2009

I wasn't paying attention and failed to note the arrival of 2010. Despite getting laid off 2009 wasn't a bad year for me. I wasn't enjoying my job much at the end and early retirement was financially feasible but not the sort of thing I was likely to do on my own. So, after the initial shock, getting fired wasn't the worst thing in the world for me. Kind of like having your spouse leave and discovering you are happier without them.

Things seem to be looking up a bit for the rest of the country as well. At least immediate disaster seems to have been averted. However the economy still seems quite fragile to me. It's nice that the markets are up but the speed and magnitude of the rise are a bit unsettling as they suggest another bubble. And the politicians aren't helping by failing to do much of anything constructive to prevent future crises. And the oil is running out which isn't going to be good.

Oh well perhaps things will work out alright. Here's hoping you all have a good 2010.

Superfreakonomics

One of the presents I received for Christmas was the book, "Superfreakonomics", by Levitt and Dubner, a sequel to their book, "Freakonomics", which I reviewed here .

I have now read Superfreakonomics and my take is that it is similar to Freakonomics. That is, it is a provocative and entertaining read but should not be taken as the last word on the subjects it covers.

As with Freakonomics it covers a diverse set of topics somewhat peripheral to the main concerns of economists. It has nothing much to say about macroeconomics and the recent crisis.

The chapter on global warming has been widely criticized but I didn't find it highly objectionable. They do make a much criticized remark about the color of solar panels which, as I explain here , seems rather fundamentally misguided. However it is not central to their main point which is that it may be more sensible and feasible to find ways to mitigate the effects of CO2 emissions than to eliminate them. I see no justification for dismissing mitigation strategies out of hand as many global warming alarmists would prefer. However it is not surprising that many people would find the author's irreverent attitude about global warming offensive as the subject has taken on a quasi-religious aspect in some circles.

The book considers numerous other topics. Some conclusions I find rather plausible. For example that child safety seats for children older than 3 provide little benefit over using adult seat belts. Others less so. Such as the conclusion that children's exposure to TV caused an increase of 50% increase in property crime and a 25% increase in violent crime in the 1960s.

In general I suspect the author's arguments rely on assumptions which may or may not be true. An egregious example occurs at the start of the book. The authors wish to compare the risks of driving home drunk and walking home drunk. In order to do this they need to know the fraction of drunk pedestrians. With no justification at all they just assume this is the same as the fraction of drunk drivers. Perhaps this is true (or nearly true) but arguments based on these sorts of guesses are obviously not ironclad.

So in conclusion a fun read but should not be taken too seriously.

Stopping distance puzzle.

Here is a quick puzzle. It is pretty easy so you might try computing the answer in your head. Suppose you are driving at 60 mph and apply the brakes. Suppose you can brake with a force of 1g. How far will you travel before stopping? For this puzzle assume 1g = 32 ft/(sec)/(sec).

Added note: As discussed in the comments I was a bit sloppy when I said "brake with a force of 1g". What I meant of course was brake so as to produce a deceleration of 1g. See this wikipedia article for much more about this common misnomer.

Bank errors

Many people don't bother checking their bank statements because they trust their bank not to make errors. In my experience this is a bit optimistic. I check my statements and have found errors. In one case many years ago my bank failed to record a deposit. Although it was a fairly significant amount of money (2 weeks pay if I remember correctly) I might not have noticed if I hadn't tried to reconcile my statement.

I recently discovered another error. It is a bit annoying since it is too late to do anything about it and it cost me $100. I have been entering old data into Quicken and found in 2006 I apparently failed to add up several items in a deposit correctly. So the deposit was recorded as $100 less than it actually was and the bank failed to correct the error. Note simply checking that the balance on my statement agreed with my records was not sufficient to detect this error. I wonder whether it was the bank or the teller who received a $100 windfall.

Of course another reason for checking statements is to detect other problems such as erroneous or fraudulent credit or debit card charges or forged checks. I haven't encountered these but they seem to be fairly common.

