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Beaten to the punch

I had a brilliant idea over the Christmas break. It would save some people money, it would give other people flexibility, it allow me to get a “markets in everything” link from Tyler Cowen. I couldn’t lose! It turns out that I’m too slow and have been beaten to the punch by a good few years.

I wanted to build a website that allowed people to trade store credit and gift cards. The sellers would get the flexibility of cash, the buyers would get a discount at whatever store they were buying the card for and I’d take a (tiny) slice out of the middle.

Here are two articles from 2005 speaking of exactly that market: one from Wired and one from MSNBC. Between them, they list five different sites already doing what I thought of. Oh well.

They still don’t seem to have realised the full potential of this, though. I would like to see a site to exchange all currently-non-tradable forms of pseudo money (that is, things that effectively are a store of value, but are tied to particular stores or providers). That includes gift cards, store credit, frequent flier miles, supermarket reward programmes and Second Life Linden dollars.

There are clear issues of fraud risk to overcome, but I wonder how those sites get around the various stores’ policies of making gift cards non-transferable (i.e. not for resale).

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John Pilger versus “the great game”

John Pilger (biography on Wikipedia) has a new piece out in the New Statesman, “The ‘good war’ is a bad war.” This is the central part of his essay:

The truth about the “good war” is to be found in compelling evidence that the 2001 invasion, widely supported in the west as a justifiable response to the 11 September attacks, was actually planned two months prior to 9/11 and that the most pressing problem for Washington was not the Taliban’s links with Osama Bin Laden, but the prospect of the Taliban mullahs losing control of Afghanistan to less reliable mujahedin factions, led by warlords who had been funded and armed by the CIA to fight America’s proxy war against the Soviet occupiers in the 1980s. Known as the Northern Alliance, these mujahedin had been largely a creation of Washington, which believed the “jihadi card” could be used to bring down the Soviet Union. The Taliban were a product of this and, during the Clinton years, they were admired for their “discipline”. Or, as the Wall Street Journal put it, “[the Taliban] are the players most capable of achieving peace in Afghanistan at this moment in history”.

The “moment in history” was a secret memorandum of understanding the mullahs had signed with the Clinton administration on the pipeline deal. However, by the late 1990s, the Northern Alliance had encroached further and further on territory controlled by the Taliban, whom, as a result, were deemed in Washington to lack the “stability” required of such an important client. It was the consistency of this client relationship that had been a prerequisite of US support, regardless of the Taliban’s aversion to human rights. (Asked about this, a state department briefer had predicted that “the Taliban will develop like the Saudis did”, with a pro-American economy, no democracy and “lots of sharia law”, which meant the legalised persecution of women. “We can live with that,” he said.)

By early 2001, convinced it was the presence of Osama Bin Laden that was souring their relationship with Washington, the Taliban tried to get rid of him. Under a deal negotiated by the leaders of Pakistan’s two Islamic parties, Bin Laden was to be held under house arrest in Peshawar. A tribunal of clerics would then hear evidence against him and decide whether to try him or hand him over to the Americans. Whether or not this would have happened, Pakistan’s Pervez Musharraf vetoed the plan. According to the then Pakistani foreign minister, Niaz Naik, a senior US diplomat told him on 21 July 2001 that it had been decided to dispense with the Taliban “under a carpet of bombs”.

That is fascinating stuff. I am glad that people like Pilger exist as journalists because he really does push to uncover the truth. Any lie by any government is shameful. Nevertheless, while I am happy to accept the facts that Pilger presents as true, it’s difficult to read this article and to know what he actually wants other than to continue his vociferous criticism of Western foreign policy and that of the United States in particular.

On the one hand, he highlights above some of the awful aspects of an Afghanistan ruled (let’s not say governed) by the Taliban: no democracy, no freedom of religion, little (if any) freedom of speech, the utter subjugation of women, an economy based on the extraction and capture of wealth. On the other hand, he later speaks of the …

… historic ban on opium production that the Taliban regime had achieved. A UN official in Kabul described the ban to me as “a modern miracle”. The miracle was quickly rescinded. As a reward for supporting the Karzai “democracy”, the Americans allowed Northern Alliance warlords to replant the country’s entire opium crop in 2002. Twenty-eight out of the 32 provinces instantly went under cultivation.

But he doesn’t bother noting that the Taliban were only able to enforce their ban by killing anyone who violated it. I’m pretty sure that Pilger opposes the death penalty. I’m absolutely certain that he opposes it when it’s instigated without any recourse to defence in a fair trial.

I agree entirely with Pilger that the main priorities of the U.S. in looking at other countries have been political stability and economic liberalism, with the rule of law being a distant third and anything else almost entirely off the radar. I likewise agree that this is principally because these represent minimum conditions for the inevitably large U.S. companies to do business in those countries. I say “inevitably” because small U.S. companies are not in a position to invest internationally. Pilger views this as a modern form of imperialism. It’s a tempting position, but I tend to think of it more as the U.S. looking out for it’s own and leaving other countries to sort out their own particular rights and values. It is not non-interventionism, but a sort of ideally-minimal-but-occasionally-dramatic-interventionism.

I would understand if Pilger thought that the West ought to promote the good things it has aspired to itself: women’s rights, religious freedom, the welfare state and so forth. But Pilger is apparantly against humanitarian intervention, which he describes as the work of the ascendant, “narcissistic, war-loving wing” of liberalism, so I am again left confused as to what he wants the West to actually do. Does he want complete isolation?

Let me put it this way: Zimbabwe is in a terrible state. From once being described as the “bread-basket of Africa,” it is now the basket-case of the continent. It’s inflation is so high as to become unmeasurable. A third of it’s population has fled the country. It has no democracy. The opposition, when they attempt to rally, is beaten. For it’s part, the West has imposed sanctions, but China has happily handed truckloads of cash to Mugabe’s regime in exchange for Zimbabwe’s natural resources. What does John Pilger think the foreign policy of the U.S.A., the U.K. and the rest of the West ought to be towards Zimbabwe?

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Organic food, standards and conspicuous consumption

There is a fantastic article up at the Financial Times by Bee Wilson, entitled “What makes a pig organic?”  It’s clearly part of a publicity push for her soon-to-be-published book, “Swindled:  From Poison Sweets to Counterfeit Coffee – The Dark History of the Food Cheats” (Foyles, Waterstones, Amazon), which was recently book-of-the-week on the BBC.  It starts with:

This is a tale of two pigs. The first – let’s call him Soren – is reared in Denmark. For the first few months of his life, he lives a cramped existence in a barn. This pink, flabby creature is castrated so that his meat won’t taste too strong. When at last he is allowed outside, his only freedom is a small concrete run. At a young age, he is killed and turned into bacon, using potassium nitrate and sodium nitrite. When you put slices of him in a pan, white watery liquid runs out.

The second – let’s call him Juan – was lucky enough to be born in the Iberian peninsula. He is sleek, black and hairless, a descendant of the original wild boar. Juan spends his life munching acorns among the oak trees. By the standards of animals destined for pork, he is allowed to live a long, calm life. He is only killed when he is 20 months, oldish for a pig, after which time his flesh is cured in sea salt until his fat turns to oleic acid, a fatty acid similar to that in olive oil. Juan is now jamón ibérico de bellota. When you eat slices of him, the salty flesh melts in your mouth.

It should be perfectly obvious which pig has led a better life and makes for better food. But there is one further crucial difference between the two. Because he has had only organic feed and has not suffered the worst indignities of factory farmed pigs – overcrowding and no access to outdoor space – Soren the Danish pig ends his life in a British supermarket labelled “organic”. Whereas Juan, for technical reasons, doesn’t qualify for the organic label.

… which is just a little bit sensationalist, but gets the point across.  A little later we start getting into the truth of the matter:

When you buy an organic egg you are not just buying the means to make an omelette, you are buying a dream. It is the dream of something delicious, which will simultaneously be good for your body and good for the hens and people who produced and packed it. It is the dream of being self-indulgent and virtuous at the same time – which essentially encapsulates the main yearning of our consumerist world. As Lynda Brown says: “Everybody wants an organic egg to come from a chicken that has led an idyllic life. But most people don’t actually want to pay for it.” The result is that when you look behind the dreamy label of much organic food – as with Soren the pig – you find it is not so very different from the industrial, compromised food you were trying to buy your way out of. The yolk is still pallid. The workers are still underpaid. The hens are still crowded – just a bit less than for conventionally farmed eggs.

In other words, buying organic is a form of conspicuous consumption.  How do we know that buying organic is a “dream of being self-indulgent and virtuous at the same time”?  Well, as Bee notes later on:

Take soy milk. In the Tesco longlife milk aisle, you can choose between: first, Tesco Calcium Enriched Soya Drink (at 63p a litre), your basic average soy milk; second, Tesco Organic Unsweetened Soya Drink (at 99p a litre), a premium-looking product with a price tag to match; and third, Tesco Value Unsweetened Soya Drink (60p a litre) with its no-frills packaging. Yet if you look at the small print, you will see that the Value soy milk is organic too. In other words, you are being offered a choice between spending 60p on organic soy milk that doesn’t appear to be organic or 39p more for the organic soy milk that loudly trumpets the fact. By paying that 39p, you are effectively admitting that organic food is simply an idea to you. It is an idea that says wealth and health (whereas “Value” is an idea that says poverty). This is the reductio ad absurdum of “organic” as a brand.

However morally-driven we might all pretend (and like) to be, people like Megan McArdle are a rarity.  For the vast majority of us, buying organic is a way of tickling our egos or showing off to our dinner-party guests.  If we actually end up easing the living conditions of the creatures we eat, that’s a largely unnecessary bonus, because it’s the label that counts.  This is not unique.  In a very real way, buying organic food is much the same as buying “fair trade” food.  We’re buying the highly-visible feel-good factor.  Don’t believe me?  Here’s another titbit of evidence.  Bee Wilson notes:

In the US, [t]he USDA allows many more nonorganic ingredients to be used in “organic” food than are permissible in the UK. Last year, there was outrage when the USDA certified Anheuser-Busch’s Wild Hop Lager, which included hops sprayed with pesticides and grown with chemical fertilisers, as an “organic” beer.

Wild Hop Lager does get lampooned, but not because they failed to make their product truely organic.  People bag it because it’s a bad beer.  Here are it’s reviews on RateBeer.com, BeerAdvocate.com and hop-talk.com.  Notice that none of them are rejecting it because of it’s judicious use of the word “organic.”  They’re rating it on the basis of what makes a good beer.  The closest we get is from the latter, saying:

Why is it awful…? Because once again a megabrewery is trying to make a product that looks like a craft brew, yet they are pouring their money into marketing it and not into making it.

… which is really saying nothing about the desirability of environmental sustainability or the avoidance of man-made chemicals.  If Anheuser-Busch produced a not-at-all organic beer that nevertheless tasted good this reviewer would be all over it.

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Another note on identity theft

I notice that Jeremy Clarkson has had his arse handed to him after ridiculing the uproar that occurred following the HMRC’s loss of CDs containing the personal information of 25 million Britons.

First came his effort in The Sun:

Clarkson published details of his Barclays account in the Sun newspaper, including his account number and sort code. He even told people how to find out his address.

“All you’ll be able to do with them is put money into my account. Not take it out. Honestly, I’ve never known such a palaver about nothing,” he told readers.

Then came his retraction in The Times (owned, like The Sun, by News Corp.):

“I opened my bank statement this morning to find out that someone has set up a direct debit which automatically takes £500 from my account,” he said.

“The bank cannot find out who did this because of the Data Protection Act and they cannot stop it from happening again.

“I was wrong and I have been punished for my mistake.”

“Contrary to what I said at the time, we must go after the idiots who lost the discs and stick cocktail sticks in their eyes until they beg for mercy.”

It’s certainly tempting to laugh at Clarkson and even feel smug about it, but that helps nobody. I attended a lecture last year by Bruce Schneier (this one, to be exact. LSE has released a video of the event here) on the economics of information security and the topic of identity theft (obviously) came up. His take, which I couldn’t agree more with, is that personal information security will not improve until appropriate incentives are put in place. In particular, those responsible for permitting a fraud to occur should be required to bear the full cost of that fraud.

Barclays (Clarkson’s bank) ought to be required, by law, to repay Clarkson his money but not get it back from the charity that it was paid to. You better believe that their security checks would be improved, and fast.

Side note: Yes, it was also Barclays that I was speaking about the last time I wrote about identity theft.

Update:   It would appear that Mr Clarkson is indeed entitled to get his money back.  That doesn’t make my point less valid.  There are plenty of things that someone with your information can do that you can’t get cleaned up, at least not with a huge amount of trouble.  They might try to take out a loan in your name, which affects your credit rating no matter whether it’s successful.  They might try to get a passport with your name and their photo on it.  They might do something that puts your name on the TSA’s no-fly list, meaning that you get detained at any US airport.

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New Hampshire and the prediction markets

Plenty of people, Paul Krugman among them, are pointing out that just like the polls (which, on average, had Obama ahead of Clinton by over 8 points), the prediction markets were plainly wrong in forecasting the outcome of the Democratic New Hampshire primary. They’ve got a point.

These are the daily closing prices on the Clinton and Obama contracts to win the New Hampshire primary from InTrade:

dem_nh_clinton.png

dem_nh_obama.png

Up until Iowa, they were fairly steady at ~60% for Clinton and ~40% for Obama, but from the 3rd of January onwards, there was a clear movement towards Obama. On the day before the primary, the markets had Obama 97.8% likely to win. On the day, Clinton won with 39.07% of the vote, while Obama received 36.47%. So why did the market get it wrong?

Paul Krugman contends that the prediction markets were just reflecting the polls and talking heads, presumably because that was all the information there was to be had. This naturally raises the question of why they were wrong (e.g. did we just witness the Bradley effect in action?), but that is not the point here. A prediction market, according to the theory, is meant to be superior to the polls in predicting outcomes because it combines information contained in the polls with information from other sources. So perhaps Krugman is right. But if he is, why did the market go so far towards Obama?

My guesses:

  • Perhaps Krugman is partially right, but the talking heads provided a positive feedback loop. The polls predicted Obama, which the markets saw. The talking heads saw the polls too (perhaps in more detail) and then spoke about it on television, but added effectively no extra information. The markets saw the talking heads and believed it to be extra information in support of the polls.
  • Like any market, the prediction markets are susceptible to bubbles. Perhaps we saw one here in the days between Iowa and New Hampshire.
  • A lack of “true” liquidity. There was plenty of nominal liquidity in these markets leading up to and during the counting, but how much of the trading was arbitrage, how much was momentum (i.e. bubble) trading and how much was “true,” changing-belief-based trading? As the counting occurred, I was watching both the leaked figures on the Drudge Report and the movement on InTrade. It seemed that the prediction market was moving steadily towards Clinton, but nowhere near as quickly as one would have expected. For example, at 9:40pm, with 46% of the vote counted, Clinton was leading 49,719 (40%) to 45,383 (36%), from which one would conclude with extremely high confidence that Clinton would win, but the market was still only putting her at 65%.
  • Perhaps – and I’m by no means certain of this last point – in order for a prediction market to work perfectly, we also need people to set the size of their position in proportion to their confidence in that prediction. So perhaps there were traders who, looking at Drudge or some other source were extremely confident that Clinton would win from quite early in the counting, but since they did not take large enough positions, they did not move the market. In other words, liquidity requirements for a successful prediction market are not just on the number of trades, but on the volume traded.

Update: Justin Wolfers, a long-time researcher in prediction markets, has an article in the WSJ highlighting how surprising the result was given the market predictions.

We were led to this research by an age-old racetrack puzzle economists call the “favorite-long shot bias“: Horse bettors historically have overbet long shots, and they win less often than their odds suggest. Our research suggests that similar biases hold in political prediction markets.

As such, Sen. Clinton’s comeback is even more stunning, as political underdogs have historically won even less often than suggested by their prediction market odds.

Historical comparisons are already being drawn between the New Hampshire primary and the famous 1948 presidential race in which President Harry S. Truman beat Republican challenger Thomas Dewey, despite the infamous “Dewey Defeats Truman” headline in the Chicago Tribune.

Yet the magnitude of the Clinton surprise is arguably even greater. Indeed, historical research by Professors Paul Rhode of the University of Arizona and Koleman Strumpf of Kansas University has shown that in the Truman-Dewey race, prediction markets had seen hope for President Truman despite his dreadful polling numbers, and he was rated an 11% chance of winning the election by election-eve. Thus, Sen. Clinton’s victory on Tuesday was more surprising than President Truman’s in 1948.

Personally, I seem to be thinking of this the other way around. Assuming that prediction markets are generally better than other forms of forecasting, I find it surprising that they got it so wrong on this occasion. Rather than thinking of the result as the equivalent of a 6-sigma event given the prediction market, I wonder what was different this time that so disturbed the market’s ability to predict?

Update 2: Okay, okay a 3-sigma event 🙂  Justin in an email:

For the polls, this was about a 3-sigma event.  For the market, which had Hillary priced at about a 7% chance [JB: Justin is referring to the WSJ market], it is about a 1.7 sigma event.  They aren’t that unusual.  Indeed, they probably happen about 7% of the time

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Interesting empirics

I cannot wait to read the paper coming out of this:

Most women work 11 hours a week and … make $25-40 per hour [versus] $7-10 per hour … in the formal sector.  They are violently victimised once a month.

Prostitutes who work with pimps have higher wages and better conditions.

Supply is quite elastic [a 60% shock in demand occurred with only a 30% increase in prices], adjusting on three margins – higher labour supply by existing prostitutes, in-migration by prostitutes from other areas, and ‘temporary prostitutes’ joining the market.

Doing this research in America, where both the provision and the consumption of prostitution is illegal, is a major achievement for Levitt and Venkatesh.  Has anything equivalent ever been done in countries where the law is less restrictive?

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Fat = lower wages on average?

Via Steven Levitt, here’s an interesting paper by Roy Wada and Erdal Tekin:  “Body Composition and Wages”

This paper examines the effect of body composition on wages. We develop measures of body composition – body fat (BF) and fat-free mass (FFM) – using data on bioelectrical impedance analysis (BIA) that are available in the National Health and Nutrition Examination Survey III and estimate wage models for respondents in the National Longitudinal Survey of Youth 1979. Our results indicate that increased body fat is unambiguously associated with decreased wages for both males and females. This result is in contrast to the mixed and sometimes inconsistent results from the previous research using body mass index (BMI). We also find new evidence indicating that a higher level of fat-free body mass is consistently associated with increased hourly wages. We present further evidence that these results are not the artifacts of unobserved heterogeneity. Our findings are robust to numerous specification checks and to a large number of alternative BIA prediction equations from which the body composition measures are derived.

Our work addresses an important limitation of the current literature on the economics of obesity. Previous research relied on body weight or BMI for measuring obesity despite the growing agreement in the medical literature that they represent misleading measures of obesity because of their inability to distinguish between body fat and fat-free body mass. Body composition measures used in this paper represent significant improvements over the previously used measures because they allow for the effects of fat and fat free components of body composition to be separately identified. Our work also contributes to the growing literature on the role of non-cognitive characteristics on wage determination.

Looking very briefly through the paper, they don’t seem to be looking at what I would have thought an important factor:  relative obesity.  Wada and Tekin don’t seem to postulate a mechanism for how body fat leads to lower wages on average.  While I’m happy to accept that it may come about because of lower productivity, it also seems reasonable to ask if it’s also partially because of a selection bias by employers.  On that basis, looking at how much fat a person is carrying relative to their community average would seem to be important.

Update:  I’m obviously assuming both causality and direction of causality here, but my comment still holds.  A strong result on my suggested extra regressor would, to me, seem to provide evidence of that causality.

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Carbon tariffs

Well, well.  It would appear that Nicolas Sarkozy is threatening China with “carbon tariffs.”  It comes as no surprise that:

His idea already has supporters in the European Commission, particularly among officials charged with defending the interests of European industry.

In other words, the criticism of China is not really based on a perceived risk to the global environment, but that by acting first and China not following, the EU feels that European industry suffers unfairly.  It’s difficult to see how this would be legal under WTO rules.

The stated justification for the threatened action was:

“We cannot have one response from Europe and one from Asia, one from the north and one from the south,” he said. “China can and must play its full part.”

…

“I will defend the principle of a carbon compensation mechanism at the EU’s borders with regard to countries that don’t put in place rules for reducing greenhouse gas emissions,” Mr Sarkozy said.

This might be morally defensible if (and I really have to stress that ‘if’) the EU were to hand the Chinese government every cent they took in tariffs from Chinese exporters, thus allowing Europe to claim that they really were acting on behalf of the planet and not just their domestic industry.

However, we still have the very large problem of sovereignty.  Why should the EU get to dictate policy to China and to impose it arbitrarily if China doesn’t comply?  Even if China were to agree that (a) climate change is real and (b) humankind can and ought to do something about it, it does not follow that China and the EU would agree on an acceptable cost to impose on polluters, not least because China is still a developing country.

The point is that for every tonne of CO2-equivalent emitted in the EU, Europe gets more goods for consumption, but for every tonne emitted in China, we get more goods for consumption and another couple of people lifted out of poverty.

This message was driven home Tuesday by an article in a Communist party newspaper that said 95 per cent of carbon dioxide emissions from the era of the Industrial Revolution through the 1950s came from today’s developed countries.  Rich nations’ per capita emissions of greenhouse gases are also far above those in the developing world, the overseas edition of the People’s Daily newspaper said.

Now, if the world can agree on some sort of framework for reducing greenhouse gas emissions that also includes some restrictions on China and India, it seems sensible enough to me to allow carbon tariffs as punitive action against non-compliant states, but that’s pretty much the only way I’d support it.

I suppose that you might argue that if one country refused to ratify some treaty and other countries judged that by failing to do so, that country was placing other countries in peril, then taking action against them – in this case, imposing carbon tariffs – might be justified under “self defence.”  It’d be a tough sell, since the danger would not be imminent, but you might try it.  The problem then would be that if the stand-alone country were one of the UN security council’s permanent members, they could veto any attempt at multilateral action.

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Western Union and incomplete (financial) markets

Via Tyler Cowen, I came across a fascinating article at the New York Times:  “Western Union Empire Moves Migrant Cash Home.”  Tyler is bang on the money when he calls it consistently interesting throughout.  What really grabbed my attention was the last few paragraphs:

[Western Union] has an estimated global market share of 14 percent, versus 3 percent for its closest competitor, MoneyGram. Though Western Union has responded to increased competition by cutting its charges, it typically remains the most expensive service.

An Oakland group, the Transnational Institute for Grassroots Research and Action, began a boycott campaign in September, demanding that Western Union lower its prices and increase its corporate giving. But it has gained little traction, in part because of the company’s recent courtship of migrant groups.

One critic who now gives Western Union grudging credit is Donald F. Terry, an official at the Inter-American Development Bank. He has spent years trying to get more migrants to use banks, so they could establish financial histories and qualify for loans.

But banks have not fully welcomed migrants, he said, while Western Union and other money transfer companies have more locations, better hours and agents who know their customers’ language and culture.

“You could say they were ripping people off, or you could also say they’re providing a service that poor people desperately needed and were willing to pay for,” Mr. Terry said. “Any consumer company in the world would like to have the customer loyalty they have. They’re doing something right.”

I’ve always been a bit surprised at the rates that financial intermediaries are able to charge.  Whether we’re speaking about “instantaneous” money transfer ala Western Union, money lenders charging 80% (an usurer in the U.S., a life-changing charity in Africa), or the rates charged by bail bondsmen, they’re enormous.  Why?

To a large extent it’s surely to do with a lack of competition, but given the profitability of these ventures, why don’t we see new entrants?  Why don’t we see country- or even region-specific competitors to Western Union?  Where is the all-Spanish-speaking competitor that is staffed entirely with Latinos in the US working off a natural, built-right-into-the-community advertising mechanism?  Even with enormous risk premiums, lending money at 80% is much, much more profitable than putting it in a US-based deposit.  Why don’t people based in that developing country do it?

Update:  Okay, okay, the market isn’t incomplete if there are transactions taking place, but there are real economic profits being made here.  What are the barriers to entry that are keeping suppliers away?