Jokes for Economists. No... really...

That's Nash.

A traditional economist, a game theorist, and a behavioral economist are about to walk into a bar.  The behavioral economist says, “Since we all know that we are going to drink too much and get into an argument, we should not all go in.” The traditional economist says, “Since my rational inter-temporal preference is not to have a hangover tomorrow morning, I agree.” Then the game theorist says, “Well then you two should give me the expected value of the drinks you would have drunk and I’ll go in and have a beer and the quiche and find myself the Nash girl in the bar.” The traditional and behavioral economists hand over their money to the game theorist, they all agree that it was a lovely evening, and part ways.

Kill Joy - The Economic Fall Out of The Cubs' Win

By Jacqueline Verrilli

Economics is known as the dismal science. This is because the law of supply and demand suggests that economic profits will always fall to zero in the long run, which sucks for capitalists, and businesses tend to find a way to exploit or create an inefficiency, which sucks for consumers. In keeping with the idea of economics being dismal thematically, I decided to do a back-of-the-envelope estimate of the productivity lost due to the Cubs winning the World Series. Now... rather than put this disclaimer in small print where everybody would neglect to see it or choose to ignore it. I am stating in bold face print here that: THIS AND ALL OTHER BACK-OF-THE-ENVOLOPE ESTIMATES SHOULD NOT BE CONSTRUED AS FACTS. IN ORDER TO GENERATE A SCIENTIFIC FACT ABOUT LOST PRODUCTIVTY A REASONABLE SAMPLE OF HEAVILY VETTED DATA WOULD NEED TO BE COLLECTED AND RUN THROUGH A RIGOROUS STATISTICAL PROCEDURE. THIS IS NOT THAT. Great.  Now that no one will mistake this for a fact, let's see if I can have some fun with this.

Anecdotal Evidence - Take 1: The Random Walk

It is now 11:00 am and I am sitting in a Starbucks on Fullerton Avenue in Chicago. In the last hour I have seen multitudes of people walking by in Cubs gear, presumably on their way to the officially sanctioned parade and celebration. Many of them looked like they should be at work. So I asked several people who appeared of employable age if they skipped work today. Everybody enthusiastically said "Yes!" Even a woman who was a freelance writer and so was self-employed, thereby, directly hitting her own bottom line more than anyone else's, said she was on her way to the parade. Out of twenty people only one woman who had a toddler in tow hadn't taken the day off work. The City of Chicago has estimated that 4 million people will come downtown today to celebrate the ending of the curse of the goat. If we extrapolate by assuming that 19 out of 20 adults attending the festivities have taken off work, and that 50% of the people who attend are an active part of the labor force (this is a WAG for eliminating children, college students, stay at home parents, etc.), then 1.9 million people attending the festivities are skipping work today.

Anecdotal Evidence - Take 2: Whack-a-mole

At about 10:00 am today, I texted several friends asking if they were going into work today and, if they were, I asked them to do a quick head count and estimate the percentage of people that would normally be there that are not at their desks. I got some wild guesses that ranged from between 30% and 50%. I asked one respondent to yell "Go Cubs!" in her office and see how many heads popped up. She decided to take a walk around instead and said that it appeared to her that people had come in and dropped off their personal items but had then headed out to the parade. Taking a truly wild guess, I would estimate (conservatively) that the workers in the downtown area who attend the festivities would not be at their desks for at least 3 hours today. I am assuming that 100% of people working in the suburbs that are attending are taking the whole day off.  

Anecdotal Evidence - Take 3: The Virtual Commuters

One respondent to my mad texting poll said that 5/6 of his team decided to work from home today. In his text to me, however, he felt that his team might be more productive because of it.  Since this event is special and would have served as a distraction, I am inclined to agree. The question is whether or not they would be equally productive at home as they would have been on a normal day at work and this is difficult to answer. Studies show that people who attempt to work from home regularly are actually generally less productive on those days. There are also studies, however, that show that, since it takes time to regain concentration, taking time away from one's assigned duties at work in order to attend a meeting can, if fact, make people less productive, so people who stay home today would not have those issues. I would argue, however, that going to meetings at work is production even with the re-focusing time. Lost concentration time is simply a part of the work day and meetings are productive for the overall company if not for the individual employee. So I'm calling people working from home today (and today only) a wash. By the way... the 6th employee...?  Yeah, he gone.

Let's Calculate, Shall We?

Okay... So here it is Chicago. Making a crazy, wild guess about the mix of the 1.9 million people lost at least partially from the world's productivity today, let's assume that 500,000 are suburban workers and 1.4 million are downtown workers, and, using an average wage of $50,000, this would bring us to a loss in productivity of about 8.2 million hours of production resulting in over $197 million of lost productivity. Now, I can't begin to calculate the additional revenue the downtown restaurants will have to today or the dollars of additional gear that will be sold today. And, as an officially official economist pointed out, there are ancillary productivity benefits that result from the relationship-building due to shared experiences. But I didn't say I was looking for a net number, did I?

It would have been interesting to see what the corresponding loss might have been if Cleveland had instead won the series. Perhaps this would console some hurt feelings about Cleveland fans' continued struggle for a pennant. Sorry, Ohio. The burden falls to you to drive the economy today. And the economists in Chicago thank you.

Wealth-Debt-Income-Invesment-Wealth

http://www.forbes.com/sites/investopedia/2014/01/28/a-study-on-the-wealth-effect-and-the-economy/2/#154cbef468a4

The above links to a Forbes article from 2014 regarding the "wealth" effect.  This article and the economic theory behind it imply that people convert some of their wealth to income and spend it in times of increases in asset prices. The research can be interpreted to be conflicting, but it appears that the wealth effect is more pronounced for wealth associated with housing price increases than with stock price increases. The suggestion in the article is that this may be due to the perception that stock wealth increases are considered more ephemeral (or risky, in economic terms).  The writer ultimately derides using your home as an "ATM" for current consumption at the expense of future consumption.

But what about using your home to arbitrage investments? Miller-Modigliani proves that, in efficient markets, debt is simply negative cash and if an opportunity exists to create additional wealth or income by investing in another asset then you should jump at it. Many people leveraged their primary residences and bought second (and third) homes, investment real estate, and other assets like stocks and bonds during this period of time to increase wealth. These are seemingly rational responses to incentives. When it was discovered that markets not directly related to housing or stocks were inefficient (the CDO crash), many assets lost value due to the waterfall effects.  More research is needed here to uncover the vectors of inefficiency before drawing conclusions about what to do with wealth. Converting wealth to income is certainly not always a bad thing, even when the conversion is for consumption, if future income is rationally assessed to be greater. But, I would argue, the circumstances of the conversion and the ultimate use of the funds can have a chicken-and-egg effect on asset pricing.

Antidisestablishmentarianism

By: Jacqueline Verrilli, Evanston, Illinois, USA

Oh, yes, she did…! Yes, folks, I just used one of the longest words in the English language as the title of this blog post. I used it because it’s length is analogous to the seemingly interminable Presidential campaign season, upon which this blog is based. And I also used it because it is an appropriate description of two people who were running: Bernie Sanders and Donald Trump. “Old news” you say? “Bernie’s not in the race anymore” you point out? Hogwash! The forces that brought these two candidates to the forefront of politics are still hard at work and wholly relevant. They have simply gotten lost in the weirdly non-issues-based ether that is our media-driven political system - especially post-convention. So I’d like to address what it is that made Donald and Bernie so popular and break it down a bit. At the heart of it is a large swath of the populace feeling disenfranchised. The question is, WHY? Well, here’s my two cents.

