Monthly Archives: August 2007

Book Notes: Discover Your Inner Economist

Tyler Cowen’s new book Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist is a delightful read, chock-full of nuggets that can improve your life or at the least sharpen your understanding of why certain things are the way they are.

The title comes from Tyler’s insistence that economic thinking can be applied to various everyday situations. He’s proves this point by running the reader through a multitude of heavenly examples, touching on every category — high and low culture, medicine, food, business, torture, and so forth. As loyal readers of Marginal Revolution know, Tyler’s range is awe-inspiring. He has a certain gift for the “mind grenade”. This book is less polemic than a series of woven mind grenades.

Below are some of the nuggets from the book, as direct or paraphrased quotes. Enjoy the hacks, but to understand the context, do buy the book.

  • When asked what makes people tick, the responding participants cited “recognition and respect” as the number-one motivating factor in the workplace. “Achievement and accomplishment” came in second.
  • One study compared two methods for cleaning up a school. Authorities could a) lecture students that they should be neat and tidy, or b) compliment them for being neat and tidy. The lecturing had no effect, but the praise increased litter collection by a factor of three.
  • Rewards and penalites often fail when individauls feel a resulting loss of control. When we do apply incentives, we should frame them with respect and at least the appearance of consultation.
  • Behavior psychology suggests that the duration of a pain has little bearing on our memory of fhow bad that pain was. Instead, we tend to remember how bad the worst pain was, and we also remember how much pain we experienced at the beginning and at the end of the experience.
  • For the most part, getting a lot out of culture is an acquired skill, dependent on periodic immersion in a cultural environment, combined with a willingness to learn and adjust.
  • Admit that we don’t care as much about culture — at least any particular part of culture — as we like to think we do. If we force ourselves to “enjoy everything in the proper way” we often end up avoiding culture altogether.
  • When you go through each room in a museum, ask yourself which picture you would take home — if you could take home just one — and why. Force yourself to pay attention. This tactic appeals to the “Me Factor”. And when visiting a blockbuster exhibit, skip room #1 altogether because there is too much human traffic because people haven’t yet admitted to themselves that they don’t care about what’s on the wall.
  • When reading a complex novel, read some middle or end chapters first. They may pique your interest. Don’t obsess over sequence. When reading through the novel the first time, get interested in at least one character, even if the rest is a cipher. Then re-read the book as a whole in order.
  • Put down books when you become uninterested; walk out of movies mid-way through.
  • The best way to impress a woman is to do something that impresses other men.
  • The best gives are often those that we, as gift-givers, do not ourselves value very much. This is why women like when men give them flowers and diamonds.
  • Purchasing certain kinds of insurance is more about signaling commitment and loyalty than the actual insurance…product warranties are often not worth it.
  • Most stereotypes about liars aren’t true. If they have any detectable physical traits, they tend to move their arms, hands, and fingers less when they talk. They also blink less. When it comes to speech, liars make fewer stumbles or grammatical errors than do truth-tellers. They are less likely to backtrack and go back and fill in parts of the story “they forgot”. In sum, they try not to make mistakes for fear of looking like liars.
  • To get a person’s real opinion, ask what she thinks everyone else believes. This is the best way to get an honest opinion – “Bayesian truth serum”.
  • When to counter-signal: When we have good news, we should often withhold it, at least if we can afford to wait. Sooner or later the news will come out anyway. If need be, let a supposedly disinterested third party carry the report. Our audiences and friends will marvel, “What a modest type he is!”
  • Group brainstorming is not usually productive.
  • At fancy and expensive restaurants, order the item that sounds least appetizing and the dish you’re least likely to want to order. An item won’t be on the menu unless there is a good reason for its presence. If it sounds bad, it probably tastes especially good. Most popular-sounding items can be just slightly below the menu’s average quality. Beware roast chicken. Too many people like roast chicken, so it will be on the menu, but it doesn’t hit the highest peaks of taste. The flip side: when cooking at home, be wary of trying something new.
  • When at a restaurant, ask a waiter, “What is best?” Don’t ask, “What should I get?”
  • Tips for ethnic restaurants: appetizers are often better than main courses; avoid desserts at ethnic resaturants in America. Eat in countries with a lot of inequality — rich people who will want tasty food, and poor people who will cook for the rich people. The higher the level of wages at the bottom, the harder it is to employ labor to cook the food, prepare raw ingredients, etc. High wages are one reason why Western Europe is losing is role as culinary leader.
  • The people with the best cooking ideas are not always the people with the most money. Few immigrant families — who presumably cook the best, most authentic food of their type — live in high end neighborhoods.
  • Eat unhealthy food outside the home. Restaurants know how to make good unhealthy food. At home, eat healthy. And don’t take recipes too seriously.
  • In poor countries give money to those not asking for it. Don’t give to beggars.
  • Tipping is restaurants is not a great way to help the world. Most tipping occurs in relatively wealthy countries. The workers in restaurants have jobs. They are usually young and have high job prospects. And, if everyone started tipping 25 percent, employers would just pay less. So tip 15 percent, even if the waitress is cute, and send the rest abroad.

