Financial Literacy

There is a really nice post over at Dean Dad about financial literacy. The part that I really liked was the issue of stock market returns. In the post he discusses how planning tools often assumed an 8% return while his own IRA has performed nominally negative. While it is possible that there could be a growth surge that makes an 8% return happen over a 30 year period, it has got to be one heck of a surge to cover up 12 years of negative nominal returns.

This is actually a more general principle and one that we should keep in mind as researchers -- for many phenomena that we study, there is limited data as to what could happen in the future. Extrapolating disease rates, for example, is hard based on current rates (especially for infectious diseases where exponential growth can matter). You also have subtle issues like vaccines and herd immunity (or, in a similar sense, behavioral firebreaks such as careful hand washing). Very small changes in circumstances can make it impossible to predict the future.

So my own lesson from this anecdote is that we need to be very skeptical about the assumptions that go into forecasting. We want to do it (because some information is better than no information) but we need to be ready to revise assumptions as data comes in.

How to ace the math section of the SAT

The SAT is the toughest ninth grade math test you'll ever take. The questions can be complex, subtle, even tricky in the sense that you have to pay attention to what the problem actually says, not what you expect it to say, but even the most challenging of the problems require no mathematical background beyond Algebra I and a few basic geometry concepts.

Because of this basic-math/difficult-questions dichotomy, many of those question have a short solution and a long one (check out this Colbert clip for an example). Quite a few others just have long solutions. Since the SAT gives students about ninety seconds for each problem, a high score normally indicates a student who was insightful enough to spot AHA! solutions* and fast enough to get through the rest.

Of course, if the SAT were not a timed test, a high score wouldn't indicate much of anything. Which is why the following is so troubling.

From ABC News:

At the elite Wayland High school outside Boston, the number of students receiving special accommodations is more than 12 percent, more than six times the estimated national average of high school students with learning disabilities.

Wayland guidance counselor Norma Greenberg said that it's not that difficult for wealthy, well-connected students to get the diagnoses they want.

"There are a lot of hired guns out there, there are a lot of psychologists who you can pay a lot of money to and get a murky diagnosis of subtle learning issues," Greenberg said. ...

The natural proportion of learning disabilities should be somewhere around 2 percent, the College Board said, but at some elite schools, up to 46 percent of students receive special accommodations to take the tests, including extra time.

This is not a new problem. I know from personal experience as a teacher that public schools have a history of trying to keep kids from being diagnosed as LD, both to save money and avoid paperwork. Everyone in education knew that, just as everyone knew that expensive private schools were working the system in the other direction.

* I assume everyone has read this. If you haven't, you should.

"Just when I thought I was out... they pull me back in."

I was going to to take a week off from blogging and work on another project, but this clip from the Colbert Report was too good to go unmentioned. Pay particular attention to the parts about learning disabilities and the grading of the writing section:

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Stephen's Sound Advice - How to Ace the SATs
www.colbertnation.com
Colbert Report Full Episodes Political Humor Fox News

"Red and yellow can kill a fellow"

The pharmaceutical industry does a great job developing most kinds of drugs, but there are certain areas where we might consider a less market based approach.* Antibiotics are one example. Here's another:

Unfortunately, after Oct. 31 of this year, there may be no commercially available [coral snake] antivenom (antivenin) left. That's the expiration date on existing vials of Micrurus fulvius, the only antivenom approved by the Food and Drug Administration for coral snake bites. Produced by Wyeth, now owned by Pfizer, the antivenom was approved for sale in 1967, in a time of less stringent regulation.

Wyeth kept up production of coral snake antivenom for almost 40 years. But given the rarity of coral snake bites, it was hardly a profit center, and the company shut down the factory that made the antivenom in 2003. Wyeth worked with the FDA to produce a five-year supply of the medicine to provide a stopgap while other options were pursued. After that period, the FDA extended the expiration date on existing stock from 2008 to 2009, and then again from 2009 to 2010. But as of press time, no new manufacturer has stepped forward.

