Wednesday , November 25 2020
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[email protected] (Luke Froeb)



Articles by [email protected] (Luke Froeb)

Removing a noisy signal improves decision making: Army removes photos from promotion sheets

8 days ago

From The Army Times:

The Army will no longer include official photos for officer selection boards, beginning in August, to help eliminate unconscious biases in the promotion process…To their credit, the Army first ran an experiment to determine the consequence of the change and found that when the photo was removed:…there was less variance between voters’ scoring, meaning voters ranked candidates more similarly across the board. After removing the photo, voters also took less time to make decisions on each individual file, and the outcomes for minorities and women improved.A similar change, Ban the Box, a ban on employers asking about criminal background, saw some employers turn to race as a proxy for criminal background.  The difference seems to be in the value of the signal:

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I am sending the Pope a copy of my textbook

15 days ago

From the Pope’s Encyclical "Fratelli Tutti" ("Brothers All"):The Pope also makes no secret of his opposition to the global capitalist free market economy. He proposes instead that wealthy countries form a seamless bond with the have-not peoples of the global south. … The problem with redistribution, of course, is, as Margaret Thatcher famously said, "Soon you run out of other people’s money." After everyone has been made equally medium-poor, then where, without incentives for hard work and production, are further disbursements supposed to come from?  
Hopefully, the Pope will at least read Chapters 1 and 2 as he makes the implicit assumption that no one will respond to the perverse incentives he proposes, but I am not hopeful.  When I sent a free copy of the 3rd Edition to President

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Did Warren Buffett finally read Chapter 9?

15 days ago

He is applying the "indifference principle" to criticize high tax states with unfunded pensions.  From Zero Hedge:

“If I were relocating into some state that had a huge unfunded pension liability, I’m walking into liabilities. . . And those are big numbers. Really big numbers. . . They will come after corporations. They will come after individuals. . . They’re going to have to raise a lot of money.”

BOTTOM LINE:  A mobile asset, like labor, will move to where it can earn the most.  Consequently, young, wealthy, and productive people will be drawn to states like Tennessee, Texas and Florida (which have low income taxes and relatively healthy pensions).

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Nice summary of the affordable housing crisis

18 days ago

In the Stanford Law Review:
[the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices— campaigns to impose building moratoria, for example, or downzonings, community benefits agreements and other exactions, lengthy approvals procedures that disadvantage developers relative to NIMBYs, various forms of rent control, and a focus on affordable housing to the exclusion of other

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No free lunch: insurance premiums go up in response to lower insulin co-pays

20 days ago

News from Colorado:A new law, signed by Gov. Jared Polis earlier this week, caps co-payments of the lifesaving medication at $100 a month for insured patients, regardless of the supply they require. Insurance companies will have to absorb the balance.  While the Colorado out-of-pocket caps will likely provide financial relief for diabetes patients, she noted "the costs will kick back to all of the insured population" whose premiums are likely to go up as a result. 
"Nothing is free," Hernandez said.The saying "there is no free lunch," refers to the the economic idea of opportunity cost.  When Colorado tries to make life better for insulin patients, they also raise the cost of offering health insurance, reducing the number of people with insurance.  HT:  Thomas B.

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The etiology of Chinese yuan

26 days ago

Chinese is a tonal language, and the pronunciation sounds more like yoo-en than yoo-aan. The only people who say R-M-B (renminbi) are bankers who can’t wrap their mouth around a foreign word and refuse to try.  The pronunciation sounds pretty similar to the Japanese currency, yen, because it is.  The Japanese aristocracy originally borrowed written Chinese and many of its words, including 元 (yuan, yen).  Both still use the same character for pricing. In Chinese, yuan holds the closest translation with the word dollar. If you are talking colloquially you would use the word kuai (块, pronounced kwai and translated as fragment, shard or piece). This would be similar to using buck or quid in American or British English respectively. RMB is the romanized abbreviation of the word renminbi (人民币)

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Why are house prices climbing?

29 days ago

Two obvious answers:  cheaper borrowing is increasing demand; or consumers want a better place to work-at-home.  The higher price increases in lower density (lower virus risk) areas suggest that it is the latter:Phoenix, Seattle and San Diego reported the highest year-over-year gains among the 19 cities (Detroit excluded from report due to virus-related reporting constraints). Chicago and New York reported the weakest YoY gains.

