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.

Why Economists Hate the Holidays

By Jacqueline Verrilli

As the holidays approach, those of us who get confused by the concept of gift-giving get very nervous.  It’s not that we are worried about finding the exactly-right present for each of our loved ones, it’s that we simply do not understand why, in first world countries, when everyone in the middle and upper classes  buys exactly what they want whenever they want it… why is gift-giving still a thing at all?  We find gift-giving to be ludicrous attempts to please others in the circumstance of monumental information asymmetries.  And this doesn’t just apply to holiday presents.  We hate birthdays, anniversaries, new babies, housewarmings…  Were it not for the fact that all this gift-giving vigorously stimulates the world economy by keeping factories pumping out home goods and electronics, keeping untold millions employed, causing a substantial increase in the velocity of money, and sharply increasing the world money supply, we would most certainly attempt to put a stop to all the nonsense.  Why?  Because giving gifts to people who have the resources to purchase those items themselves is inefficient, and the emotional drama involved in getting just the right thing that the other person could have bought themselves is irrational.  And inefficiency and irrationality violate our laws and we just don’t like that!

Gifts are Not Rational

At this time of year, millions of people spend (economists might say waste) a great deal of time shopping trying to pick out that exactly-right thing for another party.  The first thing that an economist will point out is that the investment of time in any endeavor, in this case shopping, involves the opportunity costs of doing other things that might provide a higher level of utility, like, say, spending time talking with family or catching up on the fluff pieces in “The Economist”.  We do, however, concede that shopping is considered by many as a form of entertainment.  Constant, ever-changing visual stimulation of lovely items that one might potentially bag and bring home is fun for people, so shopping in and of itself does provide utility.  With the additional overlay of touching upon our instincts to hunt and gather, shopping is a natural, ritualistic, survival behavior, which is both exciting and comforting. 

But gift-buying is where things get dicey.   Upon coming upon an item that attracts them, people often think to themselves “He’ll love this!”  The reality of this moment is that a particularly attractive item has triggered the person’s brain to react - to have a positive emotion known as infatuation - and the item now becomes a set point enmeshed with the buyer’s emotional state.  Additionally, the buyer has a positive experience in believing that they have achieved a few goals: getting one gift identified, anticipating making another person feel good, and anticipating having that person appreciate their thoughtful efforts and the results of those efforts because they found the greatest gift ever.  These (mostly unconscious) thoughts produce (mostly unconscious) expectations and emotional investment in the buyer’s mind regarding the receiver’s appreciation of the item.

The unfortunate reality of this whole situation is complicated and profound, so I will only touch on a few ways in which the irrationality of gift-purchasing and giving can ultimately decrease utility.  The expectations and emotional investment in the gift can result in the giver feeling personally rejected if the reaction the giver gets from the recipient is anything less than utter joy.  We often (egocentrically) assume that we know someone well enough to have an idea of what they might appreciate, but we may be disregarding the facts that tastes change and people can be very fickle.  Moreover, even if the item is exactly right in every way save one, e.g. the color, the giver and receiver will be somewhat disappointed and utility is destroyed.  Even more so when returns or exchanges are required.  Next, it happens very often that the receiver actually does really like the item, but makes some comment about it that the giver misinterprets as an expression of dislike or disappointment and so, even though the gift added utility to the receiver, the giver’s feelings are irrationally hurt, lowering their utility. And, of course, if, in fact, the receiver does not like the item, money and time have been spent to no avail – the utility-level bottoms out for both people.

When you get right down to it, gift-giving in the first world, among the middle and upper class, which is clearly not even remotely needs-based, is fundamentally irrational.  The idea that we can provide someone else utility by buying them something stems from an irrational, egocentric view that one human being can somehow know what is in someone else’s mind, which is not only impossible, it may border on a schizoid disorder.  Only the individual can know what will truly provide them with utility and so gifts are based upon a huge informational asymmetry – they know what they like, you do not.  You have an educated guess, an inkling, or a notion.  Those are not the same thing as knowing.  The reality of gift-giving actually involves a buyer taking a risk in purchasing something that they are attracted to in hopes that the other person will like it, too.  Hope is not a rational reaction to risk.  Calling up the potential receiver’s spouse to see if they still enjoy golf is close to rational, and calling the potential recipient directly to just ask if they would like the item you are considering is the most rational thing you can do when it comes to gifts.  “But that would spoil the surprise!” I hear you thinking (my own irrationality duly noted, here).  Yes.  Economists don’t like surprises, they are the manifestation of an information asymmetry and are, therefore, a sign of inefficiency.  Eeeewwww!  I just gave myself the heebie-jeebies!!