Antivenom shortages are a surprisingly common occurrence. The entire state of Arizona ran out of antivenom for scorpion stings after Marilyn Bloom, an envenomation specialist at Arizona State University, retired in 1999. Bloom had been single-handedly making all the scorpion antivenom for state hospitals. Recently, Merck & Co, the only FDA-licensed producer of black widow antivenom, has cut back distribution because of a production shortage of the drug. In a 2007 report, the World Health Organization listed worldwide envenomations as a "neglected public health issue."

New scorpion and black widow antivenoms are currently in the pipeline, thanks to efforts by several poison-control associations to speed foreign drugs into the market through FDA research programs. There is also a coral snake antivenom produced by Mexican drug manufacturer Instituto Bioclon that researchers believe could be even more effective and safe than the outgoing Wyeth product. But that drug, Coralmyn, is not currently licensed for sale by the FDA. The tests required for licensing would cost millions of dollars, and for such a rare treatment (there are 15 times as many scorpion stings per year as coral snake bites), it could take decades for Bioclon to make its money back.

*Or perhaps, to go the other way, a less regulated one. I'm open to suggestions.

Another failure for the blitzkrieg strategy? -- updated

This is getting interesting. There's a new poll out in California that shows Meg Whitman leading Steve Poizner 39 to 37. Now it's always nice to be ahead (even if it is within the margin of error) but there are two small details that might undercut Whitman's sense of triumph:

1. She spent $70,000,000 establishing that two point difference;

2. It was a forty-nine point lead when she started.

This has been a fun campaign to follow (who among us is above a little schadenfreude at the sight of an arrogant billionaire getting blindsided?), but it has also been interesting from a strategic point of view, raising all sorts of neat questions about the best way of runninga campaign for a compound election, particularly if you happen to be a Republican in a blue state in 2010.

Strategies in simple elections are, well, pretty simple: you pick the course of action that gets you the most votes. There are actually two goals here -- you want to maximize both the size of your mandate and your chances of winning -- but they generally line up so well that we can treat them as one.

Strategies for compound elections are anything but simple. For starters you can no longer count on chances of winning and size of mandate lining up. Mandate becomes a secondary goal that has to be somehow weighed in. Worse yet, the probability of winning is now the product of the probabilities of winning two different elections, each of which has a different (in some cases radically different) optimal strategy.

Richard Nixon solved this problem with a hard pivot strategy -- run as far to the right as you can during the primary, then run as fast as you can to the center in the general election. He based this on the observation that Republicans tended to be much more loyal to their candidates. Once you had the primary under your belt, you could generally count on their votes. (Nixon had also seen what happened when Goldwater had gone hard right and stayed there in '64.)

Nixon's insight was brilliant. It was not, however, all that robust. Republican core voters will no longer tolerate movement to the center, even when their candidate is trailing badly. This leaves GOP candidates in blue and purple states with a serious problem. The Nixon strategy is forbidden; the Goldwater strategy is hopeless.

For a while, it looked like a blitzkrieg strategy might work. This approach involves coming in with a big war chest and a stack of endorsements, establishing a huge lead as early as possible, marginalizing primary competitors, and running a campaign for a de facto simple election. Charlie Crist and Meg Whitman both tried this approach and though it is possible that either or both might end up winning in the general election, it is safe to say that the blitzkrieg failed.

Crist has adopted what you might call a Gordian-knot strategy and skipped directly to the simple election. I don't see that option for Whitman. She can continue carpet-bombing the state with ads while not taking a position on anything that doesn't involve tax-cuts. No polls to date show Poizner ahead. It's possible she could scrape by without a course change.

Or she could try a hard right turn and match Poizner's positions on gay marriage and the Arizona immigration law, but it's awfully late in the game to try to win over social conservatives and these stances will be hard to live down in a general election. Still, if the trend lines continue to hold, she may not have a choice.

