NATURE RUNS SOME EXPERIMENTS. I have posted here and here on Professor John Meyer’s warning that “Nature does not run very good experiments.” That is, nature doesn’t make the right kinds of changes in variables to let us make a computer model of the economy or find out the underlying economic relationships. Among other problems, because a number of variables move in the same direction at the same time, it is difficult to untangle causation. It occurs to me that nature is running some very good experiments right now which will serve to provide graduate students with material for dissertations for years to come.
Archive for October, 2008
NATURE RUNS SOME EXPERIMENTS.
Friday, October 31st, 2008RECESSION PREDICTIONS.
Friday, October 31st, 2008RECESSION PREDICTIONS. I recorded my changing personal subjective probabilities for a recession here. I now have raised the probability of a recession in the United States to 100% because the recession in the United States is here. GDP in the United States is estimated to have dropped by 0.3% in the third quarter after having grown by 2.8% in the second quarter. The fourth quarter will also have a drop, meeting the two-quarter decline test for a recession. I specify the United States because even with Europe looking to be in recession, there are those who think that with China still growing, there may not be a recession for the world economy (using the two-quarter decline test). A friend whose opinion I value wrote just a couple weeks ago that even with “a reasonably optimistic scenario”, including a return to functioning credit markets, world GDP growth in 2009 could fall to 3.5%. The substantial growth up until now in the rest of the world made a recession in the United States and Europe seem less probable, but here we are.
FIVETHIRTYEIGHT (COMMENT).
Friday, October 31st, 2008FIVETHIRTYEIGHT (COMMENT). Molly in a comment refers to the FiveThirtyEight website which is bringing in the insights from sabermetrics to political statistics. Nate Silver, who is one of the two authors of the site, is a major figure in Baseball Prospectus. If you like Baseball Prospectus, you will probably like FiveThirtyEight.
GETTING HOLD OF THE BEANS BEFORE VALUING THEM.
Thursday, October 30th, 2008GETTING HOLD OF THE BEANS BEFORE VALUING THEM. It has been observed that some of the mistakes that were made that led to the current crisis were intellectual mistakes made by brilliant people. In fact some of the mistakes occurred because brilliant people did not notice boring problems. It was intellectually interesting to construct and value fiendishly complicated instruments. Keeping track of them was boring, the kind of thing that clerks and bean counters do. I posted some two weeks after Lehman declared bankruptcy that hedge funds were still trying to determine what their exposure to Lehman was. An article in the Financial Times for October 27 reported that now, six weeks after the bankruptcy, the man in charge of administering (cleaning up) the London-based operations of Lehman says that they are still trying to get information about what securities around the world are being held for Lehman or its clients. He says, “…[W]e don’t know for certain what is out there in terms of assets. After six weeks you would expect that we’d have that information, but we haven’t.” All this is preliminary to tracing the lending and relending of rights in these assets, which is expected to take years to resolve. I wonder whether the intellectual debate over whether to use “market prices” (”marking to market”) to value these instruments didn’t divert attention from important back office issues.
THE EXCITING GAME WITHOUT ANY RULES.
Wednesday, October 29th, 2008THE EXCITING GAME WITHOUT ANY RULES. Baseball nearly had a disaster last night. Mark Harris wrote a baseball novel in which the players passed the time in hotel lobbies playing TEGWAR (”The Exciting Game Without Any Rules”). The joke was on the kibitzers who would gather around and try to figure out the rules; the players would make up new rules continually to frustrate them. Last night what could have been the last game of the World Series was played without some of the players and many of the fans knowing what the rules were for that game. Ordinarily a game that has gone five innings that is rained out with one team leading is official. With ordinary rules, if the rain had stopped the game with the Phillies leading after that time, the Phillies would have won the World Series. Apparently Bud Selig, the Commissioner, had changed the rule an hour before game time to provide that the game would have to go a regulation nine innings. The amazing thing is that he told representatives of each team, but did not make a public announcement. This story shows that a number of the players did not know about the rule change. This story says that “there were real questions being raised in the press box and throughout the ballpark” as it looked likely that the game would be stopped for the night with the Phillies in the lead. The Rays tied the score as the rain fell. Otherwise, the fans and reporters at the game would have found that the rules were not what they thought. Imagine trying to explain to fans that the rules were different—especially to Phillies fans. Why wasn’t there a public announcement of the rule change?