Anti: A prefix meaning “against,” “opposite of,” “contrary to,” “in opposition of or to,” “not,”

Prior to the most recent crash, it was mostly rich people who were hurt when our economy tanked. People who held stocks, people who had invested in large commercial real estate projects, people who bought large amounts of derivative investment vehicles, you know, the solidly middle class and above. These are people who knew the risks and could afford to lose the money in hopes of the return commensurate with the risk. Sure, when the economy tanks, many people of all classes lose their jobs, and often people lose as much as a year’s worth of earnings (less any unemployment insurance they collect) while finding another one. And, yes, I understand that oftentimes when people lose their jobs they are unable to find a job that was paying as much as they were making prior to the loss, and this can impact the entirety of their future earnings. We dispassionate economists would argue, however, that, on average, those that lost their jobs were making excess wages prior to the crash. Don’t send me the hate mail, send it to Adam Smith or Merton Miller. Or better yet, write a love letter to Joseph Stiglitz. He’s still alive, and he’ll empathize with you.

This last crash was different in many ways, though, because it affected, not just rich people and business profits, not just the wildly effective money-making machine that is the US economy, but, everyone, everywhere, and all economies around the globe. And not just temporarily for a few people who worked in particular industries, but broadly, on a very long-term basis, for people of even very meager means. Only the Great Depression was worse and that was only because governments refused to intervene for so long thinking that it would all work itself out. In this last crash, hundreds of millions of people around the world lost a portion of their retirement fund. And there are still millions of homes in the US alone where the mortgage is technically “upside down”, meaning that the mortgage principal (the loan amount on the home) is more than the home is worth. But many people are still paying those mortgages because they need somewhere to live. I’d be pissed, too. But being pissed off about your own poor decisions to buy stocks and first or second homes (again, economists place all of the blame directly on you, dear reader, responding to incentives) is still no reason to endorse particular candidates, is it? This is technically, irrational behavior. Blaming the government for your own poor judgment has now become an international pastime. I personally blame Facebook and network television for fueling the ability to sit around and be entertained by finger-pointing and so allowing it to become a part of the social zeitgeist.

Those of us who do actually think for ourselves and question the information we receive from all sources recognize that we have a big choice to make in this next election. Pick a “blame the government” candidate or one that can work within it. I hate to break it you anti-establishment voters but the crux of your argument boils down to a set of irrational beliefs. You really think a President can magically: get all of the money out of politics, lower taxes to near zero, make higher education free, rid the US of all crime of any kind, level the playing field for all the world’s peoples, make the rest of the countries on the planet play nice with each other, modernize the infrastructure, make carbon emissions disappear worldwide, and have our military become so powerful that the entire rest of the world cowers at the mere mention of our country’s name. In four to eight years. Those of us with reality as a basis say, “good luck with that.”

Dis: A Latin prefix meaning “apart,” “asunder,” “away,” or having a negative or reversing force

It seems to me that many voters right now are trying to run away from reality. They want people not like them to cease to exist, and they want money to cease to exist. In the case of extreme “conservatives”, they want to enjoy a privileged lifestyle without all those “others” not like them mucking things up. If they currently do not have what they consider to be a privileged lifestyle, they will latch on to somebody who they think will bestow it upon them when their leader successfully rids the country of those others. In the case of extreme “liberals”, they want equality, transparency, and a “flat playing-field” for all. Either way, voters appear to want the fundamental forces of competition to disappear and they want their leader to make money obsolete as a means of distributing resources. They want to blow-up our system and rebuild it according to the vision that they believe their leader has. In other words, ostensibly "anti-establishment" voters, paradoxically, appear to want a dictator right now. Forget all that messy “free and democratic” stuff, let’s create utopia right now.  “My utopia.”

Establishment: The existing power structure in society; the dominant groups in society and their customs or institutions; institutional authority

As you can see, a utopia depends on whose perspective you’re viewing it from. Interestingly, the framers of the United States Constitution recognized that about 219 years ago. And so they attempted to create an establishment that would be flexible enough to accommodate all comers. And don’t it beat all that this crazy, novel system works! A system that allows the pedestrian populace, not only the elite intellectuals or the wealthy, not just a king or a Khan, but everyone who can legally establish a right to vote, to have a say in the policy, works!! And this preposterous system has created unprecedented progress on all fronts. Health and longevity, scientific discovery, inclusion, care for the infirm, widespread wealth and well-being... It is certainly still a work in progress, and that is by design. Our establishment allows for people to believe whatever they wish and express it so long as, in doing so, they do not harm others. Oh sure, progress has a way of hurting people’s feelings. In order for progress to happen, some people have to change their minds, admit that they were wrong, even! A psychological pain so great, that most people will choose to go to their graves before saying “I’m sorry.” But our establishment allows for that, too. I like our establishment. I don’t agree with the opinions or beliefs of many of the individuals who make it up, but I respect that they have the right to believe what they like and espouse their opinions. And I’m voting “establishment” because of it.

Tarianism: A set of word endings that, without a root word, are nonsensical

As of the past several months, I feel like I have been dropped into an alternative universe. It seemed impossible that two people so utterly at odds with one another in almost every way could possibly have put at risk the most well-established and formerly stable political system in the world. I find myself actively avoiding the news. In this piece, I have posited that the last economic crash awakened a basic fear in our populace. A fear that, without someone to make everything “right” again, we will all fall prey to forces beyond our control and die miserable deaths at the hands of those “others”.  Maybe I’m biased, but I believe that this whole ridiculous political mess belies a need for better economic education. The concept of a “law” of supply and demand is being thrown around a lot lately, and it behooves us to understand that certain equilibria don’t always work for everyone. And I firmly believe that our current political system does a pretty good job of balancing competing interests. It is perfect? No. Is there money buying policy? Yes. Do transfer payments encourage free-ridership? Sometimes. Should we allow businesses to make mistakes? Sometimes. But hopefully, one thing is amply clear now. “It’s the economy, stupid!” isn’t just an admonishment to political hopefuls, it’s a battle cry that everyone can get behind. And I just happen to think that the establishment candidate understands that the best.

John von Neumann Was a Big Fat Idiot

Since I know that almost nobody reads my articles, I feel quite comfortable in insulting geniuses. I am also comfortable that one of my heroes will never know that I totally poached his title.  Thank you, Al Franken! Keep up the good work in congress!  IF there happen to be any economists out there reading this, you know that John von Neumann is the economics analog to Albert Einstein.  For those of you who have never heard his name before, you should know that John von Neumann discovered the Mutual Assured Destruction equilibrium strategy for InterContinental Ballistic Nuclear weaponry, designed implosion lenses for the Manhattan Project, founded the field of study known as continuous geometry (developed from the algebra he invented), introduced stochastic computing and artificial intelligence to the world, and originated the concept of self-replicating spacecraft that could mine resources from an entire other planet.  In other words, we can credit him with much of the preservation and success of the free world.