The Atlantic: Speechwriting, Rove, Quirkiness

The Atlantic is my favorite media brand. I say brand because they’re much more than a monthly ideas magazine. They have the best web site of its peer group (web-only content, interactive articles, etc), some of the most interesting writers blogging under its masthead (Jim Fallows, Andrew Sullivan, Ross Douthat), they produce the annual Ideas Festival, and much more. Here’s a recent Washington Post piece about their intense hunt for the top talent.

The September 2007 issue is outstanding. Links below are for subscribers only.

Matthew Scully, former speechwriter for President Bush, has a delicious tell-all piece about Michael Gerson‘s role in crafting Bush’s speeches. It’s apparently stirred quite the chatter in Washington. I’ve always been interested in the speechwriting world, and Scully’s first-person piece gives interesting insight into how it all works — and sometimes doesn’t.

Joshua Green has a terrific analysis and prediction of Karl Rove’s legacy. In a word: he had a huge opportunity to re-make American politics, and he failed.

Michael Hirschorn writes a piece on "quirk" in culture:

We’re drowning in quirk. It is the ruling sensibility of today’s Gen-X indie culture, defined territorially by the gentle ministrations of public radio’s This American Life; the strenuously odd (and now canceled) TV sitcom Arrested Development; the movies of Wes Anderson; Dave Eggers’s McSweeney’s Web site; the performance art, music, and writing of Miranda July; and the just-too-wacky-to-be-fully-believable memoirs of Augusten Burroughs.

Given that everybody and their kid brother seems to profess their deep love of "This American Life", it’s refreshing to hear someone complain about the show’s "unbearable lightness". I actually haven’t heard it much, but I’m all for the lone voice.

So…do you subscribe to The Atlantic? Do you read Atlantic bloggers? It’s some of the highest quality brain food around.

Menial Summer Jobs and Affluence

Arnold Kling points me to this few-week old WSJ op-ed by Kay Hymowitz about teens increasingly skipping menial dishwashing jobs in favor of more exotic (and rewarding) corporate internships or service-learning projects such as building houses in Guatemala. Her point is that what’s lost in the paper-shuffling internship is the "humbling self-discipline" that comes from flipping burgers.

She cites "globalization" — the root of all evil! — as one reason why teens are doing less of the low-skilled stereotypical summer job because there are so many immigrants mowing lawns and washing dishes:

And, according to Neil Howe, an expert on age cohorts, kids are so used to seeing immigrants doing that sort of work that they assume "I don’t have to mess with food or cleaning stuff up."

This point is arguable, as is the idea that doing low-level service labor builds character and humility.

Arnold adds:

Her description of teenage extracurricular experience these days seems right on target. Affluent teenagers are spending an incredible amount of time abroad, while they are becoming increasingly out of touch with rural and small-town America.

And this is…bad? Nah. Unfair, but good for the lucky teen.

Hymowitz, in her op/ed, does, though, touch on one big, important idea when it comes to summer jobs: rich teens do mind expanding and usually unpaid internships while poor teens work paid but boring service jobs. It’s a trade-off I’ve seen time and time again: the most stimulating jobs for young people don’t pay well (or at all). By the time you’ve graduated from college, affluent teens have accumulated four years’ worth of impressive, worldly experiences, while less affluent teens have no experiences — just smaller student loans to pay off.

