Tuesday, April 22, 2014

Flash Bubbes: An Ebay Revolt

My mother-in-law (or Bubbe, to my kids,) takes ebay very seriously.  Anyone in the family needing to sell must run the gauntlet for her to consider risking her reputation on an item.  She won't let you photograph it yourself.  She won't let you ship it yourself.  But, if you sell with her username, you have instant credibility.

However, when it comes time to buy, what does she advise? Turn to Michael Lewis' villains, the high frequency traders.  The guys who throw massive computing power and light speed technology at their trades.  She never buys without a "sniper"--that's ebay lingo for a high frequency trading operation.  You tell them your limit price.  They take care of the bidding.  They place orders for you, at the tail end of auctions.  The more you pay, the longer they'll wait.  They virtually guarantee shaving a few bucks off that singing fish.

Friday, February 7, 2014

Doctor Sends Economist To ER With Heart Attack!

In this Op-Ed in the New York Times, Robert Hoffman of NYU's Langone Center writes in support of easy access to Naloxone, the antidote to heroin overdose. I'm inclined to agree with him, but his argument relies not on data, but on reductio ad absurdum, and the something isn't absurd.

Specifically, he writes:
Some people might argue that the widespread distribution of a safe, effective and inexpensive antidote might actually encourage drug use. But that’s like suggesting that air bags and seatbelts encourage unsafe driving. Naloxone is a public-health method of intervening when a life is in the balance. Its distribution is endorsed by the American Medical Association. (emphasis added.)
But, as ANY economist will tell you Sam Peltzman is famous for the way he dresses and demonstrating that seatbelts encourage unsafe behavior!!  As I too often say...you want safe cab drivers in New York City?  Replace the driver's airbag with an ice pick.

 I can almost guarantee Naloxone availability will lead to more heroine overdoses, but that's no longer fatal, so who cares?  Will Naloxone lead to more heroine use? Two issues here:

Will a current heroin user consume more?  Probably...the price of over-consumption drops dramatically from "death" to "nasal spray". But, that's the point! Hoffman wants to protect those consumers of heroin from accidental death.

Will non-heroin users become users? I have not used heroin.  I cannot say my risk of death from overdose has ever crossed my mind.  Is that risk what stops you from using heroin?

Monday, October 28, 2013

Gay Couples? What Are The Odds?

In this Huffington Post piece, an antique photograph collector explains that he believes he has a special collection of photographs of gay couples from bygone days.  He even blogs about it, but I won't include the link because it doesn't seem to work.

Jeffery Gent is passionate about what he does.  The article quotes him saying "Unfortunately, so many of these photos were purposely destroyed by horrified family members..." He continues "For every photo that I may have mistakenly identified as gay, thousands more were burned or torn into pieces to keep a family secret..."

To those who hated college statistics, it may not be obvious that we can examine this one pretty easily.  To those of you who hated college statistics and passed the class, remember, you performed no worse than I did.  (D in undergrad stats.  You can only imagine what now Nobel Prize winning Lars Hansen, my dissertation adviser, said when he learned this.)

We'll attempt to apply Bayes Law to see what we might know about the probability that anyone in these images is gay.  Bayes Law is a great tool for drawing statistical inferences.

Where do we start?I'll formulate an answer so you can easily play with a Bayesian calculator on your own.

What is our hypothesis? The image shown portrays two gay men.

What is the data? The data is a picture of two men.

We want to know, conditional on the existence of a photograph, the probability that the picture depicts two gay men.

What is the unconditional probability an image of two men is of gay men?  This is somewhat arbitrary (and political, potentially.)  So, let's say 20%.  It doesn't matter much.  We could say that number is high (or low) for the total population of men.  We could say that number is low (why do two straight guys get photographed together?) We could say that number is high (Don't many brothers appear in photographs together? Grooms and best men?)

The key, really, is the the claim by Gent that most photographs of known gay couples were destroyed by family and friends out of a desire for secrecy.

Images are gone for two reasons: Passive loss (accidental disposal, fire, time) and active loss ("We're small minded, bigoted people who are ashamed, so we are destroying his memory.")

We need to establish the probability that a picture exists today conditional on straight men in it, and the probability that pictures exist today conditional on gay men in it.

Suppose 50% of all images are lost passively, but that a further 25% of gay men images are lost actively.  This is incredibly conservative based on Gent's statement.  We're saying only 50% of known gay images are destroyed actively.  He's implying the vast majority.

So, in our calculator, we have Pr(Image Exists | Gay) = 0.25 and Pr(Image Exists | Not Gay) = .5.

What's the result? Pr(Gay | Image Exists) is about 11%. 

If the vast majority of images depicting known gay men were destroyed (a la Gent) and we set Pr(Image Exists | Gay) = 0.01, then it is virtually impossible that any of the images depict gay men.

Even if most of the images taken historically were of gay men (90%) and the spiteful relatives destroyed 99% of them, it remains the case that only 15% of surviving images depict gay men.

Nice collection of old pictures, though.

Wednesday, October 23, 2013

Oregon Taxpayers, Please Meet Michael Dell

Should public universities go private? It's a hot topic in Oregon. Three of their seven public universities "go private" next year.

Of course I'm in favor of most anything going private, but let's consider this from the view of the Oregon taxpayer, the likely loser here.

A public university going private sounds an awful lot like Michael Dell leading a private equity buyout of the public company he founded. Substitute faculty and administration for buyout firm and Michael Dell. Substitute Oregon for the selling shareholders.

Since no one has asked, I will offer my "fairness opinion" on this buyout transaction: Good luck making this fair.  The state of Oregon contributed land, taxing authority, governance, pension backstops, and I don't know what else, to this enterprise.  Now, the new management team wants to take all that in the interests of better education, when the only obvious plans are more generous salaries and benefits, combined with higher top-line tuition.  That sounds great already.

How about this: Let the universities go private.  Let them raise capital to fund an endowment, (remember a hedge fund that prints diplomas doesn't pay taxes!) Buy the assets from the state university system: dorms, lecture halls, football stadiums...don't forget the goodwill.  Also, make sure they can fund healthcare and retirement benefits without using state resources. 

Sounds impossible right? I guess that's why those who run the University of Phoenix aren't running around buying up universities, huh?

Monday, May 6, 2013

Another Bad Reason To Invest In Hedge Funds

I know, we need bad arguments for hedge fund investing like we need...bad advice from big banks?

In an May 2nd "Eye on the Market" piece from J. P. Morgan's Private Bank, Michael Cembalest suggests that investing in hedge funds in a low yield/low spread/low everything environment might be an interesting idea. He bases this argument on this very pretty picture:
This picture shows the annualized performance of randomly generated portfolios of five hedge funds that happen to have a ten year history. Cembalest argues that because the volatility of these portfolios apparently falls below the volatility of BBB bonds, and the returns fall pretty reliably in the 4%-7% range, this might be a good time to invest in smartly constructed portfolios of hedge funds.

Here's the thing: Hedge fund managers trade spreads, they don't perform alchemy.

So-called "arbitrage" strategies earn a spread over cash returns! The annualized return on three month Treasury Bills over this period plotted above is about 3.1%.  So, at least we should knock 3.1% off the annualized returns because even hedge fund managers aren't making that return in today's environment.

Now, 1% - 4% returns with slightly lower than BBB corporate volatility doesn't look as good anymore, does it?

I guess we should rethink randomly picking portfolios of hedge funds.

P.S. Yes, I should recalculate the vol measures as spreads too.

P.P.S. You disagree that hedge fund managers earn spreads over cash?  Please send me an example.  I probably disagree!