He may yet turn out to be the savior (or ultimate destroyer) of all mankind. Seriously.  So, of course, he dabbled in economics a bit and, according to Wikipedia, “Von Neumann's functional-analytic techniques—the use of duality pairings of real vector spaces to represent prices and quantities, the use of supporting and separating hyperplanes and convex sets, and fixed-point theory—have been the primary tools of mathematical economics ever since.”  By many people’s accounts, John von Neumann was the smartest person who has ever lived.  So here’s why I think he was a big fat idiot.

In economics, one of his many major accomplishments is the definition of the “rational actor”.  Yes, John von Neumann was so incredibly brilliant he even designed the ultimate human being.  This uber-individual is the omniscient and omnipotent consumer, able to know all prices of every good everywhere and also know the exact amount of utility (the economics version of pleasure and/or well-being) each good would provide her. She knows exactly how much income she must make to purchase that set of goods, exactly how to go about making that much money, and exactly how to value her time on this planet in order to maximize her own utility, and then maintain that level of utility by optimizing her trade-offs among the options available in each moment of her life.  And this infallible automaton, the “Econ”, is engineered by integrating a set of five axioms, which John von Neumann defined.  Each rational actor, including you, dear reader, can, without error, determine their preferences with ordinal certainty through:

1. Completeness - People have well-defined preferences, and so you always know which thing or set of things you’d prefer when compared to another thing or set of things.  A critical feature of the way von Neumann defines “things”, however, is that these things might be of uncertain outcome.  In other words the “things” are probabilistic and so are most often referred to as lotteries.  But Econs can discern exactly what the odds are for any lottery and so can determine exactly which risks they’d like to take.  In math-speak: for any 2 gambles g and g' in G, either g is preferred to or is equivalent to g' or g' is preferred to or is equivalent to g.  Now we add that for any gamble in G, there exists some probability such that the decision-maker is indifferent between the "best" and the "worst" outcome. This may seem irrational if the best outcome was, say, $1,000, and the worst outcome was being run over by a car.  However, think of it this way - most rational people might be willing to travel across town to collect a $1,000 prize, and this might involve some probability, however tiny, of being run over by a car.  So the probability of collecting the prize plus the probability of dying, together, would create a “thing” in von Neumann’s world.  And an Econ can easily determine if collecting $1,000 is 99.999% probable and dying in car wreck on the way is 0.001% probable, or if collecting and dying in a wreck are each 50/50% probable (presumably based upon the Econ’s texting habits), and they can therefore easily determine what lotteries they prefer to others.  No problem, right?  Let’s move on to the next axiom now, shall we?

2. Transitivity - Preferences are consistent so that if you prefer one thing to a second thing and prefer a third to the second, then you prefer the third thing to the first thing.  This holds for sets of things as well.

3. Continuity - Some negligibly small change in the thing or set of things will not make you change your mind about your preferences. In math language this assumption states that the upper and lower contour sets of a preference relation over lotteries are closed.

4. Independence or Substitution - Irrelevant events or outcomes do not change your preferences. This means that if a decision-maker is indifferent between two possible outcomes, then they will be indifferent between two lotteries which offer those outcomes with equal probabilities, if the lotteries are identical in every other way; i.e., the outcomes can be substituted. So if the agent (actor/decision-maker) is indifferent between outcomes x and y, then they are indifferent between a lottery giving x with probability p, and z with probability (1-p), and a lottery giving y with probability p, and z with probability (1-p). NOTE THAT the outcome “z with probability (1-p)” is the same in BOTH lotteries and is, therefore, irrelevant!!  Similarly, if x is preferred to y, then a lottery giving x with probability p, and z with probability (1-p), is preferred to a lottery giving y with probability p, and z with probability (1-p).  Got it?  OK, then.

5. Monotonicity - This big ugly word simply means that a gamble which assigns a higher probability to a preferred outcome will be preferred to one which assigns a lower probability to a preferred outcome, as long as the other outcomes in the gambles remain unchanged. In this case, we're referring to a strict preference over outcomes, and don't consider the case where the decision-maker is indifferent between possible outcomes.  This has been described as the “more is always more” axiom.

Thanks to http://www.econport.org/content/handbook/decisions-uncertainty/basic/von.html for easy access to a good description of JvM utlity axioms.

In case you aren’t familiar with the term “axiom”, an axiom is defined as a self-evident truth or a universally accepted principle or rule.  Now…  I ask you…  Is it self-evident that you are able to know whether you prefer rocky mountain oysters to hagis if you have never experienced either?  According to these axioms, John von Neumann says it is because you can.  Clearly, this individual known as the “Econ” is equally as fictitious a creature as the rainbow-farting unicorn.

Now, I know that John von Neumann knew that he was acting as the equivalent of Dr. Frankenstein when he created the axiomatic automaton that is the “Econ” of today’s staunch economics modelers. He knew that only he, himself - the guy who predicted that if France didn’t re-militarize after WWI that WWII would ensue - only he could really be held to such omniscient and omnipotent standards.  But other economists and politicians use the concept of the “rational actor” as though there are 7 billion of them walking the earth.  The fact is that we are all really just a bunch of bumbling fools who buy cheese flavored chips with no actual cheese in them and work for less than we are worth simply because we don’t know what other people who do the same job are making.

Like any other social scientists, Economists can only observe choices, and economists have presumed that people’s choices are the manifestation of a rational train of thought, specifically the train of the onerously rational axioms above, and that people, therefore, make choices by connecting rational decisions to all the possible actions they can take according to their logical, probabilistic consequences (the outcomes), and then perform the action (make the observable choice) that is connected to the outcome with the highest utility.  If all those things happen, then we say that the actor is behaving rationally.  But long ago psychologists discovered the impulse - behavior where action is taken without substantial conscious deliberation being involved.  Some behavior is even instinctual or habitual where almost no conscious behavior occurs prior to the action or set of actions.  One estimate states that 80% of all human activity is completed without conscious intervention (Freud thought 90%).  And this isn’t just breathing and walking! We’re talking driving, eating, speaking, interpersonal interactions, posture, mannerisms, moods and emotions, anything that is considered “routine” or “habit”, cognitive habits and biases...

The fact is that we Humans do most of the things that we do without any conscious cognitive intervention whatsoever. And that means that we Humans make mistakes. And not just once in awhile, but all the time.  I know that I, for one, make utility-destroying choices every day. Just today I went to a grocery store for eggs and milk and came back with several other items including, not one, but, two bags of Australian licorice, which I regret buying because I have already gained 5 pounds since starting my PhD program due to eating such things and sitting for longer periods of time while studying. I am currently sitting at a computer at nearly 11 pm and I have promised myself to go running in the morning to try to shed these pounds, so I regret being up late.  Let’s see... what else...  I disappointed my son by choosing to go to a different event than his water polo match, I blew off making dinner (to go to the grocery store) and so we ate out which meant that we spent more money than we would have if I had waited until after dinnertime to go to the grocery store, and I wore horribly uncomfortable shoes to the event I went to earlier and I now have a blister on my pinkie toe.

