You are sitting in a cinema. The movie sucks. Do you go out now or do you stay till the end of the film? A rational actor would choose to leave immediately because the price of the ticket is sunk cost and it should not affect his decision about the future. Even though he has spent money on getting in the theatre if he could have better time doing something else he should not try to get some bang for his bucks out of a crappy film.
The Bulgarian minister of economy appears not to pay much attention to the concept of sunk cost when discussing whether the country should build a second nuclear power plant in Belene. Traycho Traikov says “We should decide whether to lose the already invested in Belene if we decide to cancel the project” (in Bulgarian via Dnevnik). The question is not whether the country would lose 1-2 billion euro - those are already deep in the ground (or pockets if you believe some really believable rumors) but rather if the cost of finishing the construction and operating a second plant makes economics sense. I have yet to see a convincing analysis in support of that.
Your flight has an impact. Plane Stupid’s new cinema ad, written and commissioned by creative agency Mother and made by production company Rattling Stick. Director Daniel Kleinman.
You will probably find it either daring or tasteless depending on which side of the green line you stand. The fact is that flying imposes negative externalities on the environment. If this video’s primary objective is to stimulate discussion on the problem it is a hit. However, the group that came up with it seems to be looking at the wrong solution - they want to limit commercial flying in order to reduce its impact on nature. This could hardly work. A much better way to tackle the issue is to invest heavily in research and implementation of better flight technologies that would increase efficiency and reduce emissions.
Confidence is an essential ingredient of success in a wide range of domains including job performance, mental health, sports, business, and combat. Many authors have suggested that overconfidence — defined here as believing you are better than you are in reality — is advantageous because it serves to increase ambition, resolve, morale, persistence, and/or the bluffing of opponents. However, too much overconfidence can cause arrogance, market bubbles, financial collapses, policy failures, disasters, and wars, so it remains a puzzle how such a false belief could evolve or remain stable in a population of competing accurate beliefs. Here, we present an evolutionary model that shows overconfidence actually maximizes individual fitness and populations will tend to become overconfident, as long as the resources at stake during conflicts exceed twice the cost of competition. This is because overconfident individuals make more challenges when there is uncertainty about the strength of opponents (and thus the outcome of conflicts), while less confident individuals shy away from many conflicts they would win. Where the value of a prize is at least twice the cost of trying, overconfidence is the best strategy. The model suggests that the conditions under which humans would have evolved to have a “rational” unbiased view of their own capabilities are exceedingly rare, and it helps to explain why resource-rich environments can paradoxically create more conflict. Moreover, the fact that overconfident populations are evolutionarily stable may be one reason why overconfidence persists today in politics, business, and finance, even if it causes occasional disasters.
I have been at both ends of the confidence spectrum. My experience and anecdotal evidence suggest that overconfidence indeed is the way to go most of the time. The funny thing is that in such a state I feels better about myself and the task at hand. I guess this is nature’s way to show me what works best.
Of course, there can always come that painful moment when ability and luck come short. In such a case I suggest - panic. Then get over it as fast as you can and try, try again.
Arstechnica has a nice piece on the world of high-speed trading.
If you look under the hood of the markets in 2009, you’ll find that the trading floor has been replaced by electronic networks; the frantic, hand-signaling traders have been replaced by computer systems; and all of moves in the trader’s dance—a thousand little tricks and techniques (some legal, some questionable, and some outright illegal) for taking regular advantage of speed, location, and information to generate profits—are executed hundreds of times per second, billions of times per day. And the whole enterprise is mainly powered by the same hardware from Intel, AMD, and NVIDIA, that Ars readers use for gaming.
I pity the fools with etrade accounts who wake up at odd hours to check on the markets. Few of them will be so late to the trades that they might actually get them right. Still, flash your skeptical smile at the next active amateur trader boasting big returns at a cocktail party.
In an interview for the Guardian, this year’s economics Noble prize winner shares his view on the development of the crisis and predicts a Japanese lost decade style stagnation on a much bigger scale. Although the worst was averted, there is a realistic scenario for the leading economies in the world to plunge in a liquidity trap where near or equal to zero nominal interest rates do not stimulate the economy to full employment. This may result in a price deflation and worsen the recession.
On a brighter note, Krugman praises the new US administration,
I’m increasingly happy with him [Obama]. I was unhappy; I think they could have gotten a bigger stimulus coming out the gate. But they’ve become more forceful. I would have been more aggressive on the banks; we’ll see if we need to re-fight that battle later on.
Healthcare is looking really good. I’m getting increasingly optimistic on healthcare reform. Climate change looks like it’s going to happen. So my odds that this will in fact be the kind of New Deal I was hoping for are rising. I had my scepticism, but he is smart. He’s impressive. And it is such a relief to have somebody whom you can respect in the White House.
The Washington Post runs a laudatory piece about Ben Bernanke. He succeeded Alan Greenspan as chairman of the Fed in February 2006 and now has his hands full with the biggest crisis since the Great Depression.
As noted in More of the Same, the trend of eulogistic profiles in premier media outlets of the people charged with fixing the economy will continue. But for a good reality check you should visit Krugman’s blog after every major economic policy announcement.
A somewhat lengthy profile of Larry Summers - National Economic Council chairman and former president of Harvard. I tried to speed read through some bits of it but almost every time there was a phrase that would actually make me reread the passage. It was worth it without a fail. This says enough about the quality of the piece.
Greg Mankiw calls it Larry Summers: A Hagiography. I say GREAT! You know that Beatles song - All you need is love. Well, that was in the sixties. Now all you need is confidence. And what better way to gain some but by idolizing the people who are supposed to fix the economy. I am looking forward to similar stuff about Ben Bernanke and Tim Geithner.
Warren Buffett is probably the greatest investor alive. He is CEO and chairman of Berkshire Hathaway. His annual letter to shareholders is here. Even if you are not into investments you will find it amusing.
As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
…
As predicted in last year’s report, the exceptional underwriting profits that our insurance businesses realized in 2007 were not repeated in 2008. Nevertheless, the insurance group delivered an underwriting gain for the sixth consecutive year. This means that our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable.
Over the last 44 years with Buffett at the helm, Bershire’s per-share book value has increased from $19 in 1965 to more than $73,000 as of today. He is the real superman.
