Friday
03Jul

Book Recommendation: The Ascent of Money by Niall Ferguson 

DateFriday, July 3, 2009 at 02:28PM | AuthorDennis Shiraev

     This is the second Ferguson book that I have read— I am yet to return guest blogger Grant Gibson’s copy of The War of the World from last summer— and I must say that this one was definitely written for popular consumption. It's not extremely technical and is an easy and quick read. The Ascent of Money traces the historical development of money and credit, starting with its origins in ancient Mesopotamia and ending at the beginning of the 2008 financial crisis. No, Ferguson does not actually cover every aspect and change in money and credit practices over thousands of years of Western civilization. Instead, he gives individual accounts of the creation and evolution of legal tender, government bonds, stocks, and even an interesting account of stock option pricing mechanisms. 
     For people who have little familiarity with economics or banking, this is a must read. Ferguson does a great job explaining the basics of stocks, bonds, leverages, credit swaps and pretty much anything else you might hear about on a business news network. If you have taken an introductory or intermediate level economics course, some of the chapters in this book may be a little bland for you. Even so, it’s worth a read. I was fully familiar with all of the different financial instruments that Ferguson analyzes, but the way that Ferguson situated these instruments in their original historical context was insightful .Double hat tip to Grant Gibson and Oliver Renick for the recommendation. 

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Sunday
28Jun

More on Hockey Drafts 

DateSunday, June 28, 2009 at 06:52PM | AuthorDennis Shiraev

     Before the first round of the 2009 NHL Entry Draft, Washington Capitals General Manager George McPhee (GMGM!) said that the Capitals would take the best player available when called to make the 24th pick in the draft. They would take whoever they thought was the most skilled player after 23 players from the pool were already selected instead of taking a less skilled player who may better fit into a position where the Capitals are currently lacking. Was this just a way of dismissing reporters’ questions about the Caps’ pick, or is it a sophisticated strategy derived from a precise calculus of skill and potential? 
     Even without taking any complicated risk analysis into consideration, there are simple reasons for why it is better to select the best player instead of the most fitting player. It has a lot to do with the size of a hockey team and the versatility of positions. It’s not exactly a football team, but a hockey roster is sizable at twenty players—two goalies, six defenders, and twelve forwards. A team can certainly lack, say, good centers or left wingers, but because good forwards can change positions, there is rarely a situation where an excess of good players at one position creates problems. Common sense dictates that even if the Caps are full at left wing now, for example, it would not make sense to pass on a great prospect just because he has played on the left side during his Junior career. As long as he excels, it would be easy to find a place for him somewhere in the roster. The specialization of positions and the size of rosters for baseball, basketball, and football increase the likelihood of conflicts at specific positions. 
     But let us move a step further and integrate some mathematics. How high someone is ranked in pre-draft depths chart basically reflects the confidence that scouts have in the players’ success. I’m sure that if one ran a statistical analysis of all hockey drafts, the top five picks would have around an 80% success rate (some metric for success in terms of seasons played and point production would have to be made), while fifth and sixth round picks are probably less than 10%. So when a team makes a selection, the manager effectively combines the probability of success with the necessity of acquiring a certain position. The expected value of a player at the time of the draft is equal to p x v , where p is the probability of success and v is the value of the player to the team if he succeeds. My argument is that if we worked out metrics for both variables, the v variable would not be highly dependent on the current position the prospect plays for the aforementioned reasons (one exception: goaltenders). So it makes perfect sense to simply maximize p and take the best player available at the time of a team’s selection. 

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Tuesday
23Jun

Public Knowledge of the Economic Crisis 

DateTuesday, June 23, 2009 at 10:37PM | AuthorDennis Shiraev

     This research was published online in April, but I just happened to stumble upon it earlier this morning. The Pew Research Center conducted a survey of about 1,000 adults in late March- the goal was to determine the extent to which Americans knew about basic news facts concerning the financial crisis. The questionnaire asked about basic facts such as the name of the Treasury Secretary, the country that holds the most U.S. debt, and the current level of the DOW. At first glance, the figures appeared unusually high. Any person who follows the news on even a semi-regular basis should be able to get 12/12 questions correct. Maybe I've watched too many episodes of Jay Leno's Jaywalking skits, but given the number of uniformed people out there, I was definitely surprised to read that 58% of respondents knew what Geithner's job was. These figures may have a lot to do with the fact that the questions were asked in a multiple choice format, or maybe I just don't give the common poll-subject enough credit? 
     There are tons of interesting points to pull out of this research, but these two I found most interesting:     1) On  every economic and non-economic question, men scored about a dozen percentage points higher than women. 2) People over 50 scored at least 13 percentage points higher than the 18-34 group on every single economic and non-economic question. 
     Depending on how one interprets the data, they have different economic policy implications. In theory, the more people are informed about economic news, the more power the administration has to instill confidence through headline-grabbing policies (beyond the actual effects of those policies). For me it is not clear whether or not these data suggest that confidence in the economy is closely tied to economy-related news events. 