And that’s not even a personal record for regrets in one day.  When I think back to the number of choices I made, versus the number of decisions I made, there is a large discrepancy.  Many of the things I did I did out of automaticity.  When something is missing from the cupboards you go to the grocery store.  ‘Cause that’s what you do.  In other cases, I was making active choices without really thinking about all of the consequences (go to grocery now did not equal spending money to get take-out for dinner when I left for the grocery store).  Sometimes I knew what the consequence might be, but made up an excuse to go ahead and do what I wanted to anyway (wear the cute shoes, you’ll be sitting most of the time anyway).  And sometimes I had to do what I had to do in spite of the fact that it would have a negative impact on some other aspect of my utility at some other point in time (go to networking event because you are restarting a career – feel bad about missing son’s thing later).  We could consider the last choice here as rational, right?  I knew that I would be destroying utility in one part of my life by gaining utility in another.  I knew what the trade off would be.  But here’s the kicker.  I should not regret missing my son’s water polo game if I was aware of the trade off.  If someone could please tell my amygdala that, I’d appreciate it. These are just a few of the ways in which we do things without thought and/or with thought but without a full understanding of the consequences.  I often think back to my college years and think that I would have chosen different courses and studied more “if only I knew then what I know now.”  Stuff it, John von Neumann.  I’m not going to feel bad about not becoming a brain surgeon.

Okay, okay... I am done using old John as my whipping boy, but let me wrap this up by making my true point.  We Humans are fallible; subject to beliefs, emotions, habits and impulse.  It should be clear that having a rationale is not the same as acting rationally or no one would ever eat an artificially flavored snack chip or drink a third martini. Decisions and choices are not the same thing, and, moreover, often our choices in one aspect of our lives have an impact on another at a different point in time and our non-Econ brains simply can’t make the connection.  But philosophers and economists alike have, for centuries, extolled the rationale as the means to an end for a rational act and I find this patently illogical.  Rationales and rationality are not the same thing and they need to be extracted from one another once and for all.  In recent books and papers economists have taken to distinguishing the difference between “Humans” and “Econs” and I, for one, appreciate it.  In fact, let us economists begin to allow for the vagaries of the Human mind as a HUGE driver of economic activity.  ‘Cause, let’s face it!  If we all were able to know exactly how to maximize our potential from the moment of birth the world wouldn’t need lawyers or yoga teachers and then where would the world be, I ask you?

Eat the Salad! - An Introduction to Irrational Economics

Tradeoffs

A foundation of economic theory is the concept of trade-offs.  What economists observe in the way of how you make these trades-off are your choices.  Understanding the phenomenal complexity of even a single choice, however, is impossible, and so economists make very simple, but very powerful models.  These models use the observations of your choices (your purchases, for the most part), along with statistics, to interpret and predict your behavior.  And the models do an awesome job... in the aggregate.  The models, however, rely on the Von-Neumann/Morgenstern axioms of rationality.  What these axioms do is make it so that whatever you choose is rational, mathematically anyway.  But behavioral and neuro-economists are kinda throwing a wrench into the whole model thingy by extracting economics from the math and making it more "Human".  In other words, they introduce the possibility that people behave irrationally.  Whoa!  Are you okay there?  Well, then get back in your seat after that shocker, folks, 'cause I'm gonna dig in a bit here.

"Choice.  The problem is choice." - Neo

When we all make choices, we are usually not rational.  At least not in the mathematical sense.  You see, in order to qualify as rational, you have to become an "Econ".  A being with perfect information.  You know all of the prices and costs of things everywhere and you can easily foresee the consequences of all your tradeoffs in the immediate AND DISTANT future.  But as a "Human" your senses, personal history, memories, your mood, your habits, the environment you are in, your level of alertness at the moment, your level of creativity in the moment, among thousands of other factors, all come in to play in a single choice - not the least of which is the information you have at hand about the particular subject matter pertaining to the choice.  I made the video above to point out that the specific nutritional points made by the fear-mongering media would actually have you make a worse choice at a fast food restaurant.  But thinking people who know that vegetables are better than hamburgers can still make a good choice.  [I'll ignore the fact that if you chose the burger it is HIGHLY likely that your meal will also include a bunch a French fries and a soda automatically unless you override THAT choice with ANOTHER set of choices.]  [Duly ignored.]

Me, Myself, and I - Decisions versus Choices

It is a common adage that what you don't know can't hurt you.  But people often misunderstand this aphorism because it is meant to be ironic.  When you walk into a fast food restaurant the smell will embed unconscious decisions in your brain to target high-calorie, high-fat, high-salt, high-sugar foods since these things were hard to come by in even our very recent (say, the past 5,000 years) history as human beings.  And "Me" doesn't "know" it.  It is unconscious, which is, by definition, not able to be rationalized.  So go easy on yourself when you realize that "Me" made choices in the past that "Myself" (the parts of the brain that deal in quick absolutes like "right" and "wrong") could have made better, it was your "Me" brain, not your "Myself" brain that made the choice.  "Myself" was asleep at the switch letting instinct and habit have their way.  And lest you think those are the only two people in your head, let me introduce you to "I" the one who deliberates rationally about everything and tries really hard (sometimes, too hard) to reconcile between "Me" and "Myself".  This mess of people are your "Board of Directors" and, believe me, unless "I" is involved in helping to make a choice in the moment, either "Me" or "Myself" are going to make a snap decision and you will open your mouth or move your hands without much, if any, thought behind what you are doing.  And here's the kicker.  The fact that those guys can make good choices sometimes makes you confident that "I" is just a time-waster.  The deliberative, analytical thought that "I" uses has to overcome thousands of years of "Me's" instincts to compete for whatever resources it can get immediately and "Myself's" snap judgements that rely on faulty memories that often aren't even applicable to the current situation and start using up everyone's time and brain-power, even physically overwhelming "Me" and "Myself" (using a flood of neurotransmitters in the frontal lobe) to arrive at a better decision.  And then, somehow, "I" has to make you make a good observable choice - like choosing to gather more information (for instance, reading the ingredients list on the whole meal) or walking out and finding a place with ONLY salads.

TMI - Good Thing or Bad Thing?

Your brain makes thousands of decisions for you of which you are unaware, which is a good thing because society likes it when you decide to wear a shirt to work.  But it is also a very bad thing when it decides that it should just rely on the information it has at hand to make more important decisions, like whether or not you should drive the speed limit if everyone else is moving faster, whether you should move to a new city in case the industry you work in pays better there or you would like the lifestyle there better, or when you are choosing between a salad and a hamburger for lunch.  Until you can take the decision away from the subconscious and the conscious-but-quick-to-decide parts of your brain and begin to deliberate over it, you won't always win those fights.  Remember, making a rational tradeoff implies that you were aware of all of the alternatives and their ultimate consequences and made a choice based on that information.  This is almost never the case.  I chose to complete college so I will never know if I would have been better off quitting to go be an actress.  Based on this video, I'm saying college worked out pretty well for me.

