Are economists idiots?

Paul Krugman is very much in the news for his views on fighting the fiscal phantoms. And from the bottom of my heart, I wish this economist a long life. But when the inevitable does happen, I wonder what he will be most remembered for? 

1) Winning the 2008 Nobel Prize in Economics

2) Suggesting that America prepare for a non-existent alien invasion to fix her fiscal woes (apparently it will get people working)

3) Calling some of his fellow economists idiots on radio ("There are some idiots who've won Nobels")

Source: http://school.discoveryeducation.com/clipart/clip/dunce2.html

I will certainly remember him for referring to some of the Nobel laureates as certifiable idiots. Martin Fridson in Forbes, questions whether Krugman should tip off the presidents and prime ministers of various countries in case their governments are pursuing the policies of these imbeciles. But then again, one wonders how many of the economists, whose reputations are now questionable thanks to Krugman, will in turn call him an idiot. 

I am sure Krugman won't take offense. In fact, in that very interaction on air, Krugman did say that winning the Nobel prize did not shut up his critics but it certainly stopped people from calling him an idiot for 2 weeks. 

I wonder if Alan Greenspan regarded Krugman as an idiot? Krugman certainly thought he was one. Years ago, Krugman wrote this: "If you want a simple model for predicting the unemployment rate in the US over the next few years, here it is: It will be what Greenspan wants it to be, + or - a random error reflecting the fact that he is not quite God." Last year in a blog post, he stated that "the exceptional Mr Greenspan continues his efforts to cement his reputation as the worst ex-Fed chairman in history".

What about Paul Volcker? In another blog post, Krugman stated that "Volcker is worrying about re-fighting the 1970s when we're actually re-fighting the 1930s. And fighting the wrong war is a good way to lose the one we're in." 

So what does this mean? While we widely regard economists as brilliant, they tend to regard each other as boneheads.

Justin Wolfers in Freakonomics.com speaks of one of the best-kept secrets amongst economists. According to him, there is remarkable agreement among economists on most policy questions. This consensus is obscured by 2 laws of punditry. 
First, for any issue, there's always at least one idiot willing to claim the spotlight to argue for it.
Second, that idiot may sound more respectable if he calls himself an economist. :) :) :)

A few months ago, a blogger on the Economist wrote about the history of macroeconomics. It stated that economists spent 30 years debating what the experience of the Great Depression meant and then another 30 seeing if they had arrived at the right answer. 

That it was man made became the economic consensus; the rest was intensely debated by squawking heads. Not surprisingly. According to Edgar Fiedler (an economist of course), "ask 5 economists one question and you will get 5 different answers; 6 if one went to Harvard". 

So the Keynesians focused on fiscal policy as an engine of stabilisation. They held that central banks were relatively helpless because interest rates fell to very low levels. 

Others vociferously protested - Milton Friedman led this pack. He said that interest rates were low because the Fed has pursued a too-tight monetary policy. Friedman argued that the Depression indicated that monetary policy was extremely powerful and the central bank had an important influence over money supply and in the short run this could have a significant impact on the real economy.

Later on Robert Solow had something to say about this: "Everything reminds Milton Friedman of the  money supply. Everything reminds me of sex, but I try to keep it out of my papers." If he is an idiot, he is an honest one!

But the funniest of all is this quote by John Kenneth Galbraith: "Economics is extremely useful as a form of employment for economists." Seriously, I am not one to judge specially since I hold no Ph.D in Economics. But was that not an idiotic statement? Or am I missing some profound meaning? If yes, then maybe I am the one who is an idiot. And on that, I am quite sure I could get a consensus. 

The myth of diamonds & romance

A friend asked me to accompany him shop for an engagement ring for his girlfriend.

We saw some fabulously eye-catching stones – fantastic clarity, great saturation of colour, large size and brilliant cuts. But he consistently ignored the rubies, emeralds or sapphires. He was fixated on a diamond. His reasoning: That is what men give women they love and what women want to feel loved (seriously, how overly clichéd was this?). I reminded him that even Mark Zuckerberg bypassed the diamond and went for a ruby. "But he must have had stock options to compensate," my friend argued.  

Earlier this year, Ashleymadison.comcommissioned a survey across 2,600 ‘actively-cheating husbands’ across the US. The driver behind this survey? To obtain a better  understanding of male infidelity. I doubt there are any more interesting revelations to unearth on this subject, but a few tit-bits from this survey were worth noting.  