Gift-Giving is Inefficient

Economists view the world through the lens of efficiently distributed and utilized resources.  This requires “perfect” information.  Everybody knows exactly what they need in order to survive, and want in order to thrive, and they exchange that information readily and freely with others in order to gain access to those resources.  The economist’s idea of a great gift is the one where the receiver told you  the exact one they would appreciate, including the color; no surprises, no wrong sizes, and no inefficiency.  Perfect information creates zero waste.  In Italy, similar to here in the US, it is customary to give people a gift when they get married, but it is not customary (or it wasn’t until very recently) for the coppia di fidanzati (the engaged couple) to register for gifts.  The newly married would find themselves the owners of random sets of mismatched dinnerware, a large number of knick-knacks, and multiples of household appliances like irons or espresso makers.  And in Italy (also unless things have changed recently), there are often no returns or exchanges on purchased goods.  Italian wedding gifts are an economist’s nightmare.  The utter inefficiency and utility destruction would likely keep some of us up at night.  [Don’t worry guys, after speaking to my cousin, the customs have changed a bit – registries are coming into vogue in the metropolitan areas and most people have learned to just give money.] Thankfully for us economists, the internet is making things SO much more efficient.  On-line registries and wish lists coupled with the ability to buy something instantaneously and have it shipped directly to the recipient expediently and transparently (thanks to package-tracking technology) are better than any anti-anxiety drug for an economist.

But let's face it, gift-giving among the relatively well-off is the equivalent of playing musical chairs with enough chairs for everybody, we are simply trading among ourselves the things that we all already equally have.  Truly, the best possible solution to the inefficiency of gift-giving is, of course, to give items to those people who actually need things so that resources are not just efficiently purchased, but efficiently distributed and utilized.  People providing needed items and services to those who are generally less well-off is likely to substantially improve the recipients’ well-being.  We see this happening in offices where people are asked to purchase gifts for the underprivileged locally, and at churches that organize food and clothing drives and providing meals for those who need them within their communities.  Many people are donating year round to local food banks, clothing charities, and emergency funds, and I have seen many initiatives for people to donate their professional expertise to community members.

Giving of Your Gifts

Within the last ten years charities have been exposed to be a mixed-bag of efficiency; many people who need the resources do not show up to get them out of pride, fear of judgement, or lack of awareness. Also, it has been shown that some of those who accept the charity can become dependent on it because they begin to view themselves as incapable or undeserving of wage-paying work.  A self-esteem downward spiral ensues.  The problem has been that, historically, donations are in the form of products, foods, and even money, given with no expectation of anything in return.  This is based on two misguided beliefs, that giving without the expectation of receiving anything in return is a show of unconditional love (which it can certainly be if the receiver understands how to use the charitable donation effectively to raise their level of well-being), and that people should be free to do whatever they wish with what they are given freely (again, this is noble and this article should not be viewed as denigrating charitable donations and freedom from interference – please read on).  The science is clear.  The best way for those with means to assist in the efficient distribution and utilization of resources is to act as a mentor: developing a relationship with underprivileged individuals and respectfully learning from them what they need in order to be able to raise their own levels of utility.

More and more charities are now looking to make gains in particular, focused areas of need using outreach and mentoring as their main means of impact.  Charitable organizations and social entrepreneurs are learning how to gauge the effectiveness of programs and track success with actual hard data.  Did I just hear all you economists cheer?  The effective and efficient use of resources is absolutely founded upon people at the lower end of the economic continuum being able to increase their own well-being through the better utilization of their HUMAN CAPITAL resources.  The need for food banks, homeless shelters, free clothing and other basic necessities is not going to go away in the immediate future, so don’t stop giving money and goods to those entities that effectively distribute those resources.  But when it comes to gifts, there can be no greater way to increase your own utility and that of another than giving the gift of your time in mentoring another human being.  You will make us economists very, very happy.  Funny thing is, I think this suggestion better reflects the real purpose behind some of these holidays, anyway.

