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Millionaires are not necessary good models

The Millionaire Next Door, a popular book, argues that saving is the way to become rich. Which is true, but misleading. The less money we spend, the more we save, and the richer we are likely to be. But the goal should be to maximize happiness, not wealth. Money is for spending, and it seems a bit strange to idolize the foolishness of forgetting to do so. This is no argument for profligacy, of course, we must remember both that saving now can let us spend more later, and that we have a high discount rate, hardwired from a time when the future was much less certain than it is now. Read more »


Parable of the Weeds

Once there was a man who did not like weeds. After all, weeds are ugly, they choke out the crops which feed people and the pretty flowers that make people happy. Some of them are even poisonous. When a particularly nasty bunch of weeds overran his strawberry patch, the man said to himself "Dammit, them things gotta go."

The man was not a biologist, an ecologist, a horticulturist, or any of that green stuff. So he didn't bother tryin' to understand them nasty weeds. Nope, he was a fighter, and he liked to blow things up. So he just set up his mortar, did some calculations, took careful aim, made sure no one was around to get hurt, and lobbed a big 'ol bomb right into the middle of that weedpatch.

Well, bein' a bomb, it exploded. Bein' just little plants, the weeds exploded too, little bits of 'em flyin' all over the place. The weeds were totally destroyed, no visible trace remaining, except of course all the debris lyin' around. "Well, I sure showed them", thought the man, and he replanted the strawberry patch and put the whole thing out of his mind.

Checkin' out his fields the next week, he received a startling shock. Read more »


Stocks, Options, and Dividends

I've been thinking lately about stock prices and the value of employee stock options. This is based on my own brainstorming, so some of it may well be obvious or completely wrong - if so, I rely on y'all to correct me.

The basic question I set out to answer was how to approximately value a stock option, which of course depends on the future price of the underlying stock. I wasn't looking for an exact solution or fancy math, but merely a general, intuitive idea of things like "What is the chance that this option will be in the money in a year? 2 years?" Which of course boils down to "What is the chance that the stock will be higher? Lower?".

For some reason I had taken the efficient markets hypothesis to mean that, since stock prices are a random walk, the chance of a stock being higher in the future should be exactly 50%. But this turns out to be completely wrong when there is growth or retained earnings, both of which are common. Lets see why. Read more »


Gerin Oil Addiction

An unrecognized public health hazard, by Richard Dawkins (via crasch). The article begins: Read more »


Our prediction market in the NY Times

Article here. The readers who know my family history will realize the great irony that the first time my professional work receives major press...it's for doing economics.


More on Google Prediction Markets

As some of you may know, Nick & I work for the wonderful, crazy company known as Google. One company policy is that employees can spend 20% of their time developing whatever new ideas they find interesting. I had a ton of ideas when I first showed up, but when I saw that a group had started working on an internal prediction market system, I tossed them and hopped on board. Read more »


Prediction Markets: My Google 20% project

We've finally made a Google Blog post about my 20% project - an internal prediction market system. My role was in analyzing its performance, I hope to be able to post more details about that later (measuring predictiveness is a little tricky). For now, check out the post, which has two of my graphs: accuracy and decisiveness.


Brad DeLong selectively deletes critical comments?

Y'know, I hate to quote Steve Sailer, but the behavior of DeLong's described here is pure intellectual pusillanimity:

I mentioned below that Berkeley economist Brad DeLong had issued of his "reality-based" blog a self-satisfied mathematical proof that the distribution of genes around the world must be homogenous, even thought as you know and I know, but Brad doesn't know, they aren't. A lively argument then broke out in his Comments section.

What's interesting is that the eminent professor has now gone through his Comments section and deleted many posts that undermine his worldview. Where does he find the time? Unfortunately, he forgets to delete the responses by his supporters attempting to answer the now-deleted heresies, making the experience rather like looking at those pictures from the Bolshevik Revolution pictures where Stalin had Trotsky airbrushed out from Lenin's side.

As Mahalonobis says, it's not like the deleted comments were emotional or uninformative, they were relevant technical points:

The comments were not ad hominem or inflamatory, but fact-filled and constructive. They were contrary to DeLong's argument, however, so he hoped they would go down the memory hole.

