Thursday, November 17, 2005

Dead Weight Loss of Xmas

I realized over my Birthday what a loss Birthdays and these gift giving holidays are. We all follow this tradition of choosing something to give our loved ones, which they have about a 50% chance of liking, and then receiving gifts that we have a 50% chance of enjoying ourselves, and then calling the whole thing a success. I think it's interesting how rational human beings can follow the same routine year after year and realize this Dead Weight loss year after year.

Just for the record, I'm not talking about anything any reader may have given to me on my Birthday. Ok ok, I'll speak hypothetically about Christmases, and analyze what goes on. Basically, person A finds a gift for person B and vice versa. A doesn't want to give cash, because that's assumed to be tacky, and wants to give something that B doesn't expect. B is thinking the same. Assuming these 2 people know each other fairly well, A will buy a present that B has a 75% chance of enjoying. However, if B had just received the cash, it's very likely he or she would've bought a different model/color/edition/version etc. etc. I will then (optimistically) say there's a 33% chance that the present is EXACTLY what B desired. Counting in the chance that some other person (C or D etc.) gives the same or similar present, I will bring it down to 25%, which I still find rather optimistic.

So Person A is spending 100% of the price for an object that person B will get 25% of value from, and Person B does the same to A, resulting (let's count percentage as utility) in (25x2)-(100x2)= -150 utiles. For every Christmas, and times the number of people involved.

So both A and B lose out, and where does the extra utility go? The answer, obviously, is to the manufacturers. Well, assuming Person A and B aren't entirely nitwits, they'll know there is an element of risk with each present, so they will try to maximize their chance of providing as high a utility as possible. The manufacturers will help them with this by making products: A) discounted, B) look expensive and thoughtful. Therefore, the best way for the manufacturer to sell products on Christmas is entirely through signalling. Person A will care less about the inherent value of a present, as long as it signals value to Person B, and vice versa.

Person B, on his part, will know this is occurring and expect a present to show more value than usual. In other words, he will assume that Person A spent the least amount for the highest amount of possible utility. So therefore B will assume discounts, rebates, etc. etc. Which means Person A could buy a present for 100 utiles of value, while B will assume it to have been something less (say 80), and A chose that because it was discounted or available in bulk etc. Here we're assuming Person B knows the inherent value which, if it's something Person B wanted in the first place, is safe to say he'll know.

Well, I might be missing something, but it seems to me that in conclusion you're better off giving money, so that everyone knows the value and achieves the full satisfaction, while with presents they'll know the value, assume it cost less, and only achieve 25% satisfaction from it. So from now on, everyone can just give me cash. Thanks.

Wednesday, November 09, 2005

Thesis blabbering

Ok, there are several things I wanted to talk about, but I'll discuss my thesis now, since it's rather pressing for me, and it's really long and boring.

In a nutshell, my thesis idea is based on the efficiency of markets and on rationality in general. Predicting future events is never an easy task, in that no one has a crystal ball. In International affairs we see this with country evaluators. Many institutions and organizations spend a great deal of money and resources in trying to predict economic risk, political risk, debt default rates, human rights indices, among many others. The problems with this are obvious. Variables may be missing, not relevant, or weighted incorrectly. Analysts can also be biased or have other aims.

My idea would be to improve on this by changing the method entirely. Basically, looking at empirical data, markets have been more precise in predicting events than any form of polls or analysts. Markets use an infinite amount of information, gather it together, and incorporate it in the security much more quickly than any single agent would be able to.

This might seem weird, in that any form of analysis of trends or fundamentals would make no difference. Well of course information can be useful, but it's also known that constant investment in a diversified porfolio (read, shooting darts at a WSJ stock list) gives you just as good returns as any.

Ok, there's also one interesting example of this. Michael Maboussin, a business prof in Columbia, asks his incoming students every year what the total number of assetts for IBM was in 1989. Obviously, their answers are all over the board (no one knows that by heart). But, every year, the mean of the glass is within 5% of the true number. Cool, eh?

Anyway, so that's all fine and dandy, and I can find 100 more examples of this, but in order to prove my point, I'd like to recreate it.

Ah, by the way, my idea would be to use this market method to predict FDI into different countries. This could serve public policy in that, if we have a more precise way of predicting this, then companies, organizations and others can use it as an indicator.

