The sheep never learn

An excerpt from the Daily News, 10/7/07 brings home the horrors that anti gun groups and their supporters make possible when they succeed in disarming honest citizens.

A shirtless madman wielding stolen knives went on a bloody midtown rampage yesterday - stabbing a restaurant worker and a psychologist walking her dog before being shot by an off-duty cop, authorities said.

Deranged Lee Coleman stood wild-eyed over the dog-walker, methodically plunging a knife into her body and face over and over - even pausing to change knives as the woman lay in a pool of blood, screaming for help.

"He was chopping down on her," said Andrew Fink, 29, who was getting into a cab when the attack took place. "I saw him hit her at least 10 times. She was screaming and crawling along the street and people were running away.

Not everyone would have been running away if something like this occurred in one of the majority of States that allow their citizens to carry concealed weapons. This was an easy crime for an armed citizen to stop almost immediately after it began. However, no one without a weapon is going to stop a criminal wielding a weapon.

Police cannot be everywhere at once. Your fellow citizens pretty much are.

A few choice quotes about the airline industry

A retired TWA airline pilot sent me the following quotes about the airline industry. I don’t know where he got them or whether they are true quotes. However, they are priceless, so I am posting them.

Sort of what you would expect in a competitive industry.

These days no one can make money on the goddamn airline business. The economics represent sheer hell.- C. R. Smith, President of American Airlines.

A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you've lost your trousers - you're in the airline business- Sir Adam Thomson.

As of 1992, in fact-though the picture would have improved since then-the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero.- Warren Buffett, billionaire investor, interview 1999.

I think it's dumb as hell, for Christ's sake all right, to sit here and pound the shit out of each other and neither one of us making a fucking dime. Well - I mean, goddamn! What the fuck is the point of it? Nobody asked American to serve Harlingen. Nobody asked American to serve Kansas City. . . . If you're going to overlay every route of American's on top of every route that Braniff has, I can't just sit here and allow you to bury us without giving you our best effort. Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years. Do you have a suggestion for me? Yes, I have a suggestion for you. Raise your goddamn fares twenty percent. I'll raise mine the next morning. You'll make more money and I will too. Robert, we can't talk about pricing. Oh, bullshit, Howard. We can talk about any goddamn thing we want to talk about.- Robert L. Crandall and Howard Putnam, from United States v. American Airlines Inc. and Robert L. Crandall, U.S. District Court, CA383-0325

You fucking academic eggheads! You don't know shit. You can't deregulate >> this industry. You're going to wreck it. You don't know a goddamn thing!-Robert L. Crandall, CEO American Airlines, addressing a Senate lawyer prior to airline deregulation, 1977.

If we went into the funeral business, people would stop dying.-Martin R. Shugrue, Vice-chairman Pan Am.

I've said many times that I'd be thrilled to sell the airline to the employees and our guys said no, we'll take all the money, anyway.- Robert L. Crandall, 1997.

I mean, they get paid an awful lot of money. The only good thing about them is they can't work after they're 60.- Judge Prudence Carter Beatty, New York Southern District Bankruptcy Court, regards Delta Air Lines pilots. Reported in The Wall Street Journal, 18 November 2005.

Freakonomists and incentives: Missing the point

Steven Levitt’s 10/5/07 Freakonomics column in the New York Times, “Looking to Live in a Community with Low Murder Rates? Try Committing a Crime” points out that the murder rate in prisons is lower than in many big cities.

“Ironically, however, some of the lowest murder rates are found in places where one might suspect just the opposite to be true: U.S. prisons.”

"In 2005, 56 prisoners were murdered. There are roughly 2 million inmates held in state prisons, meaning that the homicide rate per 100,000 prisoners last year was only 2.8. That number is less than half the rate of New York City (6.6 per 100,000) and an order of magnitude lower than Baltimore (42 per 100,000). Indeed, of the 66 largest cities in the United States, only El Paso, Tex. and Honolulu, Hawaii have lower homicide rates than the state prisons.”

Levitt attributes the low murder rate to prisons being a highly controlled environment.

“These low homicide and suicide rates are both testimony to the fact that prisons are incredibly highly controlled environments. Whenever I have visited prisons, I have been amazed at how safe I felt.”

How typical of Levitt to miss the point.

Anyone who has watched movies about prison knows that, for all practical purposes, nothing prevents one inmate from murdering another (sorry, couldn’t resist).

The safety of visitors to a prison does not imply the same safety for the inmates. Furthermore, Levitt’s feelings of safety are irrelevant; a prison visit does not make one a prison safety expert.
Could it be that the low murder rate in prisons reflects the fact that inmates contemplating violence against other inmates recognize that they may end up being the loser? Could it be that John Lott is right that felons are capable of assessing risks and act accordingly? Could it be that one way of lowering violent crime rates is to convince potential perpetrators that attempting a violent crime is dangerous?

In Florida, it is easy to obtain a license to carry a concealed weapon. Potential perpetrators have to wonder whether the weak little old guy (me) could blow their brains out.

Competition and Government

The potential benefit of having states within the United States is the competition it fosters. States with unproductive laws and policies tend to lose out to those with less unproductive laws and policies (note that I avoided any reference to states with productive laws and policies – there are none :-)).

The real purpose of the states’ attorneys’ general is to eliminate as much of the potential benefit from competition as possible.

The following is from the Wall Street Journal’s “Best of the Web Today - September 28, 2007” by James Taranto.

Life Imitates 'Seinfeld

"Newman learns that bottles and cans can be refunded for 10 cents in Michigan (as opposed to 5 cents in many other states). Kramer tells him it's impossible to gain a profit from depositing the bottles in Michigan due to the total gas, tollbooth and truck rental fees that would compile during the trip, but Newman tries to find a way."--Wikipedia description of "The Bottle Deposit, Part 1," aired May 2, 1996.

"Authorities said they arrested 10 people and seized more than $500,000 in cash after breaking up a smuggling ring that collected millions of beverage containers in other states and cashed them in for 10 cents apiece in Michigan."--WDIV-TV Web site (Detroit), Sept. 26, 2007.

Hedge funds managers and quants don’t get the point

Every time hedge funds and quant funds lose big, their managers characterize the market’s behavior as a “10 sigma” event or a “one in a 1,000 year” event. In other words, they blame the market not themselves. Who could have known?

A good example is in the recent Wall Street Journal article “One Quant Sees Shakeout For the Ages – 10,000 years” by Kaja Whitehouse. The protagonist is Matthew Rothman, Global Head of Quantitative Equity Strategies for Lehman.

Here are two quotes from the article.

“The trouble started Aug. 3, when stocks started moving not only in ways that commonly used models didn't predict, but in precisely the opposite direction from what was expected. Equally troubling, the moves were far more volatile than models based on decades of testing assumed were likely.”

"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."

History suggests that hedge fund managers and quant managers won’t remember what happened for long. What long-term impact did the Long Term Capital Management collapse have?

Perhaps hedge fund managers and quant managers shouldn’t “remember” for long. Most of the time, they walk away with plenty of money in the bank. Their clients are the ones who lose big.

The primary problem with many hedge fund managers and quant managers is that they mistake the map for the territory, despite abundant evidence to the contrary.

Quant models are models, not reality. A quant model that describes reality reasonably accurately most of the time is valuable. However, it is inadvisable to use a quant model to compute the probability of a large loss from using the model aggressively. It is also inadvisable to compute the probability of a large loss from using the model aggressively from a simulated application of the model.

Suppose a quant model implied that so called “10 sigma” and “one in a 1,000 year” adverse events were fairly frequent? Would it be used? No. The only quant models that are used are the ones that are unrealistic enough to make such adverse events appear to be “10 sigma” and “one in 1,000 year” events. The same goes for long-term simulations.

The ability to hedge and diversify aggressive investment strategies effectively depends on strong assumptions about the market’s behavior, i.e., on the realized interactions among its securities. These are not known.

