Saturday, January 31, 2009

Economics of Odd Stuff

My fellows here think that economics can help to understand, among others, these following: Why Asians are good at math; why relatively there are more New York celebrities with dogs than Virginia-suburbanites; and how you assign dishwashing chore amongst family members.

Those are some very preliminary thought in a submitted two-pages first assignment. But probably some of them would evolve into a good, and surely intriguing, paper.

In case you want to know my proposal (maybe not), it's the economics of rainmaker --why many Indonesians resort to believe in rainmaker and Americans CNN's weather report (or something like that).

How Much Is An Un-shameful Bonus?

So Obama was furious with 18.4 bn dollar bonuses for Wall Street executives and people quickly join the fray and share the rage.

But, first off, we need to get it, at least conceptually, right on how labor (executive included) should be paid. Economics tells one needs be paid according to their marginal productivity --how much additional value of product one creates once he/she is joining production process. But this is technically difficult. In a joint production, can you really separate the marginal product of your labor and marginal product of, say, the computer that you use?

Thus the best way would be to look at the opportunity cost of hiring you --how much employer are actually willing to pay you, after considering any other best alternative in a competitive market. In other words, the market price. You may enter efficiency wage argument to adjust for some market imperfection, but the bottom line is that market will tell how much you are worth.

Now, enter the government with their bailout plan.

Among other things, what the government does obscures real value of hiring you because some of your marginal product is now provided by the government. Since the government help your company, you seem not as worthless as you actually are --you screw up thing, but somehow the government help you along the way by making your company doesn't go out of business. If the government don't bail your company out, your overspending firms would go bust, and the only way to stay afloat is then to keep your bonuses in check.

But as the government decided to step in, the market is distorted and you are overpaid. This is very much predictable trade off of any government bailout. You give up the ability of market in allocating resources for another objective --like saving the whole financial system.

Whether it is a fair trade is another story. The government -- as now major shareholder of US banking system -- has all the reasons and rights to complain, nonetheless it is surprising that the administration seems not prepared for this consequence of their very own action.

Or maybe it is just a political statement that has to be judged based on its own term. I don't know.

Wednesday, January 28, 2009

Tail You Lose (Big Time)

In one article in their special report on the future of finance, The Economist, describe why the quants' model failed to foresee the recent crisis as follows:
In markets extreme events are surprisingly common—their tails are “fat”. Benoît Mandelbrot, the mathematician who invented fractal theory, calculated that if the Dow Jones Industrial Average followed a normal distribution, it should have moved by more than 3.4% on 58 days between 1916 and 2003; in fact it did so 1,001 times. It should have moved by more than 4.5% on six days; it did so on 366. It should have moved by more than 7% only once in every 300,000 years; in the 20th century it did so 48 times.
And the Catch-22 is
On the one hand, you cannot observe the tails of the VAR curve by studying extreme events, because extreme events are rare by definition. On the other you cannot deduce very much about the frequency of rare extreme events from the shape of the curve in the middle.
Modern finance may well be making the tails fatter, says Daron Acemoglu, an economist at MIT. When you trade away all sorts of specific risk, in foreign exchange, interest rates and so forth, you make your portfolio seem safer.
To make the point clear, look at the graph on that article.

One of my old teachers, when discussing economic model for developing countries, once said that sometimes the real story lies in the outliers. I think he made a good point, and I should add the modern advanced finance too.

Monday, January 26, 2009

Liberal Communist, A Philosophical Misnomer

What do you call a person who happens to not only make a lot of money out of market transaction (or capitalism), but also spend a considerable sum of it for charities or deeply concern with social responsibility?

Think people like Bill and Melinda Gates, Bono, or you --who is working at the heart of capitalism, the firm, but love to buy only fair trade product, deliberately join anti-globalization protest, or sincerely pay the zakat more than legally required.

Slavoj Žižek, in his latest provocative book, Violence, calls them liberal communist.

In his words, they are the true citizens of the world today, who think that they can have the capitalist cake, i.e, thrive as profitable entrepreneurs or workers, and eat it too, i.e. endorse for social responsibility and ecological concern.