Princeton

My potential job site is in central New Jersey, near Princeton. I drove down Sunday to look around a bit. Princeton seems to be the sort of college town that some people find quite appealing but which strikes me as expensive and crowded. The picture is of some buildings on the Princeton University campus.

I ran into a little traffic but even best case it appears the commute would be almost 2 hours each way so I will probably need to move. I have been looking at real estate sites and it appears that real estate prices for the sort of 2 bedroom townhouse condominium I have here are roughly similar (at least outside of Princeton itself) but that property taxes are higher. If any reader has useful information about housing options in the Princeton area I would appreciate hearing it.

Agnosticism and Atheism

In a previous post I described myself as an "agnostic/atheist". This prompted some comments so I think I will explain myself a little more.

One reason I describe myself as an agnostic/atheist is that I have never been completely clear on the exact definition of agnostic and atheist and the precise distinction between them, something that the wikipedia entries on Agnosticism and Atheism don't really clear up at least in my mind. And I expect other people are confused as well so describing yourself as one or the other risks misunderstanding as different people are likely to ascribe different meanings to the words.

Another reason I describe myself as an agnostic/atheist is that to the extent I do understand the difference my views are somewhat intermediate. The wikipedia agnosticism article cites Richard Dawkins as follows:

According to Richard Dawkins, a distinction between agnosticism and atheism is unwieldy and depends on how close to zero we are willing to rate the existence of any given god-like entity. Since in practice it is not worth contrasting a zero probability with a probability that is nearly indistinguishable from zero, he prefers to categorize himself as a "de facto atheist".

I agree up to a point. But almost zero is not zero especially since there are an infinite number of possible god-like entities so summing over all of them might yield a reasonable chance for the existence of something like a god.

Also the distinction between agnostic and atheist sometimes seems like one of those pointless religious quarrels that nonreligious people like myself prefer to avoid. So it seems simplest to describe myself as an agnostic/atheist.

Christmas

I was raised in a nonreligious home which nevertheless celebrated Christmas. Although I am an agnostic/atheist I have continued to do so. Merry Christmas.

Senate passes heath care bill

My prediction that health care reform was about to go down in flames proved incorrect as the Senate passed a bill on a party line vote. Of course there are still ways for final passage to elude the Democrats but I didn't expect them to get this far.

Perhaps an example of seeing the world as you wish it to be as I was rooting against them. There are problems with our health care system but in my view the current reform bills will just make matters worse. They do nothing to reduce costs, in fact they are likely to increase them substantially with little benefit. So ultimately they are mostly just a giant gift to the medical industry which is already consuming an unreasonable proportion of the nation's resources.

Mapquest time algorithm

I have found Mapquest is usually pretty good about selecting the fastest route. However on my recent trip to the Outer Banks, I noticed an apparent problem with the suggested route just south of the Delaware Memorial Bridge. Mapquest suggested turning south off 295 onto 13 and then following 13 until it merges into 1. This is about 3.5 miles shorter than continuing on 295 to 95 and then turning south on 7 which also becomes 1. However the Mapquest route contains about 14 stoplights so it seems unlikely it is actually 3 minutes faster as claimed. I thought perhaps Mapquest was ignoring the stoplights although descriptions of their algorithm on the web claim they are accounted for (but not expected traffic delays). But when I tried Google directions it suggested the second route would be faster because Google estimated its time as 5 minutes less than Mapquest did while generating the same estimate for the shorter route. So perhaps Mapquest has incorrect data for the second route.

To confuse things more when the direction of travel is reversed Google also selects the first route after increasing the time for the second route by 3 minutes for no apparent reason. So perhaps there is something flaky about the data being used.

I used Deepwater, New Jersey and Middletown, Delaware as endpoints when experimenting.

