Saturday, December 31, 2011

Government vs. Private Incentives

From an article discussing the recent natural gas find by Noble Energy:
Communications Minister Efthymios Flourentzos struck a note of optimism, saying that as a public listed company, Noble would always announce a more conservative estimate of the quantities of natural gas, so as not to run afoul of the New York Securities and Exchange Commission.
So what? Does that mean that a government company would announce a much more liberal estimate because it would not be penalized at all for being wrong? That sounds an awful lot like the rest of government functions.

Further in the article:
University of Cyprus professor and member of the group of experts appointed to advise the government, Panos Papanastasiou agreed, saying the find was "possibly the second largest offshore gas find in the last decade".
"Companies are usually conservative. They don't announce figures and then downgrade them because they run the risk of being penalized,"  Papanastasiou said.
It almost sounds like there is no easy way to hold a government agency or company accountable (i.e penalizing) if they make a costly mistake or misrepresent matters. Call me a cynic, but people are still under the delusion that government officials and employees are public servants.

Also in the article:
The minister added that some sort of national company needed to be created to manage the existence of hydrocarbons in Cyprus' EEZ, giving the state a "decisive role" in wealth management.
With all due respect, why? A national energy company gives too much incentive to the government to perform mischief, taking the proceeds from exploration and production and wastefully spending on social programs, neglecting necessary reinvestment in fields to maintain production. See Venezuela, for example, where oil production is declining and they can not get international investors interested, though you would think that with them producing oil, they could surely fund reinvestment to maintain a cash flow stream... except for those social programs!

The private sector would run the exploration and production better because they at least are accountable to shareholders (corporations have the agent problem, but governments are the ultimate example of the agent problem), and would probably maximize resources extracted from the field. The government can just take its royalties and taxes and be happy without having to manage a company.

Except, of course, if Cypriots want more government involvement in their lives through a national company adding significantly to the coffers, resulting in a government likely to lavish them with social programs and handouts. If they want to disincentivize themselves even more from self-reliance, then I suppose they deserve the government they have. They will likely realize too late what a mistake that would be.

Wednesday, December 28, 2011

The first thing you must remember is to get the hell out of Brussels as quickly as you can

Somehow I do not think Michael O'Leary is going to be invited back to Brussels. Bureaucrats never like to hear how inept and idiotic they are.

Amusing Points:
  • First three minutes and thirty-five minutes
  • Timestamp 5:30: "and British Airways, which used to be the world's favorite airline, isn't even the UK's favorite [airline] anymore, we [Ryanair] are!
  • Timestamp 6:45: "We got an email back last Friday saying, 'I'm sorry the [European] Commission can't pay for a Ryanair flight because there's a ban on low-fare flights within the Commission.'"
  • Timestamp 7:40: "The first thing you must remember today is to get the hell out of Brussels as soon as you can."
  • Timestamp 8:25: "[L]ower prices beats higher prices every time, unless you work in the Commission where, of course, by law you can only buy higher prices because, let's face it, the European taxpayer is going to pay for it anyway."
  • Timestamp 9:20: "...We take your bags from you on departure so we can carry them here and give them back to you on arrival, unless, of course, you flew British Airways, in which case we lose 50% of them in between.
There are a few more humorous moments after, along with plenty of good ribbing at the European Commission. 

Of course, the Commission flunky had to point out that the Commission deciding to deregulate the airline market as part of the single market allowed Ryanair to exist. Which begs the question of the use of regulation in the first place, eh?

Monday, December 12, 2011

A Teachable Moment in Skyward Sword

So when you first buy adventure pouches in Skyward Sword, the first one is 300 rupees. The second is 600, and the third 1200.

Call me amused...thanks to Nintendo for a teachable moment about supply and demand (decreasing supply of pouches and increased demand from you buying them resulting in price increases for each incremental purchase until supply is exhausted). Pity that they couldn't give Beedle a better story to illustrate that point.

Just think, if they had, how many fewer people would consider higher prices in abnormal times to be price gouging when in reality it reflects 1) the sudden scarcity of the product; and 2) the pricing mechanism use by store owners to ration it out to those with the most desire and ability to pay. That does raise another point: in normal times, it is cheaper to prepare for risks (insurance, stockpiling, etc) than in abnormal times...