And if you still feel the need to give a gift to someone who has the resources to buy the item in order to show your appreciation for that person being in your life, well, so be it.  Go ahead, see if we economists care.  It’s your money, you get to do whatever you want with it…  Fine.  But call them first, please…???

Trump Brand Gets Trumped By Trump

By Jacqueline Verrilli

Has Donald Trump Permanently Damaged His Brand?

Branding.  It is the one thing that keeps all cans of corn at the grocery store from being identical commodities.  There is little reason to pay more for something that doesn’t provide greater value to a consumer, but pretty packaging, particular words, and carefully chosen imagery do provide value.  Economists and business leaders know this.  Luxury branding is particularly risky because the products must meet the expectations of very discerning individuals who have time to complain, the money to purchase other luxury items, and the power of personal connections to destroy the brand with one off-hand comment at a board meeting or golf outing.  Personal branding is something that is becoming more and more ingrained in society as we all try to find ways to differentiate ourselves from our coworkers and other job applicants.  Most of us use resumes to denote our education, certifications, skills, and talents to try to convince an employer that we will do the job better than all other comers.  But Donald Trump uses his own name to denote his luxury brand of golf courses, home goods, commercial real estate properties, and himself.   As he becomes the target of boycotts across the nation and around the world how will Trump fare as brand?

On July 16, 2015, Donald Trump announced that he would run for President of the United States of America.  Since then he has attended debates and created press opportunities that have substantially increased his following and have established support for his candidacy.  But along the way, he has made statements that have alienated and insulted entire potential constituencies including the Latino community, people who identify as Muslim, women, and intellectuals.  In the world of instantaneous information transmission, and a world market full of people hungry for news, the words that come out of a celebrity’s mouth quickly become a part of the portrait of who they are.  In Donald Trump’s case, with his image so enmeshed with the value of his businesses, his eagerness to get publicity at any cost may in fact cost him more than he anticipated.  As of this moment, a major middle-eastern retailer has removed Trump products from its shelves at the request of its customers.  A Dubai-based luxury property developer, DAMAC Properties that is building on behalf of Trump, is facing tremendous pressure to cut ties with his organizations.  Numerous calls for removing the Trump name from billboards and buildings have been circulated on social media such as Twitter, Facebook, and Instagram.  Business leaders across the world are distancing themselves from Trump.  IdeaWorks is a respected travel consultancy, and in emails to members of the global travel industry, its president, Jay Sorenson, vowed to boycott Trump properties and is calling for colleagues to do the same.  Sorensen said he expects that the national and global response to Trump’s remarks “truly will penalize the finances of the Trump hotel brand.”  In the New York Times today, reporter Christopher Reynolds interviewed Alan X. Reay, president of Atlas Hospitality Group.  Mr. Reay suggests that licensing deals involving the Trump name may soon start to unravel.

“Alan X. Reay said he imagines big trouble behind the scenes at the Trump hotels.  If you’re the manager of a hotel that’s operated by the Trump organization, ‘I don’t think there’s much that you can do,’ Reay said.  But in situations where other investors and hoteliers have paid to use the Trump name – “there’s going to be huge fallout from that … You’re obviously paying to drive business toward your hotel, not drive it away.”

And according to CNN Money, an “influential Arabian Business magazine on Tuesday published an opinion titled: "Time for Gulf firms to review their links with the toxic Trump brand."

At this point, I would guess that it is highly unlikely that Mr. Trump will be able to mount a new TV series given that most major media outlets will also wish to distance themselves from him.  And his access to banking resources is likely to dry up quickly for similar reasons.  It seems that Mr. Trump, having become overly focused on a goal of raising awareness of his personal name for political gain, may have created a financially disastrous situation for his businesses.  Forgetting that you are an international businessman whose name is inextricably linked to the value of your companies is bad business.  Perhaps "The Donald" should have taken a refresher course in Global Marketing.  The rest of world should learn this very valuable lesson: your name is your brand, don't tarnish it.