This made me think of the following abstract of this paper, emphasis below by Tyler Cowen:

Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime?  We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth — features which are chosen to match observed properties of earnings dynamics by cohorts.  We find that as of age 20, differences in initial conditions account for more of the variation in lifetime utility, lifetime earnings and lifetime wealth than do differences in shocks received over the lifetime.  Among initial conditions, variation in initial human capital is substantially more important than variation in learning ability or initial wealth for determining how an agent fares in life.  An increase in an agent’s human capital affects expected lifetime utility by raising an agent’s expected earnings profile, whereas an increase in learning ability affects expected utility by producing a steeper expected earnings profile.

Hindsight Bias Devalues Science

My friend Eliezer has been on a tear over at the Overcoming Bias blog. Here’s his post on how the Hindsight Bias (aka the "I knew it all along" phenomenon) devalues science. He links to this helpful primer on the hindsight bias.

Here’s my post about Eliezer’s paper about cognitive biases — the best introduction I’ve read on this fascinating topic. Here’s a podcast with Eliezer on the singularity and other topics.

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If you want to see Eliezer in-person, go to the Singularity Summit on September 8-9 in San Francisco. It’s probably the most important conference of the year if you’re interested in the issues surrounding the singularity. Tyler Cowen says it’s no longer intellectually acceptable not to be familiar with this topic.

Stupid Investors, Rejoice!

What a crazy couple weeks we’ve had in the financial markets….And through it all, how many times I have logged in to see how my investments in the stock market are doing? Zero. That’s right. Zero times — I haven’t checked even once to watch how my index funds are holding up.

That’s because the money I invest in the market is for the long-term. I won’t touch it for many years. So I don’t much care how it goes up and down and up and down because I know, in the long-term, there’s a very good chance it will be up.

Ben Stein has a brilliant mini-essay at the Fortune web site on what to make of the current crisis. Stupid investors, rejoice!

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

To make money, at least in the postwar world, all you have to do is buy the broad indexes domestically–both in the emerging world and in the developed world–and, to throw in a little certainty about your old age, maybe buy some annuities.

To lose money, pretend you’re really, really clever, and that by reading financial journalism and watching CNBC, you can outguess the market day by day. Along with that, you must have absolutely no sense of proportion about money and the world at large.

The "smart" investor nevertheless reads the papers, bails out, heads for the hills, and stocks up on canned foods. He gets a really big charge out of reading in the press that there are also problems in the mergers and acquisitions market and that some deals will not go through because there are problems raising the funds for the deal. He does not see that the total value of the U.S. major stock markets (the Wilshire 5000) is roughly $18 trillion. The value of the deals that have failed in the private equity world is in the tens of billions or less. The loss to investors–what the merger price was compared with the normalized premerger price–is in the billions. It’s real money, and I could buy my wife some nice jewelry with it, but it’s pennies in the national or global systems.

The "smart" investor also reads that the Fed has injected, say, $100 billion into the banking system in the last week or ten days, and says, "Aha! The whole country is vaporizing. Look how desperate the system is for money!" What he does not see is that the Fed is always either adding or subtracting liquidity and that recent moves are tiny in the context of a nation with a money supply in the range of $12 trillion. No, the "smart" investor is far too busy looking for reasons to run for cover and thinks he can outsmart long-term trends.

The stupid investor knows only a few basic facts: The economy has not had one real depression since 1941, a span of an amazing 66 years. In the roughly 60 rolling-ten-year periods since the end of World War II, the S&P 500’s total return has exceeded the return on "risk-free" Treasury long-term bonds in all but four ten-year periods–the ones ending in 1974, 1977, 1978, and 2002. The first three of these were times of seriously flawed monetary policy that allowed stagflation, and the last one was on the heels of the tech crash and the worst peacetime terrorist attack in the history of the Western world.

The inert, lazy, couch potato investor (to use a phrase from my guru, Phil DeMuth, investment manager and friend par excellence) knows that despite wars, inflation, recession, gasoline shortages, housing crashes in various parts of the nation, riots in the streets, and wage-price controls, the S&P 500, with dividends reinvested, has yielded an average ten-year return of 243%, vs. 86% for the highest-grade bonds. That sounds pretty good to him.