What I can know is that I have to eat to stay alive and if I think back to what it was like before mass produced and distributed food systems, I can figure out that food was probably relatively scare not that long ago (it wasn't readily available everywhere like today in the first world) and limited in variety.  Food was probably largely restricted to minimally processed (think butchered or picked as the only processing), and so also didn't have many calories added on to its original form.  But nowadays I don't have to think to generate information.  The world brings it to me magically.  In short order, I have learned LOTS of information - scientists have discovered that my body needs fat and protein and salt and some carbohydrates and vitamins and minerals, and lots of things that I can't see.  Scientists are awesome at making the otherwise invisible known.  But that information escapes out into the "media" and now all that information seems to make things more complicated and "Me", "Myself" and "I" could get into a knock-down drag out about what is the best decision until two give up and one gets their way.  The funny thing is that all the information is hard for "Me" to process, after all that's "I" job, but "Me" also "knows" that all the "Good Things" my body needs comes in fresh veggies and fruits.  She's just forgotten since there are SOOO many other options available.  "Me" knows that her body is built so that she can move around, "Me" knows that those cute shoes are going to hurt, and "Me" knows those newer golf clubs aren't going to improve my swing.  But "Me" has a tendency to think shiny, new, and now are the main objectives.  Those are "Good" and, remember, "Myself" is easily talked into "Good".  Which is often bad.  "I", the reasonable voice in your head, thinks functional, tried-and-true, and long-term, but is often not thinking long-term enough so that you can go full circle and get back to the choice you have to make right now without a battle.  Emotions are the weaponry in these battles and they are indiscriminant - like WMDs.  Once emotions get involved "Me" Myself" and "I" entrench, that is, they get IRRATIONAL, and nobody wins.  Your emotions are very primitive features of your brain and they make you behave like Kim Jong Un on crack.  And that's always bad.

The Game of Tradeoffs

What economists have come to incorporate into the idea of tradeoffs is the idea of risk.  When Megan McCarthy was asked about her eating habits, she noted that it was a risk for her to tradeoff  a hamburger and French fries for a salad because she "could get hit by a bus tomorrow".  This was, of course her "Me" and "Myself" attempting to playout the game of life as though it would be concluded in the next 24 hours.  If "I" wants to make a rational decision, whether that decision is about food,  education, a job or career change, or a chuck-it-all-I'm becoming-a-beach-bum decision, "I" has to think about the risks of the consequences of the actual choices into the far future and use cold facts and hard logic to convince "everyone" involved of its position based on its assessment of the risks and rewards (remember a reward is as much a consequence as a bad result is to any choice).

Consolidating the hapless, Freudian trio into one single "Human", it should be clear that we non-Econs often make decisions based on very little information, or information that is so woefully limited that if we knew even the amount of information we didn't know pertaining to a single choice, we'd be utterly stymied and probably end up catatonic.  Life is a hard game to play when most of it is in a black box that we give to the triplets to shake and see if they can figure out what we should do next.  All The Geekonomist can tell you is this: The risk of you dying tomorrow is really, really low.  Eat the salad!

The Math to Enlightenment

by Jacqueline Verrilli

I believe that the formula above holds the answer to all of life’s problems.  This humble little formula is the most common of all formulas in mathematics and is actively used in every human endeavor of every kind in any discipline.  It is deceptively simple in nature, involving only addition and division to derive, and yet within this simplicity is a powerful beauty beyond any that can be achieved in painting, sculpture, or literature.  It has most certainly been around since shortly after we started counting things and so it shocks me that no one, outside of statisticians, has revered it or even so much as paid much attention to it.  I believe that it is the equation for life, the universe, and everything and I’m sorry that Douglas Adams won’t get a chance to read my blog, but hopefully the inter-dimensional beings are reading it now and will make this formula their new Supreme Being.

For those of you that haven’t used mathematical symbology since high-school or college (or ever), the weird looking set of hieroglyphs above is just the formula to calculate the average of a bunch of numbers, also known as the arithmetic mean.  Like most math, the calculations behind this scary-looking equation are actually relatively easy to do.  For example, the mean of the numbers 13, 5, 17, 22, and 20 is 15.4 and is simply calculated by adding the numbers up and dividing the total by the number of numbers.  If you had, say, a bunch of bushels of oranges, you could count the number of oranges in each bushel and find the average number of oranges per bushel.  And if you did this, as long as, the bushels were not filled by a super-accurate machine that put exactly the same number of oranges in each one, you would find that the number of oranges in each bushel varied a bit, so that there would be a distribution of numbers around the mean number of oranges per bushel.

Below is a graph of a distribution of numbers around a hypothetical mean.  This is a very typical graph that is often described as a bell-curve, for obvious reasons, but is known among the mathematically–minded as a “normal” distribution.  The conventional interpretation for bell-shaped distributions is that we tend to think of the right side as positive (or higher or “better”) and the left side as negative (or lower or “worse”).  I took this particular version of a normal distribution off of the internet and, as you can see, whoever created it was using it to show some distribution of “ability”.  We can think of this ability as just about anything.  We could, for example, make everyone in the world perform a standing jump, measure the height of each person’s jump and we would likely see a normal distribution across the population.  Most people would be able to jump, say, 18 inches off the ground, others would only be able to jump 8 inches, while other could jump 25 inches.  At the very extreme ends we might see a few souls who were able to jump, say 33 inches.  These people might fall into the tail of the bell curve on the right-hand side which would mean that they fall above 99% of the rest of the population in ability to jump high from a standing positon.  These would likely be your Olympians if you could find them in your country.  Others may only be able to jump, say ¼ of an inch.  These folks would fall into the tail on the left side of this distribution falling below 99% of the population in this particular ability.  Normal distributions occur around the mean, or average, of the population’s “ability”, so those of us who fall in the middle, jumping 18 inches, would fall on the line in the very center.  Let’s say ½ billion of us fall at exactly 18 inches, then the people who could jump 17.95 inches would fall just to the left of us, and the people who could jump 18.05 inches would be on a line just to the right of us.  So you can, hopefully, now see that this graph also shows the relative number of people (or things) that would fall into each level of the measurement.  That is why this is also called a density distribution function.

 The unbelievably amazing thing about normal distributions is that they occur in nature everywhere.  If we test the height of human beings worldwide, they fall into this pattern.  If we research people’s incomes, IQs, or the number of hairs on their heads, these figures will all tend to be distributed around a mean in this pattern. Even when we ask people subjective questions, and offer them an array of possible answers, their answers will tend to fall around a mean.  In recent years, economists, psychologists, and governments have been looking at a very subjective, yet extremely important factor in the advancement of humanity: well-being.  In the social sciences, we often use the term “Subjective Well-being” because an individual must report their level of well-being to an observer, like, say a social science researcher, since it cannot be observed and determined objectively like, say, the number of oranges in a particular bushel.  Since self-reports of well-being are considered subjective, it is said that researchers really shouldn’t compare one person’s reported well-being to that of another.  What I might call a “5 out of 10” as my feelings of satisfaction with some element of my own life, you might call a "9 out of 10" under the same circumstances, or vice versa.  It is also a matter of debate as to whether you can compare a reported level of well-being from one individual at a particular point in time to another reported by that same individual at a later time.  Human beings are known to be notoriously moody and often can’t shed that mood in order to answer subjective questions about their lives as objectively as possible.  And, of course, since neither of these comparisons is an ideal way to assess well-being, we social scientists do them anyway ‘cause, really, what in life is ideal?