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Friday
19Jun

Book Recommendation: Outliers by Malcolm Gladwell 

DateFriday, June 19, 2009 at 02:25PM | AuthorDennis Shiraev

     Malcolm Gladwell’s argument is fairly straightforward: we should not think about stories of success solely in terms of personal diligence, hard word and ambition. These aspects should not at all be dismissed, but it is much more useful to understand success in terms of successful people’s surroundings and the opportunities they were presented on their way to success.
     The author has many illustrative examples. He points out that almost all of the Silicon Valley mega-billionaires (Gates, Allen, Jobs, etc.) were born within a three year time span between 1954 and 1956. Why is this relevant for understanding their success? The “PC revolution” took place in the mid 1970’s— had these software pioneers been born before this time period, they would have been too young to take advantage of the business opportunities in this emerging market. Had they been born after this time period, they would have probably already been working for computer companies and would have overlooked the profit potential of the personal computer (it was an unintelligible/unprofitable concept for many computer scientists at the time). Gladwell has many other examples including U.S. industrialists, The Beatles, and countless other personal stories of success. 
     It’s certainly interesting, but after reading the first couple of chapters I started thinking that there wasn’t anything particularly spectacular about Gladwell’s thesis. He seemed to be saying that if one surveys a large group of successful people, you will find that an overwhelming majority of them were presented with auspicious and door-opening opportunities on their way to success. Well, duh! It would be truly extraordinary if he discovered that the opposite were true—that the majority of successful people faced overwhelming obstacles on their way to success— but his findings appeared to be a no-brainer told through a series of intriguing anecdotes and vignettes. 
     But after reading the rest of the book I realized that the author is not just stating the obvious. He really does present a way of looking at success that puts an original emphasis on community, culture, surroundings, and opportunity without at all dismissing the personal dimensions of successful undertakings. 
     Gladwell’s book also analyzes the nature/nurture debate about whether or not, in the long run, raw intelligence or hard work leads to greater instances of success. The results of his survey research are both encouraging and discouraging. Citing a study that tracked several thousand high-IQ children over the course of many years, he points out that success in this group of wunderkinder seemed to be dictated not by their IQ-scores but by their family background and wealth. Read the book for a full analysis. Highly recommended. Hat tip to my friend Joey Pantoga for the pointer. 

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Sunday
14Jun

Yukos v. Russian Federation 

DateSunday, June 14, 2009 at 11:39PM | AuthorDennis Shiraev

     News about this case has been severely lacking on the internet and around the blogosphere, so I thought I would do a quick post about the soon to be decided Yukos v. Russian Federation case. With a result valued at $100 billion dollars, this could be the largest international arbitration case in history. 
     The entire story started in 2003 when the Russian government arrested Mikhail Khodorkovsky— he was then the wealthiest man in Russia and the 16th wealthiest man in the world— threw him in jail for fraud charges and quickly dismantled/nationalized his oil company Yukos. After the dismantling, the publicly traded and owned entity obviously ceased to exist. But the foreign investors were still around, only, they were $100 poorer because of what they saw as the Russian government’s illegal seizure of their assets. 
     The investors’ legal claims rest on article 26 of the Energy Charter Treaty, which basically guarantees investors against arbitrary and biased legal proceedings within member countries. The Russian Federation signed the treaty, but the Russians are now arguing that the treaty was not in effect because it was never ratified by the legislature. As some Russian analysts point out, the fact that the Russians have hired one of the biggest and best American law firms, Cleary Gottlieb Steen & Hamilton, suggests that they are very serious about the potential loss of $100 billion. 
     A decision should be reached by the international courts within a couple of weeks, but at this point it is not looking too good for the Russians. Last year, Dutch arbitrators ruled in favor of a group of investors who were seeking returned assets from the Russian Federation on similar grounds. I would refer you to some articles about the case, but like I said, information is severely lacking on American sites. In any case, it will certainly be interesting to see how European investors plan to “extract” $100 billion from the Russian government if they are in fact awarded that sum. 

