We have one and only one ambition. To be the best. What else is there?

-Lee Iacocca, of Chrysler.

Wisdom courtesy of the business school intranet home page. If you refresh it, it comes up with a new inspirational quote. This was the one with which I was greeted this morning.

Control

Fundamental to the study of economics is the idea of a market within which supply meets demand at some price/quantity level which then becomes the equilibrium. This is such a central idea for economics because it describes the world as one big market (the macroeconomy) within which there are many smaller markets (regional markets, final good markets, factor markets and so on). So it's a pretty big deal when the market fails. One of the main ways that a market can fail, and also a good reason why economic models aren't the best descriptors of how the world works, is when the information in the market is not perfect.

Perfect information is required because buyers and sellers in a market need to know all the information that will impact their decisions, so that they can make efficient decisions and thus get the market pricing and signalling correct. However, it is rarely ever the case that all such information is available. Usually the situation that exists is one of 'asymmetric information', where one side of the bargain has more information than the other side has, and so is able to manipulate the party with inferior information to take advantage of the situation. There are two resulting outcomes that can occur from this: adverse selection, and moral hazard.

The main example used for the analysis of imperfect information is health insurance. There is asymmetric information because while the customer is capable of knowing everything about themselves, the insurer is not. The insurer is trying to make a profit by signing up lots of low risk/good health customers, to subsidise the payouts that they have to make for the weaklings. However, healthy people don't find it hard to pay their health bills and so are less likely to purchase health insurance in the first place, and so the insurer is likely to get lumped with a lot of sickly people. This situation is adverse selection, as more of the 'low quality' product has entered the market than the 'high quality' product, the low quality product is more likely to be selected. Here, this means that while the insurer needs lots of healthy people to make a profit, because they don't have full information about the unhealthy ones, they end up with a lot of sickly people, and have to pay them out and reduce their profits.

The other issue that arises is that once people have bought health insurance, and so know that they won't have to pay their health bills, they become less concerned about getting sick, and accordingly do not take as good care of themselves as they would have otherwise. This is moral hazard: the adverse behaviour that occurs by allowing people to buy insurance for an event.

But what makes economics even better is that you can use it to look at situations which aren't obviously economic. Take, for example, the situation that follows. Because it is one of my favourite novels, I've used the characters from Persuasion and their backstories for assistance:

Let's introduce two characters to begin with: Anne Elliot and Frederick Wentworth. Anne, the daughter of Sir Walter Elliot, was a member of the landed gentry. Wentworth was a man of the navy, who, while not a member of the landed gentry, due to his profession and his calibre, was guaranteed social mobility. Despite this, Anne and Wentworth had a lot of interests in common and soon became romantically involved. Those who knew the couple were extremely envious. However, as the relationship went on, as always does happen, but people never seem to expect it, Anne and Wentworth had to work harder at the relationship. Although Wentworth was never made aware, because Anne didn't want to let it on, Anne was becoming distracted by her sister, who was becoming worryingly and increasingly ill. Understandably, receiving less attention, combined with the fact that Anne was a bit of a prude, upset Wentworth.

One night, without Anne, Wentworth attended a ball. Beaten down by Anne's apparent inattentiveness, Wentworth propositions Henrietta Musgrove, who disapproves initially, but later comes around. Distressed by the evening's happenings, Wentworth decides that he cannot tell Anne of what happened, and so leaves her.

Anne knew intuitively that there was something about the situation that didn't add up. Wentworth had told her that he was no good for her and so must leave her, but could only vaguely describe why. When pressed, the ambiguity remained. It was not until Charles Hayter, who was also interested in Henrietta, approached Anne, that she received near perfect information on the situation.

So for all that time, Anne had been moping because she thought that it was her own conduct that had driven Wentworth away. It was definitely a factor in why Wentworth left, but Wentworth put the nail in the coffin (to use one of my mother's expressions).

The issue remains, what should Anne do? For the first time since Wentworth had left her, she knew exactly what to say to him. How dare Wentworth treat her with such cold politeness, and make her feel like he was being generous in even talking to her, when he was the one who transgressed? But no, that would be too dramatic and impulsive for a character like Anne, who despite being very Romantic (capital R = the literary period, not loving, just to clarify) in her own mind, is dominated by a sense of duty to her family and to the prevailing social order. She doesn't act out of line. She takes it with a typically Augustan calm. She forgives him. She moves on.

