Cape ticks many boxes you’d want from a rule-of-thumb: simplicity, comprehensibility, and clarity. Its relationship to long-term returns is statistically significant but for short-term forecasting it is next to useless. And even longer-term forecasting accuracy depends on the future looking like the past. We should celebrate it as a superb starting point for market analysis — one that furnishes market outsiders with probing questions to put to their fund managers. But let’s not overburden it with unrealistic expectations of precision.
Managerial Econ
Economic Analysis of Business Practice
Monday, August 5, 2024
All my rich friends sold too early...
Friday, August 2, 2024
Hidden costs of the Chernobyl accident: US deaths from air pollution
Namely, Chernobyl caused many more deaths by reducing nuclear power plant construction and increasing air pollution...
Friday, July 26, 2024
Energy Markets for Corporate Control
Managers differ in their ability to maintain productivity, or in their incentive to try. This can make low performing firms targets for acquisition by higher performing firms. A recent study of thousands of US power plant ownership changes by Demirer and Karaduman finds a 2% average increase in efficiency for acquired plants.
Our evidence suggests that high-productivity firms buy underperforming assets from low-productivity firms and make them as productive as their existing assets through operational improvements.
These mergers move power plant assets from low value uses into higher value uses.
Tuesday, July 23, 2024
[2016]: Political compromise is like collusion, ...
Correlation is not causality: income and health
This paper provides new evidence on the causal relationship between income and health by studying a randomized experiment in which 1,000 low-income adults in the United States received $1,000 per month for three years, with 2,000 control participants receiving $50 over that same period.
We can rule out even very small improvements in physical health and the effect that would be implied by the cross-sectional correlation between income and health lies well outside our confidence intervals.In other words, in this randomized control trial (the gold standard in causal inference) higher income does not cause better health. The other explanation goes by the name of "selection bias" or "omitted variables bias," i.e., there is some other factor that causes both. And this leads into the nature vs. nurture debate, covered so well in Steven Pinker's The Blank Slate. (Earlier blog post on Pinker's book, Is Nature Stronger than Nurture.)
Sunday, July 21, 2024
Book Review: The Venture Mindset
"In the late 1970s, the firms on the S&P 500 had been on that list for 35 years, on average; by 2019, the average tenure was closer to 20 years. And rapid advances in technology mean that even the most stable industries risk being upended by start-ups that can reach scale on ever-faster timelines."
- Consensus decision making doesn't work because "contrarian ideas because those are the ones that deliver outsize returns....At successful VC firms, individuals are not trumped by the group." For example Reid Hoffman backed Airbnb even though his fellow investors were opposed to the idea.
- Keep teams small: "Think of Amazon, where meetings with more than 10 participants are quite rare. Communication in smaller teams is faster and clearer, and there is greater accountability. The setup not only streamlines decision-making but also ensures that diverse perspectives—crucial for innovative outcomes—are heard and considered."
- Assign a devil’s advocate.: To ensure that opposing views are heard, many VC partnerships make it a standard practice to assign the role of contrarian to one person or to a small team. For example, a16z often designates a “red team” of people who argue against a deal.
- discussion of "the jockey [the team] vs. the horse [the idea]." A bad team with a good idea is doomed to failure but a good team with an OK idea can pivot to a new idea as they learn more.
- the books hostility to "team building," "consensus," and "bureaucracy." [professors learn this from faculty meetings]
Friday, July 19, 2024
[2019]: Do incentives imply inequality?
I spent the morning searching for an old Economist article on this topic, and came up with these citations:
Thursday, July 18, 2024
Why fewer unicorns [firms worth $1B] in China?
In 2020 Mr Xi began worrying about a “disorderly expansion of capital” as tech giants moved into businesses over which the state wanted tight control. Regulators lashed out, alarming entrepreneurs and investors. ...
The environment has become so forbidding that some firms are switching nationality [to the US]. ...
The Chinese government may now see the error of its ways. Mr Xi and the prime minister, Li Qiang, have been meeting entrepreneurs, urging them to invest and innovate. ...US financing has fallen off, above, so the Chinese Government is stepping in. But, this investment comes with strings, and threats:
“Our job all day,” says one fund manager in Beijing, “is to figure out where the government is going to be investing and bet on it.” And investors who lose money, as VCs often do, risk graft charges when using state funds.
President Biden proposes nationwide rent control, then offers to help landlords who are hurt by policy
Higher mortgage rates and home prices are pushing Americans out of the home-buying market. This is contributing to higher demand for rental housing. Rents on average nationwide have risen 30% over the last four years and even more in Sun Belt states with fast-growing populations. Evictions are also increasing in many markets.
Enter Mr. Biden, who on Tuesday pitched conditioning “valuable federal tax breaks” on landlords capping rent increases at 5% annually. The White House says its plan would apply to “corporate” landlords with more than 50 units, covering more than 20 million units or roughly half the country’s rental stock.If the "valuable federal tax breaks" offset the loss in profits from "capping rent increases," the only effect of the policy would be to increase the number of government employees who must oversee it.
Tuesday, July 16, 2024
Sportsbooks Avoid Bets from Winners
Gamblers who manage to beat sportsbooks say they are often shut down when they succeed too much.
Dave Holmes, a sports bettor in Chicago, said that as he started to win more using a math-based wagering strategy, companies including BetMGM, ESPN Bet and Caesars began rejecting his bets.
It is not surprising that sportsbooks are limiting adverse selection. Limiting risk this way may or may not be fair, but it is profitable.
Is using data analytics for betting more like casinos banning blackjack players from counting cards or more like day-traders developing sophisticated algorithms to arbitrage implied differences in security prices? Securities markets are positive-sum games and better analytics generate more informative price signals for many others to use. Gambling on sportsbooks, like gambling at casinos, is a zero-sum game and "the house" only earns money because the odds are in their favor. Eliminating that edge could make the whole enterprise nonviable. Or it could just mean that the house must do better at developing mechanisms that balance the odds.