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Book Recommendation: The Art of Strategy

October 13, 2020

Just started reading The Art of Strategy, and am already hooked.  The first chapter alone is a great intro to how game theory can inform strategic decisions, where payoffs depend not only on what I do but what my rival does.  Really well written!

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Reducing leverage hurts options buyers

October 11, 2020

Financial options on funds are bets that, e.g., a fund’s price will increase up to a specified strike price.  Leverage tends to make a fund more risky, and more likely that the fund price will hit the strike price at which the option pays off.  So far so good.  But for every person who buys an option (long) hoping that the price will increase to the strike price, there is a seller on the other side (short), who hopes that it doesn’t.  Colleague Bob Whaley has pointed out that changes in leverage of the fund can reduce its volatility which would make it less likely to pay off (link).  Using data from 2018, Whaley gives an example:…ProShares had reduced its leverage ratios in Ultra VIX Short-Term Futures fund (UVXY) and its Short VIX Short-Term Futures ETF (SVXY). The combined market

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Satire of economists’ belief in markets

September 15, 2020

From the Atlantic, "The Market as God," by a Divinity professor:

A few years ago a friend advised me that if I wanted to know what was going on in the real world, I should read the business pages. Although my lifelong interest has been in the study of religion, I am always willing to expand my horizons; so I took the advice, vaguely fearful that I would have to cope with a new and baffling vocabulary. Instead I was surprised to discover that most of the concepts I ran across were quite familiar. 

Expecting a terra incognita, I found myself instead in the land of déjà vu. The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine’s City of God. Behind

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Are we in a stock market bubble?

September 14, 2020

The graph above plots Prof Robert Shiller’s cyclically adjusted price/earnings ratio or CAPE. Shiller is the bubbleologist who predicted the 1999 stock market bubble using a graph like the one above as well as the 2007 housing bubble.  The price/earnings ratio is a measure of the value of a stock, and we see that when it goes above 20, we generally see subsequent declines.  However, we have been above this value for the past decade.  DISCLAIMER:  If I really knew, I wouldn’t be teaching school.  HT:  ZeroHedge.com

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Should we ban private label brands?

September 13, 2020

Democrat Rep. Cicilline thinks so:  

Rep. Cicilline says, “you can be one or the other. You can’t set all the rules, control the marketplace, and also sell on it.” What he forgets is that vertical integration benefits consumers and businesses alike. If America followed Cicilline’s way, this new law would drive up the prices of everyday goods. In fact, it would be illegal for CVS to sell generic over-the-counter medications, leaving low-income Americans with fewer options and higher prices.And don’t forget the beneficial effect that private brands have on competition within a store:And most consumers like having these generic brands as options because they’re cheaper, force prices down of name brands, and can even push companies to improve their quality.

So who benefits from this?  Rival

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Are we in a housing bubble?

September 12, 2020

Chapter 9 tells us that, in the long run, we should be indifferent between renting and owning.  The above plots the price of a housing relative to the price of renting.  Currently its is about 40% higher.  I suspect Shiller would say we are in a bubble.  Here is a piece I found on the web:’It would suggest declining home prices in the near future,’ Shiller, who teaches at Yale University, told Bloomberg Television on Thursday. ‘I wouldn’t be at all surprised if house prices started falling.’

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Why is the Chinese yuan strengthening against the dollar?

September 12, 2020

Over the past six months, the dollar has depreciated relative to the Chinese yuan, falling from 7.1 yuan to only 6.85 yuan, a 3.5% decline.  It may be that Chinese citizens (who have high savings rates) are more reluctant to invest in the US or to hold their savings in dollars.  The strong yuan is hurting China’s recovery:China’s currency has climbed more than 5% from this year’s low in May, the best performance in Asia. A strong yuan is an obstacle when the nation’s economy is recovering from the coronavirus pandemic and confronted with escalating tensions with the U.S. because it could undermine the attractiveness of exports.The yuan’s gain versus its trading partners’ currencies is smaller compared with its move against the dollar. The Bloomberg CFETS RMB Index Tracker, which measures

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RIP Paul Michael Saint

September 7, 2020

I fondly remember Mike as the rare student who cared not about grades, but rather on the ideas and how to apply them.  Generations of students will know him through the Chapter Four story of how he (CEO) designed an incentive pay scheme for his company.4.5 Tie Pay to Performance Measures That Reflect EffortMeasuring performance is a critical part of any organization, as the following story illustrates. In 1997, a 50-year-old chief operating officer (COO) with a bachelor’s degree in journalism and a law degree managed a consulting firm with 10 account executives. The COO was in charge of keeping clients happy and ensuring that the account executives were working in the best interests of the company. The COO earned a flat salary of $75,000.After taking classes in human resources, economics,

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Arbitrage opportunity in betting markets?