I think Zizek is just caught off guard: in the standard myth of capitalist, one can only win in the market only if he/she applies maximum greed. A class of citizen, who bypass the state to effectively channel the resources for redistribution, also does not support the ideal of socialism.

In my opinion, however, nothing's funny about this. Such behavior does not violate the standard argument that people maximize his/her utility by combining their actions --not only the ones with financial reward, like working your ass off in a company, but also ones with non pecuniary reward, like seeing the poor children's utility goes up by giving them scholarship, and at the same time avoiding government, because to them, it is a dis-utility.

I would just call them good guys.

Friday, January 23, 2009

Time preference

If something that you want to buy will cost cheaper if you wait for a couple of weeks or months, are you willing to wait?

Of course, the answer is not obvious. That depends on many things; whether you still have the money, whether the thing will still be available, how urgent do you need it now (or, how do you value the goods later), and - for sure - how much cheaper will it be. In many occasions, we will still buy the goods immediately. I need a new laptop now, so it doesn't matter if next year it will cost much cheaper. The text book will surely cost cheaper by the end of the semester, but by that time I will have failed the subject. I am desperate to know the ending of Harry Potter's saga, so I don't want to wait for the soft cover version.

So, I don't have to be puzzled when reading this story. But still, I was amazed. Come on... De Jong, for GBP17m when you can get him for GDP2.3m? But then, this what happens when you have an owner whose money pit is bottomless, but you are not certain whether you will not be relegated by the end of the season.

Tuesday, January 20, 2009

Not Ready to Toss Away My Holiday Hopes

Lynda, our regular coffee taster is bothered. She expressed her angst once on blind faith, among all. There, she refused to get defeated. Now, with the world is seeing fractured democracy, lame law, yoga ban, and terrible war, she refuses to surrender her hopes. Rather, she wishes us all louder laughter, sweeter love, stronger health, better luck, more peace, and wiser self. Ladies and gentlemen: Lynda.

-- Kate

Not Ready to Toss Away My Holiday Hopes
by Lynda Ibrahim

The thing about having a December birthday, with the New Year looming, is that I get to reflect on life in the passing year at one intense go. Things are so bleak I had no choice but to hope for happier days this year. My holiday SMS wished for louder laughter, sweeter love, stronger health, better luck, and more peace. A quintessentially dry friend quickly replied ‘wonderful, but wishful’, but I didn’t let him to rain on my jolly parade.

Yet, it has since rained out there, literally and figuratively. Raining season brought floods, landslide, and tidal wave. Earthquake comes jolting. Many Indonesians lost lives and possessions. Then Gaza happened. It’s like the universe conspires against my holiday hopes. As the world started a new calendar year, technically we all got a bit older. But, have we gotten any wiser?

I recently saw Teater Koma’s Republik Petruk. The play borrowed the storyline from Petruk Dadi Ratu, a tale off the Javanese puppet-shadow’s Mahabharata. Petruk is the nosey middle son of Semar, a once misbehaved god who’s now banished to Earth as wise court jester (punakawan) to Pandawa princes. Petruk accidentally gets hold of divine power and becomes a king, but over time forgets his real priority is serving as punakawan. In a classic satire, Petruk lounges on his royal golden bed Cleopatra style, cheekily boasting his brand of ‘SBY’ democratic leadership. The Indonesian President’s initials stand here as ‘Semua Boleh, Ya’ or ‘Anything Goes, Right’, implying that anything is acceptable as long as done in a ‘democratic’ fashion. Touché.

Instead of growing wiser in finding similarities and more tolerant on differences, after all that’s what democracy is all about, we’re quicker in pointing out differences and fiercer in holding our own fort, adamant that democracy guarantees our rights to speak, be heard and accepted. Many people conveniently forget that it’s actually EVERYONE’s rights, not only their own, and definitely not only the rights of the majority, that’s promised by democracy. This is precisely why the law is more pivotal in a democratic system, because the law serves to secure a common ground where everyone can co-exist peacefully despite the differences.

