All of inflation's little parts

Very cool graphic showing the inflation pie. For the U.S., that is. It would be nice if the UAE had inflation data like this.

Via Growthology.

Speaking of inflation, Zimbabwe, you ain't seen nothin' yet. Perhaps the Mugabe's Obesity Tourism Strategy isn't working. (Thanks for that one, Juandos.)

Economists take advantage of people's weaknesses

Washington Post

The world of the behavioral economics, which melds psychology, finance and emotion, seeks to explain and sometimes exploit why we do what we do when it comes to investing. It is a field that has become more accepted lately, particularly since 2002, when Princeton University psychologist Daniel Kahneman was awarded the Nobel Prize in Economics for, as the Swedes put it, integrating "insights from psychology into economics, thereby laying the foundation for a new field of research."

Kahneman is a director at Fuller & Thaler, a firm whose other namesake is Richard Thaler, a prominent University of Chicago behavioral economist and a frequent collaborator with Kahneman. Two of the funds the firm manages that use behavioral methods have beaten Russell benchmarks from their inception through the first quarter of this year. Not surprisingly, Fuller & Thaler is not the only firm using such techniques. Firms ranging from J.P. Morgan to AllianceBernstein say they seek to capitalize on the faulty investor mind.

For instance, Fuller & Thaler likes to pay close attention to analysts who may be anchored on a stock, not raising their earnings-per-share estimates enough even though positive information has come out about the company. Fuller & Thaler's investment team pounces before the analysts realize they were wrong. As Kahneman said in an interview, "I think that betting on mistakes of people is a pretty safe bet."

Good for them. My interest in talking to the likes of Kahneman, Thaler and other behavioral economists and personal finance advisers -- besides confirming that I am not dumb -- was to understand these mistakes and what there is to do about them. "I don't think you can fix what's in your head," Thaler said. "What you can do is train yourself to say, 'This is a risky situation, and this is the kind of situation where I get fooled.' "

I asked Kahneman what fools us most frequently. That was simple, he said: overconfidence. "It's the idea that you know better than the market, which is a very strange idea," he said. "Individual investors have no business at all thinking they can do better."

Why do we? "It's because we have no way of thinking properly about what we don't know," Kahneman said. "What we do is we give weight to what we know and then we add a margin of uncertainty. You act on what you think will happen." That's what I did by buying Citigroup. But Kahneman added, "In fact, in most situations what you don't know is so overwhelmingly more important than what you do know that you have no business acting on what you know." Oops.

Barbara Warner, a financial planner with Warner Financial in Bethesda, said she sees a lot of overconfidence among two groups of people: relatively new investors to the market (me), particularly recent business school graduates (not me), and retirees (never, with my investment sense). The latter group can be exceptionally frustrating. "Now they have entirely too much time on their hands to devote to CNBC and Money magazine," she said. "People suddenly think they are smarter than they used to be because they have more time to pay attention to it."

That's a disastrous situation, Kahneman said: "The more closely you pay attention, the more you do things. And the more you do things, the worse off you will be." For proof, he pointed to groundbreaking research done by one of his former students, Terrance Odean, now a professor at the University of California at Berkeley.
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Odean said he saw two options: Be dumb and let others make money off you, or just buy a no-load index mutual fund and stop focusing on beating the market.

Don't think about it, it will only cost you.

Here's how the American Economic Association allocates its portfolio.

Smoking and the hive mentality

Researchers have found that smoking cessation works best when you concentrate on groups.

The New York Times reports:

The study, by Dr. Nicholas Christakis of Harvard Medical School and James Fowler of the University of California, San Diego, followed thousands of smokers and nonsmokers for 32 years, from 1971 until 2003, studying them as part of a large network of relatives, co-workers, neighbors, friends and friends of friends.

It was a time when the percentage of adult smokers in the United States fell to 21 percent from 45 percent. As the investigators watched the smokers and their social networks, they saw what they said was a striking effect — smokers had formed little social clusters and, as the years went by, entire clusters of smokers were stopping en masse. So were clusters of clusters that were only loosely connected.

