Category Archives: Economics

Are women more honest than men?

The journal Science recently published a fascinating article from Alain Cohn et al, which looked at cultural proclivities for civic honesty around the globe. They employed a rather ingenious method: they “lost” wallets all over the world and recorded when the receiver of the lost wallet attempted to return the wallet to its rightful owner. The wallets were fake and included a false ID of a person who appeared to be local to the country in which the wallet was lost, including fake contact info that actually belonged to the researchers. The ingenious element of the research was that instead of leaving the wallet out in the open, the research assistants actually pretended to have found the wallets in our nearby local businesses and turned in the wallet to somebody working in that business, thus enabling them to record interesting ancillary data on the “subject,” such as their age, if they had a computer on their desk, and whether or not the person was local to the country. Clearly, the researchers were hoping to engage in a little bit of data mining to ensure their not insignificant efforts returned some publishable results regardless of the main outcome.

As it turns out, they needn’t have been concerned. The level of civic honesty, as measured by wallet return rates, varied significantly between cultures. In addition, there is an interesting effect where the likelihood of the wallet being returned increased if there was more money in it, an effect that persists across regions and which was evidently not predicted by most economists. I encourage you to read the original article, which is fascinating. On the top end of the civic honesty scale are the Scandinavian and Northern European countries, with rates at around 75%. On the bottom end of the curve is China, with about 14%. In the case of China, all the study did was confirm what anybody who does business there knows, and something that has been well covered by journalists and completely ignored by our politicians: to the Chinese, not cheating is a sign you’re not trying hard enough.

Here’s where things get interesting: in keeping with modern scientific publishing standards, the researchers made their entire dataset available in an online data repository so that others could reproduce their work. There are a lot of interesting conclusions one can make beyond what the authors were willing to point out in their paper, perhaps due to the political implications and the difficulty of doing a proper accounting for all the possible biases. However, unburdened by the constraints of an academic career in the social sciences, I was more than happy to dig into the data to see what it could turn up…

Perhaps the most interesting thing I found is that women appear to be more honest than men. Over the entire world-wide dataset, women returned the wallets about 51% of the time, versus 42% for men. It is tempting to look at individual countries, but the male versus female difference is not statistically significant enough when looking at individual countries, so I chose to only look at the aggregate data. The data is not weighted by country population, so one should take the absolute magnitude of the difference with a bit of skepticism. However, looking at the individual country data it appears a proper accounting for population bias would likely maintain or increase the difference. (Some of the most populous countries had the largest difference between women and men.)

Worldwide, women appear to be statistically significantly more honest than men. Standard error was less than 1% for both cases.

Here is the full dataset of men versus women broken down by country. You can see that the most populous countries are those where women appear to be more honest than men, so fixing the chart above to account for sample bias would likely still find a significant difference.

Women appear to be more honest than men in most cultures, though the individual country results are not usually statistically significant.

Another interesting question to ask of the data is whether or not there is a generational difference in honesty. Surprisingly, the answer turns out to be that there’s not a statistically significant difference:

Age doesn’t appear to be a statistically significant predictor of honesty. Standard error was roughly 1%, so the difference shown is not meaningful.

Looking at the breakdown by country, we see that there are no big differences between the generations, with one exception that I’m not even going to try to explain:

It’s possible that the young are more honest than the old, but it doesn’t appear to be statistically significant except in one country.

One interesting set of issues that always comes up with population studies like this is what, if anything, should we do with this information? It is true that a Swedish woman is about eight times more civically honest, on average, than a Chinese man. That’s interesting, but also pretty dangerous information. Should this inform our immigration policy, where population statistics might actually be valid? Is it better to not even ask these questions given the abuse of the information that might result? Or, is it good to have this information, especially when it flies in the face of our image of ourselves and others? I suspect in the case of the US, most would be surprised to find out that the average US citizen is as honest as the average Russian. We may be surprised by both halves of that statement, and both might be good to think about.

Is technical analysis and algorithmic trading a legal form of market collusion?

Does the world really need MBAs?

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A few weeks ago I was sitting in a coffee shop writing my thesis. Next to me were two students from Harvard’s Business School, that esteemed institution responsible for many of the managers who have been doing such a bang up job of running our nation’s financial system. They were going over a case for one of their classes, and from listening to them struggle with simple math, it was apparent that those two, who are at the best business school in the country, probably wouldn’t have lasted a minute in any graduate program in the hard sciences.

To begin with, I am skeptical of the very idea of having a management class that swoops in from their MBA school, sans real world experience, to manage companies. It seems to me it would make more sense to pick management from people inside a business who have demonstrated understanding and ability of the unique aspects of that industry.

From my admittedly distant vantage point, business school seems to train people not to truly lead, but to be the quickest in following the herd. Instead of giving us managers who learn a business and find ways to improve its product, it gives us a bunch of jar scrapers who do little of sustance but simply find increasingly clever ways to fool people into paying more for less using the latest management fad. You leverage your customer base into a value-added service relationship, or you outsource non-core competencies, or synergize across divisions, etc. Anything to goose the next quarter earnings growth. You put Snickers bars near the check out at Kinkos, but god forbid do you actually innovate and create something of unique, sustainable value.