Especially in Indonesia, where hundreds of native groups with traditions or mother tongues as different as German to French live spreading on 17,000 islands. The law is critical in ensuring that Indonesians can co-exist at all amid the glaring differences. The priority should be to find the common ground or uniting bridge for all Indonesians, then create the law and uphold it together.

But for the past decade I see most people are still trapped in only finding the ‘best’ way for the majority, or for the ones who wield most power, or for the ones who shout the loudest and grab public’s most attention. The interests of others outside those are kicked away, sometimes literally on the streets by the ‘winning’ group. That’s not democratic law, that’s jungle law.

Some groups, who are uncomfortable on how others present themselves in clothing or expressions, decide to hide behind women’s fear of sexual abuse and parents’ fear of pedophile to create a pornographic law. Want to genuinely fight pornography? Task law enforcement to sweep through multimedia trading circuits regularly and punish violators severely, empower schools to check students’ information tools like their increasingly hi-tech pocket gadgets that can smoothly transfer smutty files via Bluetooth while they solemn-facedly finish an essay, and more importantly, make parents legally accountable so they take more charge in their children’s life. Punish both prostitutes and the paying men. The real priorities are barely touched by the vague bill that so far only makes many Indonesians feel their centuries-old native traditions being penalized.

A company’s spewing mud costs thousands their homes, which are only compensated meagerly after years-long wait, and nobody’s ever brought to court. The sister company’s unpaid debts bring down stock exchange; bailout plea by taxpayers’ money ensues. Business and personal wallets may differ, but isn’t that mind-boggling that the mostly family-owned group claims to be cash-strapped yet manages to throw the most extravagant fete of the year for a family member, where the bride, without the slightest hint of irony, bubbly states adoration for Marie-Antoinette as the inspiration for one of the wedding receptions? Wonder if the trust fund has procured real history books beyond Sofia Coppola’s 2006 movie.

A neighbor’s majority loses political power, then uses their religious clout to issue edict that yoga chants can dilute one’s faith. Even more comically, their Indonesian counterpart first ignorantly states that no Indonesian Muslims are known to practice yoga, only to backpedal in one day with me-too decision to review all yoga studios. My mom first learned yoga in Jakarta in the ‘70s, I’ve done it for years and even learned some serene chants, and I’m happy to share that I actually can focus better when performing shalat now. Look, there’s Starbucks and La Senza Lingerie in the mall next to Mecca’s Masjidil Haram, does that mean Umrah and Haj pilgrimage get less holy? Instead of reviewing yoga, better use the resources to review our Haj management process to avoid the same mess repeated every year.

And now Gaza. Let me first clarify that I’ve always tried to remain objective over the years. I have Palestinian and Jewish friends across different nationalities, who all want peace as any decent person would. I don’t wish to dwell on the origin of Israel state anymore than being dragged into the whole biblical arguments of Chosen People and Promised Land. PLO, Fatah, Hamas, and sometimes next door’s Hizbullah, have caused lives of Israeli or Jewish descent civilians in their fights, that’s one sad fact everyone should admit. Lost of civilians is wrong, regardless of race or religion.

Which makes what Israel has done in Gaza since Dec 27th is blatantly unfair. Why? When innocent Israelites get wounded by Hamas rockets, nobody stands in Israel government’s way to immediately help their citizens or invite international press to cover. But Israel only let humanitarian aids to enter Gaza after 10 days of fighting for a brief 3 hours per day, even as Palestine civilian casualties mounted since Day 1. To disallow independent journalists, bar the heavily-guarded lone BBC cameraman’s few minutes-coverage on Week 2, only gets everyone to openly question Israel’s true motives beyond disarming Hamas. And don’t get me started on the shelling of UN aid trucks, shelters and compounds. Ignoring UN’s repeated pleas for cease fire is quite disrespectful, but opening fire to humanitarian aids makes me questioning Israel’s intention in becoming a world citizen. Israel may eventually relent for a truce, but the bloody images of Gaza civilians will have forever been etched on everyone’s mind.