Dr. Christakis described watching the vanishing clusters as like lying on your back in a field, looking up at stars that were burning out. “It’s not like one little star turning off at a time,” he said. “Whole constellations are blinking off at once.”

As cluster after cluster of smokers disappeared, those that remained were pushed to the margins of society, isolated, with fewer friends, fewer social connections.
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The new study also looked at smoking initiation but, because many more adults were stopping smoking than starting in the years of the study, its main focus was on cessation. Still, Dr. Christakis said, smoking initiation followed the same patterns as cessation: people started and stopped smoking in groups.
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The study and the obesity study that preceded it, said Duncan Watts, principal research scientist at Yahoo! Research in New York, provide a new view of society.

“We tend to think of individuals as atomized units, and we think of policies as good or bad for individuals,” Dr. Watts said. “This reminds us that we are all connected to each other, and when we do something to one person, there are spillover effects.”

Traditionally, economists think of individuals as atomized units. It is not immediately apparent to me that economists will need to abandon that tenet to explain these facts. Some relationships are part of our environment, taken as given just as we take larger economic conditions as given when we make individual decisions. Other relationships are choices. Thus, if an individual wants to quit smoking he knows that changing his circle of friends will make a difference -- that is, if nonsmokers will admit him. Or he knows that making a pact with friends to all quit smoking together can make a difference.

Carpooling regulations

Over at UAE community blog Seabee outlines the hoops that Dubai government Roads and Transport Authority have created in order to carpool legally. The plain if nontransparent reason for these regulations is to protect the government's monopoly in public transport - both bus and taxi.

Dubai is not the only government that protects taxis. Check out these examples to be found at Carpe Diem.

For earlier posts on taxis, and taxi regulation in the Dubai and the UAE click the label "taxis" to this post.

Buildings go years without utilities

Would you build if you didn't have reasonable assurance you'd get utilities for the building? What investors would tie up their money with these prospects? There are a not insignificant number in Sharjah and Ajman. Emirates Business 24|7 has the story:

Some 30 towers with hundreds of residential and commercial units are sitting empty following a wait of up to five years for services such as electricity, water and sewerage, said real estate sources in Sharjah and Ajman.
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The CEO of Sharjah's Noor Al Mamzar Property, Khalid Abdul Aziz Al Suwaidi, said the waiting list for public utilities was "years' long", in both emirates, but the problem was worse in Ajman.
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Al Suwaidi said he knew of developers in Sharjah, who had to wait four years for services after obtaining their building licences.

And he said the problem was different in the two emirates because Sharjah produces its own power, while Ajman is dependent on federal sources. Ajman has already experienced power cuts as the demand on the electricity grid has outgrown supply. As a result, new buildings cannot be hooked up to the main network until more power is created.

Sources close to the negotiations, who did not wish to be named, told Emirates Business Ajman has already reached out to international companies to discuss building its own power plants. Ajman officials recently held meetings with representatives of a Canadian firm to discuss building a power plant – which could cost as much as Dh1bn – powered from gas from coal.

Meanwhile, the waitlist for utility services has grown so long some investors have begun to treat a notice of confirmation that supply will be provided from the municipality as a commodity that can be sold. These investors then sell projects that will be hooked up for much more than they paid for the land, without every building anything, said Obeid Al Tunaiji, CEO of Al Tunaiji Property. The promise of electricity and water, he said, has become enough to increase the value for developers.

Emphasis added. It simply makes no economic sense in the Gulf to build power plants fired by gas from coal.

Thanks to The Sandbox for the pointer.

Travel boom, bust or bubble?

Dubai and its imitators fashion themselves as tourist destinations. Are they in danger of overbuilding?