Anne forgives Wentworth because she knows that he too has had a hard time and felt a lot of guilt about the situation, perhaps for different reasons, but still, unhappiness nonetheless. Bizarrely, the one thing that upset her the most was that Wentworth didn't just tell her the truth. The strange thing about the truth is that the more we try to conceal it, the more likely it seems to be that it will come out somehow. This is because the truth, as Winston Churchill said, is incontrovertible. Malice may attack it and ignorance may deride it, but in the end, there it is.

So I guess what that long and rambling narrative was meant to show is that as well as in relations between corporates and businesses and other money making entities, imperfect information can impact relations between friends and even my beloved Jane Austen characters. If Anne and Wentworth could have just told each other the truth, they could have saved each other a lot of economically suboptimal decisions further along the line. Although, I'm not going to lie, Jane Austen stories do lose their appeal somewhat when you think of them in terms of economics and market failure. And there is still another half of the novel to get through.

Indecisiveness and other related matters

salvete! As you've probably noticed, I've been messing around with the layout of this blog for a while. Finally I have something that I'm vaguely happy with, though it is annoying that the original layout that I had when I started this blog seemed to disappear from the layout selection list, and also annoying that the background images available to choose from are so unsophisticated. I think I'll have to write some HTML for this blog at some point, so that the design will be nicer (HTML: the things you learn from myspace...), but this is it for now. It's not as bright as the other one, but I think that my years have private schooling have drummed into me that writing should only be in black or navy blue. So there we go.

I'm also writing this post as a reminder that I've thought up two blog posts that I need to write:

-varium et mutabile semper femina, which I had posted, but then deleted, because I wanted to write a more complete entry on it;

-The deal behind the whole 'imperfect information' thing.

I also need to find a flash drive for work tomorrow. Where are these things when you need them?

Bonne nuit for now!

0100101

For the last six days, I've been on holiday at my family's beach house. Fortunately, the weather has been excellent so I've been able to spend the time outside, hopefully soaking in some vitamin D and generally enjoying the holiday period. This has been a huge relief, because I am by nature a city dweller, and I start to go a bit nuts when I find myself in remote (i.e. 1 hour north of AKL) places like Omaha. This is particularly the case when the weather is bad, because fine weather is pretty much a condition precedent to a beach holiday. However, many times have my parents driven me up to Omaha to stay there for weeks in the rain, with nothing to do. Accordingly, we now have quite a large collection of magazines to get us through rain at the beach. I always thought it would be easier just to drive home. My parents disagreed.

A few days ago, as I was lazily eating my breakfast, I started to flick through an old Hello! magazine, from when Prince William first started dating Kate Middleton (I am not quite sure why I am so keen on all these royal family stories; perhaps it is as they say that girls secretly want to be princesses). The article basically detailed all her background, as told by a 'close friend'. It painted one of those classic and almost cliche stories of the girl who was ignored all through school then went on to befriend a prince at university. Charming. The bit that interested me was that apparently when she was in high school, there was a practice in place whereby the boys of the school would rank the attractiveness of the girls from one to ten, and tell them. Kate was a seven.

This then brought back a high school memory of my own. At Dio, at the end of fifth form, it was quite common for quite a lot of girls (typically the very bright ones, or the ones whose parents wanted them to marry into a rich family) to leave the school and go to King's, another of the country's top schools. King's College is a private boys' school from years 9-11, and then there are boys and girls for years 12 and 13. As it happened, a lot of my Advanced Maths class was leaving to go to King's, and those who were leaving talked incessantly about King's from as soon as they found out that they had been accepted, until the end of the year. Anyway, someone had heard that King's College too had the practice where the boys rated the girls according to their appearance. Immediately, many of the prospective King's girls laughed it off, and one began a lengthly speech essentially about how women shouldn't see themselves as objects to men, and somehow linked this in with the ranking system. I wasn't fooled. I could feel it. Panic was in the air.

I never did find out whether my friends were rated. In fact, I never really thought about it again for a while. However, last year I was in the car with two of my male friends, who were rating seemingly all the girls in our year of Law. I probed them for more information on the rating system. Apparently, the 'marks' that the girls receive go from one (ugly) to ten (beautiful), and obey a skewed bell curve distribution. The mean is seven (because apparently at our age most females are in the prime of their lives) and you can't give out fractions.

I went home and pondered the information I had just been given. The conclusion that I came to, however, is that despite how seriously my two friends were taking their rating system, it simply fails to provide any useful information. If the distribution of female attractiveness is really bell shaped, meaning that a perfect ten is extremely rare. However, most men are married, and to women who I'd say are objectively less than tens. So, giving a girl a rating out of ten is useless, because the ratings are not given relative to the score at which that the man would 'settle'. For example, saying 'that girl is a seven' is unhelpful unless you add 'but I'd be happy with an eight'. The whole dilemma is further confounded by the (scandalous!) fact that some women's personalities add to or detract from their overall attractiveness. The interpretation of the figure is just too uncertain.