I did caution friends not to get too carried away by Obamania, yet I harbored hope for a less biased US foreign policy. Must admit it’s rather disconcerting that President-elect Obama chose to wait for a week before offering a mild statement on Gaza crisis, considering his immediate sharp remarks during Mumbai attacks. Let’s hope that real change, as was the theme of his rousing victory speech that gave me goose bumps, will remain the priority comes January 20th.

For my Muslim Indonesian fellows, I share your sadness and frustration over Gaza. But first things first. Prayer for the safety of Palestinians or donations for Palestine refugees are the best options. Before boycotting any American or Israeli products, do realize that in globalization era those goods may well have Indonesian-made elements and/or are marketed by companies who employ Indonesians. Don’t get easily manipulated by hidden agenda, like the circulating SMS about Masjidil Aqsa allegedly being surrounded by Israel army. 10-second Web check can verify that the mosque is located in Old City Jerusalem that is geographically in Israel yet is full of holy sites for Muslims, Jewish and Christians, each managed by its own religious representative. More exactly, Masjidil Aqsa is on Temple Mount, the holiest Jewish site. Please check independent sources before forwarding any SMS or emails that may inflame hatred even more. Misleading chain message like the Aqsa rumor is as unfair and dangerous as the “Muslim Indonesians like killing people of different faiths” that circulated after Bali bombings. Just like demanding the closure of Surabaya synagogue, which wouldn’t make you any nobler than the actions of Israeli government you’ve strongly criticized.

Last but not least, though I loathe quoting religious passages for cheap validation, this one is a suitable pearl of wisdom indeed. Remember that Prophet Muhammad once say to prioritize close neighbors over distant relatives? That’s not only kind but also logical, because your close neighbors, regardless of colors and religions, are the first you can turn to when your house is on fire or your children need midnight ride to ER. Recently our fellows in Manokwari lost homes over the earthquake; Sulawesi has been hit by landslide and ferry accidents, and some Jakartans suffering a 2-meter flood. Before we get all carried away by faraway concerns, have we lent any hand to our own fellow Indonesians?

Common priorities. Not only for the majority, the strongest or the loudest, but for everyone involved even if they don’t share visible traits with you. That holier-than-thou attitude really gets nobody nowhere. The more you sincerely open yourself to learn about people different than you are, the more evolved human being you become. Equal freedom and fair law make a real democratic society. For those insisting on jungle law I earnestly suggest discarding modern accoutrements and relocating to the forest. Let me know how the elephants and tigers greet you.

I’m still not ready to toss away hopes and will contribute my part of work. I hope you will, too. For louder laughter, sweeter love, stronger health, better luck, more peace, and wiser self. Happy New Year 2009.

Saturday, January 17, 2009

Discussion: Crisis and Protectionism

Freedom Institute, Café Salemba, Diskusi Ekonomi,, International Policy Network, and Friedrich-Naumann-Stiftung invite you to:

Discussion on Economic Crisis and the Danger of Protectionism
Featuring: Faisal H. Basri, M. Chatib Basri, Alec van Gelder, and Ari A. Perdana.
Place: Freedom Institute Jalan Irian No. 8, Menteng, Jakarta
Time: Wednesday January 21, 2009, 7-9ish pm

Saturday, January 10, 2009

Sorry dear friends, I have sacrificed you for a Whopper

There was this scene in one of my fave TV series: Prison Break. T-Bag was left alone with a friend in a desert by some random guy who had given them ride but then was more interested in their money. The companion, an oversized man, couldn't take the misery any more: after walking so far under the sun, he got so hungry. He had to eat. Or die. So he tried to eat ... T-Bag! But T-Bag of course won the fight. He killed the giant. Then he was about to leave when it occured to him: he was hungry too. Why not eat ... that friend?

I happened to remember that story as I came across this Whopper "anti-friendship" program. It is a software you can add on to your Facebook account to ... sacrifice your friends to get ... a sandwich. It's relatively new. So let's see how it plays out. I guess there are not too many people willing to sacrifice 10 friends for 1 Whopper. Or are there? What I think true though is, friendship is not priceless. Recall the T-Bag story above.