Average is the New Awesome

Let’s look at a bell curve for “success”.  In point of fact, the definition of success is as subjective as all-get-out, but since this is an economics blog, let’s just use "wildly wealthy" as our definition of success.  The media LOVES to cover the lives of wildly wealthy people.  So we hear about them, ad nauseum.  We don’t often hear about people who are huge successes at just being decent human beings.  Our sample of "successful people" is, therefore, generally comprised of those who are in the tail ends of the bell curves, which are subject to availability bias.  For example, we might consider Warren Buffet or one of the Kardashians one of our success heroes.  But we, as consumers of the media, we, the average people, make up the market for information.  And if we stopped caring about those people in the tail ends of the “success” or “fame” bell curves and started watching only stories about average people, the media would have to respond in kind.  We simply don’t understand the power that we have in that opportunity!  My Econ Prof even pointed out the power that the average person has over the distribution of money.  Each time we click on an ad that has been placed with Google, Google gets money!  Can’t you feel that rush of power!  Imagine if we could just get rid of the Electoral College!  The point is, it is those of us in the tall and wide part of the bell-curve that have all the power.  We are the vast majority of the “normal” in Normal Distribution, after all.  And it behooves us to use that power in the most efficient and effective manner because, as we all know, with great power comes great responsibility. That’s why average is the new awesome!

Everybody Please Hold Hands and Take One Step to the Right

It is the average person that makes the world go ‘round, not the outliers.  The average person determines who wins an election, what prices prevail in markets, which goods and services are provided, and what team gets the good odds in Vegas.  We can argue that the monied and powerful people manipulate the systems and, yes, this is true, because we average people allow it.  We allow ourselves to be bought and manipulated and then place the blame outside ourselves.  It is an evolutionarily ingrained instinct to think of ourselves as autonomous and above influence, all the while allowing the outside world to effect our self-image, and our self-confidence, and, hence, our autonomy.  As much as we want to be viewed as special by everyone else, we are built to fit it so that we can be accepted and belong and enjoy the protection of the group.

But when even one of us does something that is a little different, even when we think we are doing it just for ourselves, like, say, sitting in the front of the bus, or wearing pants suits on the Congressional floor, or starting an internet search engine to help us find what we want more easily, the world actually gets better for everyone.  When a writer writes a great story, or an engineer designs a mechanical solution, or a teacher finds a way to help students understand chemistry, or a doctor describes a new illness, they feel proud of themselves because solving problems is fun.  And if one person improves their own well-being, it improves all well-being.  And you don’t even need to invent or discover anything to improve your own well-being or that of anyone else.  When my garbage haulers just do their jobs, it makes my life a WHOLE lot better because I don’t have to do anything other than drag the can to the curb!  When someone else teaches my children biology, I don’t have to; when someone drives a truck that delivers broccoli to my local grocer, I don’t have to; and when my husband takes the no-kill mouse trap out to the back yard, I don’t have to.  I would argue that they, thereby, improve my well-being.  Now, according to the calculation of a mean, if even one person under our bell-curve becomes better-off in terms of their well-being, it moves the entire mean to the right.  This shift may be ever so slight; so incredibly slight as to be unnoticeable to the casual observer, but the mean, nevertheless, has moved, and we can calculate the amount of the change.

Sure, But What's in it for Me?

I hope you’re as excited as I am at this point because here’s the BEST PART!  Remember that formula for the mean and how you add up all the numbers before you divide?  That’s why I believe that the mean is the math to enlightenment: it is an axiomatically logical and mathematically calculable function of what many people know to be true intuitively; that we are all interconnected to one another.  Our actions affect one another without us even necessarily meaning for it to happen!!!!  And wait!!  It gets even BETTER because of what that means to society as a whole.  It is everyone’s purpose in life to move the mean to the right.  And we all do it just be being ourselves!  Just imagine if we all started to actively help one another out!!  Holy compassionate actions, Batman!

Red Shift

When one person who might have dropped out of school instead stays in and completes a high school diploma or a college degree, the whole world is better off.  If a teacher or mentor helped to influence that outcome the whole world is even better off.  If even one person helps someone, anyone, that is even just slightly to the left of them on the bell-curve in any ability and that individual goes on to use this newly improved ability to their advantage, the mean for the world’s well-being moves to the right.  The graphic above is the latest assessment of an agglomeration of factors contributing to Subjective Well-being as reported via a survey given to the peoples of countries around the globe.  It is from a document quaintly entitled the “The World Happiness Report 2015”.  If you’ve heard anybody state recently that Switzerland is the “happiest” country in the world it’s because of the data contained in this report.  Don’t let the cutesy title fool you, though, the report is 87 pages long, involved the collection of thousands of data points, and involved statistical analysis of those points.  All to arrive at a mean level of well-being for each country, and that mean is then categorized and color-coded.  As is convention, red is worse than green.  I sincerely hope that everyone will read “The World Happiness Report 2015”.  It is an important document for individuals as well as world leaders and social scientists.  But even if you don’t read it, take a huge deep breath and go to work or send your kids off to school knowing that any little positive thing you do helps us shift away from the red.  And “The World Happiness Report” will thank you.

http://worldhappiness.report/ed/2015/

Helliwell, John F., Richard Layard, and Jeffrey Sachs, eds. 2015. World Happiness Report 2015.
New York: Sustainable Development Solutions Network.

The Force (of Inflation) Awakens

http://www.nytimes.com/2016/01/12/upshot/star-wars-and-how-a-force-helps-the-federal-reserve.html?emc=eta1&_r=0

Click on the above link to have the force of the web take you to a fun economics article.

Thank you to my husband who sent this to me.

Dr. Michael Burry - The Big Short’s Biggest Jerk

by Jacqueline Verrilli

Make no mistake, I have great respect for Dr. Michael Burry.  I think anyone with enough research prowess to find a huge investment opportunity, enough willingness to take a tremendous amount of criticism from investors, enough audacity to shut his investors out of taking their money back when they wanted it, and enough risk-tolerance and patience to pay huge sums out and wait years for a gigantic payoff deserves a lot of credit.  But it just so happens that his name is currently the one that is most associated with making a lot of money off the most recent financial meltdown, and hence he is going to be the whipping boy on this post.  We have had several financial crises of varying severity over the years including, but not limited to, the stock market crash of 1929, stag-flation of the 1970’s, the commercial real estate crisis of the 1990’s, the dot-bomb of the early 2000’s, and, of course, the Global Financial Market Meltdown of 2008-9.  And the fact of the matter is that the “Dr. Michael Burrys” of the world are part of the problem.  Scion Capital LLC (his old firm) and other hedge funds often promote and provide the liquidity necessary to increase the inefficiency in irrational markets and thereby exacerbate the value destruction in a financial crisis.  In an interview with “New York Magazine” Burry claims that he “knew what was happening, but there was nothing I, or anyone else, could do to stop it.”  That may have been true in 2007, but since the crash, instead of using his brains to help thwart another crisis, Scion Asset Management LLC (his new firm) is using his money and power to help create another one.

Who’s Responsible???!

