economics

‘War is a matter not so much of arms as of money.’ —Thucydides

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On January 2, 1977, the Shah of Iran made a painful admission about his country’s economy. “We’re broke,” he confided bluntly to his closest aide, court minister Asadollah Alam, in a private meeting. Alam predicted still more dangers to come: “We have squandered every cent we had only to find ourselves checkmated by a single move from Saudi Arabia,” he later wrote in a letter to the shah. “[W]e are now in dire financial peril and must tighten our belts if we are to survive.”

The two men were reacting to recent turmoil in the oil markets. A few weeks prior, at an OPEC meeting in Doha, the Saudis had announced they would resist an Iran-led majority vote to increase petroleum prices by 15 percent. (The shah needed the boost to pay for billions in new spending commitments.) King Khalid bin Abdulaziz Al Saud argued that a price hike wasn’t justified when Western economies were still mired in a recession — but he was also eager to place economic constraints on Iran at a time when the shah was ordering nuclear power plants and projecting influence throughout the Middle East. So the Saudis “flooded the markets,” ramping up oil production from 8 million to 11.8 million barrels per day and slashing crude prices. Unable to compete, Iran was quickly driven from the market: The country’s oil production plunged 38 percent in a month. Billions of dollars in anticipated oil revenues vanished, and Iran was forced to abandon its five-year budget estimates.

A damaging ripple effect persisted: Over the summer of 1977, industrial manufacturing in Iran fell by 50 percent. Inflation ran between 30 and 40 percent. The government made deep cuts to domestic spending to balance the books, but austerity only made matters worse when thousands of young, unskilled men lost their jobs. Before long, economic distress had eroded middle-class support for the shah’s monarchy — which collapsed two years later in the Iranian Revolution.

[…]

In November 2006, Nawaf Obaid, a Saudi security consultant connected to Prince Turki al-Faisal, then Saudi Arabia’s ambassador to Washington, wrote an op-ed in the Washington Post noting that if “[i]f Saudi Arabia boosted production and cut the price of oil in half … it would be devastating to Iran … [and] limit Tehran’s ability to continue funneling hundreds of millions each year to Shiite militias in Iraq and elsewhere.” Two years later, at the height of the global financial crisis, the Saudis acted: They flooded the market, and within six months, oil prices had fallen from their record high of $147 per barrel to just $33. Thus, Iranian President Mahmoud Ahmadinejad began 2009, an election year, struggling with the sudden collapse in government oil revenues and forced to slash popular subsidies and social programs. The election’s contested outcome was accompanied by economic contraction and the worst political violence in Iran since the fall of the shah.

{ Foreign Policy | Continue reading }

image { Evander Batson }

previously { The Conventional Wisdom On Oil Is Always Wrong }

‘My tears are salt water.’ –Tom Waits

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The process is called reverse osmosis (RO), and it’s the mainstay of large-scale desalination facilities around the world. As water is forced through the membrane, the polymer allows the water molecules to pass while blocking the salts and other inorganic impurities. Global desalination output has tripled since 2000: 16,000 plants are up and running around the world, and the pace of construction is expected to increase while the technology continues to improve. […]

Seawater desalination, in fact, is one of the most expensive sources of fresh water. The water sells—depending on site conditions—for between $1,000 and $2,500 per acre-foot (the amount used by two five-person U.S. households per year). Carlsbad’s product will sell for around $2,000, which is 80 percent more than the county pays for treated water from outside the area. […]

Already, some 700 million people worldwide suffer from water scarcity, but that number is expected to swell to 1.8 billion in just 10 years. Some countries, like Israel, already rely heavily on desalination; more will follow suit. In many places, “we are already at the limit of renewable water resources, and yet we continue to grow,” says John Lienhard, a mechanical engineer and director of the Center for Clean Water and Clean Energy at MIT. “On top of that we have global warming, with hotter and drier conditions in many areas, which will potentially further reduce the amount of renewable water available.”

{ Technology Review | Continue reading }

art { Evander Batson }

‘Unless one is inordinately fond of subordination, one is always at war.’ –Philip Roth

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This study examines the relationship between physical appearance and labor market outcomes. It focuses on hair color and addresses the effects of the “blonde myth,” a series of perceptions about personality characteristics of blonde women.

Inexperienced blonde women earn significantly less than their non-blonde counterparts. This wage gap declines over time, and blonde women with more work experience earn higher wages.

The relationship between earnings and hair color is not explained by personal or family characteristics. I argue that employer or customer tastes drive the initial blonde hair penalty; job sorting and mobility allow blonde women to close the gap.

{ Labour Economics | Continue reading }

photo { Stacy Leigh, average americans (that happen to be sex/love dolls) }

They charged me 15 dollars. That’s how much it costs to only have 20 dollars.

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This research proposes that because rounded numbers are more fluently processed, rounded prices (e.g., $200.00) encourage reliance on feelings.

In contrast, because nonrounded numbers are disfluently processed, nonrounded prices (e.g., $198.76) encourage reliance on cognition.

Thus, rounded (nonrounded) prices lead to a subjective experience of “feeling right” when the purchase decision is driven by feelings (cognition).

Further, this sense of feeling right resulting from the fit between the roundedness of the price number and the nature of decision context can make positive reactions toward the target product more positive and negative reactions more negative, a phenomenon referred to as the rounded price effect in the current research.

Results from five studies provide converging evidence for the rounded price effect. Findings from the current research further show that merely priming participants with rounded (nonrounded) numbers in an unrelated context could also lead to the rounded price effect.