To illustrate, only an estimated covariance matrix is available and it is not the true covariance matrix. Moreover, the fund’s realized hedging effectiveness depends on the realized covariance matrix, which is different from the true covariance matrix. Worse yet, not even the realized covariance matrix captures a fund’s true risk.

The true probability distributions of returns and relative returns of aggressive hedge funds and quant funds have much more probability of devastating negative returns and negative relative returns than the normal distribution suggests.

A quant model may allow an aggressive fund’s risk to be known pretty well most of the time, but the other times occur frequently enough with devastating effect to make aggressiveness a loser’s game.

“10 sigma” and “one in 1,000 year” market events have occurred frequently enough over recorded history to convince any reasonable observer that they are nothing of the sort. They are quite common.

There is nothing wrong with the market. It’s the quant models and those who use them that are the problem.

Achieving Social Security and Medicare solvency

Predictions of Social Security and Medicare solvency reflect the distorted demographics due to the baby boomers. The ratio of workers to retirees will decline dramatically as the baby boomers retire.

The easy solution is to change the demographics by increasing the number of workers. This can be achieved by allowing enough foreigners to work in the United States on some kind of work visa. These foreign workers would pay enough US taxes to keep Social Security and Medicare solvent, would not be citizens, would not vote, would not be entitled to remain in the United States indefinitely, and, best of all, would not be entitled to Social Security or Medicare payment themselves.

Rather than building fences to keep foreigners out, the United States should be encouraging foreigners to come here and work.

Minimum wage laws

Steven Landsburg, a smart economist, wrote an interesting article in Slate, “The Sin Of Wages: The Real Reason To Oppose The Minimum Wage”.

Landsburg’s article makes two valid points. First, that increasing the minimum wage has little impact on employment. Second, that minimum wage laws are unfair because they constitute a tax on a small segment of society that should be paid, if paid at all, by all of society.

According to Landsburg:

Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It's easy to look up exactly how much the government gave American, and it's easy to look up exactly which senators voted for it.

By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you're a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That's no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody's taxes.

If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Income Tax Credit, for example, accomplishes pretty much the same goals as the minimum wage but without concentrating the burden on a tiny minority. For that matter, the EITC also does a better job of helping the people you'd really want to help, as opposed to, say, middle-class teenagers working summer jobs. It's pretty hard to argue that a minimum-wage increase beats an EITC increase by any criterion.

Landsburg is right that this is reason enough to oppose minimum wage laws. However, it is worth noting why minimum wage laws may not have a material impact on unemployment.

It is clear that a large increase in minimum wages, say to $100/hour would cause widespread unemployment, other things equal. This establishes that, other things equal, any increase in minimum wages causes some unemployment. If other things really are equal, the fact that increases in minimum wages have not caused material unemployment only goes to show that an immaterial percentage of workers have minimum wage jobs.

But are other things equal? Over the years, the cumulative increase in the minimum wage has been dramatic, with no apparent impact on unemployment. One possible explanation is that the real impact of increasing the minimum wage by X% is a dynamic reaction leading over time to inflation of X%. In this case, workers earning below the minimum wage have no ultimate benefit from increasing it. Another possibility is that productivity increases reach X% over time offsetting the adverse unemployment impact of the minimum wage increase. In this case, workers end up with the same, higher, wage they would have gotten anyway. Or, there could be a combination of the two.

In either case, eventually, the increased minimum wage is detrimental (if you think inflation is detrimental) and has no impact on the people it is designed to help.

Racial profiling or good policing?

The New York Post article “NYPD frisked blacks at 5 times the rate of whites” notes that of total frisks in 2006, 52% were Black, 29% Hispanic, and 10% White.

Does this indicate racial profiling?

Does this indicate racially biased policing?

Consider that the arrests resulting from these frisks were 51% Black, 30% Hispanic, and 12% White.

The fact that the arrest and frisk percentage breakdowns by race were almost identical implies that the probability of an arrest, given a frisk, was the same for all races. Assuming that the arrest decisions were made without regard to race (something that remains to be determined), then the implication is that the frisk decisions were racially unbiased and not due to adverse racial profiling. This is not to say that there was no racial profiling, only that, if there was, it was statistically relevant.