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Tuesday
09Jun

Ultimate Frisbee and Price Discrimination 

DateTuesday, June 9, 2009 at 08:35PM | AuthorDennis Shiraev

     I promised several friends that I would integrate some sort of economic concept into a post about our attempted ultimate frisbee game last night, so here goes! Yesterday evening a small group of us gathered for a fairly routine frisbee game at South Run, a rec. center in Springfield that offers large open baseball fields that are free for public usage. It is an ideal location for ultimate frisbee because of the stadium lighting— frisbee is a running-intensive sport and can get rather uncomfortable during the afternoon heat, and the lightning normally allows for us to play in the cooler evening temperatures. Anyways, we showed up last night to discover that the stadium lights were no longer operational. After a small trek to the main office, we found out that because of budget cuts, Fairfax County required that prior reservations be made (according to the website, it appears that this costs substantial money). What a disappointment. 
     It is obvious that the county is trying to save money on lighting. Residents frequently use the fields, and I wouldn’t be surprised if people frequently leave the lights on long after they are done playing. But the policy is inefficient and reflects a failure to integrate the very basic economic concept of price discrimination. 
     Price discrimination is a method for maximizing a firm’s profits, and it simply refers to the practice of charging customers different prices based on their ability and willingness to pay. An anecdotal but illustrative example: you own a paperclip store, and you only sell one brand of paperclips. If you set the price of your product at $3 per box, you will attract X number of customers who are able and willing to buy at that price. The people who personally value paperclips at less than $3 per box will not buy, but anyone who values the box at more than $3 will be getting a good deal and “maximizing his or her utility.” But your business could do better. You could charge $3 to the people who value the box between $3 and $5, and then charge $5 per box to customers who value the box between $5 and $7. Yes, I am doing some hand waving with a couple of points here, but the basic idea is that by using price discrimination the firm can significantly increase revenues. 
     This is obviously more difficult to implement in practice. In order to effectively implement a policy of price discrimination, the firm must be able to 1) identify which customers are able and willing to pay more, and 2) make sure that there are no secondary transactions or reselling between people who are paying different prices, since this would totally eliminate the point of the policy. 
     Coupons are an excellent example of price discrimination. Think about it: the people who take time to cut out coupons care about buying at lower prices, and the people who don’t use the coupons don’t care as much about price. By distributing coupons, a firm basically charges people different prices based on their capacity to pay. Some hotels even have discount deals where the only thing a customer has to do to get the deal is to ask about it! 
     How does this relate to our stadium lighting fiasco? In this case, the South Run facility is acting as the firm. Instead of all together banning non-organized public recreational usage of the fields—this is effectively what they have done, since I seriously doubt that people will make separate reservations and pay significant fees to toss frisbees for an hour or two at night— they could simply enact a policy of non-pecuniary price discrimination. If they required that players simply go to the main office and request that the lights be turned on for an hour for a particular field, this would eliminate the issue of lights being left on for inordinate amounts of time and also cut down on total field usage. Only the people who value their stadium lighting enough to investigate with the park would use the fields, and lighting costs would also be decreased. By putting up a medium sized hurdle for field usage, South Run could achieve their goal of cutting costs and still leave us, the dedicated frisbee players, satisfied and able to see our discs! 

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Sunday
07Jun

Sotomayor: A Racist? A Person Who Does Not Think Before She Speaks?

DateSunday, June 7, 2009 at 09:20PM | AuthorJack Lund

It would appear that our President, the great empathizer, now understands what Sonia Sotomayor meant when she said, "I would hope that a wise Latina woman with the richness of her experiences would, more often than not, reach a better conclusion than a white male who hasn't lived that life."  He seems to think that she would "restate" her comments if she were given the chance but also dismisses portrayals of her as a racist as "nonsense."  He has not chosen to offer an explanation of what she meant to say but claims that it is somehow self-evident that whatever she meant must be ok.  If she would restate her comment, then there must be something wrong with it.  

If Justice John Roberts had stated, "I would hope that a wise white male with the richness of his experience would...reach a better conclusion than a Latina woman" I do not think he would have been confirmed.  All of his other experience would be worthless.  The argument that she simply misspoke and would not say the same thing again fails.  First, I am not sure what is worse, a racist justice or a justice who doesn't think about her statements.  I don't think that anyone wants a racist on the bench, but honestly, race is going to a factor in a small fraction of the cases before the Supreme Court.  Thoughtful analysis will always be required.  If Obama is right and she is not a racist but rather a careless speaker she is worse than we originally suspected.  After all, she has delivered the same line on five different occasions.  So it looks like the problem is not that she does not think about what she says.  Rather, the real problem is what she thinks. 