Update: Talking Points Memo has a completely different take on Poizner's surge, crediting it mostly to Whitman's association with Goldman Sachs. I suspect that the difference has a lot to do with geography. TPM is based in New York where it's easy to imagine the world revolving around the financial services industry. I'm sitting in Whittier, where I've noticed the following:

1. Various groups have been trying to push the Goldman Sachs story for months;

2. By contrast, the Poizner campaign has only gone into high gear recently (just before Whitman started to slide);

3. Goldman Sachs continues to play a small role in the campaign. The "Vultures" ad (which debuted April 30) is not in particularly heavy rotation. It's hard to see how it could have slashed Whitman's lead in about a week;

4. People seem to be paying more attention to more prominent ads featuring immigration, McClintock's endorsement, and Arnold Schwarzenegger morphing into Meg Whitman.

TPM is still my favourite place for politics, but I think they got this one wrong.

"U-Va. should fight Cuccinelli's faulty investigation of Michael Mann"

The Washington Post weighs in on Ken Cuccinelli's investigation (via Mark Thoma):

By equating controversial results with legal fraud, Mr. Cuccinelli demonstrates a dangerous disregard for scientific method and academic freedom. The remedy for unsatisfactory data or analysis is public criticism from peers and more data, not a politically tinged witch hunt or, worse, a civil penalty. Scientists and other academics inevitably will get things wrong, and they will use public funds in the process, because failure is as important to producing good scholarship as success. For the commonwealth to persecute scientists because one official or another dislikes their findings is the fastest way to cripple not only its stellar flagship university, but also its entire public higher education system.

I'm not saying we should stop trying...

but it is worth remembering that most innovations don't work out all that well.


From Wired:

What Felix Salmon missed -- the Hulk paradox

Felix Salmon has an interesting piece in the New York Times arguing that:

[A] futures contract on box office receipts would be great news for the industry. For one thing, if the market got big enough, it would allow studios to easily hedge their investments in movies just by entering into a simple derivatives transaction. Studios could essentially sell contracts on their movies’ grosses into the open market, and pocket the proceeds. They would lose money on the contract if the movie does well, but in that case they’d make enough money on the movie itself to cover their derivatives losses.

The problem Salmon's thesis is that Hollywood runs on expectations and perceptions. A futures market would add another set of hard-to-dismiss numbers to the process. It's difficult to spin a forty million dollar opening as success if the market had predicted seventy.

Consider the case of the Hulk movies. Most people (myself included) were under the opinion that the first was a flop and the second was a success, but the first film made almost exactly the same amount of money when you take into account its smaller budget. In terms of return on investment it did much better than the second film, but in terms of advancing careers, it did much worse.

This was largely due to the fact that the press had reported an expected opening of $45 million (weak for a $150 million action film). By comparison, the $55 million opening looked great even though the first had opened with $62 million five years earlier with a smaller budget. The ability to get that '45' into the press made the film a perceived success. If there had been a futures market and it had said '55,' the film would have been seen as lackluster at best.

I'll let the Onion take it from here:

Why No One Want Make Hulk 2?
By The Hulk

July 14, 2004 | ISSUE 40•28

X2 come out last year. Spider-Man 2 come out last month. Both great sequels to great movies about Hulk friends. Hulk love great action movies about friends! People buy tickets. Make money for theaters, make money for movie company. Movie company make more movies with money. Already, they working on X-Men 3. Hulk movie come out last year. It success. It big popcorn movie with heart. So why no one want make Hulk 2? It make Hulk mad!

Hulk know what people say. Original movie no good, people say. Hulk movie Hulk-sized bomb, people say. That not true! Hulk more successful than people think. Make $132 million in U.S. alone, only cost $120 million. That not small potatoes. Add international box-office receipts and DVD sales and it add up to big money. Big! Oh, and did Hulk forget merchandising tie-ins? First Hulk movie really forge Hulk brand identity. Make people aware of Hulk. Hulk now poised to build on success of first Hulk movie. Hulk 2 smash box-office records!