Driver: No Seatbelt. Passenger: Seatbelt

In Russia and Ukraine drivers don’t wear seatbelts. Same holds in many other developing countries.

Assuming cars are equipped with seatbelts (despite not being worn), and that most of the local drivers do not wear them, this scenario is actually ideal for the Western tourist.

You, the rational tourist, promptly buckles up in the taxi. In case there’s a crash, you’ll have some protection. The driver and other drivers, meanwhile, wear no seatbelt, thus reducing the Peltzman Effect which says people respond to safety regulations by acting more recklessly. Drivers who wear seatbelts drive less safely.

So the next time you get in a taxi and the driver says, "Don’t worry, we don’t wear seatbelts here," as the driver said to me in Odessa, Ukraine, just smile and say, "Good". And then buckle up.

Questions About Being a Foodie

“More lemony than toasty, more refreshing than overwhelming.” That was description of a wine that I read on a recent wine list. I always enjoy scanning wine or cheese lists and reveling in the absurdity of the adjectives. Did you know cheese can be “subtly earthy” or “mildly musty”?

I’m not a foodie. I gorge myself at buffets in Las Vegas, order my In-n-Out Burgers animal style, and say with total truthfulness that my favorite drink (alcoholic or non) is clean, pure water. So long as it’s not spicy, I’ll chow anything down the tube — from sushi to seafood.

Maybe this will change. Maybe someday I will sniff a glass of wine with an air of knowingness and pronounce it “oaky”, or ask for my meat done in something other than “medium rare”. Until then, I must study the existence of foodies from afar, pondering their self-satisfied ways, admiring their slow pace with the fork, and resisting my temptation to finish off their half-eaten steak.

Questions for the world:

1. Are some foodies fakes? Do they claim to deeply appreciate fine food and wine for the same reason that many people “love” art and the opera and high culture generally, that is to signal wealth and sophistication?

2. Do you have to be rich to be a foodie? Fine wine is expensive, no question there. Fine restaurants are also expensive. And buying healthy, fine food from the supermarket may at times be more expensive than processed, frozen, unhealthy, unsophisticated groceries.

3. Should parents cultivate an appreciation of fine food in their under-21 age kids? I’m not a foodie probably because I wasn’t raised one. For me growing up, food was introduced mainly as fuel. Joanne Wilson on the other hand, a self-confessed foodie, says on her blog that her kids are food snobs.

4. Is being a food snob analogous to being a literature snob or a music snob or a refined consumer any other type of cultural product where you devote extra energy and derive extra appreciation? Or is it different because food and wine cost real money? After all, you can’t rent food from the library or listen to food continuously on a CD.

All this being said, the social pressure is getting to me. I found myself savoring the different kinds of cheeses for breakfast in Vienna the other week. And don’t forget that I took a cooking class in Florence last summer. Keep. Hope. Alive.

The Twentysomething Lifehacker

My friend Cal Newport has a good essay in Flak Magazine on the paradox of young lifehackers. Money quote:

Since when did twentysomethings, the demographic that previously gave rise to the beatniks, hippies, punks, and slackers, care about something so prosaic, so establishment, as to-do lists and reclaiming wasted time?

Cal offers some insight into the burgeoning category of young people who undergo extensive goal setting exercises and inbox-efficiency tests.

I still think the period of emerging adulthood is marked more by slouching around than hyper-organizing; more wandering than end-in-mind focus. But there is indeed a minority of folks like my blog friend Scott Young who represent this breed of focused, young lifehackers. With the web they can connect, form a community, share tips, and most important, feel less strange that they care deeply about getting the most out of every minute of every day.

St. Petersburg

Apparently tourists who visit Moscow after St. Petersburg complain that there’s nothing to see. That’s because while St. Pete might be smaller in size, it’s larger in terms of cultural institutions, beautifully architected buildings, Venice-like canals; it has an overall ambiance that feels more European than Russian. It’s also free of many of the big-city hassles of Moscow (though St. Pete is still big — 5 million people). Notwithstanding all this, I liked Moscow as much as St. Pete — they’re just different.