• 53% of the cheaters said they would buy diamond jewellery for their mistresses, and only 27% considered doing the same for their wives
• 38% would buy flowers for their mistresses, only 19% would do so for their wives
• While just 8% would buy household items (like toasters, I guess) for their mistresses, 27% would happily gift such stuff to their wives (how practical)

So diamonds might hint at romance, but not at fidelity. 

In an earlier post, I wrote about Paco Underhill's reasons on why men purchase jewellery for women from his book Call of the Mall.

1) Keys to the front door

When men want to make blatant declarations of affection or intention they gift jewellery. These occasions don’t present themselves very often - engagement, marriage. And if the woman is lucky, an anniversary or birthday down the line. This is their way of convincing/ reminding the woman of the extent of their love. After all, you would not blow up thousands if you were not committed right? My friend falls in this category.

2) Keys to the back door

When they need the convenience of a relationship without the commitment that comes with front-door entry. Hence, mistresses, lovers and girlfriends are recipients of jewellery. Their way of convincing the woman it is worth her while to hang around. Ashleymadison’s ‘actively cheating husbands’ would feel right at home here. 

3) Keys out of the doghouse

Their way of saying sorry and want to make amends for bad behavior, specially if the woman at the front door has found out about the woman at the back door. Flowers wither too quickly, perfumes don’t last forever and chocolates will only make you fat. Nothing says “please forgive me for being such a jerk” better than a fine necklace that has caused a sufficient dent to the bank balance.

But then again, this is jewellery at large. Why are diamonds so stereotypically associated and synonymous with romance?

Apparently, the blame is to be squarely laid at the feet of De Beers. Ira Weissman, Founder, Truthaboutdiamonds.com, believesthat the entire tradition of the diamond as a gift given during a marriage proposal is a modern-day invention of Fifth Avenue real-life Mad Men. :)

The De Beers ad campaigns in timeless black and white used the slogan “A diamond is forever” in what has been expressed as one of the best marketing campaigns ever (credit to agency N. W. Ayer). In this particular one,  it tells you how two month’s salary lasts forever. Of course, it does not say that the size of the salary will also determine the size of the diamond and the eventual return on the investment. In another, a man screams "I love this woman" on a public square much to her embarrassment. The ad suggests a better way - give her a diamond ring. On getting that she throws her arms around him and whispers "I love this man, I love him, I love him".

Decades ago, Edward Jay Epstein wrote a legendary piece in The Atlantic on this very subject. Advertising agency N. W. Ayer drew up a well-orchestrated advertising and public-relations campaign to impact the "social attitudes of the public at large and channel American spending toward larger and more expensive diamonds instead of competitive luxuries."

The agency romanticized diamonds by altering the public's picture of the way a man courts -- and wins -- a woman. Since "young men buy over 90% of all engagement rings" it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.

Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. 
The agency offered stories and society photographs to select magazines and newspapers to reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman. 
Fashion designers would talk on radio programs about the "trend towards diamonds".

The Ayer plan also envisioned using the British royal family. "Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this industry by wearing diamonds rather than other jewels." Queen Elizabeth later went on a well-publicized trip to several South African diamond mines, and she accepted a diamond from Oppenheimer.

Lecturers were arranged to visit high schools across the country. "All of these lectures revolve around the diamond engagement ring, and are reaching thousands of girls in their assemblies, classes and informal meetings in our leading educational institutions," the agency explained in a memorandum to De Beers.

And that for me explained the link between romance and diamonds - all the fabrication of smart marketing executives. 

But of course, as an investment, diamonds outshine many rivals. This month itself, the auction of diamonds created waves across the globe. A flawless deep-blue diamond sold for little over SFr 10 million (Sotheby, Geneva). The Archduke Joseph Diamond fetched around SFr 20.35 million (Christie’s, Geneva). 

SFr = Swiss Franc

While this is beyond the reach of virtually all humans on this planet, it has indicated a trend of holding diamonds as an investment. Eric Valdieu, an expert formerly with Christie's  launched an investment fund last year called Divine Jewels. In September, Financial Times reported that IndexIQ, a New York company, is supporting the first diamond-backed exchange-traded fund. The proposal is being reviewed by the Securities and Exchange Commission. Harry Winston, the largest publicly traded diamond company, is also collaborating with a Swiss asset manager on a $250m fund to buy diamonds wholesale to store in a vault, using money from hedge fund investments.
The article went on to state that diamonds have proved to be a low volatile investment and the super rich are giving it serious thought. Prices of polished diamonds have risen 100% since 2004 and show no signs of abating. 
A few months ago Business Today wrote on how Indians are considering diamond purchases though we are apparently way behind the Chinese.