Ok great, so now I have to try to recreate this whole market in a lab setting, so I'm wondering what to do. Since I'm getting no funding my options are:

A) Send out e-mails to many people, telling them they can trade on future values of say 5 countries, and they're given an endowement of $1000, and they can trade until the day before new FDI levels (for 2005) are announced. The more precise ones are paid off. (trading would be done by e-mailing me, and i'd post what levels we're at at the end of everyday or week)

B) Perform this in a lab. One of my professors offered this, but since a futures market should be conducted over time and with new information and whatnot, I said it wasn't ideal.

C) Take experimental Econ next semester and do it as my major assigment.

Anyway, I'm going with option A for now, and seeing if it's feasible. Option B wouldn't reflect real life enough, and Option C is too late for me (there's still a chance none of this works out, in which case I'm screwed).

So that's basically it. I'm just writing it down because I have no idea what's going to happen with this. So it'll be interesting for me to look back in a couple months. Or not. Actually it won't. There's a big chance that none of this works out, in which case I'll be changing my thesis to the 6 party talks on North Korea. But I don't know when the cut off date for this should be. At some point I need to choose one or the other and stick with it, otherwise I'll be spreading myself way too thin.

If you got through this whole thing I'm impressed. But if you have any suggestions please let me know. I hate being all up in the air like this.

Thursday, November 03, 2005


Ok, I learned something interesting about connections in my OB class.
Connections, or contacts, can be classified in two main groups: Close contacts and Institutional contacts. Close contacts would be close friends and whatnot. Insitutional contacts are ones you can still use for jobs or whenever needed, but they aren't as close. The question is which are better, and how many, in what sort of mix, etc. etc.

Anyway, in class we came to the conclusion that it is best to have contacts in many different groups. In other words, to have a contact in investment banking, another one in law, another in medicine, etc. That way, you can use your banking contact for any banking needs you may have, or your law contact for any legal needs, without too many redundancies. Plus, if your legal contact needs some investment banking help you can be the middleman, which gives you that power and makes sure you're not a redundant member of some group, as in they need to turn to you, like so:

PEOPLE IN INVESTMENT BANKING <-----------> ME <--------------> PEOPLE IN LAW

(Those arrows mean they are connected. Ok nevermind)

However, then we learned about a study performed at the Pentagon where contact groups were analyzed, and they found that there was precisely this sort of relationship going on. There were higher up managers, lower managers, and one person who was seen as the go between and the person people turned to (As a sidenote, no one saw him as this, but after analyzing each person's group it became obvious that he was the so-called power-broker). So we decided that he must have had a lot of power. The interesting thing is, shortly after the study, he quit. And then the whole department pretty much fell apart. So so much for that.

The fact was, he was contacted to broker between the two groups continuously, and he couldn't take anymore of it so he quit.

So is it good to be a power-broker, a middleman, a go-between, or whatever you want to call it? The fact is, it gives a sense of power, and so many people assume that's what they want to be, but it may be much better to know someone else in that position, and let them worry about all this, as in:


Well, in conclusion, I think it can be good to be the middleman when dealing with close friends. When you do favors for close friends there's more of a chance they'll feel indebted towards you, or that they'll find a way of repaying you either way or allow you to benefit from their advantage. With institutional investors, however, it may be better not to be in that position. Say a TASIS grad sees I'm looking for a job and to show how much influence he has he lands me a good job. Chances are I'll send him a nice letter and maybe a bottle of wine, but I probably won't remember much about him 10 or 20 years down the line, when he may be in need.

I guess the secret is to keep close friends as they are, but to take advantage of the fact that others like to show how influential they are by using them as "middlemen". The trick is to find enough of these "middlemen" to have a pretty much exhaustive network, and to play on their egos whenever you need a favor done. Your payoff is the favor, while theirs is an ego-boost, and it seems to me you get the better deal by far.

Tuesday, November 01, 2005

Since our debate idea worked out so well, and since I update LJ too much, I decided I'll keep the school/thesis related updates on this blog, and the usual crap for crap updates on LJ. No one else is using this, so whatevs.

Anyway, so since there's a risk that I may have to change my thesis to something North Korea related, I have started receving news updates re: North Korea and whatnot. Here are some for today:

Reuters Tue, 01 Nov 2005 8:57 AM PST
Visitors to North Korea's capital, Pyongyang, say traffic pollution is not a
major environmental concern simply because there is hardly any traffic. Fuel is
short and so are vehicles -- whether with four or two wheels.

World Peace Herald Tue, 01 Nov 2005 7:26 AM PST
SEOUL -- Three out of four North Korea defectors living in Seoul say they
witnessed public executions in their communist homeland, according to a recent
survey by South Korea's government-run human rights body.

That's it. I don't really have any comments. They were just interesting.