PROBLEM: TWO CANDLE STORES IN A RICHMOND MALL.
Wednesday, October 29th, 2008PROBLEM: TWO CANDLE STORES IN A RICHMOND MALL. Kids, in economics, it’s helpful to start with a problem, as Paul Krugman did. Here is an economic problem that Annalisa raised. There are two stores that sell candles close together in a shopping mall in Richmond. Annalisa expressed surprise that there was enough demand for candles to support even one store, but then wondered why they would choose to locate so close together. We are accustomed to thinking of retailers as choosing a location where there are few competitors, where there is an untapped market. Why are the two candle stores near each other? I’ll make some suggestions in a couple days.
PAUL KRUGMAN’S NOBEL PRIZE.
Tuesday, October 28th, 2008PAUL KRUGMAN’S NOBEL PRIZE. Kids, Paul Krugman has won the Nobel Prize for Economics, and you can understand some of the ideas for which he won. This article in the Economist has a good introduction to some of his models, and I am tracking the article in what follows. Begin with one of the factual puzzles which Krugman addressed. Previous theories of international trade had predicted that countries that had different resource endowments would engage in trade. A country would export goods in which it had a comparative advantage (in terms of its factors of production) for goods in which it had a comparative disadvantage. The article gives the example of Portugal selling wine for which its climate is suited. The problem that had to be explained was that countries with similar resources engage in a lot of trade; more than half of Germany’s exports to France are things that France also exports to Germany. Krugman identified a number of factors which affect the location of companies and the directions of trade, including consumers’ desire for variety and economies of scale. (You could think of France and Germany as Volkswagen and Renault and get some feel for one possible solution.) One of the nice things about Krugman’s work is that there is a set of solutions depending on facts. He describes his model as a tool, but it could also be looked at as a set of tools. Here is a paper by Krugman (by way of the Marginal Revolution blog) which summarizes some of his ideas and shows the number of variables which enter into his models.
HOW RARE ARE TWINS?
Monday, October 27th, 2008HOW RARE ARE TWINS? As an identical twin, I should have an idea of frequently one encounters twins, but I didn’t. My first reaction on looking at twins who are successful in sports was surprise at how few there were. This wikipedia article puts things in perspective. About 2% of the people in the world are twins or triplets with the current rate of twin births in the United States being about 3%. However, less than 10% of twins are identical so that you could expect one pair of identical twins in about every 1000 people. So twins are not conspicuously unsuccessful in sports.
ARE TWINS BETTER IN SOME SPORTS THAN IN OTHERS?
Monday, October 27th, 2008ARE TWINS BETTER IN SOME SPORTS THAN IN OTHERS? The NBA season is starting and the Lopez twins are joining the Collins twins, also identical twins, as NBA players. One of my correspondents suggested to me that twins seem to be more successful in professional basketball than in other sports. He pointed to the Van Arsdale twins in the seventies, the Grants in the nineties, and the Collins twins and Lopez twins today. I checked this wikipedia article and added the names of Heather and Heidi Burge and Coco and Kelly Miller in women’s professional basketball. With the article I came up with Tiki and Ronde Barber and Josh and Daniel Bullocks in professional football. In baseball, nine pairs of twins have played in the majors, even if you go back to 1910—with only five pairs of twins since 1950. So it looks like there is some evidence (although with small samples) that twins do better in basketball. Could one reason be that basketball is a sport that you can practice one on one?
LEVERAGE–HOW BIG AN ISLAND WOULD YOU BUY?
Sunday, October 26th, 2008LEVERAGE–HOW BIG AN ISLAND WOULD YOU BUY? John Lanchester is an award-winning novelist who has written for the London Review of Books two of the best articles about the current financial crisis. In the October 20 issue his article puts in perspective the degree of leverage that some financial institutions have had. He writes: “The ratio of Barclays’ assets to its equity in June hit 61.3 to 1. Imagine that for a moment translated to your own finances, so that you could stretch what you actually, unequivocally own to borrow more than sixty times the amount. (I’d have an island. What about you?)” Of course, individuals are different from banks, but you can get a picture of some of the pressures that are out there if you now imagine trying to hold on to that island when even five per cent of your creditors ask for their money back. (The 61.3 ratio is not that extreme; the Samuelson article I linked to today gives a ratio of 30 to 1 as common for investment banks and hedge funds).