It's also unnecessary. Attraction is binary. Yes or no. 0 or 1.

My personal public transport gripe

For work, I have been researching transport, and in particular the motorways. The other student who works with me is researching public transport. Accordingly, many discussions have been had over the relative merits of different public transport systems. The views espoused are generally positive.

However, last week, when I took the bus home, something happened. It was something which both brought back memories and left me rattled.

What I am about to say next will sound like a digression but it actually isn't:

School field trips were great. You used to be able to skip classes without having to get a parent to ring up and say that you were sick, and go to some place that was sort-of related to what you were studying, (usually) with a group of friends. However, there was one aspect of field trips which was always somewhat problematic. This was the bus travel, but not for the reason you think. Most people would probably think that I don't like bus travel because of the perception that I'm a neo-liberal who doesn't believe in public goods. This is not completely true, though public goods do make an economic mess when you're trying to draw them on a graph.

The real issue was the whole two-person-to-a-seat rule on buses. For most of my high school life, I didn't have a best friend at school. Accordingly, this meant that I didn't automatically have the 'right' to sit next to anyone. And after you're about 12, it's a bit weird to ask someone who is your friend but not your best friend "can I sit with you?" without sounding a tad creepy. That's just my opinion. As it happened though, I was fortunate enough to have a group of friends, and I can only once remember having to sit next to a random. Happy times.

So, I guess you could say that my approach to getting a seat on the bus (and a partner) was a bit like the aircraft gas mask approach: help yourself before you help others. Survival of the fittest, to put it less originally.

But, as it happened, finding a partner was never the biggest issue. There were two potential problems that could arise prior to the completion of a successful bus ride. The first is when you're walking down the aisle to get to your seat, and you see someone that you know, who is alone and is looking for a partner. The best way to get around this was to avoid eye contact, which was actually easier said than done, because usually the desperate person would be trying everything to lock in some unsuspecting classmate. Sometimes, in desperation, they would call out your name, and you'd have to say, as quietly as possible "uhh sorry X, I've already promised to sit with Y...." ...meanwhile all the people sitting around are a) witnessing the person's public rejection; and, b) probably thinking that I'm a horrible person. The second situation that could arise was when the teachers realised too late that they had not ordered enough buses, and so would shout out "THREE TO A SEAT!". Anarchy invariably ensued, and if you didn't move quickly enough, you would either have some random assigned to your seat, and be burdened with having to include them in your conversation for the entire journey, or, even worse, some teacher would pull you out and assign you to another seat, and so you would be the burden on some other people's conversation.

And now to get back to what I was talking about. I got onto the 746 at Britomart. I was one of the first people on, so I had my choice of seats. I took the seat behind the second lot of doors at the back of the bus. Before departing, the bus waited for more people to arrive, and by the time we departed, the bus was full. It was so full that everyone had to stand. All the seats were taken. All except one, and that one happened to be the seat next to me. I began to wonder why no one getting on was sitting next to me. Subconsciously, I was probably even staring longingly at each passenger who walked past, trying to make eye contact. But alas, the seat next to me stayed empty for the entire trip.

Don't get me wrong.. there were certainly people on that bus next to whom I would rather not have sat, for example, the lady who looked like she had just done Christmas shopping for a family of twenty, judging by the number of bags she had. Despite this, I was plagued by self doubt. Why did someone choose to sit next to the bag lady and not me? Did I seem unfriendly? Did I look like a criminal?

Or maybe everyone else had organised their partners before they got on the bus.

The Law of One Price, and why Supre is relevant

As you can tell by the title of this post, it's going to be a random walk through topics as I think them up. It's ok. We'll both live with it.

Every weekend, for the last little while, my parents have driven up to Omaha. This is because the beach house is currently being painted, and they want to inspect the progress weekly. Since my exams finished, I too have been dragged up with them each weekend, to look at the beach house. It's very boring; an awkward car ride during which my mother and I have to stay quiet because my father will have some American on the phone (it's still Friday there), and then we get out of the car, and I am forced to make some comment on how great the house looks, even though I can hardly tell the difference between the colour of the house where it has been painted and where it has not.