Job search update

Back in March I applied for a security clearance which was granted in November . The costs of obtaining the clearance (which I believe are considerable) were borne by a potential employer so it seemed likely that an employment offer would follow. This has proved to be the case as I received an offer letter Tuesday.

Strangely enough my feelings about this are a bit mixed. I have found I don't miss working all that much and it was becoming apparent that I could get by financially. Also the new work location is about 90 miles from my current home so I will probably have to relocate. On the other hand getting a salary (and benefits) in addition to my pension will certainly improve my financial position. And it seems unlikely that there are a lot of better jobs around. So I am leaning towards accepting.

The position would be temporary (with the possibility of becoming permanent) but this doesn't bother me too much since early retirement has its attractions. It does mean I will be cautious about buying rather than renting if I relocate.

Ruthless default

There has been some recent discussion about the morality of ruthless (or strategic) defaults in which a homeowner voluntarily defaults on a non-recourse mortgage loan (surrendering the property to the lender), although they are financially able to continue making the payments, because the property value has fallen far below the amount of the loan balance. A non-recourse loan is one in which the borrower has no further legal obligation after surrendering the collateral even if the value of the collateral is insufficient to cover the loan balance. This does not strike me as particularly wrong so I guess I come down on Salmon's side. However I think his justification that it is OK because banks are evil is wrong. The idea that it is OK to cheat evil people puts you on a very slippery slope. The way I see it you are just exercising one of your options under the contract. The same as if you refinance because interest rates have fallen, an option which is also unfavorable to the lender. The value of these options should be priced into the terms of the loan. Since you are paying for the option I don't see any problem with exercising it when advantageous.

Weather report

The big East Coast snow storm was a bit of a dud here as the storm passed southeast of New York City and Ossining just got a few inches.

And the Yahoo weather forecast has a rather annoying feature in that there is a one-day gap between the current forecast and the extended forecast which means the forecast for Christmas day is currently unavailable.

10% down

In one of my first posts on this blog I advocated requiring home buyers put 20% down. In a recent post Kevin Drum argues for 10% down:

That's too much. Just as leverage much above 10:1 is dangerous in the banking system, it's dangerous in the home mortgage market too. If 10% had been the minimum down payment over the past decade, the housing bubble never would have taken off the way it did. Crazy loans would have been rare. Unqualified buyers would have continued to rent. Mortgage fraud would have been dramatically reduced. Speculation and flipping would have been dampened. Foreclosures wouldn't have decimated entire cities. The derivatives market wouldn't have reached such stratospheric heights. We still might have had a medium-sized housing bubble, but the world probably wouldn't have been on the verge of imploding last year.

While I would prefer 20%, 10% is better than nothing. Unfortunately even after the disastrous housing bubble Congress is still in the thrall of the housing lobby and seemingly unwilling to even consider sensible measures to prevent another.

Health care reform prediction

The health care reform political battle seems to be approaching a critical point. My prediction is that it is about to go down in flames. But I could be wrong. We should know soon.

Oregon Inlet Life Saving Station restoration

When visiting the Outer Banks in 2000 I had noticed an old abandoned building which turned out to be the Oregon Inlet Life Saving Station. Apparently it is being restored as its appearance on my recent trip was quite different. I believe the hole in the foreground is intended to be a parking lot but it was full of sand and water possibly from the November Nor'Easter which did considerable damage to the Outer Banks.

Chincoteague sunset

I am back after a short vacation trip to the Outer Banks of North Carolina. This was my first trip there in almost ten years. This time of year the weather can be chancy and it was a bit cold on Thursday and Friday and rainy on Sunday but Monday was nice. It would be possible to drive down in one day but I always stop along the way. This time I stopped in Chincoteague, Virginia which is just a few miles off Route 13 on the way down. The photo was taken at sunset from near my motel which was located just before the bridge to Assateague Island.

Hiatus

Blogging will be sporadic for a bit.