The idea had to do with the recent piece by Bruce T. Lahn of the University of Chicago, who found a gene associated with brain size was found with very different frequencies in different populations, suggesting it was selected for, and thus evidence of some sort of evolutionary selection. As a modern American liberal, DeLong pooh-poohed this observation, noting that under certain situations selection for dominant genes would not matter very long. In the debate that followed, certain researchers made the point that although most genetic variation is within-race, that does not mean races are "not real". This is because even though there is large within-race variation (85%), the correlation of genes within a race are sufficiently different that a geneticist would have no problem differentiating a Swede from a Hutu, just as no regular person would have difficulty differentiating a Swede from a Hutu. The deleted comments were technical extensions of this argument. DeLong obviously considered this blasphemous, or at least inconvenient.

You can read the deleted comments in Sailer's post, and here is the original entry (with many comments). I haven't verified this, but Sailer claims that responses to the deleted posts were left, which would provide some circumstantial evidence for his claim. Read more »


Broken

In an op-ed, Bruce Schneier writes:

Our nation needs to spend its homeland security dollars on two things: intelligence-gathering and emergency response. These two things will help us regardless of what the terrorists are plotting, and the second helps both against terrorist attacks and national disasters.

Katrina demonstrated that we haven't invested enough in emergency response. New Orleans police officers couldn't talk with each other after power outages shut down their primary communications system -- and there was no backup. The Department of Homeland Security, which was established in order to centralize federal response in a situation like this, couldn't figure out who was in charge or what to do, and actively obstructed aid by others. FEMA did no better, and thousands died while turf battles were being fought.

Our government's ineptitude in the aftermath of Katrina demonstrates how little we're getting for all our security spending. It's unconscionable that we're wasting our money fingerprinting foreigners, profiling airline passengers, and invading foreign countries while emergency response at home goes underfunded. Money spent on emergency response makes us safer, regardless of what the next disaster is, whether terrorist-made or natural. This includes good communications on the ground, good coordination up the command chain, and resources -- people and supplies -- that can be quickly deployed wherever they're needed.

Similarly, money spent on intelligence-gathering makes us safer, regardless of what the next disaster is. Against terrorism, that includes the NSA and the CIA. Against natural disasters, that includes the National Weather Service and the National Earthquake Information Center.

Katrina deftly illustrated homeland security's biggest challenge: guessing correctly. The solution is to fund security that doesn't rely on guessing. Defending against movie plots doesn't make us appreciably safer. Emergency response does. It lessens the damage and suffering caused by disasters, whether man-made, like 9/11, or nature-made, like Katrina.

Bruce's problem is that he thinks that government spending is about turning tax dollars into citizen benefits. It's not, of course. It's about turning tax dollars into juicy zero-bid government contracts and cushy jobs for your cronies. Of course we'd use his methods if we wanted security. But instead we seem to want a democratic government, which naturally tends to bloat and corruption, so we naturally get waste and inefficiency, not good solutions. Read more »


Bleed Or Blowup

An interesting paper by Nicholas Taleb in last years JFE: Read more »


Worry about cops now, corps later

Anti-corporate types often seem to miss the ways in which government agencies are just as bad or worse than large private corporations. And anti-government types often seem to miss the ways in which large private corporations share some of the same problems as government. Arnold Kling lampoons both nicely: Read more »


Refugees or Detainees?


Law Enforcement prevented people from leaving New Orleans on foot

As I am inured the callousness and ineptitude of public employees, it rarely shocks me, but this is an exception. Read more »


Austrian Castles In The Air

From VIENNA AND CHICAGO: FRIENDS OR FOES? Tale of Two Schools of Free-Market Economics, excerpted here. After discussing the many areas of agreement between the Austrian and Chicago schools, the section on disagreements begins: Read more »


Generous Sinners

Ah, the brave new libertarian world. With the legalized drugs, gambling, and prostitution, surely it's a world of sinners, a heartless world, a Vegas atmosphere with all recreation and no responsibility. Corporations are so unfeeling, not like government. And without forced charity, funelled through the benevolent welfare state, who would give?

If a disaster happens, those in charge of safeguarding the public health would surely be much more effective at helping people than a bunch of sinners. Right?

Or not: