Sad Commentary

This post is not related to VMI per se, just a small part of the article revealing a sad fact about society:

Last year, the U.S. Justice Department began investigating whether VMI's environment is especially hostile to women. Allegations of sexual assault have become a fact of VMI life, occurring about once a year, typical for a school of this size, according to college officials. The first case to result in a criminal charge ended Tuesday.

In that case, a female cadet alleged that Stephen J. Lloyd, then a senior from Mason Neck, Va., pulled her into a storage room the night of March 27 and raped her. Lloyd no longer attends VMI. On Tuesday, he entered an Alford plea, which means he did not admit guilt but acknowledged that there is enough evidence to convict him. The plea is tantamount to a conviction of misdemeanor sexual battery.

The sentence: a year in jail and a $2,500 fine, suspended.

That means they guy could have easily been convicted, but instead got a suspended sentence, meaning he will not serve a day for rape. Probably happens all the time all across the country, and that is a sad commentary on our society.

Milestones

The dow closed over 10,000 today. What does it mean? Nothing, really, but maybe it helps psychologically.

Lurking Variables and Statistical Literacy

People are squealing about pork and the payrolls for federal employees. Fact: Federal employees make more on average than private-sector employees. Fact: They are not overpaid.
Economix explains why:

In 2008, only 14 percent of federal workers were on part-time schedules, compared to 26 percent in the private sector. Federal workers were far older on average: 55 percent were between the ages of 45 and 64, compared to 36 percent of private-sector workers. Furthermore, 45 percent of federal workers held a college degree or higher educational credential, compared to 29 percent of private-sector workers.

and

analysis of the impact of individual education and experience on earnings in the United States by the Harvard economist George Borjas showed that federal employees are paid considerably less than comparable private workers at the top end.

Basically, people looking at the simple averages are not accounting for several important ("lurking") variables that more than explain the average differentials between federal employees and the average private-sector employee.  Andrew Gelman calls this a lack of "statistical literacy"; some call it "lying with statistics". These statistical liars include Chris Edwards at Cato (who by the way should probably know better but is advancing a deliberate agenda), The Free Enterprise Nation, Ilana Mercer of World Net Daily, and Jeff Jacoby of The Boston Globe.

The Prize

The prize in economics went to Ostrom and Williamson for institutional economics.

“In reading [Professor Ostrom's and Williamson's] work, you are
impressed that economics is not really fundamentally about markets, but
about resource allocation and distribution problems. Markets appear
because they operate effectively to handle a subset of these resource allocation
challenges. ” - Michael Spence, senior fellow, the Hoover Institution.

A timely reminder to those who are following the current crisis.

Protons, Prostate Cancer, and Bad Incentives in Health Care

Here, and here. If you have 3 options of equal impact, one that is free, one that is $50,000, and one that is $100,000, why is it that our current system picks the third one? Answer: it's hard to convince most people that more health care is not equivalent to better health care. Most people think "proton radiation therapy" sounds like it will do more good than "wait and watch." It doesn't.
I'm still puzzled by the blind faith we put in doctors when it comes to their motives in recommending treatment. Doctors, like mechanics, have an incentive to "run up the bill" even to the point of making s--- up or recommending treatments (repairs) that may or may not be necessary. We should WANT a bureaucrat that knows something about the effectiveness of treatments between us and our doctors, whether it's a government bureaucrat or a private sector one! Problem now is that the private sector bureaucrat has perverse incentives, too. A little regulation in these cases (or a public provider) could go a long way.

Predictably Unpredictable?

The Economist on the importance of independence in mixed strategies. Here is the full ungated paper.

TV is an Inferior Good

The economist writes:

the shares of all the big American media companies have outperformed the market since March.

The Downside of a Global Supply Chain

Mmmmm beef parts. Still damn tasty.

Ground beef is usually not simply a chunk of meat run through a grinder. Instead, records and interviews show, a single portion of hamburger meat is often an amalgam of various grades of meat from different parts of cows and even from different slaughterhouses.... The frozen hamburgers made by the food giant Cargill, were labeled “American Chef’s Selection Angus Beef Patties.” Yet confidential grinding logs and other Cargill records show that the hamburgers were made from a mix of slaughterhouse trimmings and a mash-like product derived from scraps that were ground together at a plant in Wisconsin. The ingredients came from slaughterhouses in Nebraska, Texas and Uruguay, and from a South Dakota company... Those low-grade ingredients are cut from areas of the cow that are more likely to have had contact with feces, which carries E. coli, industry research shows. Yet Cargill, like most meat companies, relies on its suppliers to check for the bacteria and does its own testing only after the ingredients are ground together.

Order Matters

Most polls have health care reform in its currently proposed form at about 43% for/45% against. Fox News has it at 35% for/49% against. Something's fishy, but the sampling was fine and so was the overall wording of the question. It was the questions that preceded the health care question that may have biased the attitudes of the respondents. See more at fivethirtyeight.com

Chessboxing

Here. Maybe my students could think of a joke relating to a full-contact statistics exam.

"Locavorism" and the Environment

"Buying local" is not necessarily buying green:

...lamb raised on New Zealand’s clover-choked pastures and shipped 11,000 miles by boat to Britain produced 1,520 pounds of carbon dioxide emissions per ton while British lamb produced 6,280 pounds of carbon dioxide per ton, in part because poorer British pastures force farmers to use feed. In other words, it is four times more energy-efficient for Londoners to buy lamb imported from the other side of the world than to buy it from a producer in their backyard.