September 3, 2020

The Iowa Electronics Markets sell contracts that payoff $1 if a particular candidate is selected.  The prices can be interpreted as probabilities if Price=Expected Payoff=Prob[win]*$1.  Below, the implied probabilities seem to track the polls, which suggests that Biden has a big lead.  However, this educational betting market is thin (mostly students, only $40,000 or so).  The much bigger betting markets in London has the election as much closer: Trump is trading at -120 (Prob[win]=54%) and Biden is trading at 110 (Prob[win]=47%).  Here is a calculator for converting "American odds" to probabilities.  Here are three reasons why the polling may be different from the betting markets.  The one that seems most plausible to me is, "Theory #3: People don’t trust polling after 2016."  In 2016,

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One in eight women will get breast cancer, but who gets screened?

September 1, 2020

Answer: those less likely to get the disease, and when they do, it is caught at an earlier stage. 

[embedded content]  The video suggests that if you are doing benefit-cost analysis of screening (Chapter 3), you will understate the benefits of screening because of selection bias (Chapter 17). To see this clearly, imagine that only people who don’t have the disease get tested. In this extreme case, there is no information revealed by the test, i.e., the test has zero benefit and some cost.  The same intuition is behind the selection bias:  less information is revealed by testing a selected group who are less likely to have the disease than if the testing had been done randomly, i.e., over the population.  The second part of the answer above, catching breast cancer at an earlier stage

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California plays chicken with Uber and Lyft

August 24, 2020

Washing Post Opinion piece:Most recently, Uber and Lyft, based in San Francisco, announced they would close their California operations after a court ordered them to reclassify drivers as employees [under new law AB5]. They’re still running at the moment, having secured a last-minute stay, pending appeal, but ultimately, unless that appeal proves fruitful or the law changes, they say they’re pulling out. …

And you should believe them, though AB5’s architect, Democratic Assemblywoman Lorena Gonzalez of San Diego, seems to think they’ll blink if she just shows enough steely will. “These are billion-dollar companies who are publicly traded,” she told a local television station. “They have enough money to treat their employees correctly.”
The pandemic has shifted the game, however. Now

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Deterring partying

August 23, 2020

Syracuse University suspended students who attended a party where social distancing was not practiced.
…Vice Chancellor for Strategic Initiatives and Innovation J. Michael Haynie said the gathering of first-year students "may have done damage enough to shut down campus, including residence halls and in-person learning, before the academic semester even begins."Because the individual expected costs of partying (the probability of suffering harm from infection times the cost of harm) are much lower than benefits for young people, it is easy to predict that young people are more likely to party.   And, because the costs of partying fall on the University, while the benefits of partying accrue to the students, it is easy to understand why the University wants to deter partying.  Deterrence

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Taxes destroy wealth: Uber and Lyft may exit California

August 18, 2020

From Foundation for Economic Education:On Friday, Uber and Lyft may exit California, which will leave hundreds of thousands of drivers unemployed and millions of Californians chasing more expensive cabs. …

In September of 2019, the California state legislature passed AB5, harshly restricting independent contracting (the gig economy).   … By requiring ride-sharing apps such as Uber and Lyft to reclassify their drivers as full employees, the law mandated that the companies provide healthcare and benefits to all the drivers in their system and pay additional taxes. … Legislators didn’t realize the drastic implications their legislation would have…

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Power point tips

August 18, 2020

from Garr Reynolds.  My favorite is 2. Limit Bullet Points & Text Your presentation is for the benefit of the audience. But boring an audience with bullet point after bullet point is of little benefit to them. Which brings us to the issue of text. The best slides may have no text at all. This may sound insane given the dependency of text slides today, but the best PowerPoint slides will be virtually meaningless with out the narration (that is you). … HT:  Kimberly Pace

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