Want to read another example of pricing in chaotic times? Daniel Abraham's first few chapters of The Dragon's Path is a rather well written tale to that effect. If I was an economics professor, I'd look to real life and fiction to find good supporting anecdotes like that.

Saturday, December 10, 2011

Status Quo Bias: The Devil Ye Ken versus the Devil ye don't

It is that time of year when everyone is assessing where they are in their life, what they've done, what they've not done, and what they want to do next year. I find the whole effort somewhat amusing, because ultimately though people will want to change matters, they somehow decide not to at the last moment.

At the heart of the matter is status quo bias. We prefer that which we know and have shaped ourselves around to that which we do not know. Certainty over uncertainty, minimizing pain through avoiding change even if it might be for the better.

However, what if that change is for the better? Would you regret not having gone through the effort to execute it?

For example, I refer you to one of my favorite passages in Diana Gabaldon's Outlander series (and no, it's not one of the romance novel moments, though Diana writes those amazingly well too...), since it calls out a two psychological biases (status quo and authority):

"Better the Devil ye ken, than the Devil ye don't," Murdo Lindsay said, shaking his head lugubriously. "Handsome Harry was nain sae bad."
"No, he wasna, then," agreed Kenny Lesley. "But ye'll ha' been here when he came, no? He was a deal better than that shite-face Bogle, aye?"
"Aye," said Murdo, looking blank. "What's your meaning, man?"
"So if Handsome was better than Bogle," Lesley explained patiently, "then Handsome was the Devil we didna ken, and Bogle the one that we did - but Handsome was better, in spite of that, so you're wrong, man." [Emphasis mine] 
"I am?" Murdo, hopelessly confused by this bit of reasoning, glowered at Lesley. "No, I'm not!"
"Ye are, then," Lesley said, losing patience. "Ye're always wrong, Murdo! Why d'ye argue, when ye're never in the right of it?"
"I'm no arguin'!" Murdo protested indignantly. "Ye're takin' exception to me, not t'other way aboot."
"Only because you're wrong, man!" Lesley said. "If ye were right, I'd have said not a word."
"I'm not wrong! At least I dinna think so," Murdo muttered, unable to recall precisely what he had said. He turned, appealing to the large figure seated in the corner. "Mac Dubh, was I wrong?" 
The tall man stretched himself, the chain of his irons chiming faintly as he moved, and laughed.
"No, Murdo, ye're no wrong. But we canna say if ye're right yet awhile. Not 'til we see what the new Devil's like, aye?" Seeing Lesley's brows draw down in preparation for further dispute, he raised his voice, speaking to the room at large. "Has anyone seen the new Governor yet? Johnson? MacTavish?"

In case you did not figure it out, Mac Dubh, or Jamie Fraser, is the authority among the prisoners in this book. We'll leave aside a discussion about the magnificence of a man like Jamie Fraser.

I sincerely hope that passage triggered some thoughts within you about the merits of sticking to your goals for the next year. I know that 2011 was predicated around various changes to my status quo. Some of those I executed more successfully than others:

  • Career - I decided it was time to apply for an MBA, so my applications are currently out there
  • Personal life - sorry, but this is private! You can ask me in person.
  • Investing: reading more than ever, and starting to journal my thoughts (albeit inconsistently)
So, for 2012, what will I be doing to change the status quo? Well, I certainly will not be protesting Wall Street or anything. And I view it as futile to protest the government, as if they'll listen and change things for the better (edit: Who knows, maybe they will, in some cases like SOPA, though I'm still a pessimist overall here thanks to the NDAA 2012, which continues the trend of the past 10 years).
  • Career - the MBA, or plan B
  • Personal life - again, this is private! I may post a passage from the The Dragon's Path in the future to illustrate the risks I see right now which I will be mitigating via actions for my personal situation (hint, part of it has something to do with what the Medean Bank did as a counter to the notion that power tends to corrupt, certainly among sovereigns and conquerers).
  • Investing:
    • Reading certain authors I respect on a regular basis (Jeremy Grantham and James Montier, though I think their Keynesian framework is wrong; John Hussman; and a few others)
    • Journaling on a weekly basis
  • Education: 
    • Learning a foreign language (something I've never managed to do so far)
    • CFA studies
My plate is certainly full for next year! With discipline, I'll accomplish it. Whatever your desires next year are to change your status quo (and for most of us, I believe we ought to), I wish you the best of luck and determination in executing your plans.