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Sunday
07Jun

The Future of High Culture 

DateSunday, June 7, 2009 at 08:13PM | AuthorDennis Shiraev

     This is the introduction to Tyler Cowen’s most recent book, Create Your Own Economy, as it appears on his website:

     As economist Tyler Cowen boldly shows in Create Your Own Economy, the way we think now is changing more rapidly than it has in a very long time. Not since the Industrial Revolution has a man-made creation—in this case, the World Wide Web—so greatly influenced the way our minds work and our human potential. Cowen argues brilliantly that we are breaking down cultural information into ever-smaller tidbits, ordering and reordering them in our minds (and our computers) to meet our own specific needs.
     Create Your Own Economy explains why the coming world of Web 3.0 is good for us; why social networking sites such as Facebook are so necessary; what’s so great about “Tweeting” and texting; how education will get better; and why politics, literature, and philosophy will become richer. This is a revolutionary guide to life in the new world.

     This is especially interesting to me because this is a question that has been bugging me of late: what is the eventual conclusion of the hyper-proliferation of online social networking communities and other web 2.0 applications like blogs?  Will this growth of new media eventually result in an enhanced cultural experience? That is, will people become more educated and develop better ideas, and will our society be better off for it? Although I have not read Cowen’s book yet, my working argument has always been that the growth of the world wide web will only make things like politics, literature, and philosophy “richer” if it acts in conjunction with and does not supplant existing media and modes of communication. See earlier post. 
     I’ll put up a review as soon as I read the book. In the meantime, please leave any preliminary thoughts in the Comments section. 

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Wednesday
03Jun

The Unifying Theory of Everything...Seinfeld 

DateWednesday, June 3, 2009 at 09:42PM | AuthorDennis Shiraev

I must begin with a short disclaimer: I have never read any television reviews, books, our outside literature on the television program Seinfeld, and all of the following ideas are either my own or the product of conversations I’ve had with my friends. They are mainly the product of many heated discussions. Seriously. 

     Hilarious, witty, complex, nihilistic, brilliant, spectacular, genius: these are the words I would used to describe Seinfeld, the greatest television show of all time. I have seen every episode several times, and I have no problem with re-watching the same episode (usually something from the “breakthrough” Season 4) multiple times a week. Many of my friends have even said that my entire life revolves around this scene. 
     Aside from its comedic value, Seinfeld serves as an interesting point of social commentary and analysis. After all, why is this “show about nothing” so popular? And is there any sort of unifying characteristic that describes the group of people—which includes your truly, co-bloger Jack Lund, and both Into the Breach! guest bloggers Grant Gibson and Oliver Renick—who know almost every funny line of every episode and follow the show religiously on a night to night basis? Yes, the final episode aired more than a decade ago and most of us were not followers at the time, but it still has a profound impact in shaping our daily lives! Do we all have something in common? 
     I think the first question is rather simple. Seinfeld was popular and remains popular because it is genuinely funny. Even if you don’t think it’s the greatest show ever made, I’m sure you would admit that it has genuine comedic value. I could go into a long and winding point about how the show represents cultural decay and the acceptance of an almost mocking and nihilistic view of life, but this would be excessive. It’s funny, for sure. 
     The second question is much more complex. What characteristic really draws people to become intimately attached to the show? My original answer, one initially shared by my Cornell Insider co-blogger Oliver Renick, was a pretentious one: the key determinant of a person’s partiality to Seinfeld is intelligence. It takes real intelligence and wit to understand the subtle and sophisticated humor of the show.  The writers take advantage of observational comedy and well-constructed plots with great characters to evoke laughter. You have to be smart and patient to uncover the true ridiculousness of the show, the true humor of the nihilism and absurdity that it depicts. But this explanation falls short on empirical grounds. I seriously doubt that 76 million of the smartest Americans tuned in to watch the final episode, and I know many self-proclaimed non-erudite people who can totally relate to the humor. 
     I had many other guesses—partiality to dry humor, selfishness, level of religiosity— but each and every one failed when I tested it against my sample set of about twenty college and high school friends who fit into my “Seinfeld fanatic” grouping. I would love to hear all of your opinions in the comments section, but unfortunately at the moment I am forced to admit defeat and agree with what Jack Lund said to me earlier this year: our generation came after the heyday of Seinfeld, and the only good determinant of whether or not someone is very into the show is whether or not his or her parents watched it. Agree? Disagree? Or is this just another post about nothing? 

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Monday
01Jun

CIAR Volume II, Issue II

DateMonday, June 1, 2009 at 12:20AM | AuthorDennis Shiraev

     Check out the most recent publication of the Cornell International Affairs Review. This colorful PDF version of our journal features an article by yours truly along with Into the Breach! guest blogger Grant Gibson. Other articles include an analysis of the financial crisis by Michael Prada, a piece on coming financial regulations by Cornell Professor Elizabeth Sanders, and an article on the Russia-Georgia conflict by Michigan State Professor Vladimir Shlapentokh. Next year I will be serving as one of the literary editors for this journal, so please contact me if you have any interest in submitting a piece to the editorial board of the journal. 

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