But there are other things an FBer might want to consider before sacrificing a friend. For one, his status will read something like this "John sacrificed Joel Kaplan for a free Whopper". How many people would want to have a status that reads like that? If your friends know that you just sacrificed a common friend, chances are, they (or some of them) would rush to sacrifice ... you (before I get sacrificed like Joel, I should sacrifice that bastard first). But hey this seems interesting...

Another thing is, currently coupons apply only to US residents. So we in Indonesia can still hug each other...

Thursday, January 08, 2009

Baristas meeting

Your baristas. Seems like they are planning to apply new stuff to the Cafe?

Tuesday, January 06, 2009

RIP - Samuel Huntington

I didn't realize that Prof. Samuel Huntington passed away on Christmas Eve until I read The Economist's recent Lexington column. He died at 81 in his house in Martha's Vineyard (surely a nice place to 'rest').

It was a bit ironic that the news of his death was overshadowed by two international events that are related to his works on conflicts among religions: Christmas and New Year holidays, and the Israel attack on Gaza. The first was an example than on some things, contrary to his thesis, globalization has brought down cultural differences across the world. The holidays were originally Christian's holidays, but now it has been secular holidays, celebrated or enjoyed by most people in the world. The second somehow shows that his thesis might still hold.

Prof. Huntington is both a respected and controversial intellectual of modern days. His name is almost synonymous to the phrase "clash of civilization", a theory he published in the early 1990s, just when many people in the world celebrated the end of cold-war. The theory received mixed responses. It received a lot of praises, as well as criticisms (was he correct in defining civilizations?), or denial (he sounds right, but isn't it too pessimistic?). But even those who disagreed strongly with him must admit the logical clarity of his thesis. He is an intellectual whose arguments always make people to think and rethink. His arguments always had strong building blocks, and his opponents could not avoid being dragged into his logic first before shooting the counter arguments.

People tend to label him "western-chauvinist." This temptation was inevitable. In one article, he wrote that "the west is unique, and the western values are not universal" (hence there can be no such thing as westernization). In his more recent book, his criticism to the Hispanic immigrants earned him "anti-pluralism", even "racist", tag. Such labels are unproductive, for sure. Many people would think that he is a hardcore (neo-) conservartive, while in truth he is a lifelong Democrat.

I admit I can't say much about him or his work. His classes at Harvard have always been oversubscribed (and I had to allocate my credit for other courseworks). The only chance I got to formally learn about him is in this class. But one big question from his works that have always been intriguing for me is '(how) does culture matter?' I touched this issue in a discussion here and here. Of course, he thought that culture matters, and it matters a lot. He once argued that the wave of democratization in the late 20th century "might have more to do with the Second Vatican Council, rather than the spread of free-market ideology."

May you rest in peace, Professor Huntington. Unfortunately, your pessimistic view over the world peace still holds.

Note: in a 2003 article, Ron Inglehart and Pippa Norris wrote:
Samuel Huntington was only partially right. The cultural fault line that divides the West and the Muslim world is not about democracy but sex. [Based on the World Values Survey data], Muslims and their Western counterparts want democracy, yet they are worlds apart when it comes to attitudes toward divorce, abortion, gender equality, and gay rights-which may not bode well for democray's future in the Middle East.

Sunday, January 04, 2009

Dear Kate: Matchmaking

Dear Kate,

I'm looking for a date. I've been surfing through profiles posted in those matchmaking services in newspapers and internet. "Kontak Jodoh" in Kompas is one of my favorites. Some people sound cute, some boring. Mostly they run their ad in the following pattern: sex, age, edu, race, religion, weight and height. Then they would add some personal goodies (or so they think) like "honest, faithful, caring, responsible" along with hobbies and finally their expectation of their future date. I wonder what to make of these kinds of information. Any ideas?