(you really have to read the rest of this)

White flight

The most dramatic improvement I've ever seen in a marketing model came from adding an urban/suburban/rural variable. I wonder how that model is holding up given this:

In a reversal, America's suburbs are now more likely to be home to minorities, the poor and a rapidly growing older population as many younger, educated whites move to cities for jobs and shorter commutes.

An analysis of 2000-2008 census data by the Brookings Institution highlights the demographic "tipping points" seen in the past decade and the looming problems in the 100 largest metropolitan areas, which represent two-thirds of the U.S. population.

The findings could offer an important road map as political parties, including the tea party movement, seek to win support in suburban battlegrounds in the fall elections and beyond. In 2008, Barack Obama carried a substantial share of the suburbs, partly with the help of minorities and immigrants.

"You can't shrink your way into prosperity"

This is interesting:

New research from the Univ. of Colorado, Denver shows major job cuts don't guarantee prosperity down the line but, in fact, lead to lower profits and stock returns.

"Those who cut deepest, relative to industry peers, delivered smaller profits and weaker stock returns for as long as nine years after a recession," the WSJ reports, citing a study by Univ. of Colorado business professor Wayne Cascio. He studied how companies in the Standard & Poor's 500-stock index have performed during and after recessions over an 18 year period.

Why?

Turns out firms that cut aggressively aren't prepared to ramp up quickly once the recovery begins. In contrast, peer firms that cautiously trimmed are well-staffed to take advantage of a swift shift in momentum. "You can't shrink your way into prosperity," says Cascio in the article.

Assuming the research holds up, isn't this the exact sort of thing an efficient market should catch?

A brief history of beast-starving by Bruce Bartlett

Via Thoma, Bruce Bartlett traces the rise and consequences of an economic theory. The whole thing is worth a read but these paragraphs in particular caught my eye:

Once upon a time Republicans thought that budget deficits were bad, that it was immoral to live for the present and pass the debt onto our children. Until the 1970s they were consistent in opposing both expansions of spending and tax cuts that were not financed with tax increases or spending cuts. Republicans also thought that deficits had a cost over and above the spending that they financed and that it was possible for this cost to be so high that tax increases were justified if spending could not be cut.

Dwight Eisenhower kept in place the high Korean War tax rates throughout his presidency, which is partly why the national debt fell from 74.3% of gross domestic product to 56% on his watch. Most Republicans in the House of Representatives voted against the Kennedy tax cut in 1963. Richard Nixon supported extension of the Vietnam War surtax instituted by Lyndon Johnson, even though he campaigned against it. And Gerald Ford opposed a permanent tax cut in 1974 because he feared its long-term impact on the deficit.

Tyler Cowen has nerves of steel

With no apparent sign of fear or hesitation, he links to the following WSJ article:

Do Girls Speed More Than Boys?
Survey Says Girls Drive More Aggressively; Insurers Up Rates
By JOSEPH B. WHITE and ANJALI ATHAVALEY

Some big auto insurers are raising the rates they charge to cover teenage girls, reflecting the crumbling of conventional wisdom that young women are more responsible behind the wheel.

In a survey of teenage drivers, Allstate Insurance Co. found that 48% of girls said they are likely to drive 10 miles per hour over the speed limit. By comparison, 36% of the boys admitted to speeding. Of the girls, 16% characterized their own driving as aggressive, up from 9% in 2005. And just over half of the girls said they are likely to drive while talking on a phone or texting, compared to 38% of the boys..

The results were "a surprise to many people," says Meghann Dowd of the Allstate Foundation, an independent charitable organization funded by Allstate which sponsored the survey.

While teens fessed up about their own bad behavior, they also said their friends drive even worse. The study found that 65% of the respondents, male and female, said they are confident in their own driving skills, but 77% said they had felt unsafe when another teen was driving. Only 23% of teens agree that most teens are good drivers. This suggests teens recognize in their friends the dubious and dangerous behavior they won't admit to indulging in themselves.