Of course, you can’t expect them to do that, because true leadership isn’t something you pick up in a seminar, and acquiring the skills to really innovate in a meaningful way requires a tough slog through an actual technical education. Don’t get me wrong, I have tremendous respect for good managers, having worked under a few. But it can’t be taught in a class. Worse, the concept of business school means that our leadership class is an entirely self-selected group. Leadership should be a position that is earned, not self-anointed by one’s choice of graduate school.

In fact, give some thought to what kind of person even thinks it possible to become a valuable leader with two years of night school, and you begin to understand why corporate America is in the fix it’s in. It’s no surprise so many of them cut corners ethically and focus on short term results at the expense of true sustainable value. When I was applying to grad school, I looked at the statistics of the GRE scores by major. Business majors scored lower than everybody; lower on Math than English majors, and lower on Verbal than Engineers. It seems the only qualification one has to have for leading people in corporate America is an inability to do much else.

This kind of pseudo leadership is epitomized by the well-documented decline of Hewlett-Packard under the erstwhile tenure of Carly Fiorina. This once great innovator that gave us the first handheld calculator was morphed into a company that sells cheap plastic printers at cost so that they can gouge consumers with ink at 1000% profit margins. Short term, that works as a way to make money. Long term, HP is never going to invent anything again, because after all the short-sighted cost cutting, their research labs are essentially defunct. Of course, a marketing consulting firm was probably paid hundreds of thousands of dollars to come up with their “invent” slogan. The management class has no sense of their own self-created irony.

Like HP, many once great American businesses are essentially management consulting companies that happen to have inherited some intellectual property. Far out product development funding is decimated, and what remains is for management to scrape the bottom of the jar with marketing tactics, outsourcing, and whatever trivial refinements are allowed by their skeleton R&D departments. Looking naively at corporate profit growth in the US, the MBAs seem to be vindicated, but this growth has been illusory. They call it transforming America to a knowledge-based economy. I call it burning the furniture to heat the house. How much longer can we grow by shrinking?

Given the ubiquity of MBAs, it’s easy to forget that the very concept of business school didn’t come about until the early 20th century, and it didn’t take off until after the war. We managed, as a country, to produce some of the world’s greatest industrial achievements without the aid of MBAs. We built a transcontinental railroad, gave the world aviation, invented the automobile industry and modern assembly line manufacturing, all without a single business school graduate around to synergize or value-add anything.

I believe history will show that the concept of management school, and the notion of a management class that is self-selected by career choice and not demonstrated ability in a field, is a major failure. Maybe it’s time to rethink our pipeline for corporate management.

Obviously, any time one is talking about an entire group consisting of hundreds of thousands of people, you’re talking in approximations and on the average. Some of the great leaders I’ve met that I alluded to above actually had MBAs. My point is that they are great leaders not because they have MBAs, but because of their experiences and inclinations. In fact, the people I know who I respect the most with MBAs have very little respect themselves for the degree, which is where much of my skepticism about the degree originates.

Why unions tend towards self-destruction

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As pointed out by Mish Shedlock, the public MTA union has brokered an 11% pay increase while municipalities across the country struggle to make ends meet. The callous disregard of public unions for their taxpaying “employers” is highlighted in this article by the candid comments of an Albany police union chief, who stated for the record that “If I’m the bad guy to the average citizen… and their taxes have go up to cover my raise, I’m very sorry about that, but I have to look out for myself and my membership.”

Given that most local and state government budgets are complete disasters, the only possible result of such union intransigence is massive layoffs. It’s already happening, in fact, as municipalities all over cut back on police and fire budgets. Some towns have even shuttered their police departments, relying on county sheriffs for protection.

Plot illustrating the steady decline in union membership over the past several decades.

It’s pretty clear that unions, far from providing job security to their members, more often price their members out of a job. One need only look at the massive decline in American union membership (see the included figure) to see proof of this. Union bosses get rich at the expense of the junior members, whose jobs are cut. But how is this possible? How can union presidents continue to get elected despite the fact that they are clearly pricing their members out of existence?

The answer, I think, is that unions are inherently self-destructing because of a survivorship bias in their member voting, exacerbated by union domination of the labor prices in certain fields. When union jobs are lost, those who are fired are likely to seek employment in other fields, as unions do everything they can to ensure that when a job is priced out of existence at one firm, it is priced out of existence at all firms. That’s why there are three (for now) US auto companies but only one union. If companies do it, it’s called price fixing. If labor does it, it’s called the United Autoworkers Union.