Behaviorally Socialist Government?

It is a well-known fact that human beings often make choices that are counter to their best interests.  Yes, that includes you, dear reader.  And influencing people to do such things is not really all that hard.  Using advertising as an example, by appealing to people’s emotions, you can get them to buy things that are not necessary for their existence and may even be counter to their goals - like snack chips and really expensive jeans.  Appealing to your emotions helps companies stack the deck in favor of you exhibiting the behavior of parting with your money.  As it turns out, and as the newly established Social and Behavioral Science Team (SBST) under the Obama administration is proving, you can also use behavior-influencing techniques to get people to do things that are clearly in their best interests.  And it can be incredibly cost effective to do so.  By implementing a simple verbal prompt, people begin to save for retirement; requiring a signature on a form gets greater compliance with the terms of an agreement; and blast reminders can get potential students to complete the process of applying for college and get military service-members to renew their choices for earned benefits.  In the report that the SBST released in September, the proof of concept for the implementation of behavioral interventions to enhance government program efficiency and effectiveness was very clear; double digit percentage improvements and millions of dollars in potential increased revenue and tax savings.

Because these were pilot programs that were experimental in design, the SBST was extremely limited in what they could attempt and accomplish.  The scope of most of the interventions was limited to communicative prompts and form redesigns.  But as the report points out “…because behavioral changes to program administration often require little or no additional cost, returns on investment can be large even when project effects are small. It is no more expensive to send an effective version of an email than an ineffective one.”  The results of the pilot programs using minimal behavioral interventions known as “nudges” and “choice architecture” created dramatic, beneficial results.  But the social and behavioral sciences include disciplines like psychology, sociology and anthropology (and some other “ologies” that I’m forgetting right now) and they have all come a long way from Pavlov and his dogs.  Utilizing the vast wealth of research and data from the social and behavioral sciences could profoundly change the nature of governance.  Human behavior is not a mystery to us and just as companies can use behavioral techniques to sell you goods and services, organizations like the government can use the knowledge of behavior to make their programs more effective.  In fact, up until now, the government has been at a huge disadvantage in not doing so.  Program effectiveness is at the heart of simultaneously improving societal welfare and reducing government.  Could it actually be that, aside from benefiting society, the behavioral sciences show promise for finding commonalities among political constituencies?

This is not just a flippant, rhetorical question.  It is often forgotten that the social sciences includes economics.  Economics is the study of transactions and their value.  Transactions can be defined broadly to include a mother’s kiss on a child’s forehead, which can create an incredible amount of future value by way of the child’s self-esteem.  It is also considered a transaction when you choose to (or not to) read a document completely before signing it.  But, as we all know, economists tend to focus on those transactions that involve money.  Because of an historically excessive focus on money, however, it is also often forgotten that transactions are, in their essence, human social behavior.  Government exists in large part to facilitate the beneficial transactions within society and minimize or mitigate those that do not.  Quite frankly, how we’ve gotten this far without incorporating scientific research on behavior in government is a mystery to me and a testament to society itself.  But there is a wealth of knowledge in the social and behavioral sciences that has increased the understanding of beneficial interpersonal transactions tremendously, and it has been largely ignored until now.  All sciences investigate the realities of our world so that we can make predictions about what will happen under certain circumstances and make educated guesses about what is most likely to happen under uncertain circumstances.  The fundamental goal of science is, therefore, to help us poor, hapless humans to behave according to the best information we can get about the future.  Thus far, we seem to have been operating under aphorisms like “every man for himself” and “share and share alike” as attempts to govern behavior.  Science provides a more pro-active approach.  By observing behavior and predicting responses to stimuli we can get more individuals to behave in their own best interests and that of others.  We can get members of social groups to support one another, we can get families to function better, we can get people to eat more healthfully, save for the future, and avoid risky behaviors, and we can get more people to earn higher wages by staying in school longer.  These are all practical results of social and behavioral science research.  And now, finally, we can get government to be more effective and efficient.