The data was gleaned from online interviews with 1,063 teens across the country. It was conducted in May 2009 for the Allstate Foundation by the TRU division of TNS Custom Research Inc., a Chicago-based youth research and marketing firm. (For highlights of the study, see www.allstate.com/foundation/teen-driving/Shifting-Teen-Attitudes.aspx).

The survey relies on what teens report about themselves, and Allstate Foundation spokeswoman Meghann Dowd says that means the results could be affected by how forthcoming individuals are when answering the survey questions.

(read the rest here)

I don't know how he does it. I started to sweat when I hit the second paragraph and it just got worse from there. I'm not ashamed to admit that I get nervous around studies that:

1. assume that teenage boys and teenage girls are equally likely to tell the truth about their illegal driving habits;

2. assume that teenage boys and teenage girls are equally likely to be aware of their illegal driving habits;

3. have a spokesperson who talks about individuals not being forthcoming but doesn't mention the possibility that this effect might be more prevalent for one gender;

4. don't cross-check their findings against highly correlated hard data like highway patrol citation records;

5. contain at any point any variation of the phrase 'online interview.'

I have to sit down now. I'm getting dizzy...

Things I've learned -- 60s pulp edition

One of the pleasures of popular art is the glimpse it provides into the attitudes of the times. Sometimes this pleasure comes from the naivete of earlier times. More often, though, the experience is just the opposite -- you discover that the attitudes of previous generations were complex, surprisingly modern and often at odds with the conventional view of the era.

I recently read a couple of pulp novels from the Sixties that fell into the second category. One was The Thief Who Couldn't Sleep by Lawrence Block (discussed here). The other was The Ambushers, the sixth book in the Matt Helm series by Donald Hamilton.

Matt Helm was a counter espionage agent specializing in wet work, closer to a John LeCarre hero than to James Bond. The books were well reviewed (Anthony Boucher, writing, I believe, in the New York Times, said "Donald Hamilton has brought to the spy novel the authentic hard realism of Dashiell Hammett; and his stories are as compelling, and probably as close to the sordid truth of espionage, as any now being told."), they were extremely popular and they were sturdy enough to survive a god-awful series of in-name-only adaptations starring Dean Martin.

If you picked up a copy of the Ambushers in 1963 and turned to the first page, you'd find the narrator slipping into a Latin American country carrying a rifle with a high powered scope. The rebel leader he has been sent to kill may have had it coming, but it's not obvious that target was any worse than the leader the U.S. supported (later in the story, Helm is glad to hear that the latter has also been assassinated though his superiors most certainly are not).

The Russians in the Ambushers are sometimes enemies and sometimes allies, depending on the circumstances. The American agents generally hold the high moral ground but it's a distinction that can be rather thin and the protagonist has learned not to dwell on it too much. Everyone's hands are dirty.

As in many stories of the period, the threat nuclear war here comes not from either of the superpowers but from a third party. In this case, a Nazi war criminal who, not surprisingly, would like to see Russia and America destroy each other.

You will often hear the attitudes implicit in this story associated with the late Sixties and early Seventies, usually attributed to the escalation of the war and and the rise of a politicized youth culture, but this was 1963. It was early in the war and even the oldest of the boomers were still in high school.

If you surveyed the pop culture of the time you would find other evidence that a radical shift in the way we looked at the cold war took place in the late Fifties and early Sixties. Nuclear war was no longer likely to be depicted as a Pearl Harbor-style attack but rather as either a horrible mistake (Failsafe -- novel 1962, film 1964) or the work of a madman (Red Alert -- 1958/Strangelove* -- 1963) or the terrorist scheme of a third party (too numerous to mention). Anti-communist agents could be as morally compromised as the enemy (The Spy Who Came in from the Cold -- 1963). A sympathetic Russian was so acceptable that by 1964, you could have a loyal and openly communist Russian agent as a co-star in a popular spy show (albeit a Russian played by the Scottish David McCallum).