Last weekend, I decided not to go. I had a birthday party to go to, and I needed to buy the present. When my mother came into my room to wake me up to go, and I told her that I wasn't, she was quite shocked. This amused me, as it was as if she thought I enjoyed it each week. But this is a digression. Anyway, instead of going to Omaha, I decided to take a trip to Newmarket. In particular, I was looking for what I call 'commodity fashion items'. These are generic items like black cardigans, white tank tops, denim cutoff shorts (apparently these are out of fashion now, alas), white plimsols and so on. Just the basic items that everyone has in their wardrobe, and which are sold by pretty much every shop.

In economics, there is an important concept, which has recently (according to some) been debunked. This idea is the Law of One Price. This states that in efficient markets, all identical goods must have only one price. Supposedly, an example of where this did not apply was when Royal Dutch/Shell shares did not price according to the way they had agreed to divide their future profits (60-40).

I think a more obvious example that the Law of One Price does not apply is the Broadway shopping strip. Take, for example, the garden variety acid wash denim skirt:

Price at Glassons: $29.99

Price at Cotton On: $30

Price at Supre: $55

Does anything there stand out to you? In fact, the Supre skirt probably wasn't even real denim. So next time you hear someone complain that "Supre has such high prices for its crap quality" (an oft-heard complaint), tell them that it's more than that. In pricing its products above other similar products, Supre dares to violate the very foundations of the market pricing system that we live by.

Your friends will think you're really smart. Or insane. But when you think about it, the two aren't mutually exclusive. Draw the Venn diagram.

Tutto va bene

I renamed my tumblr. I had been through a few names for it, before settling for salve! Emma nomine., also the title of this blog. I first used it in the 'About Me' section of my myspace page. I guess I just like the way that in Latin you can say "Emma, by name". It seemed like something that an action film hero might say, not dissimilar to "Bond, James Bond".

But as it happened, I figured that I had outgrown the title. It was also probably a bit superfluous, given that my name was listed elsewhere, so, as ends up happening to most superfluous things, it was cut. The new name is tutto va bene. I first came across this phrase in year 11, when I was doing a family history album for a Level 2 History internal (standards 2.1 and 2.2.. I still remember). Anyway, during my 'research', I came across this book about the history of Italian immigration to Wellington. The title was Tutto va bene, which means "everything's going well".

I think it describes my personality and general character development through life quite well. I'm mean-reverting. Where I am and how I feel about life tends to change from time to time, but it always reverts back to one viewpoint and outlook. Particularly since I started Law School properly (2009), I feel like I've been spending too much time panicking/stressing/making work for myself, and not a lot in self-examination (more on this later), and so I entered a bit of a depression/recession etc, but now I'm just reverting back to the mean again. It's quite comforting. Life is good. Tutto va bene.

Also in high school, though not for L2 History, we studied Socrates. I really disliked (Plato's portrait of) Socrates. I just imagined these poor ancient Greeks, strolling through the agora, going about their daily business, when all of a sudden a nutty man in ragged clothing would start questioning them about something. Had I been in Euthyphro's position, I would have been extremely annoyed. All I wanted to do was make a statement on, in Euthyphro's case, piety, and this arrogant fool starts questioning me, seemingly for the sake of it more than anything else. The reason for all of this, supposedly, was that the unexamined life is not worth living. Socrates' badgering meant that Euthyphro had an opportunity to 'examine' his position, so to speak, and rethink it and then improve on it. My year 12 self found this rather dramatic. In fact, I still do. Surely an unexamined life, inferior as it may be, is not 'not worth living'? Excuse the double negative. It also seemed quite self-indulgent. While the Sophists, criticised heavily by Plato for litigious deception, were out seeking excellence in all they did, Socrates and co were examining their lives. I dunno. Something about the former approach seemed a bit nobler to me.

But I think Socrates had a point. While I still wouldn't go as far as saying that the unexamined life is not worth living, I would say that there is huge importance in examining one's life. It's especially important because for the last three years I had been (not so?) happily studying lots of things and now I need to decide what I want to do with my life so that I can plan accordingly. Law honours? Economics honours? Finance honours? Ahhhhhh. I guess I'm actually quite lucky that I have this dilemma, rather than being forced into once path.

That's a bit of a digression though. I guess the point is that sometimes you have to take time and reflect on who you are and what's important. I hadn't self-examined for a while, but now that I have, I've reverted to my 'mean' position. Hopefully, continued self-examination will keep me there. But not too much; I wouldn't want to end up like Socrates. Nutty old fool.

PS: On the subject of mean-reversion. Yes, it does disgust me mildly that I'm describing my personality with a financial term, used to describe market expectations. Never mind.