My Life, Economics, and Finance

I do very much like Thaler and Sunstein’s book Nudge. They promote the idea of liberal paternalistic state, which nudges, but doesn’t force, people to do the right decisions. An example would be a choice architecture, which encourages people to consume more vegetables, buy an insurance policy, save for retirement, etc.

Recently they have posted a Simpson comics at their blog featuring a supposedly good choice architecture.

Of course, I don’t like the comics. First of all, why should an entrepreneur care for someone’s health? An entrepreneur should care for his profit, not Homer’s diet! The only reason why the entrepreneur rearranged his store, and so impeded his profits, was to meet some bureaucratic regulation! Good choice architecture improves the welfare of some while not diminishing welfare of others. A choice architecture that arbitrarily helps some (Homer), while damaging others (Indian shopkeeper Apu) is a bad choice architecture.

The risk of liberal paternalism is that the liberal part of the choice architecture will be omitted, and we will end up living in a paternalistic state, where everyone will be told what to do in order to achieve the highest level of welfare, like in North Korea…

I came across a behavioral finance paper Information Uncertainty and Expected Stock Returns, which (among other things) ranks stocks based on the level of their “ambiguity”. Ambiguity, or information uncertainty as they call in in the paper, measures how hard it is to value a stock.

The most difficult to value are services, such as business, health, etc.. The least difficult to value is for example railroad transportation. Why these two?
Valuing a railroad transportation company is relatively easy, there is nothing hard about valuing the assets, such as trains, wagons, few buildings. The business relations and so the revenue stream is likely to be very stable. Finally the costs won’t fluctuate very much either (unless the unions go nuts of course).
On the other hand valuing a consultancy company (business services) is much tougher. Their main asset are the employees, about which you as an investors have very limited knowledge (what if a key employee left last year? What if the newly promoted partner turns out to be incompetent? etc.). Their revenue stream will also be significantly more volatile than in the previous case. Coal has to be transported from a mine to a power plant every day, but consultancy jobs come and go.

I guess you got where I am going by now. The least ambiguous category of stocks is the “Tobacco products” category. The reason why should be relatively clear by now. Tobacco companies have an extremely stable flow of revenues, they can truly rely on their customers and their demand for tobacco products.

Thank you for smoking…

Feldstein blogs on the future of the US dollar. He is way more optimistic than most of the “would like to be” market analysts. I think he is right in what he says. We should expect slow/mild depreciation rather than any dramatic fall in the value of the dollar.

The traditional way to succeed in the world of business was to have better product, better marketing, better service etc., than the competition. The firm had to strive to please the consumer. (It’s a bit idealistic view,but whatever…)

The weapon of modern times is Antitrust. Big companies lobby in Brussels (or in Washington DC) for antitrust examination of their rivals to get them tangled in red tape, and slow their growth. Last case is a preliminary examination of Google, triggered by a complaint by Ciao! (owned by Microsoft), and two other EU based companies. Often these investigation find nothing wrong, but end up damaging the investigated company.

It would be very sad if the legal environment in the Western World incentivized companies to spend their resources on lawsuits and lobbying rather than on competition to create the best product…

The debate can be found HERE. Ross Levine is for the motion that financial innovation boosts economic growth, Joseph Stiglitz is against the motion.
(I like Levine’s opinion better – no surprise).

I found (actually LM found) a cool blog. John Cassidy is posting there interviews with Chicago School economists. I did particularly like the one with Fama..
Here is a quote, just to give you a taste:

Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)

By the way, despite being super smart, I think some of the Chicago guys, Fama and Cochrane for instance, are a bit too extreme…

At the end of an article  Fear of the dragon in this week’s Economist, analyst Chris Wood (I have no clue who that is) is cited saying that China is doing more to eliminate the global imbalances than the US (Global Imbalances = Chinese working like crazy and not spending – exporting a lot, Americans consuming way too much – importing ). He says that China is encouraging spending while the US is doing nothing to prop up the already low and further falling saving rate.

He misses the point why the US saving rate is falling and that the government has a very limited maneuver space. The saving rate is falling because of massive US government’s borrowing and stimulus spending.  The Americans, like the Chinese are trying to spend more to prop up the economy. The falling saving rate is a (negative) byproduct of the fiscal stimulus. Unless the above cited analyst argues that the fiscal stimulus is stupid, he has no case…

By the way, even though one can certainly argue against the stimulus, I actually think that despite all the inefficiencies associated with government spending, it makes sense. (More on that sometimes else…)