Monday , July 6 2020
Home / Tag Archives: 05. Investment decisions: Look ahead and reason back

Tag Archives: 05. Investment decisions: Look ahead and reason back

Bad ideas from Nashville politicians

Potential exam question:QUESTION:  Nashville currently has had a ban on evictions for about two months.   In about two weeks this ban will expire. Question:  What would happen if we followed Councilman Sean Parker's call for banning "Evictions ... until Davidson County's unemployment rate returns to 2.8%..." ANSWER: In the short run, it would reduce incentives for renters to pay rent in a timely manner.  This would reduce the value of owning and building housing, which would reduce the...

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Lockdowns vesus contact tracing

Mulligan, Murphy, and Topel* have a thoughtful policy piece on "Some basic economics of COVID-19 policy." It combines a number of economic concepts (e.g., fixed costs versus marginal costs, option value, externalities, capital depreciation (physical and human)). Essentially, it compares the relative strengths of the policy alternatives of Large-Scale Social Distancing (LSSD) versus Screen, Test, Trace and Quarantine (STTQ). From their summary: Our analysis indicates that the features of a...

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Get rich slowly: the power of patience

Patience makes you rich.  I tell this to my kids, my students, and anyone else who will listen.The theory is simple.  If you have a low discount rate, it means that the future is almost as valuable as the present.  For example, a "patient" person with a discount rate of 5% is willing to invest $100 if she can earn $105 in one year, a relatively low threshold for investing.  In contrast, an "impatient" person with a discount rate of, e.g., 30% is willing to invest only in much more lucrative...

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The benefits of being WEIRD (Western, Educated, Industrialized, Rich, Democratic)

Reputation and trust can solve a lot of business problems, like post-investment hold-up or free riding. It turns out that WEIRDo's (about 12% of the planet) have been successful, in part, because they manage to build and maintain reputations and trust more easily than others.   WEIRDos are more individualistic and independent, less conformist and obedient, more likely to favor “impersonal prosociality” — the idea that one set of moral rules should govern how you treat everyone, from the...

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Is predatory pricing profitable?

Predatory pricing is rare, at least in the US, because it is an investment that rarely pays off.  After an incumbent firm drives an entrant out of the market by pricing low (and deliberately losing money), the incumbent must be able to recoup the lost money by raising price--without attracting more entry--when the entrant exits the industry. Perhaps the best examples of predatory pricing come from the airline industry, when the Department of Justice brought several cases in the 1990's....

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Why is PG&E shutting down power in California?

The incentives are clear:  to avoid liability from fires caused by its power lines. PG&E filed for bankruptcy in January after amassing tens of billions of dollars in liability related to two dozen wildfires in recent years. As speculation grew that its equipment might be the cause of the Kincade Fire, its stock price plummeted about 30 percent on Friday to $5.08, a small fraction of its 52-week high of $49.42. Liability laws are designed to give potential wrongdoers (tortfeasors)...

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Do tattoos signal your discount rate?

The NPV theorem (Net Present Value) says that an investment earns more than the opportunity cost of capital required to fund it if, and only if, the discounted stream of profit is positive.  It follows that individuals with higher discount rates will make fewer investments (in education, health, or reputation) than those with lower discount rates.For many jobs, employers may prefer individuals with lower discount rates as they would invest more in becoming better employees in the hope of...

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Anticipate hold-up–China edition

From a friend who worked in China for two years: I was working with an education consulting company, and had signed a contract prior to moving that said I would live and work in Chengdu for two years. After about 4-5 months in Chengdu, my company said they needed to relocate me to Shenzhen. I agreed under the condition that my move would financially covered.   I arrived in Shenzhen the night before starting work. That next morning I received a message from my manager saying that I needed...

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Should you move from Connecticut to Wisconsin?

To figure out how much to save to pay off current and future retirees, public pension defined benefits plans discount future expected liabilities at 7.5-8.5%.  If they earn that much on their investments, then they will have enough to pay the retirees.  However, this year, their investments earned only 6.8%, the lowest since 2016.On average, pension under-funding is close to 50%.  So pension fund managers have tried to earn more by investing in ... riskier, less traditional investments over...

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