The Economist:

Booming emerging economies are the great hope of the world's travel and tourism industry. Dubai is the most shimmering example. It has only a tiny percentage of the United Arab Emirates' oil reserves, and so is straining to turn itself into a regional hub for finance, travel and high-class tourism. Three palm-shaped island-resorts are being built: the Palm Jumeirah (pictured), the Palm Jebel Ali and the Palm Deira. The Burj al-Arab, curved like a sail and on another artificial island, is the world's only seven-star hotel—with its own helipad, naturally. Dubai also boasts the Middle East's first indoor ski-slope.

About 30% of Dubai's GDP depends on travel and tourism, but Sheikh Mohammed bin Rashid Al Maktoum, Dubai's ruler, wants the industry to grow much more. He is the driving force behind the construction of Dubailand, a tourism and entertainment complex divided into seven theme worlds that are Dubai's answer to Disneyland. By 2015 Dubailand is aiming to attract 15m tourists [the population of the country is 5m of which 1.5m are citizens], roughly 40,000 visitors daily.

And, Asia, Beware Benidorm:

In the 1960s the governments of Spain, Portugal, Italy and Greece encouraged the building of hotels and other tourist infrastructure, which seemed the fastest way to catch up with the wealthier north. During the 40 years of breakneck development that followed, vast stretches of the Spanish coast were concreted over, transforming the Costa del Sol into the Costa del Concrete and attracting hordes of tourists in search of sun, sea and sand. Some Greek islands have come to resemble a Hellenic Hong Kong, with high-rise hotels and traffic jams.

Some people in tourism made good money, but in recent years even they have started to notice how the ugliness and the noise is keeping visitors away. The government in Madrid grew so concerned that it bought tracts of seaside land itself, to stop developers from getting their hands on it.

As tourism is about to explode in the developing world, governments should heed such lessons.

Thanks to Secret Dubai for the second link about which she offers this analysis.

What, you may ask, is Benidorm?

Oil bubble? Economists wonder

James Hamilton at Econbrowser:

I do not believe that speculation is the reason oil went from $60 to $120 a barrel. The biggest part of that longer term trend is due to fundamentals, not speculation. Notwithstanding, it does appear that speculation has gotten ahead of those fundamentals in the most recent developments.

For the bubble to continue, we would need to see ever-increasing volumes of investment money pouring into the futures markets, and continuing stagnation in global production to ratify them. Even if the former occurs, my best guess is that the latter will not.

Charles Engel at RGE:

The problem for economists is that the market for oil is so complicated that we cannot very accurately calculate what the price of oil “should be” if there is no bubble. We have to read the entrails to figure out whether the price is really reflecting market fundamentals – demand, supply, real interest rates – or has a bubble component. As I look at the rising price, I wonder which story is most plausible: (1) the markets have been surprised over and over about demand by end users and production capabilities; (2) markets have been surprised over and over about how low real interest rates are; (3) there is a bubble. These stories may go together, in fact. Indeed, it is hard to see how a bubble could get started all by itself, or how it could go on for a long time before it popped.

Paul Krugman:

If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price. ... So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.

Arnold Kling at EconLog

I do not believe that the oil price today reflects a bubble. So in that respect, Krugman and I are not on opposite sides. Nonetheless, I do think that his model of the oil market has some strange properties.

Krugman ignores two elements of the oil market. Explictly, he ignores forward prices. Implicitly, he ignores the decision by producers either to pump oil or keep it in the ground.

UPDATE: More from James Hamilton.

Carpe Diem, human browser

Did you know that wheat prices are actually down?

Or, "According to data available from the USDA, expenditures on food as a share of disposable personal income have decreased from a high of 25.2% in 1933 to a low of 9.7% in 2004. In 2005 and 2006, there were insignificant increases to 9.8% and 9.9%, respectively."

Or that, "since late 2006 male employment in the U.S. has been stagnant, while female employment has continued to grow. From April of last year through April 2008, men have lost 131,000 jobs while women have gained 781,000 jobs."

Or that there's at least one monopoly that's raised price faster than OPEC has been able to. Perhaps President Bush could make a diplomatic mission to the sheik of USPS.

