusion of paying nothing – given the chance, people would still more likely pay less than they would otherwise have done.

However, comScore’s study is based on data obtained from the company’s database of “several hundred” who have provided the information voluntarily. Moreover, it only covered a short period, 10-29 October, so the results should be taken as a preliminary indication of downloaders’ behaviour only.

Hail to the Thief
Then does this mean that all 38% who chose to pay for the download are completely bananas?

The economist Dani Rodrik conducted a similar experiment on his blog by letting his readers bid for his new book, with the difference that all the money would go to charity. The results were very similar to the Radiohead figures – many opted to pay nothing, amounts paid averaged $21, and a few people paid ridiculously high amounts ($100-$145). What was interesting is that many of those who chose to pay felt a rational justification was necessary—many claimed they paid so much only because they wanted to contribute to charity.

Charity too, is what drives most people who give to buskers. Do you give because that 70 year old guy standing on the corner of the street just gave a haunting rendition of ‘Mary had a little lamb’ on his recorder, or do you give because… well, he’s a 70 year old guy standing on the corner of the street with a recorder, and you feel he could probably do with a little charity?

The same goes for tipping. There is no ‘rational’ (in the economic sense) reason for giving the hotel bellboy a fiver for moving your luggage, or for tipping the waitress more because she drew a smiley face on the check.

Not that this author is implying that Radiohead are buskers, or that the 38% are merely tipping the band for their jolly good effort, or because they were charitable. What motivated these people though, is perhaps similar to what motivates us daily to throw spare change to buskers or tip our waiters. Why we do it is still less than clear, as the economist Greg Mankiw confesses on his blog “Economists do not have a good theory of tipping.”

Million Dollar Question
Are we on the verge of a distribution revolution? Sadly, not really. Albums to download have long been in existence. It’s not a case of a ’legalization’ of free downloads either – it has never been illegal; iTunes has long offered free download samples, and Spiralfrog (US and Canada only, for now) provides ad-supported free music from major music publishing companies like Sony and Universal.

And what at first seems like a fun exercise of first degree price discrimination – getting people to pay exactly what they value the product at—turns out to be no more than a veiled attempt at product differentiation. Available to order, only online, alongside the ‘In Rainbows’ album download is the £40 discbox set consisting of two CDs, two vinyl records and other memorabilia. Less price sensitive customers would likely order the more expensive set, and the increased internet traffic due to the whole pay-as-much-as-you-want hullabaloo undoubtedly helped in driving some less price sensitive customers to the site. In fact, comScore’s research finds that for every one dollar generated from album downloads, sales of the discbox made two dollars. Offering cheaper (or even free) products to attract customers who would potentially buy more expensive but related products is not new either – both Rodrik and Mankiw have started blogging (the free product) because they have new books coming out (the more expensive but related product).

Even though the results of the Radiohead experiment are less than compelling, it seems to be a step in the right direction – no more dodgy torrents, legal DRM-free music, artists manage to make good money out of it… and if it means it gets more people to think about the economics behind what they do, all the better.

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Picture a screenshot of their website, so not sure about the copyright.

Link to the comScore report : it would be nice if we can get some of their results in graphical form.

david romer's rules

• Don't clutter up your life with other activities;
  just write.
  
• Don't carry out a thorough and comprehensive search of the literature;
  just write.
  
• Don't attempt to make sure that every page you write shows the full extent of your professional skills;
  just write.
  
• Don't write a well-organized, well-integrated, unified dissertation;
  just write.
  
• Don't think profound thoughts that shake the intellectual foundations of the discipline;
  just write.
  
• If you don't have a paper started by the spring of your third year,
  be alarmed.
  
• If you don't have a paper largely drafted by the fall of your fourth year,
  panic.
  
• Have three new ideas a week while you are getting started.
  
• Don't try to game the profession,
  work on what interests you.
  
• Good papers in economics have three characteristics:

  • A viewpoint.
  • A lever.
  • A result.

page up... can you guys edit the links at the site? you can go to "template" and click on links to edit... or if you guys are real whizzes you could spruce up the page, though it's more an informal place to collect work if you want to use it.

just a place to jot down random links/ideas between meetings, and provide an easily searchable place to edit and compile the media that goes into an article.

i hope you will find this useful. if anyone needs to be added, drop me a mail at j.s.oeni@lse.ac.uk

It is tough to make predictions, especially about the future - Yogi Berra

Book Reviewed: The Black Swan, Nicholas Nassim Taleb, Allen Lane, 2007




What happens out there in the real world? Many times I’ve peered through the iron bars of the small windows at the LSE while sitting through my class in real analysis. In the real world, some of my contemporaries could have discovered “the next Facebook” , or become the best thing to happen to an investment bank since sliced bread. Personally, I would love to sell a million copies of my as-yet unwritten future book, but I may well be serving banana caramel lattés in Starbucks ruminating about how it all went pear-shaped for me since my heady undergraduate days. It all seems a little bit unfair, and you start wondering what you could have done better or differently.