Intuitively, one would expect that any union boss so arrogant as to insist on pay raises unaffordable by the employer would get voted out by union members. However, if you lose your job you’re probably not going to sit around paying union dues, you’ll probably going to start looking into a lateral move into another trade. Or you might just give up looking for work or retire early. The point is this: the people who continue voting for the status quo union leadership are, by definition, those who have benefitted from union membership, not the millions of workers who have had to leave their chosen profession due to the union destroying their jobs.

Imagine a hospital which has such poor medical care that anybody who has more than a cold dies, but whose cafeteria serves fillet for every meal. Customer surveys of this hospital would be nearly unanimously positive; all the people who leave the hospital will have had a great time, but the corpses can’t complain. This pretty much describes what is happening at unions.

It’s a buyer’s market for greater fools

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If there’s one thing we’ve learned from the financial crash, it’s that the efficient market hypothesis is utterly bogus. As a corollary, just as dead is the idea of buy-and-hold investing as a rational way to make money. Stock market results from Japan over the past two decades, and now America and Europe, are making it increasingly clear that the relatively steady returns of the last century were an anomaly begetting complacency.

Moreover, I’d especially be wary of long term investing in an environment with nearly 10% unemployment and an economy entirely propped up by war-level deficit spending when (a) there is no war and (b) we already have more debt* than the entire private wealth of the country. The financial system crashed because we had unsustainable levels of credit being issued, pulling future demand forward in a way that had to end sometime. So, what did we do? We simply pulled demand forward by using a bigger lever, the United States Federal Government. When debt levels became untenable for individuals and corporations, we simply shifted them to the government, an entity with a higher credit rating by dint of its ability to steal with impunity to pay its bills. But that’s the end of the line, folks, and even the US government has its (credit) limits. At the end of day, to paraphrase Charlton Heston, it’s all just people. The day of reckoning is drawing near, as the Chinese have made clear, and it won’t be pretty. I’m not predicting apocalypse, just extended tough times as we finally have to start paying the liquor bill for the long party.

So, if buy-and-hold is out, should you trade the market short term? Well, unless you’re a investment bank like Goldman Sachs, with the ability to access privileged order flow information and front run trades, you’d also have to be insane to try it. At this point, our stock markets are a farce, a rigged game for the benefit of a few elite financial firms. Spreads are huge, and people are getting scalped right and left by manipulation and high frequency computer trading games.

I’ve always looked with skepticism at the stock market. It’s a giant zero-sum game, for the most part, since dividends and stock buybacks have largely disappeared. Despite all the pumping of the market as a way to make wealth, it’s a mathematical fact that the stock market is essentially just a mechanism for transferring money between people and institutions. But lately, it’s also an empirical fact that it’s largely a way for money to be moved into Goldman Sachs’ trading accounts.

The stock market has become a Persian bazaar, and yet another example of the hubris and unchecked greed of Wall Street. It’s time the average person says “enough is enough” and quits playing. The only way Wall Street will get the message is if enough of us decide to quit being patsies, and leave the market. The truth is, your broker doesn’t care if you make money. They don’t offer their stock advice or “trading tools” because they give a damn about helping you. You’re the trading tool. They know, by definition, that their customers will lose money on average by taking their advice (it’s a negative sum game when you factor in commissions, even before considering that it’s a rigged game). They just need you to play the game, because the only way Wall Street stays alive is by skimming from the streams of money flowing through it.

If you haven’t thought about it yet, just ask yourself where money goes when it “goes into the market.” In truth it just goes from one person’s cash account into another’s. There is no such thing as money “in the market” or “on the sidelines.” It would be just as ridiculous to talk about money being tied up “in oranges” when people buy produce. Money is always going from one bank account to another. The market is just a way to transfer money and shares, and rather than money “moving in” from the sidelines it’s really more accurate to say that at any given point, dumb money is moving in or out of the market in the opposite direction of smart money. If you’re a short term trader, you have to wonder if you’re on the right side of this transfer if you don’t have access to a thousand CPU cluster computer center and direct exchange connections. If you’re a long term investor, you have to wonder if you’re on the right side of this transfer when you see investment banks make bets with their own money in exact opposition to what their retail research advises.

I know you might miss the fun of trading stocks, but consider taking up gambling on sports, instead. At least it’s a fair game.

(*including government entitlement promises as debt)

Why does volume mean one thing in housing and another in stocks?

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Housing numbers were just released, and the big news is that home sales were up 11% from the last month. That’s 11% up in volume, not price. Prices are still abysmal on a relative basis, down 12% from this time last year (and yet still too high, if you ask me). There are more foreclosures in process in California than home sales in the entire nation. However, everybody says this spike in volume is great news, and a sign the housing market is turning around.

But isn’t it true that if the stock market goes down on higher than expected volume, these same experts will call that a sign of great weakness for the equities market and a harbinger of doom?

Can somebody tell me how it is that rising volume with falling prices is terrible when it happens in the stock market but it’s an unmitigated positive when it happens in the housing market? My current guess is that they are wrong in both cases, and that you can’t glean much predictive value from volume in any market.

Jonathan Birge

Another monkey with a typewriter…