Singleton @ Pejaten

Dear Singleton,

Information, in order to be useful, requires credibility. Credible information should at least satisfy two properties: measurable and verifiable. The first set of information you listed above seems to meet these criteria (let's assume that he or she has authentic letters certifying the age, edu, etc). The rest are questionable. You can't trust somebody just because he says he is honest. You should observe what he does. Yes, it is a rather tall order: you need to spend some time with him to know that. Hobbies might be easier to verify (if he says reading, test him with books). Finally, for 'expectation of future date', it is just his way to avoid being overwhelmed by inquiries by people he would not be interested in.

So, the most useless information set is the second one (the one you termed 'goodies'). Ignore it. Wait, let me put it this way: maybe it does have some value after all. It actually reveals the negatives you want to avoid (think about this: somebody puts 'humble' in his ad. Aha, isn't that a contradiction? You don't want this guy)

Happy hunting,

Saturday, January 03, 2009

Dear Kate: Signaling alarm

Dear Kate,

I'm a rookie in car theft business. Recently I've been tempted to steal one of two cars always parked not far from my cousin's place. I'm yet to decide which car I'd steal. My tutor told me I should choose one, there's no way I could get 'em both. As I'm just a rookie, I'm nervous. The two cars are of the same class. One is Honda City and the other Toyota Vios. It seems to me they're also of 2006 made. I've also noticed that the drivers of the two cars are of early 40; they're both your average working citizens -- although I'm not sure if this is relevant.

Another thing that I have observed is that the Vios has that sticker telling you it is equipped with an alarm system, but I don't see any such sticker on the City. Again I'm still thinking about this, but something's telling me that you might be interested in this information.

I know you're an economist and have nothing to do with car burglary market. But if you were me, the rookie who needed to prove his talent to the seniors, what would you do?

Rookie @ Cileungsi

Dear Rookie @ Cileungsi,

I have to admit, at first I took offense by your email. But as an afterthought, hey I should probably be proud that even a criminal like you consult with me. And I came up to a conclusion that it is not my position to make a judgment on your profession.

So here you go. It seems to me that everything that is of interest to you has been listed in your email. Those similarities -- made year, class, driver's appearance -- they're not very interesting to me. But they're useful to at least imply that the two car owners fall into the same income level -- at least not very far apart one another.
The sticker thing. Now that's more interesting. We economists tend to believe what people do more than what they say. Sticker is saying. Non-sticker is non-saying, but might be a doing. In a similar income level, attitudes toward risk might not be very different. But similar also means not exactly the same. I would assume the following. One of your drivers thinks alarm is important. The other thinks making people believe it has an alarm on his car is important. The first one would install a very good alarm system and hence wouldn't need a damn sticker. The second would not have an alarm or at most have the less reliable (then cheaper) alarm -- he would need a bright sticker to signal otherwise. You tell me which one is the easier target? Yes, the one with sticker. Take the Vios.

That said, don't blame me if you get busted. I'm just trying to make sense of the information you gave me. And remember, I'm no thief. So you were wrong to ask me in the first place.

But good luck!


Government Failure #379

I fail to understand why the Ministry of Communication and Information forbids inter network free SMS -- the name of the Ministry already sounds like an Orwellian bad dream, by the way.

They think it violates fair competition because the benefit goes to large providers as consumers switch to them and use more minutes calls for more free SMS.In other words, they blame the big providers because they are, well, big.


Friday, January 02, 2009

The AIG Saga

If even after that hangover from the New Year's Eve party receded, you still find yourself not knowing what to do to spend the rest of the holidays, I'd like to offer you a small healthy dose of reading that will not ruin your joyful feeling.

From the last year's one of the biggest financial fiasco, a trilogy of AIG's (and American taxpayers') journey to hell (The Beautiful Machine, A Crack in The System, and Downgrades and Downfall), from The Washington Post.

It's a wonderful journalistic work (based on, I guess, mostly interviews and legal documents) that introduces you to the state of the art --well, before the crash obviously--, of some arcane financial securities, the rise of quants and risk modeling, and money - helluva lot of money.

It's also a great story line for a movie, I believe, in which I already imagine Jack Nicholson, Sean Penn, Philip Seymour Hoffman, and Michael Douglas to star. But I still can't figure out who should play Alan Greenspan.