My Life, Economics, and Finance

There was a conference on globalization at Yale two weeks ago. The speakers were excellent! Rajan (Chicago), Bhagwati (Columbia), Nordhaus (Yale), Reinhart (Maryland), Ferguson (Harvard), Buiter (LSE) plus many others.
If I had to choose between going to the conference and to a Led Zeppelin concert, I might choose the conference… No, honestly, I would go to see the LZ, but you know what I mean…

The closing session of the conference turned in to a standard “Economists vs. The rest of the Social Sciences” debate. The initiator of the debate was Ferguson from Harvard. He was absolutely right in saying that the economists should listen to the historians, but his arguments were absolutely flawed. (So nobody accepted what he was saying…)

He said (I can’t recall the exact wording, but the idea is such): We (historians) were listening and learning from economists in past decades. So now, it’s the time for economists to listed and learn from historians…

Let me use the exact same argument.
Six year old child comes to his teacher and says: I’ve been listening to you the whole morning. So you are going to listen to me the whole afternoon…

The argument is ridiculous!

The reason why we (everyone, not just the economists) should listen to the historians is because we need to be reminded of the mistakes mankind did, such that we don’t repeat them. End of story!

Buying a book is a tricky business. You don’t know whether it’s good, and so worth the money, until you read it. That is why,  we often rely on our friends’ recommendations, customer reviews on Amazon, or book reviews by professionals in our favorite newspaper.

The problem is that your friends might not have the same taste as you. Even though “Mostly Harmless Econometrics” is a fantastic book on statistics, my friends that are studying English Literature would probably not like it!

Some reviewers at Amazon might not be representative for the same reason as your friends are not representative. They might read a book that is intended for a completely different audience giving it too low rating.  I was reading reviews for Nudge (Sunstein and Thaler) and many reviewers simply DID NOT GET THE POINT of the book.

Also, there are too few reviews for some books. (How do I know the author did not create a fake identity giving himself a bunch of good reviews! – I wonder whether this is really happening).  Even if the authors (and their publishers) are honest guys everyone who too statistics 1.0 knows that drawing an inference from two observations is stupid.

Finally the Newspaper. First of all, they review only a tiny fraction of all published books. Second of all, how can you trust these snobs at the New York Times?

THE SOLUTION (or the TomasH method)

I will propose a solution based on market forces! (Yes it’s going to be perfect!).

Step 1:  Determine whether the book is intended for your type of audience. This is actually much simpler than it sounds (common sense suffices). Example: If you are an Econ Grad Student everything that has something to do with economy, econometrics, business, finance is potentially intended for you (you might also want to check whether there are any formulas in the book, that’s a big plus). If you are an alcoholic, unemployed, wife-beating male from Texas, than Going Rogue by Sarah Palin is potentially your kind of thing.

Step 2 (Here the market forces come in): Go to Amazon and  check the price difference of used versus new books. The bigger the difference, the worse the book is (relative difference is probably more relevant).

The more are people satisfied with the book, the less likely are they to sell it. The less likely they are to sell it the lower the supply of used books there is. The lower the supply the higher the price! The price of good used books is close to the price of new ones!

Now it should be clear, why you first need to determine whether the book is intended for your type of audience.  Going Rogue by Sarah Palin is among her supporters apparently perceived as an excellent book.  They want to hang on to it and it’s resale price is close to the price of the original book! But I would still never want to read that garbage! (Actually read few pages of it and it gave me a headache.)

(I know few democrats bought it out of curiosity and then quickly resold it, but it was apparently only tiny fraction of all the sale and so had no effect on the price of the used books on Amazon – Yes I doubt they liked it and kept it).

And now it should also be clear why is my method better than Amazon reviews! Going Rogue by Sarah Palin has some pretty bad reviews, yet based on what the market says her supporters are gonna LOVE IT.

p.s. I could write an empiric paper on this! “How much off are Amazon Reviewers, ABR – American Bookstore Review, 2010″

p.p.s. When I wrote this cheapest used Going Rogue was selling two dollars  expensiver than the new book.

UPDATE:
The reason why you don’t need to look at demand is because I’ve assumed it to be a constant fraction of the overall demand.
This will be true only within classes of books. That is different fraction of Harry Potter readers will be inclined to buying a used book than the fraction of readers of Econometrics textbook.

I do not think this is the most genial idea ever (that’s why I was ironic and said that it will be published in ABR – American Bookstore Review [which sounds a "bit" like AER])

Clarification
After rereading my previous post, I think I should add some clarification.

My previous post was meant to be a “research” proposal. I wanted to test whether people form the main street who know somebody in a well paid position are less likely to approve high wages in their friend’s industry.

The idea being, that people from Prague will dream about the life of Hollywood stars and idolize them, while cleaning lady that works for a Hollywood star sees that George Clooney is an ordinary human being like everyone else… The cleaning lady should be less likely to approve his high income (see the prev. post)…

I did want to avoid connection with the crisis. That’s what I meant by saying that bonuses reflect performance. But I agree, it’s a hot topic and is connected with the crisis no matter what one claims.

The Update

I went to Bob Pozen’s (Harvard) presentation of his new book “Too big to save” this monday (It’s on my Christmas reading list, I’ve just ordered it!). After reading the concluding chapter of the book, I have radicalized my view on the response to the crisis and on the aftermath of the crisis.

Yes, I agree, bonuses at THE Investment bank  are ridiculous this year. You cannot pay huge bonuses, thanks to your counter party -AIG (,that owes you 12 billion) being bailed out and you getting back every single penny of your bad investment. Entrepreneurship is both about gains and losses of the entrepreneur.

I do not get why Lehman was not saved, while hundreds of non-systematic (read:unimportant) institutions were.

I do not get many things that happened last year… Both because I do not know enough and because some things are too ridiculous for a rational human being to process…

Maybe the policy response was pretty good in the end. Everyone is just being smart ex post (I think this is definitely at least partly true).

“The Wall Street bankers were making as much money as George Clooney!” aktualne.cz (prestigious CZ news server.)
What is wrong if somebody, CEO of a big investment bank for instance, is making a couple million dollars a year? As long as the wage reflects performance of the company (however you measure it) then there is nothing wrong with huge bonuses!

This is apparently a minority opinion. Well, minority opinion only in to an extent. People seem to approve enormous wages in certain professions. Who can make a lot of money? In my opinion the public approves enormous wages of sport stars, actors, artists, but not bankers or managers.

People seem to approve high wages for somebody whom they admire! For somebody who seems to be a distant, god-like person.

Everyone bumps from time to time in to a top manager of the factory where he works and sees that the manager is a normal person as everyone else. Why should (s)he make more money than everyone else? The only visible difference is that he is wearing a tie!

On the other hand, George Cloony is this super rich, handsome guy living in distant LA, having sex with every young good looking film star… People are dreaming about such life and idealizing it… In my opinion this idealized image of Clooney (Beckham, you name the retard…) and his life is what makes people approve his enormous income.

I think this is easily testable. All you need to do is measure approval of Clooney’s income in LA (or wherever he lives) vs. for instance Prague… (Shiller, Tversky and many others have done similar research)

p.s. I am not justifying bonuses for behavior that led to the crisis, but bonuses in general.

p.p.s. I can’t understand how can any person ( with IQ higher than average chimpanzee) say that the bankers were making AS MUCH money as George Clooney (or Beckham). Banker is a profession that is absolutely essential for functioning of the economy. I don’t think the same can be said about actors. And even though I approve high wages of actors (b/c I believe in free marker), if I were to choose between a world without Warner Bros and a world without Goldman Sachs, I would choose the world without Warner Bros…