The use of social and behavioral science in government is long overdue and we can go far beyond shortening wait times and reducing printing costs.  Human behavior, in large part, is not random and is surprisingly easily influenced.  Often, it takes little more than a well-timed or well-worded communication to create a huge, positive difference in someone’s future.  While behavioral science may not have politicians running to the middle isle and shaking hands yet, the SBST report proves one thing - it works.

Are Entrepreneurs in Short Supply?

By Jacqueline Verrilli

Because of the news of wildly successful start-ups, it’s easy to get the impression that there are lots of good jobs being created around the globe.  But a few disparate pieces of evidence add up to a much different picture.

Would you like to upgrade to a Full-Size car?

Underemployment is still a huge problem. The Pew Research foundation gauges underemployment by looking at the wages and salaries of college graduates. A person is considered underemployed if their level of education exceeds that required for their job, like a college graduate working the counter at a car rental agency, or if the job’s wages are substantially below what the average person with that level of education is earning.  According to Pew’s research, the good news is that underemployment in the US has been dropping steadily for the past 15 years.  In 1990, fully 65% of college graduates were underemployed in “Good non-college jobs”, and “Low wage jobs”. That figure had fallen to 50% by 2012.  But that, of course, still means that 50% of college graduates are underemployed. Shockingly, over 20% percent of college graduates are now ending up in jobs that earn less than $25,000 a year; 5 percentage points higher than back in 1990.


Given that studies show that underemployed individuals are far more likely to be dissatisfied with their lives, not just their jobs, this statistic has larger implications. Job dissatisfaction is the number one stressor cited in polls and large scale studies of US workers and is a major contributor to poor self-confidence and behaviors that lead to health issues.  So underemployment is not merely a financial issue, it has more far-reaching welfare implications.

Go Generate a Job, Will Ya?!


Just last month several news outlets reported that the major banks, including J.P. Morgan Chase, Citigroup, and Deutsche Bank, were turning away their corporate clients’ cash deposits and, in some cases, charging fees to hold the cash.  The Wall Street Journal reported that the ostensible cause was the new regulations being put into place to lessen the likelihood of another banking crisis making these large deposits more costly for the banks. But if we look more closely, there is also another reason. The October 18^th Wall Street Journal article entitled “Big Banks to America’s Firms: We Don’t Want Your Cash” states “the globe is awash in cash”.  The article cites soft economic growth and limited corporate investment as causative reasons for the excess of cash.  The article goes on, “Many businesses have large sums on hand and opportunities to profitably invest it appear scarce.”  It appears that big companies literally have more money than they know what to do with. They aren't purchasing other companies, engaging in mergers, or even spending on R&D.

This boils down to a perceived lack of quality investments in the marketplace and no new good ideas coming from internal sources.  If this trend continues, an economic slow-down is all but inevitable.

Where is My Real Iron Man?

Elon Musk has gotten a lot of attention for taking on gigantic projects and succeeding. From PayPal to Tesla Motors to SpaceX, Musk has set his sights on making the internet more efficient for transactions, disrupting the fossil fuel industry, and colonizing Mars in our lifetime. Well, that’s all well and good, but I still don’t own a robot.  And I want one. True, I do own a little automatic vacuum that is, as I write this, scampering around the house sweeping up my children’s crumbs and the dirt my husband tracks into the house after a run, but I don’t have a personal servant that can get into a self-driving car to run errands, cook fresh, nutritious meals for my family, and give me a neck massage when I’ve been sitting at the computer too long. Okay, okay… My stiff neck may not qualify as a big enough problem that a fully functioning cyborg needs to be created to solve it, but burning buildings and tedious menial labor jobs abound. My point is that there are many, much larger problems in the world that need to be addressed and it takes people who are willing to take big risks in an effort to create a particular vision of the future to solve them. Right now there is an abundance of educated individuals and cash, and not enough visionaries to put these valuable resources to good use.


It’s always great to hear about a new flavor of snack chip, and I am always super-geeked to hear the news from CERN about the search for dark matter. But the world is in desperate need of people who can look just over the next hill and create something truly useful for society’s present problems. To all you readers, I call for you to take up the glove, pick a problem, and start running the entrepreneurial gauntlet.  The world needs you.