Isn’t it comforting then, that someone comes along and tells you that you shouldn’t be too hard on yourself, and that chance has a big part to play in dealing the winners and losers. It’s certainly tempting.

To Nicholas Taleb, much of the world we live in today resembles “Extremistan”. It’s a world in which events of large import and magnitude occur with small, but non-negligible probabilties. It’s a world in which payoffs are highly non-linear and “lumpy”, where a chance alignment of factors makes an author extremely rich but 999 (or more) others very poor. It is a world in which wars happen and we are confronted by our own mortality. These large events are the “Black Swans” which lend their name to the title of the book.

The author’s fixation is with uncertainty, more specifically, those black swans not unlike what former US Secretary of Defence Donald Rumsfeld once controversially dubbed “unknown unknowns”. This curiosity about rare events and how we react to uncertain events is informed by experiences in Taleb’s own life. Having observed his native Lebanon degenerate into civil war, and having contracted, and recovered, from throat cancer, he is constantly amazed how often people underestimate risk. This was especially marked in his career as a quantitative options trader, where he saw many other traders take comfort in their Gaussian models. People feed of success and the continual feeling of victory as they make profits daily in the stock market, but this is akin to picking up dimes in front of steamrollers. Taleb’s hedge fund, Empirica, adopts a different strategy of being ultraconservative (80% in T-bills) and hyperaggressive (the rest in out-of the-money options). It’s difficult to walk around most of the days of the year slowly bleeding money and making losses, yet on the days where something unexpected occurs, be it the Russian debt default, 9/11 or the recent sub-prime crisis, he makes a killing. It takes some intellectual discipline to go against our instincts and mental biases. Paradoxically, it is courageous to be prudent.

In exploring “Black Swans”, he takes us through a wide range of knowledge, drawing from his polymathic knowledge of fields such as philosophy, economics and biology. While the concepts presented are abstract and theoretical, his informal style and street sense make this read an engaging one peppered with interesting anecdotes and stories. Taleb’s book, to be fair, is not a vast collection of his original ideas. The main mantra of the book, is “don’t be too confident in what you know.” This is certainly nothing new, after all, Socrates said it all those years ago : “One thing only I know, and that is that I know nothing.” The title of the reference, is in itself an allusion to the belief that all swans were white, until the discovery of black swans in Australia demonstrated the weakness of induction as a basis of knowledge. It’s strength lies in creating an engaging synthesis of the literature to back up his theory. It introduces you to advances in mathematical finance suggested by the father of fractal geometry, Benoit Mandelbrot, and the theory of science advanced by Karl Popper. It is also a good introduction to those Nobel Prize winning psychologists, Kahnemann and Tversky, who have conducted numerous experiments investigating our heuristics and biases involved in judgement under uncertainty.

“The Black Swan” builds on his previous effort, “Fooled by Randomness”. That book contained several anecdotes of his life as a trader observing how people dealt and made decisions regarding uncertainty. Significantly, it also contained a section on how to deal with the uncertainties in life, with stoicism and good grace. This book builds on the last effort by presenting a more coherent theory with good doses of erudition.

Nassim’s style will polarize readers. He tries to write accessibly, out of memory, and has a conversational prose which is engaging yet at times loose. Less patient readers will not suffer his many digressions. He must have enjoyed writing it, however, for a book preaching epistemic humility, it does make some strong and sweeping statements. While I do agree with much of what he says about too much respect being given to those who have won a “Nobel”, some of the asides smack of having a huge axe to grind.

Yet behind the brash exterior of the book one finds heartwarming tales and consolations. That the world is random gives texture to life, and one value Taleb has as a skeptic is introspection. Things are not always going to go our way no matter how much we try, and it is the way we reflect upon, and subsequently deal with the environment around us which will preserve our dignity and give our successes and failures their proper perspective.

You shouldn’t take my word for it. After all, book reviewers are fallible. However, if you do happen to pop by the local bookstore, do take a look at it, for there are serious lessons to be learnt for everyone. For academics and practioners in finance, perhaps we should be less secure in the technical sophistication of our models and develop methods which may be less elegant, but provide a better fit for reality. For the lay person, it will provide a good dose of perspective on how to prepare ourselves for the black swans which will change our life, for better or worse.

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* Cover Art is free of copyright issues... obtained from Wikipedia... 500kb. If higher resolution is needed, justification can be made to Penguin Allen Lane

Could do: List of related books

- Mandelbrot (Randomness in Finance)
- Kahnemann and Tversky (Heuristics and Biases)
- Taleb (Fooled by Randomness)
- Popper (Conjectures and Refutations, The Open Society and its Enemies)