In his rant to “New York Magazine”, Dr. Michael Burry, in the same breath, manages to disparage the defrauded ex-home owners, bash the Federal Reserve and big banks, and take pot shots at politicians - all after opening his rant by saying, “The biggest hope I had was that we would enter a new era of personal responsibility.  Instead, we doubled down on blaming others…”  I would love to think that he intended the irony as a hilarious joke, but I don’t think he did.  I would love to say that he, like so many others who get rich exploiting market inefficiencies, is in denial as to his role in the crash.  But Dr. Burry is not so lacking in self-awareness.  He knows that his short trades (buying credit default swaps against the incredibly poor quality bonds known as “CDOs”) contributed to the ultimate disaster, and he admits as much to Michael Lewis, the writer of The Big Short.  He knows better than anyone how it all went down and who paid the ultimate price.  He states, “The ones running the machine did not get punished after the dot-com bubble either — all those VCs and dot-com executives still live in their mansions lining the 280 corridor on the San Francisco peninsula. The little guy will pay for it — the small investor, the borrower. Which is why the little guy needs to be warned to be more diligent and to be more suspicious of society’s sanctioned suits offering free money. It will always be seductive, but that’s the devil that wants your soul.”  So rather than share the information about how to empower “the little guy”, or go on a mission to change what’s really broken, he spews vapid aphoristic statements that point the finger of blame away from himself and starts a new hedge fund.  Good show, I say, old boy.

Every party needs a pooper…

…and I guess that’s me.  I hate to say it in quite this way, but here’s the blunt truth.  Money makes people irrational and irrational people with money create irrational markets.  In the obfuscating language of economists and Federal Reserve Chair People, excessive liquidity can create a situation of decoupling asset pricing from the underlying fundamentals.  Allianz Chief Economist said yesterday (Jan 4^th, 2016) that the current level of the stock market indicates decoupling.  In common, everyday language “decoupling” means that stocks, bonds, and other assets (even homes), can become overpriced simply because investors continue to buy them.  Buyers often figure that the price they are given must be the right price, they assume that markets are rational.  We can’t all be experts, but clearly not enough people understand the factors that create an asset's underlying value.  If we stop to think about it for a moment, however, we can begin to get a clue.  The demand for the products a manufacturing company makes creates the underlying value of the company, and hence, of its stock.  For a bond, the credit and cash flow of the issuer creates the value.  But, for most of us, it’s just no fun to read prospectuses or industry market studies.  Watching a stock ticker, on the other hand… now that’s exciting!  From day to day, and even moment to moment, we can see how much other people think a company or a bond is worth, and, just like when the Earth was flat, what we see confirms our own ideas.  The stock is going up so other people must agree with our opinion that it will continue to do so, and all those people couldn’t possibly be wrong (least of all me), and so we buy.  But what may actually be happening is that the assets become priced based on the amount of money chasing them, and the availability of the assets, regardless of what actually creates their value. The asset pricing becomes tautology; they are going up because they are being bought at higher prices, not because the underlying company is becoming more efficient or because the market for its goods or services is growing.  There’s just too much money chasing the stock!

What Dr. Michael Burry Knows But Won’t Tell You!

In the curious case of continued financial market crashes, the cycle repeats itself with regularity because the investors believe that the new assets on offer are somehow different from the old assets.  These ones are better!  Fresher!  Now with better taste and more flavor!  The salesperson said so!  Ok… ok… I will take the cynicism down a bit and go just back to bashing Burry.  Since HE won’t tell us how to defend ourselves from market irrationality, I will put in my two cents.  And three points:

1)  FASBs are easily gamed

The Financial Accounting Standards Board sets out the generally accepted rules for accounting known as FASBs (pronounced “faz bees”).  There are a lot of FASBs, and they are complicated, which is why you need to take a really hard test to become a Certified Public Accountant (CPA).  But one thing that is apparently every bit as exciting as watching the stock-ticker is figuring out ways to get around the FASBs.  If you have ever heard the term “creative accounting” you might want to interpret that as “gaming the FASBs”.  Of course, the FASBs must be flexible to allow for business judgement, but the way they are worded allows a CFO to use poor judgement just as easily as good judgement.  If a company is in need of more earnings (to meet projections, of course), they merely need to reallocate some of the cash they have coming in or going out to another account.  If a company wants to hold off on marking its assets to their true market value, they can redefine the assets to put off alerting their investors to the gains or losses.  Accounting slight-of-hand abounds in the public-corporation world and even those investors who have a fairly sophisticated understanding of accounting would find it difficult to tease apart some of the manipulations and gyrations of this numismatic magic.

One way to help thwart a future financial crash would be to make it WAY less easy to consider ANYTHING “off balance sheet”.   In the CDO/Default Swap debacle, the investment banks were able to hide all of the assets by holding them off balance sheet.  This was allowed because, under FASB rules, since the bonds were hedged against default by the “insurance” of a credit default swap, the CFOs judged the assets to be “riskless” and, therefore, not truly assets to the company.  Seriously.  They did that.  Why no one seems to be calling out the accounting practices that serve to hide assets is beyond me.  I was hoping to find a crusader in Burry, but instead he’s probably using knowledge of the FASBs to his advantage in more ways than one.

Many corporations of various sizes and in varying industries use “off balance sheet” accounting to reduce the value of their assets and make it appear as though their return on assets (ROA) is higher than it actually is.  The use of “synthetic leases” has been common among companies that hold a lot of real estate, for example.  And creating a new legal entity that is only nominally owned by the originating company is another way to get things off the books. “Oh!  But Ms. Verrilli,” I hear you CFOs protesting, “all corporations must disclose their off-balance-sheet assets in the footnotes of their quarterly and annual reports.  All one need do is look there to read how the assets are treated.”  That’s what Burry and Buffet do.  I have, in fact, read several areas of the very small print of company financial reports, and I have often had to re-read them several times in order to even begin to understand what they are trying to convey.  It's small print for a reason – nobody wants you to attempt to read it, let alone understand it.  And this brings me to my next point.

2)     Small print should be in BIG, BOLD LETTERS!

Information asymmetries are generally at the heart of most people feeling like they got taken to the cleaners, or worse.  The fine print on the labels of drug canisters describing the potential side effects is the easiest example to point to, and probably the hardest to read for those of us over 40.  At this stage of my life, I have heard of many people being harmed by a drug, but, because the potential side effect was disclosed (in legalese, mind you) in the fine print on the jar or in an insert, along with the legal a priori assumption that taking any drug poses a risk, people are often not compensated for their harm.  And this seems fair.  Even over-the-counter analgesics have been shown to pose a risk.  But it is very clear to me that very often a doctor prescribes a drug and leaves the label-reading up to the patient.  The drug company that makes the drug may be the only entity in the equation that actually knows about the potential side effects.  In one instance of which I am aware, an individual’s nerves were permanently damaged by a common drug.  It was disclosed on the drug packaging that this happened in less than 1% of the cases of individuals taking the drug.  The doctor had been made aware that this was a potential side effect, but did not disclose it to the patient because the odds were “obviously very low” that this patient would fall into the 1%.  In this case, the individual was able to sue for damages, but I’d bet they’d rather have their nerves intact or at least have had the opportunity to decide to take the gamble on the 1%.

Examples of information asymmetries as market inefficiencies abound, and they don’t even have to involve small print.  The PRESERVATION AND MAINTENANCE OF PROPERTY clause in a mortgage document is a prime example, here.  When someone is buying a home, especially their first one, they are never thinking about home maintenance.  They are thinking about what colors the walls should be, how to organize the tools in the garage, and making sure the movers don’t mishandle the dining table.  But if you fail to maintain your house, and the bank deems that it could be sold for more than the mortgage amount, and you default even technically, this clause could be used to take away your home.  Unlikely scenario?  So is global financial market meltdown, no?