From the St. Pete airport we went straight to St. Catherine’s Palace. Stunningly beautiful and ornate! Gilded wood covered with gold plate is in endless supply. A lot of restoration had to happen since the Nazis burned much of it during the battle of Leningrad. Still — each fresco, wood carving, and room feels authentic.P8070081

St. Catherine’s Palace is situated just outside St. Pete. In the city itself, there is a kind of center part (anchored by a huge statue of Lenin) around which most of the interesting things lie. Several beautiful canals / rivers provide a nice walking area. You can definitely do some "wander around by foot" in St. Pete.

During the first night we went to the ballet — no surprises here. Ornate building. Since it was out of season, it was mostly tourists. We finished at 10:30 PM and walked outside to daylight. St. Pete is very close to Scandinavia (two hour drive from Finland) and therefore it similarly stays light late

On day 2 we went to Peterhof, a series of buildings and gardens made by Peter the Great. Very similar to St. Catherine’s Palace on the inside; the magic here is the outside landscaping. The gardens are beautiful, waterfalls everywhere. All the waterfalls and fountains are gravity-powered, which is amazing.

Finally, St. Petersburg is home to one of the greatest art museums in the world: the hermitage. Overloaded with art from big names and little names, but mostly big names. Impressionists, Spanish, on and on and on. It rivals any museum in scale and famous works. We spent three hours; could have spent a whole day.P8070089

For our last dinner in Russia / Ukraine, we finally found a Mexican restaurant! It’s not that Russian food is bad; it’s just bland. And it gets tiresome. Carne asada, chips and salsa, margaritas: all refreshing changes!P8080035

The State of Emerging Markets: Eastern Europe

Emerging markets are growing at more than double the rate of developed economies like the U.S., Japan, or Western Europe. The economic statistics are impressive, but to walk the streets of places like China, India, and Eastern Europe and feel the growth on the streets makes an even bigger impression.

I’m interested in emerging markets not only from a business or investing perspective (I have some money in an index fund with this emphasis). The cultural and political changes which accompany massive growth are equally interesting. They’re at times disheartening (witness the millions of Chinese who have been displaced by their government) but they never fail to excite and surprise.

Last week I had coffee in Moscow with Tom Nastas, a local VC there, who gave me a good overview of the emerging markets and how Russia / Eastern Europe fits in.

After reflecting on our conversation, I concluded that I’m much more interested — from a business perspective — in Eastern Europe, Latin America, Dubai, Israel, and Southeast Asia than I am in China and India. From my limited perspective and experiences, I see China and India as overhyped and crowded. India sorely lacks physical infrastructure and China lacks sustainable political infrastructure, among other things. Both problems can and will be overcome in time. But there’s a larger problem for the enterprising individual or small business who’s getting into the game now as opposed to 10 years ago: western entrepreneurs are swarming both countries, driving up prices and crowding the battle for genuine opportunities. Be cautious where others are greedy, goes the saying.

Today I read a solid, brief essay of the state of emerging markets hosted by my publisher Wiley as part of its "Directions" series (where the future is going). The author, Mark Mobius, identifies the potential of Eastern Europe:

Within the emerging markets realm, Eastern Europe in particular has undergone significant developments. A major event was the accession of 10 additional countries into the European Union (EU), which expanded the trade bloc to 25 members in May 2004; the addition of Bulgaria and Romania this year has brought the total number to 27. Improved corporate governance, robust earnings growth, consolidation and M&A activities in the region as a result of EU convergence, a reduction in sovereign risk, and a stronger macroeconomic environment have all contributed to the stock price appreciation and the re-rating of Eastern European equities over the last five years. While the correction in oil prices from the high in 2006 has impacted oil-exporting markets such as Russia, we expect oil prices to remain firm because of geopolitical and bottleneck problems. The 12 Eastern European markets which gained entry into the EU in 2004 and 2007 are expected to continue to benefit from EU convergence, access to funds, relatively lower labor costs, business-friendly tax laws, cost competitiveness, higher GDP growth, and foreign direct investment inflows.

The entire essay is worth a read.