If you are considering an investment in diamonds, there is no fund (as mentioned above) available in India. You will have to purchase the stones, so make sure you buy certified ones. Gold is gold. But each diamond is different and unique and the pricing tends to be opaque. Do your homework before venturing into this territory. 

Dating, investing & the reptilian brain

My friend ventured on a speed date.

Her logic was impeccable.

To optimize her chances of meeting “Mr Right” she needed to go to where the supply exceeded (or at least matched) demand. Where else will she meet at least a dozen compatible (single) men in one room and get the chance to talk to all of them?

At a speed date session, the men and women have a couple of minutes to chat with and impress each other before moving onto the next prospective candidate. The ones that potentially hit it off indicate that they would like to start dating.

According to economist Tim Harford, research on speed dating indicates that both sexes tilt towards educated non-smokers; but men prefer slim bodies and women prefer fat wallets. Those findings must bear some semblance to reality going by my friend’s experience. She took an immediate fancy to a good looking, well-dressed guy with an apparently hot job. Both are educated non-smokers, she is slim and he seemed well to do. They were keen on seeing each other again. 

The illusion soon dissipated when they met the next time. Once he began to talk, which was instantly and constantly, he had tremendous difficulty shutting up. No doubt, he loved the sound of his voice. He went on an evangelical monologue about anecdotes from his life and times in various countries. His elevated opinion of himself was “nerve wracking”. The guy turned out to be an insufferable oik. The clincher was when he referred to himself as a global citizen, which according to my friend, made him sound like an ageing hippy. She refused to ask him what he meant by that term (he had resided in 4 countries out of the 190+ counted by the United Nations) and branded him a fiasco of style over substance.

Why am I writing about this? Because of my friend's conclusion. She rationalised that her initial attraction boiled down to a reaction of her lizard brain.

Apparently, there are 3 parts to our brain.

The lizard (reptilian) brain is the most primitive part that is concerned with self preservation and survival (we share this with other reptiles). It is known for snap judgments. Have you ever suddenly just met someone and instantly your “gut feeling” is not to trust him or her? The lizard brain is at work. This reaction is based on appearance and mannerisms and happens on a barely conscious level. It is the part of our brain that works on auto-pilot – keeps your heart beating, controls breathing, pumps adrenalin when needed, etc. It is constantly alert to danger and focused on survival.

The limbic system (mammalian brain) allows us to experience our feelings and emotions.

 

The cerebral cortex is the logical part of our brain and is much bigger than the above two parts combined. It is where our speech, writing, math and thought come from.  It is the part of our brain that is conscious, intentional and rational. You are using it right now as you read this post. It helps you decide whether to have a tequila shot or a Bloody Mary and maneuver your way through traffic jams. 

All three parts of the brain are processing information simultaneously. So, if you have been dumped by your boyfriend, you experience the deep survival fear through the lizard brain, the emotion through the mammalian brain and logic (he was a jerk anyway) through the cerebral cortex.

Now what my friend indicated was that when she found herself attracted to this man, it was her lizard brain that kicked into action since it was looking for self-preservation and survival based on primitive instincts – security (capable of taking care of her & her offspring), resources (money & home) and protection (able bodied). What was unsaid was that the rest of her brain apparently switched off in the first interaction (or was probably figuring out which drink to settle upon) and began to work only on the first date when it told its reptilian counterpart to shut up. 

Frankly, I am of the opinion that she laid a mind-blowing trip on me because she did not want to admit she was a sucker for first impressions. Yet, it was not the first time I heard about our 3-part brain. Very recently, Michael Crowley of TIME magazine claimed that individuals processed the US presidential election debates with their reptilian brain when referring to the Obama-Romney debate. No one remembers the 2008 Obama-McCain debate but many would recall the vice-presidential debate between Joe Biden and Sarah Palin where she got infamous for her multiple winks at the camera. I really could not fathom which part of Palin's brain was working when she behaved so ridiculously, but Crowley was not talking about her brain. He claims that the crowd remembers it because the reptilian brain (audience in this case) watches for moments of conflict, wit and fallibility.