Bilingual education

Here is an article about the 1998 California proposition which limited bilingual education. It reports that the shift to English immersion has been quite beneficial for Hispanic students which is consistent with other accounts that I have read. Apparently, whatever the theoretical merits of bilingual education, as actually practiced in the United States it is actively harmful. This seems to be fairly well established. Still many liberals continue to reflexively support bilingual education in other parts of the country. Strange and ironic how separate and unequal classes have become politically correct.

Value Line again

As noted here I recently sold a long term poorly performing investment in the Value Line Fund mutual fund. I was unaware at the time of the information in this story about the end of the less than successful reign of the daughter of Value Line's founder. It appears I would have been wise to get out long ago since among other things it appears the mutual fund was paying inflated commissions:

Value Line found another way to profit from its mutual funds, according to the SEC—by overcharging customers. Starting in 1986, when Mrs. Buttner was president but not yet CEO, the company began what the SEC calls a “fraudulent practice” of sending mutual fund trades to brokers who charged inflated commissions and then kicked back a portion of the commissions to Value Line.

This is an example of the perils of nepotism. It appears making your daughter your successor because you can't find anyone else is not the best plan:

Mrs. Buttner was appointed president of Value Line in 1984 by her father, who had looked in vain both inside and outside the family for a successor; she became CEO upon his death three years later. ...

And a reason past performance does not guarantee future results as the disclaimers say. I guess paying a bit more attention to my investments is indicated.

Recent comments working again

The recent comments gadget is currently working after having been broken . Hopefully this will last.

Climatology vrs Economics

The exchange between Hansen and Krugman regarding the relative merits of a carbon tax vrs cap and trade as a means of reducing CO2 emissions reminded me of one of the more annoying things about climate change alarmists. Which is many of the same people who will argue that laymen should defer to the expert opinion of climatologists are themselves completely unwilling to defer to the expert opinion of economists. People who happily expound silly and ignorant economic arguments have little grounds for objection when other people come up with silly and ignorant climatology arguments. I have never seen a convincing explanation for why climatologists should be granted more deference than economists.

Fake Gucci

Felix Salmon and Kevin Drum discuss counterfeit luxury goods and their effect on sales of the real items. However they overlook one type of damage. Kevin Drum:

... There are also people who just flatly can't afford a real Gucci and never will. But in those cases Gucci isn't losing anything when they buy a fake. ...

But this is surely wrong. People buy luxury goods in part to show off, to flaunt their wealth. However this is ineffective if there are lots of indistinguishable cheap fakes in circulation. So Gucci is hurt by cheap fakes as they diminish the appeal of the real thing. Similarly luxury brands are wary of adding low end items to their product line. It cheapens the brand as the saying goes.

I can understand why people think enforcing laws against counterfeiting luxury goods should be low priority but luxury good makers are not crazy to want these laws enforced.

Why housing

Kevin Drum asks why we had a housing bubble and concludes:

The real difference seems to lie not in housing becoming a better target for investment, but in real goods and services becoming less attractive ones. ...

But this seems wrong. There was a complete collapse of underwriting standards for housing loans. So it was very easy to speculate in housing with other people's money. This made housing a more attractive target for speculative investment than other areas where loans were harder to get meaning you were required to risk more of your own money. So there was a flood of borrowed money into housing which drove up prices which attracted still more investment. A classic asset price bubble. You don't need easy credit for an asset price bubble but it certainly helps.

Matthew Yglesias agrees but then adds:

All that said, it’s worth emphasizing that the mere existence of an asset-price bubble and its subsequent collapse doesn't necessarily lead to a years-long recession. A worse policy response than the one we got could have saddled us with Depression conditions, but a better one could have avoided a ton of the human suffering we’re seeing right now.

Of course an asset price bubble doesn't have to cause major problems if it is small and isolated. But this asset bubble was allowed to grow to the point where it endangered the solvency of many big banks and other financial institutions. Once that has occurred there is likely no easy way out. It is unlikely of course that the policy response was perfect but I don't see any obvious way to have avoided our present problems. Yglesias has consistently claimed more can and should be done but that seems to me to be mostly wishful thinking.