Finally, this research provides process support by showing that the rounded price effect is mediated by a sense of feeling right.

{ Journal of Consumer Research }

photo { Photo Frances McLaughlin-Gill, Woman wearing yellow coat, scarf, hat, gloves and skirt, 1947 }

‘What does a woman want?’ –Freud

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[T]he patient was a woman who, although she was being examined in my office at New York Hospital, claimed we were in her home in Freeport, Maine. The standard interpretation of this syndrome is that she made a duplicate copy of a place (or person) and insisted that there are two. […]

This woman was intelligent; before the interview she was biding her time reading the New York Times. I started with the ‘So, where are you?’ question. ‘I am in Freeport, Maine. I know you don’t believe it. Dr Posner told me this morning when he came to see me that I was in Memorial Sloan-Kettering Hospital. […] Well, that is fine, but I know I am in my house on Main Street in Freeport, Maine!’ I asked, ‘Well, if you are in Freeport and in your house, how come there are elevators outside the door here?’

The grand lady peered at me and calmly responded, ‘Doctor, do you know how much it cost me to have those put in?’ […]

Because of her lesion the part of the brain that represents locality is overactive and sending out an erroneous message about her location. The interpreter is only as good as the information it receives, and in this instance it is getting a wacky piece of information.

{ NeuroDojo | Continue reading }

‘Principle is OK up to a certain point, but principle doesn’t do any good if you lose.’ –Dick Cheney

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Crimes such as bribery require the cooperation of two or more criminals for mutual gain. Instead of deterring these crimes, the state should disrupt them by creating distrust among criminals so they cannot cooperate. In a cooperative crime with two criminals, the state should offer amnesty and a bounty to the criminal who first secures punishment of the other criminal. When the bounty exceeds the bribe, a bribed official gains less from keeping the bribe than from confessing and receiving the bounty. Consequently the person who pays the bribe cannot trust the person who takes it. The game’s unique equilibrium is non-cooperative and bribes disappear.

{ Review of Law & Economics }

‘But as the power of Hellas grew, and the acquisition of wealth became more an objective, the revenues of the states increasing, tyrannies were established almost everywhere.’ —Thucydides

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‘Right is to be taught even by the enemy.’ —Ovid

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Studying the satellite launch industry, Madsen and Desai (2010) find that the probability of a successful future launch increases with the cumulative number of failed launches.

KC, Staats, and Gino (2013) find almost exactly the opposite at the individual level, showing that individual surgeons future success is positively influenced by their past cumulative number of successes and negatively by their past cumulative number of failures. While a surgeon’s future success rate is negatively correlated with his or her cumulative number of failures, it is positively correlated with the cumulative number of failures of other surgeons in the same hospital. […]

While the exact channels vary from context to context, the empirical literature is clear: individuals and organizations learn from failure, be it their own or the failure of others. […]

[M]any failures go unreported and their lessons are lost.

{ Victor Bennett/Jason Snyder | Continue reading }

photo { William Eggleston, Untitled, 1960 }

‘History is the science of what never happens twice.’ —Paul Valéry

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A recent Wall Street Journal/NBC News poll found that 49% of Americans still believe the U.S. economy is in recession, even though we are now in the sixth year of the recovery. […] If investing when others are skeptical has historically been a successful strategy, why don’t more investors do so? […] Taking advantage of the findings discussed earlier requires investing when the economy and market seem to be at their worst, and rebalancing when conditions appear to be the best. This is counterintuitive for many investors, who tend to wait for confirming evidence before acting. This is related to herd behavior, the tendency to follow the crowd with portfolio decisions. Investing when others are skeptical is emotionally difficult but, as we’ve shown, tends to be when rewards are the greatest.

{ JP Morgan Funds | PDF }

related { It is not possible for a human to know whether Bank of America made money or lost money last quarter. }

art { Jim Campbell, Ambiguous Icon #1 Running Falling, 2000 }

As sparrows eagles, or the hare the lion

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We conduct an empirical study to analyze how waiting in queue in the context of a retail store affects customers’ purchasing behavior. […] pooling multiple queues into a single queue may increase the length of the queue observed by customers and thereby lead to lower revenues. We also find that customers’ sensitivity to waiting is heterogeneous and negatively correlated with price sensitivity, which has important implications for pricing in a multiproduct category subject to congestion effects.

{ Management Science | Continue reading }

photo { Garry Winogrand }

It rubs the lotion on its skin. It does this whenever it is told.

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When individual performance was publicly posted in the workplace, employees working in a group performed better than when working alone; however, when individual performance was not posted, employees working in a group performed worse than when working alone.

{ Management Science | Continue reading }

photo { Lionat Natalia Petri }

‘Nothing will come of nothing.’ —Shakespeare

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The next time I had to negotiate a contract, it began in typical fashion with a prospective employer sending me a lopsided agreement and asking me to counter-propose. I said I was incompetent to do that and suggested they write a new contract as if they were me, putting in everything that would be in my best interests, and then taking out everything they would never agree to. Since that would be the best I could get, I would accept it subject to agreement on compensation.

We started with base pay. I wrote down the least I would work for and asked them to write down the most they would offer a perfect person, irrespective of whether I was that person or not. If when we exchanged papers, their number wasn’t higher than mine then we could stop there and save time. Their number was twice the best base pay I had ever received in past jobs, and my request was for $0. I explained that my goal is to live a debt-free life, and therefore I wanted to give value before receiving compensation.

{ qz | Continue reading }