In Self interest has to be your only interest, Peter Guber claims that as much as 95% of our decisions are controlled by our subconscious mind. In particular, the reptilian brain actually manages much of how humans behave. It acts viscerally, responding by fight or flight; is ruled by hunger and fear; and is concerned about survival. The reptilian brain makes decisions in about 2 milliseconds, far faster than the 500 milliseconds that your rationale brain requires. That would probably explain why we react so badly when someone rubs us the wrong way and then regret our impulsive behaviour. 

All this has financial implications. Marketwatch.com talks about former Goldman trader Terry Burnham who explained investing in these terms. In his book "Mean Markets & Lizard Brains", he says that our primitive brain was designed to help our ancestors hunt for food and daily survival stuff. For instance, if they knew that animals frequented a particular place at a particular time of day they would work around it. Or, if certain animals or birds were most active before dawn, they would act accordingly. So the lizard brain is designed to look backward. But investing "by its very nature, requires us to be forward-looking, to anticipate events. Thus, the lizard brain (which is backward looking) causes us to be optimistic at market peaks (after rises) and pessimistic at market bottoms (after falls)." So whether it's optimism or pessimism, greed or fear, Burnham is of the opinion that trading and investment is not done rationally. 

Once you realise that your lizard brain is not the best reference point for making monetary decisions, you will tend not to act based on initial reactions. So you won't go and sell all your funds just because the market has collapsed. Neither will you pump most of your money in a sector fund just because that sector is on a roll. You will learn to judge present circumstances objectively which will help you act consciously and rationally. Once you systematically restrain your instinct, you are on your way to becoming a smart investor. 

Keep your "gut instinct" for dealing with bosses and strangers. Whip your cerebral cortex into action where your money is concerned. It's the only part of the brain that will help you get wealthy. 

Mistresses, single women & the economy

Jin Yanshi knows how to get noticed.

Very recently, this Chinese economist came out with a theory implying that a women's marital status is key to a vigorous economy. According to his theory in China Times and Business Insider, the more the number of single women, the better it is for the economy. 

His hypothesis is cloaked with 3 assumptions: 

1) Women love money (as if men do not!)

2) Women love to spend money (and men are misers, is it?)

3) Women are born consumption animals (and men are not?)

Based on those assumptions, he pontificates on why consumption is such a distinctive element of the female psyche. “Women express their desire in competition" (who knew?). "This competition therefore promotes a city’s consumption.”

His theory: The more the "divorced" and "leftover" women (the latter being a term to describe singles over 28), the greater the chance of an economy's prosperity.

His reason: Their jostling with other females for attention and competing with one another only feeds their innate consumption desire. This, in turn, does wonders for domestic consumption. 

If China follows his theory, the decision makers don't have to worry about an alternative to their faltering export model which is hitting growth. They just need to ensure that their women marry late and encourage divorce. 

I was curious to see what he had to say about "leftover" men, if there is such a term. 

According to him, men who have NO spending power will NOT be able to find wives (he obviously is no romantic) and so will NOT contribute to the city's economy. 
His remedy: Kick them out of town (he failed to cite the destination). 

Yanshi surprisingly excluded ernai; a literal translation is second wife but it actually indicates a mistress. Mistresses are neither divorcees nor "leftovers" but are very much part of China's social landscape. According to a report in Yahoo Finance, Chinese men buying gifts for their ernai may be among the best customers for luxury goods. And the young ladies' designer wardrobes play host to labels like Jimmy Choo, Cartier, Versace, Prada, Chanel, Yves Saint Laurent and Louis Vuitton. For instance, a 42-year old property developer called Jian in the southern metropolis of Shenzhen claimed that his 20-something mistress set him back by $6,100/month. He referred to her as being an "expensive hobby like golf". Jian is not my sleight of hand or figment of my imagination. He actually was interviewed by The New York Times. 

So if infidelity is such a big contribution to China’s consumption story, am surprised that this set of women was ignored when concocting such a theory.

More worrisome now, for retailers, is whether this trend is dropping. During the credit crunch in 2009, CNN reported on how a businessman could not afford to keep his 4 mistresses, so he employed the services of a local modelling agency to stage a private talent show and judge the women on their looks, their singing ability and how much alcohol they could hold. The winner would stay his mistress. 
Moneyweek recently reported that nearly half of the 1,000 richest people in China saw their wealth shrink in the past year. While China's boom spurred a market for mistresses, the weakening economic growth is affecting that equation. According to a research note by HSBC, the practice of wealthy men acquiring mistresses is on the wane. Coupled with the fact that there is less official tolerance of wealthy government officials flaunting their "bling", the $12 billion luxury market is being hit. 

Even though the country's growth engine is spluttering and luxury sales are being hit, China's consumption boom is not fading into insignificance. Yahoo cites various reports to prove this point. A World Bank Report envisages per capita income rising to $16,000 by 2030 (from $5,000 now). The report also predicts that domestic consumption will shoot up to 2/3rd of economic activity. A McKinsey report reckons that China's mainstream consumer class will comprise 400 million people with household incomes between $16,000 and $34,000 by 2020. Boston Consulting Group says China will be the world's No. 2 consumer market by 2015. 

The Wall Street Journal says that China has a lot of tools to drive wealth and encourage investments. China is encouraging domestic demand and household spending in a bid to drive GDP growth and speed up economic restructuring. Encouraging growth in domestic consumption to find quality drivers for the economy was one of the key targets of China’s 12^th 5-year-plan. The country is looking at potential reforms to boost investment and consumption in the areas of pension, healthcare, education, agricultural and land ownership, and continuing urbanization. 
Looks like the government is not taking Jin Yanshi too seriously. 

Why your boss is overpaid

My friend has a huge problem with her boss.

She claims that she works like a dog while he sits all day and purrs like a fat contented cat behind his rosewood altar, drinks herbal tea and swivels aimlessly in his leather chair. His daily ritual is to rearrange the post-its on his computer and send mails to the lesser-paid mortals asking for updates or demanding that they justify their existence. And when the cat is in a particularly foul mood, whoever comes into his line of fire gets skewered. 

She has figured out his apathy: His mind is either on permanent vacation, or worse still, has already retired but the company just refuses to let his body follow suit, for a reason she cannot fathom.

Her biggest grouse is that while she and her colleagues work their backs off to add to the bottom line, he is at the receiving end of a bloated salary and inflated bonus.

Before I continue, let me set the record straight. This post is NOT about my bosses, who, incidentally, all read this blog hence my urgency to clear the air. All my bosses (that's right, I have more than one) sit at work stations identical to the rest, no plush leather seats or polished wooden desks - be it mahogany or teak or rosewood. None of them use post-its or, to my knowledge, drink herbal tea.

Back to my friend. While I do (silently) admit to the possibility of exaggeration on her part, the point is hard to miss. Are our bosses really overpaid?

Years ago, economist Tim Harford tackled this issue in his book The Logic of Life and presented a downsized version in Forbes titled Why Your Boss is Overpaid. According to him, there is a logic to bosses making obscene sums of money while the downtrodden cubicle slaves toil. The ugly truth is that your boss is probably overpaid because of you. He isn't being paid for the work he does but, rather, to inspire you. So you work your socks off in your underpaid job in the hope that one day you will become an overpaid fat cat yourself.

Economists (bless that breed of individuals!) have a name for this: Tournament Theory.

According to Tournament Theory, workers are frequently ranked relative to each other and promoted not for being good at their jobs but being better than their rivals. For instance, Andy Murray was paid $1.9 million for winning the US Open. He was not paid to work hard. He was not paid to play objectively brilliant tennis. He was paid to beat his opponent - Novak Djokovic. And not in his backyard or anywhere else, specifically at Flushing Meadows. Harford goes into great detail about “tournament theory” and “promotion tournaments” in the office space, which I don't have the patience to delve into.  

This very month when the Occupy Wall Street movement completed a year, The Economist tackled the issue of overpaid bosses. With Steven Kaplan’s help, The Economist challenges three propositions:

• CEO pay just keeps on going up
• CEO pay is not tied to performance
• The Boards are not doing their job of holding fat cats’ paws to the fire

Kaplan questions the notion that CEO pay always goes up and argues that CEOs are paid for improving the performance of their company’s stock and provides data to back his claim. But according to a much earlier article in The New Yorker, overpaid CEOs are not just expensive, they are even destructive. And, you guessed right, they have data to back their claim too. 

The New Yorker ends with the conclusion that in the long run companies that do not balance pay with performance will suffer on the stock market. The Economist concludes by saying that CEO pay packets are determined by demand and supply. 

So basically, scarce good talent is heavily in demand but the supply is drastically limited. Hence the steep premium. Companies pay what it takes to woo the best bosses and show them the door if they falter. Whether the boss delivers due to his business acumen or intelligence or because he possesses the ability to attract great talent and drive them like slaves is another issue altogether and meaningless to some extent, at least to the Board. The results are what they look at.  

Back to my friend. She has rubbished all of the above. But the thought of sitting behind that rosewood desk in soft leather has got her pulse racing.