Coupons

Bed, Bath and Beyond has inundated me with coupons providing 20% off on any single item. As a result I am reluctant to buy more than one thing at a time in the local store. Somehow this does not seem like the optimal marketing strategy.

Value Line Fund

Thursday I called the Value Line 800 number and told them to exchange all my shares in the Value Line Fund for shares in the Value Line Income and Growth Fund. I had initially invested equal amounts in both with a series of small purchases in 1982-1983. I have been reinvesting all distributions ever since.

The investment in the Value Line Fund was not one of my better calls. Although the value did increase by more than a factor of 5, an annual return of about 6.3%, this considerably lagged the market. The performance in recent years seemed particularly bad. And indeed according to Morningstar (via Quicken ) over the last 5 years 99% of similar mutual funds have performed better. Since I also had a large unrealized capital loss selling seemed indicated.

Perhaps I should have gotten out of the other Value Line fund as well but it had done considerably better. Its value had increased by more than a factor of 12, an annual return of about 9.7%. This still lagged the market (but perhaps with less risk). And according to Morningstar over the last 5 years only 4% of similar funds have done better. Since exchanging just meant a phone call and a complete redemption would have required a signature guarantee my natural laziness and inertia dictated exchanging.

Looking back at the performance of my investments over time it is a bit disconcerting how much luck is involved. Since I tend to take the path of least resistance and let investments ride rather casual initial decisions can have big consequences over time as differences in performance accumulate.

Recent comments broken

The recent comments gadget has stopped working. I don't think this was because of anything I did. A brief internet search suggests the gadget is a bit flaky. Hopefully the problem will resolve itself soon.

Pension started

Back in September I sent in all the paperwork required to start my pension on November 1. You might think this would be soon enough to get my first payment on time but it seems it wasn't. I didn't receive anything until Wednesday when I was paid for November and December. Fortunately the delay didn't matter for me but people who need the first payment on time should make sure they get all the paperwork done well in advance.

My pension is a small fraction of what I was being paid but it does look a bit better on a net basis since a smaller percentage is being taken out. On the other hand I will have to start paying my own medical insurance next year. Still the pension amount will be adequate for me to live on (although if inflation is high it may not remain so). If you are well paid (as I was) it isn't really necessary to match (or nearly match) your previous income for a satisfactory retirement. I find the benefit of not working to be worth quite a bit.

Predicting rare events

One final comment on "The Black Swan" .

Taleb is correct that it is difficult to confidently say much based on empirical data about events that occur too rarely to appear in your data set. However I don't really agree that this means you shouldn't even try. There are techniques that help a bit and that may provide useful warnings. The following example comes from a talk I heard many years ago at IBM.

Suppose you are trying to predict the 200 year flood or 500 year flood, the maximum flow for some river that can be expected over the stated period, and you only have say 100 years of data. You can look at the maximum flows each year and model them as the results of some underlying random distribution and then derive the expected n-year flood. But this is risky as the real distribution may include occasional samples from a process which didn't happen to operate during the period for which you have empirical data. A real world example is where hurricanes occasionally pass over the watershed in question. If your data set does not include any hurricane years you may get a completely misleading picture of what the maximum flood size over periods of time long enough to include hurricane years is likely to be. But there is something you can do. As well as looking at historical data from the particular watershed you are forecasting you can look at data from many similar watersheds. In this case some of these watersheds would have experienced hurricanes giving you notice that a process capable of generating extreme events likely operates occasionally for your particular watershed as well. This will make your predictions more realistic and may encourage more prudent behavior.

This technique is generalizable. For example for financial markets you can look at data from outside the United States. Of course this just mitigates the underlying problem and you may still be caught by surprise but it isn't really practical to worry about everything. I agree with Taleb that you should expect the occasional surprise but not that it is useless to even try to predict and avoid them.