Whenever you are undertaking a transaction, create your own BOLD PRINT disclosures to see if you would still undertake the transaction.  Here are some good ones to start off with:

·        A HOME OF THIS PRICE COSTS AN AVERAGE OF $2,500 ANNUALLY TO MAINTAIN, AND THE EXPENSES CAN OFTEN COME IN LARGE CHUNKS UNEXPECTEDLY.  FAILURE TO MAINTAIN THE PROPERTY IN ITS CURRENT CONDITION CAN RESULT IN FORECLOSURE.

·        THERE IS A 0.8% CHANCE THAT YOU WILL SUFFER PERMANENT NERVE DAMAGE INVOLVING PAIN AND/OR THE LOSS OF THE USE OF LIMBS WHILE TAKING THIS DRUG.

·        THIS STOCK IS CURRENTLY CLIMBING BECAUSE TECH STOCKS ARE IN FAVOR.

·        THIS SUPPLEMENT HAS NOT BEEN PROVEN TO PROVIDE ANY BENEFIT WHATSOEVER BUT STILL COSTS $30 A JAR.

·        THIS IS A SINGLE-FUNCTION KITCHEN GADGET THAT YOU MAY USE AVIDLY FOR 3 MONTHS AND  IT WILL THEREAFTER TAKE UP SPACE IN YOUR CUPBOARDS UNTIL YOU DONATE IT TO A CHARITY.  IT MAY BE EASILY REPLACED BY A KNIFE YOU ALREADY OWN.

Drug makers, home and stock brokers, and businesses of all types want you to spend your money on their products and services.  They create them to provide a benefit to consumers, for sure, but “Buyer Beware” is not sufficient to mitigate information asymmetries for you as an individual.  It takes LOTS of time for you and your doctor or lawyer or salesperson (or your less impulsive self) to go through each facet of every transaction.  DO IT ANYWAY!!  Asking questions of yourself and others and doing your own research until you completely understand a transaction empowers you against information asymmetries.  Will you ever get the coveted “perfect information” that is an economist’s dream?  No.  BUT TRY ANYWAY.  I hope you enjoyed all the bold print in this point.

3)     Fear the acronym!

CDO stands for Collateralized Debt Obligation.  REMIC stands for Real Estate Mortgage Investment Conduit.  IPO stands for Initial Public Offering.  EDITDA stands for Earnings Before Interest Taxes Debt Service and Amortization.  EIQ stands for Emotional Intelligence Quotient.  LOL stands for Laugh Out Loud.  LMFAO is the name of a band, and also happens to be what I do whenever I hear a new acronym come out of Corporate America or Wall Street.  Let’s just take a quick look at the reality behind the letters CDO, shall we?  Collateralized Debt Obligations are created as follows:

1.  Originate mortgage loans (don't worry about the quality of the loans because...),
2.  Sell mortgage loans to other entities like investment banks (get them “off the books”).
3.  Investments banks put all the loans into an aggregated “pool” and create bonds or Mortgage Backed Securities (MBS) (oh, yes, we must have an acronym here!).
4.  Get MBS bonds rated by a rating agency to get a percentage of the bonds blessed as “AAA” rated (WOW! Triple A!  They must be good!), and a percentage of them rated “AA”, and so on.  Give “AAA” rated bonds the lowest interest rates, since they are the most secure, and give “BBB” rated bonds (which still sounds pretty good, doesn’t it?) higher interest rates since they are more risky.  The percentage left unrated used to actually be honestly-named “junk bonds”.
5.  Sell bonds to investors. This is where all the good small print and legalese gets inserted into the documents with statements like “these investments were rated by a third party and do not imply or reflect the opinion of the issuer as to the quality of the investment” and “the underlying cash flows from these investments is drawn from a pool of residential mortgages originated at institutions other than the issuer…”
6.  Take all the bonds that don’t sell (including the junk) and re-bundle them into a CDO!!!!!!!!!!!!!!  Let’s recap up to this point.  The original loan payments on mortgages that went into the MBSs are now re-pooled and re-bonded.  So, a CDO is a bond made up of cash flow off of bonds made up of the cash flow off of mortgage loans that were originated and sold by a bank.  You still with me?  OK.  Good.  Cause then…
7.  Have the CDO rated by an agency to see what percentage will be deemed “AAA” “AA” “A”… and sell those, too.  Or hold onto them since they have fairly high interest rates as well as high ratings!
8.  Sell people like Dr. Michael Burry “swaps” to make extra money and create “riskless” assets and get those CDO/Swap combos “off the books”.

Seriously.  They did that.

I, and Dr. Burry, believe that the investment banks basically just started drinking their own kool-aid.  Their own acronyms and jargon got them so confused that they no longer understood what they were doing – they just saw huge sums of cash coming in.

Acronyms and jargon are super-efficient in meetings and reports where everyone is already “in the know” on the obfuscation.  But whenever you hear or read an acronym, jargon, or some seemingly innocuous words thrown into a sentence that act to trivialize the discussion, you should instantly be wary and be prompted to ask this “stupid” question:

·        I’m sorry, I haven’t heard that acronym (or term) before; what does it stand for (mean)? (if reading, Google it)

Then ask this follow-up question more than once:

·        And what exactly does that actually mean? (Google that, too)

Acronyms, jargon, and trivializing colloquialisms are a sure sign that someone is trying to appear “in the know” and therefore, outsmart you.  The funniest part of this is that often times the individual using the acronym or jargon does not actually understand the underlying fundamentals upon which the acronym or jargon is based.  If they do, they should have no issues with explaining them to you.  If you read The Big Short you will find that Dr. Michael Burry is an unabashed questioner when things don’t make complete sense.  Take that lesson to heart, everyone!!

Back to Burry Bashing

Dr. Burry is at it again, taking advantage of market inefficiencies at his new-ish firm, Scion Asset Management, and I do applaud him for it.  Making more money for wealthy people is not a bad thing in and of itself, and the fact that the wealthy people often don’t spend their excess funds (or even pay taxes on them) is not technically Burry’s problem, nor is it his fault.  The issue I take with Burry is that, as a super-smart guy who now has literally more money than he knows what to do with, he took the easy path and went after more money.  Has the devil gotten his soul, too?  Look, I know it’s fun for him to research the crap out of companies and financial instruments and figure out what the “play” is given the prevailing economic environment.  It’s hard to fight your passions.  Believe me, I get that, being the Geekonomist, myself.  But at the very least Dr. Michael Burry could have taken the time to help out the poor schleps who dabble in the markets buying mostly S&P pegged mutual funds.  He calls us “the little guys” meaning “the people who are hopelessly under-educated in finance” and, because we are uninformed and lacking in the interest, know-how, or time to do anything but our jobs, raise kids, and have some fun in our lives, we remain the financially bullied. Burry knows we’ll just sit and take it because there is no big-shouldered body-guard on the playground (Elizabeth Warren notwithstanding).  The Big Short left me feeling like he and the other “shorters” should be standing up for us since they have recognized the main issues, some of which I have put forth here.  I don’t know about the other guys, but Burry is back at facilitating liquidity and I think that that makes him The Big Short’s Biggest Jerk.  Thanks for nothin’, pal.