Nor is knowing the producer necessarily good for the community:

Historically, such personalized economic transactions were the norm, but they were inherently fraught with risk and tension. In colonial America — a place I’ve studied in some depth — all markets were initially driven by face-to-face interaction. It should come as no surprise that things could get, well, personal. Markets were intensely competitive and exclusive. Everyone knew everyone. And that was often the problem. The court records of colonial New England are replete with personal market transactions gone awry.

Food for thought, so to speak. Trade is good.

Bayes' Rule and Dick Cheney's One Percent Doctrine

I was teaching Bayes' Rule this week, and there's an example that has to do with lie detectors and stealing. The story is that you have employees, of whom 10% are stealing. You also have a lie detector that is 80% effective (i.e. P(positive test given stealing) is 0.8 and P(positive test given not stealing) is 0.2, etc.). So, if you apply Bayes' Rule, you learn that given a positive test (i.e. the lie detector says you are lying/stealing) is just 0.308!
So, what about Cheney's "One Percent Doctrine" for justifying torture? Even worse! Let's suppose that there is a 1% chance that a detainee has information about a terror attack. Now suppose that torture is 90% effective in the sense that if that detainee is conspiring with terrorists he "confesses" and gives information about it with probability 0.9, but also confesses (with whatever made-up details he can think of) with probability 0.1 if he is innocent. (This, I think, is being generous to the effectiveness of torture!) Then, GIVEN a confession, the probability that there was really a plot is just 0.009/(0.009+0.099) = 0.083 - less than 10%!
The conclusion here is that the one percent doctrine logically fails when there is even a small chance of getting false positives from your intelligence-gathering resources and methods. It seems from what you hear that torture leads to sufficiently many false positives that it probably isn't helping, and is probably HURTING our security by leading our enforcement agencies on wild goose chases! Food for thought!

Made up Statistics

Nate Silver accuses Strategic Vision of cooking its books on poll "data" it releases.

Alex Tabarrok Tells Reiterates all the Good Stuff about Globalization

Another Ted.

Intrinsic Motivation vs. Extrinsic Motivation (a.k.a. "Incentives")

From Ted Talks.

More Financial Innovation that Doesn't Suck

For the last couple of years unbanked Kenyans have been using their mobile phones as mobile banks, which has proved invaluable as a means for small savings and remittance transfers for poor households.

Big car (not =) safe car

From consumer reports via Marginal Revolution. 2009 Malibu vs. 1959 Bel Air.

On the Wages of Clergy and Accountants

Dedicated to my wife and brother in law Tom.

Cap and Trade Basics

If you care to be informed about the impact of cap and trade, read this. Here are the important points:
1. Think of the benefits to the private sector from pollution. ... it’s cheaper ... to produce goods if you don’t worry about whatever emissions result as a byproduct.
2. A cap-and-trade system puts a limit on overall emissions, so that emitters have to pay a price for emitting.
3. The cost to the economy of this limit is the benefit the private sector would have gotten by emitting more than is allowed under the cap.
4. The creation of cap and trade means that emission permits command a market price, and the value of these permits ... (a growing fraction over time) would be captured by the government through auctions, and ... in effect, recycled to consumers.
A couple of notes for those who don't want to read the original: 1. the costs in (3) are not very big - they are a deadweight loss triangle, not the total market value of the permits (which is what some guesstimates of the costs say); 2. the current and future environmental benefits of the cap may or may not outweigh the losses to firms; 3. assuming that the "cap" does a good job of balancing firms' losses with environmental gains, an auction is more efficient than a Pigouvian carbon tax which is more efficient than the current system of "cap and regulate," which is in turn more efficient than subsidizing emission-reducing investments (*see below); and 3. the effectiveness or fairness of how the government is able or willing to "recycle to consumers" the revenues generated is something we can have a fair debate about.
* Note on policy options: Cap and trade and a carbon tax both have the advantage of allowing the firms for whom it is most expensive to cut emissions to emit more if they are willing to pay, whereas those for whom it is least expensive have an incentive to make more cuts. Firm-by-firm regulations do not achieve this, and subsidies have the unintended long run side-effect of leading to higher consumption of the very things whose production results in emissions. In theory, an auction does a better job of "getting the price right" for a given desired quantity. One thing that might tilt in favor of a tax over an auction would be setup costs - designing an auction that gets the price right is a difficult problem in theory and in practice.

Using Derivatives for Good Instead of Evil

This excerpt Robert Pozen's "Too Big to Save? How to fix the US Financial System" points to a good use for derivatives (HT: Marginal Revolution):

The Danish model has another critical and innovative feature.  Holders can retire their own mortgages by purchasing the same face amount of mortgage bonds at the prevailing market price.  To prepay a mortgage by purchasing bonds, the home owner must give advance notice of several weeks to the MCI [mortgage credit institutions], which designates by lottery the specific bonds to be purchased.  Thus, if rising interest rates or other factors cause mortgage bonds to trade at a discount, home owners can reduce the principal or retire the whole mortgage by purchasing an appropriate mortgage bond at a discount.

This is an example of innovation that would make markets more robust help prevent foreclosures, rather than the types of innovations we've seen in the US, which are mostly meant to subvert regulations. The fact that this has not evolved in the US makes me think two things: One, that the balance of power IS tilted in favor of banks and against the consumer (maybe due to lobbying power, which Adam Smith and other "classical" market economists warned against); and two, that the regulatory framework has created some degree of moral hazard and/or regulatory capture (i.e. banks are taking risks and doing things way beyond what they would normally do because they do not face consequences from the market, i.e. bailouts, or the regulators, i.e. bureaucratic corruption) over the last 30 years.