I've wondered if this shift was a reaction the Cuban Missile Crisis. Talking to those who were around at the time, I get the impression that for all the paranoia and anxiety and civil defense drills, the concept of nuclear war was never truly real to most people until 1962.

Good researchers in sociology or political could probably provide a rigorous answer to the question of what exactly drove the shift. I'd be interested in seeing what they came up with and if they need another topic after that, I have a whole shelf Gold Medal paperbacks for them to check out.

(You can watch Dr. Strangelove online here)

Things I've learned -- media critic edition

Felix Salmon has a good, thoughtful take on the Newsweek sale, but before I link to it, I'd like to preface it with a few things I've learned writing about media for the past twenty years. They aren't specifically at Salmon's piece but they are relevant to the larger discussion:

1. Profits from newspapers and broadcasting were obscenely high for so long that anything less now seems like the end of the world;

2. Markets for traditional media are shrinking but the rate of decline is generally overstated by shoddy statistics;

2. Most failures in media are blamed on changes in markets and technology;

3. Most failures in media are caused by unrealistic business plans, poor management, and products that suck;

4. When reading expert opinions on media and business, remember that many of these experts predicted the death of networks in the Eighties and the success of online grocery shopping in the Nineties; these experts have lost none of their self-confidence.

Felix Salmon, on the other hand, is one of those experts whose confidence level is highly correlated to his track record. Check out his very shrewd analysis here.

Scraping by on 200 million

The LA Times recently ran an interesting article on attempts to reign in the costs of big budget movies:

Bruckheimer's next production, "Pirates of the Caribbean: On Stranger Tides" — his 26th film for Disney in 16 years — dramatically illustrates the new reality.

With the fourth installment of the swashbuckling tale poised to start shooting June 14, Bruckheimer and the filmmakers are scrambling to meet the more constrained budget that Disney is imposing. Although it's still large — north of $200 million — it is at least a third less than the last "Pirates" movie and includes far fewer shooting days and visual effects shots.

Ross said that Bruckheimer, known for spending lavishly, is working within the new constraints. Bruckheimer reassured him of that in Ross' first week as studio chief, Ross said: "He looked at me and said, 'I will work with you to figure out the economics of the movies going forward because I understand what we are all facing.' And I said two words: thank you."

Even before Ross took the studio reins last fall, Walt Disney Co. Chief Executive Bob Iger was mandating that executives ratchet down costs after underperforming movies — including Bruckheimer's expensive family film "G-Force" — triggered two quarterly losses at the studio last year.

It's a well-reported piece but it doesn't address the underlying question of why movie budgets have skyrocketed. Even if you adjust for inflation, 23 of the 25 most expensive films ever made were produced in the past fifteen years, and yet the same period was marked by economic and technical trends that should have made production less, not more expensive.


CGI and digital production

CGI has become so associated with big budgets that it's easy to forget that it is primarily a cost-saving measure. Ray Harryhausen used to tell directors that he could give them anything they wanted if they had the time and the money. That might not have been completely true but for the vast majority of the cases, CGI is used to replace the more expensive techniques of effects men like Harryhausen or to avoid costly reshoots (as in Disney's digital breast reduction of Lindsay Lohan in Herbie). Add to that the cost and time savings of innovations like nonlinear editing and you would expect film-making to get much cheaper.


Weakened unions

Hollywood is still a heavily unionized place but these unions have been steadily losing ground for at least the past quarter century. You would expect some of those losses to translate into lower production costs.


Competition from other states and countries

There have been many attempts to grab some of the business away from Southern California. Most of those attempts were sweetened with so many tax breaks and other incentives that these would-be competitors often lost money on the deals.


Off-Shoring

As a consequence of digital production, a great deal of work can now be done remotely.


Low inflation

Prices in general haven't exactly been shooting up over the past twenty years.


Obviously something caused the surge, but I suspect it has less to do with economic forces and more to do with studio politics.