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    Does Luck Matter?

    Oct 31 • Behavioral Economics, Businesses, Economic Debates, Innovation, Labor, Regulation, Thinking Economically • 563 Views

    In Las Vegas, the 2010 World Series of Poker was composed of 32,000 players and 57 separate tournaments. For the final event, $9 million was at stake. Freakonomics economist Steve Levitt and U. of Chicago law professor Thomas Miles studied the poker world series to determine whether luck or skill created winners.

    Their conclusion? Poker is a game of skill.

    The best players have more than a 30% return on their investment (ROI). Average players? The ROI is -15%. Translated into dollars and cents, that means the return to skill, per player, per event averaged over $1,200. For the less skilled, the loss was more than $400. (The ROI compared the tournament fees to amounts won or lost.)

    Our bottom line?  Similar to poker, in business, skill matters most. Using Bill Gates and Southwest Airlines as examples, this NY Times essay illustrates that skill, discipline, and knowledge turn good and bad luck into success.

    The Economic Lesson

    The NY Times piece says yes, Bill Gates was lucky. However, Mr. Gates was successful because his skills, decisions and willingness to persevere optimally converged. As a lesson for all aspiring entrepreneurs, Bill Gates depended on a lot more than luck.

    An Economic Question: Which characteristics might be necessary for a successful entrepreneur?

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  • Inequality Questions

    Oct 30 • Behavioral Economics, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Government, Households, Macroeconomic Measurement, Thinking Economically • 766 Views

    Astoundingly, the country in which we are born determines 60% of our income. And then, the next 20% relates to our parents’ affluence.

    Here are some answers to other interesting questions we never knew we wanted to ask. All are from The Haves and the Have-Nots.

    • Who was the richest person ever to have lived? Probably John D. Rockefeller. Looking at average income figures, the ratio of Rockefeller to the average was 116,000 to 1.
    • Compared to the world, how high is your income? Calculating Purchasing Power Parity (PPP-The Haves and the Have-Nots, p. 166), to be in the world’s top quintile, your PPP, $5,000. The top 1%? PPP is $34,000.
    • What was Anna Karenina’s upward mobility? Having had modest origins, marrying a successful civil servant elevated her to the top 1% of Russian society. Continuing to climb, her relationship with Count Vronsky took her to a man at the very top. Whereas her husband’s annual income was probably close to 9,000 rubles a year, her lover’s was 100,000.

    The Economic Lesson

    Through the scholarly side of The Haves and the Have-Nots, economist Branko Milanovic suggests using 3 questions to assess the impact of inequality.

    1. Identify the cause of inequality. For example, determine whether income inequality increases or decreases as the economy grows.
    2. Identify the impact of inequality. For example, does inequality create positive or negative economic incentives?
    3. Identify the ethical implications of inequality. For example, are there good and bad ways to have ascended to affluence?

    An Economic Question: Being aware of your bias about income inequality in the US, how would you answer Milanovic’s 3 questions?

     

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    The Seven Billionth Baby

    Oct 29 • Demand, Supply, and Markets, Developing Economies, Environment, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 530 Views

    On October 12, 1999, according to the United Nations, the 6 billionth person (approximately) in the world was born. At the time, the UN projected the arrival of number 7 billion during 2013. Now though, the due date has been changed to this Monday.

    With 8 and 9 billion soon to come, in 2025 and 2043, a NY Times Op Ed asks whether we will need “a bigger pie (more productive technologies) or fewer forks (slower population growth through voluntary contraception).”

    As we noted in this econlife post on the 5 ways to double our food supply by 2050, don’t we first have to figure out the right incentives?

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus (1766-1834) told us that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate. Less concerned, Malthus’s friend, David Ricardo (1772-1823), said that free trade would diminish the problem.

    An Economic Question: Whenever a transaction between two parties affects a third, uninvolved individual or group, economists see an “externality.” Which good (positive) and bad (negative) externalities might population growth create?

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    Euro Deal Primer

    Oct 28 • Developing Economies, Financial Markets, Innovation, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 689 Views

    To understand euro zone bailout plans, just think BBB.

    Bonds, Banks, Bailout

    • The Bonds: If you own Greek debt, then you would be asked to accept a 50% haircut. That means you will get new Greek bonds worth half the old ones. The catch? It’s voluntary. A bondholder could say, “No.”
    • The Banks: If banks are going to accept a 50% decrease in the Greek bonds that they own, then the value of their assets plunges. To prevent a ripple of bank failures, 70 Greek and Spanish banks would get an injection of new funds. The catch? Contagion. What about the other PIIGs’ debt?
    • The Bailout fund: The Bonds and the Banks part of the deal require lots of money. At least $750 billion more. Where to get the money? One major source is the EFSF (European Financial Stability Facility). The plan is to make the stability fund 4 times larger. The catch? Who will loan it the money? NPR’s Planet Money perfectly describes “the catch” in this podcast.

    For a fascinating chart that illustrates a much more complicated version of BBB you could go here.  And here is the NY Times interactive series of graphics that summaizes the euro crisis.

    Our Bottom Line: How can the euro zone enforce central monetary power when fiscal authority is decentralized?

    And finally, even if none of the plans materialize, we can still remember BBB.

    The Economic Lesson

    In 1787, functioning under the Articles of Confederation, we had thirteen states with individual currencies and governments and taxing authority. If a state wanted to borrow more than it could afford, no one could stop it. If a state did not want to collect its federal taxes, no one could make them. If they did not want to contribute to payments on the national debt (from the Revolutionary War) they did not have to. And yet, the actions of individual states affected everyone else. Believing we needed a stronger central government, Alexander Hamilton and others like him convened a constitutional convention during a very hot summer in Philadelphia. We wound up with our Constitution and a powerful central government.

    An Economic Question: Is it valid to compare the euro zone to the United States in 1787?

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    Innovation and (Steve) Jobs

    Oct 27 • Demand, Supply, and Markets, Economic History, Environment, Households, Innovation, Tech, Thinking Economically • 923 Views

    From the iPhone and iPod to a…thermostat?

    At a Silicone Valley start-up, a former Apple design leader has switched his focus to diminishing carbon emissions, decreasing electric bills, and moderating energy usage. He has changed from iPhones and iPods to thermostats.

    Described in the NY Times, his firm, Nest Labs, has developed a “cool” thermostat. It looks great, has motion sensors that track you, can self-program, and with a click or two, does what you want. Knowing that existing digital thermostats are complex and/or boring, he wants to transform the experience.

    Our bottom line? Incentive. Yes, even when we care about the environment, it takes the appropriate incentives to modify our behavior.

    The Economic Lesson

    Noted during a 60 Minutes segment, for personal computers, animated movies, music, telephone, retail stores, tablet computing and digital publishing, Steve Jobs made the past obsolete.

    Now, maybe, it’s the thermostat? Like his former employer, Nest Labs founder is hoping for some of Joseph Schumpeter’s (1883-1950) creative destruction.

    An Economic Question: Explain the following equation: incentive + green technology + creative destruction =  Nest Labs’s thermostat

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