If not, then maybe you should make Carpe Diem a regular read (besides the words there are lots of nifty charts, too).

Beer roundup

Several stories on beer and economics. [Click on image to read sign on store.]

1. Inflation - A Lunch in Zimbabwe (Ian Brakspear) : "During the meal, one of my mates was drinking beer — 750ml bottles of Castle Lager (fondly called bombers). He ordered a fifth one, was advised that the price, which when he ordered his first, second, third and fourth ones was 160 million [Zimbabwean dollars] per bottle, had gone up to 340 million per bottle.
That's right — during lunch there was a price increase…"

2. Time - The Rich Drink Better Beer, Not More (Daniel Hamermesh) : "The reason is simple: it takes time to consume quantities, while the consumption of high-quality goods takes no more time than low-quality goods; and as we get richer we have no more time — we all face 24 hours in the day."

3. Prices of other goods - Miller CEO says more Americans are drinking cheap beer :

MILWAUKEE - Consumers still want different types of beers, but for a growing number with empty pockets, that means less expensive ones, the chief executive of Miller Brewing Co. said Thursday.

The Milwaukee-based brewer saw a small increase in sales of economy beers like Milwaukee's Best starting in January, at the expense of higher-priced brews, Tom Long told The Associated Press in an interview.

It's a direct result of people having less disposable income as they grapple with higher gas and food prices, he said.

4. Let's not forget that in 2006 Congress made this American Craft Beer Week.

Does OPEC remember the 1980s?

Michael Giberson, over at Knowledge Problem, writes about Marc Vatter's analysis in "OPEC's Demand Curve."

Giberson:

High prices induce a number of adjustments, some of which have long term repercussions. Last time there was an oil price shock at all comparable to the present was around 1979-1981, when world oil prices reached near $100 (in $2008). High prices then helped support continued growth in non-OPEC oil supply (which really got started during the oil crisis of 1973) and spurred substantial consumer interest and investment in energy efficiency. Over time the adjustments contributed to a nearly 20-year long period (roughly 1986-2004) of prices below 1973 prices in real terms.
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He sums up his estimates by saying, "we should not expect prices to fall below [$81 a barrel in $2008] for long" given current non-OPEC supply and world oil consumption.

Two of the economics profession's warhorses remember the 1980s. Gary Becker has a post on the rising price of oil in which he discusses why oil is not headed to $200/barrel. Richard Posner is rooting for $200/barrel oil.

Preston McAfee, All Star

My old pal Preston McAfee is waking waves in the economics profession again. As always, good waves. His innovations as editor of Economic Inquiry come in for special praise by Steven Levitt at Freakonomics. Bravo, Preston.

Chris Blattman, human browser

As regular readers will have noted, The Emirates Economist has a new favorite human browser, Chris Blattman. More links today via Blattman:

1. Tackling corruption gets tougher every day. Blattman points to a post at Global Integrity Commons about corruption in Nigeria, and in specific, "a discouraging trend of Nigerian lawmakers declaring greater personal assets than they currently posses in order to build in a cushion that accounts for corrupt gains while in office. ... Official Secrets Acts across many Commonwealth nations are an unfortunate legacy of the British colonial period that provide officials with an easy excuse to withhold information from the public."

2. Love and romance in the Kingdom of Saudi Arabia. Blattman points to a series by Katherine Zoepf, writing in The Lede and the New York Times: Out With the Boys for a Night of Numbering ("chasing cars containing young girls and trying to give the girls their phone numbers via Bluetooth, or by holding written phone numbers up to their car windows"); Q&A about love and romance in Saudi Arabia; and Love on Girls’ Side of the Saudi Divide ("A cellphone picture of Alia’s fiancé — a 25-year-old military man named Badr — was passed around, and the girls began pestering Alia for the details of her showfa. A showfa — literally, a “viewing” — usually occurs on the day that a Saudi girl is engaged").