Tort Refrom and Nudges

Over at andrewsullivan.com (of The Atlantic) there is an interesting back and forth going on about "Tort Reform" and health insurance as a legislative device.

My interest in this largely Republican meme (see Palin, Sarah who speaks about it somewhere I'd care not to link to) arose in reference to Thaler and Sunstein's _Nudge_ where they talk about tort reform not from a legislative perspective, but from an individual insurance one...

Why not charge for the right to sue regarding negligence claims (as opposed to assault and battery ones) in terms of insurance? Like limited tort in auto insurance (basically giving up the right to sue for those vague "neck injuries"), you pay less in premiums a month to stop suing for malpractice.

Unfortunately, Thaler and Sunstein are a bit vague on the implementation in practice (given that most of us "purchase" our insurance through our employer), but what if for medicare you were given the option of opting out of the right to sue and perhaps getting a small rebate (as in people who didn't would pay more for care) ? Would this save money? I'm unclear about the dynamics of implementation...

ARRA, Tax Cuts, Behavorial Economics

Andrew Sullivan writes:

The stimulus has worked modestly so far, partly because it was a two-year program and its earliest stimuli were tax cuts which people saved.

Actually, the jury is out on whether these tax cuts were saved. In one of the small nods to "behavioral economics" of the ARRA, the tax cuts were not structured as they typically are in these situations-- as lump sum "refunds." Rather they were small incremental refunds on each pay check. The theory (derived from research/experiments) being that consumers would spend more of it then they would if they received a lump sum (which are almost entirely saved).

I can't find the data details... I imagine they aren't yet available: hence the "jury is still out" rather than "Andrew Sullivan is wrong-- yet again-- about economics."

My reply to Aaron Pressman

regarding your posts and reply (a copy is also available on my blog ignorancearbitrage.blogspot.com)...

In your original post your methodology was, in fact, singularly idiotic. It still is. To wit, "That beats the S&P 500, but it’s much worse than a simple mix of say 70% U.S. stocks and 30% bonds, which lost only 25%. A 60/40 mix dropped 19%.

And a year-end rebalancing wouldn’t have helped — at least not yet. If you set Swensen’s allocations up at the beginning of 2008 (and lost 23%) and then rebalanced at the beginning of 2009, you’d be down 17% so far this year. But if you let your winners ride, so to speak, and went with the portfolio as it stood, you’d only be down 12%." Your method was entirely short-term and short-sighted. Your follow up doesn't address that or admit responsibility for that.

I am heartened that you indicated the shortfalls of your perspective by broadening your horizon to a whopping 4 and a half years. Especially since the year you chose represents a peak in REITs, one of the diversified asset classes.

Why not provide us with 5, 10, 15 year comparisons of Swensen's approach? Probably because they don't support your arguments (neither does picking out the best performing mutual fund of a category).*

You comment, "Swensen’s seemingly conservative strategy worked fine under “normal” market conditions but failed miserably in the bear market." How you describe failure is by comparing it to a portfolio divorced of equities (or 60/40 portfolio, which it lost to by 7% in the really short term and beat in the mediumish term) in both the mediumish and short term.

Moreover, in your initial comments you dismiss the chief advantage of Swensen's rebalancing by commenting on 3 months of results. Poor, poor, poor. The chief advantage of Swensen's model is that it provides you with a low-impact method of recovering from your down year and also achieving equity like returns without the volatility of equities. Contrary to most investors (poor market timing instincts) rather than running from equities when they've been hammered you are running to them... Picking up LONG-TERM values. (Particularly in REITS which, given that this is a real estate crisis, have been predicably hammered.)

While I appreciate your attempts to "reach out" to your audience and appreciate your point that there is no magic formula (something in my reading of Swensen I never noticed... Indeed, he makes clear that his are suggestions), you seem to skewer Swensen simply for advising less-active investors into equities, when equities took a dump (Your reproach: Swensen in his book doesn't forecast the future. Bad Swensen).

Accordingly, while I agree with your contention that careful analyses of MPT (particularly in light of the growing correlation of previously thought diverse investment classes. Also, as commentators here have noted, why not commodities?) and the average investor are important, I disagree with your point that your earlier post advanced the debate (Indeed, it is a common trick to post schlock and then say you were merely advancing the debate-- the debate advancement was done by those who commented on your poor initial post. No thanks to your post.)

Consequently, I'd also like to thank many of the writers here for elevating Pressman's poor thinking into an interesting exchange.

* I ran a rough check using the (no longer working) Icarra portfolio of Swensen-- which hasn't been updated of late-- over the last 9.5 years vs. the S and P and a 60/40 portfolio... Swensen seems to be winning by with a return of 12,600 on 10,000 invested versus 10,600 for 60/40 and negative returns for the S and P 500. Moreover, his margin was achieved in a ten year secular bear market. If anyone could compare, or, better still, provide me with service that does what icarra does (and still works), I would appreciate it.

In the Hopper

I'm working on a book review of _When Genius Failed_

Several years late, I'm aware, but one that people have been referring to repeatedly as the crisis evolves and stock is taken...

ObamaCare (making the pitch for)

Stream of consciousness...

Health care reform-- like climbing Everest for the first time-- will be a long struggle... I'm in favor of it-- having lived for too long in Europe, I suppose...

What follows is a slightly disjointed marketing plan:

My father is an accountant by training... Left accounting went into management... Left big business to run a medium sized business... In order to save the company money, mom and he left his health care and switched to her's... As an accountant the old guy realized that more and more of the bottom line was being chewed up by health care costs... I remember clear as day, walking up the Boulevard St. Michel when my Rockefeller Republican father told me that the country needs national health care insurance.

The trouble is most small business owners are not accountants (a group with faults, no doubt, but one that is tends to focus less on ideology than numbers). Indeed, most small business owners regard themselves as up by the boot-strap types... doing it alone. And, consequently, they tend to think "Republican" falling into the idea that the market knows best-- even when (as with healthcare) the market is screwing them someplace uncomfortable and charging them double the market rate for the privilege.

What the President should do is start going to the belly of the beast and set up town halls with these small business owners- preferably with an accountant (like the old commercials, when the accountant speaks, people listen), and explain why this plan will help them in the long run to cut costs, put more money in their pockets, and grow their business...

(He should leave out that we're hoping they grow their business so that we can RAISE TAXES!!! [Insert Evil Socialist Laugh])

Inflation, continued

I really like Dan Gross writing at Slate on matters of the economy and he has a sharp analysis of the Ferguson/Krugman feud. Sharing Krugman's skepticism about these "Bond Market Vigilantes" who appear to caution about government spending whenever the Democrats start spending.

Here is a particularly relevant paragraph to the points I had made earlier:

Both the Fergusonians and the Krugmanites (of whom I count myself one) err in reading too much into short-term fluctuations in bond prices. There's so much more at work. Randall Forsyth of Barron's explains a technical reason for the short-term spike in 10-year and 30-year rates. Banks and financial institutions that own mortgages hedge their exposure to refinancing by buying and selling Treasury bonds. When mortgage rates start to rise, as they've done in recent weeks, institutions do the opposite and sell. "While mortgage investors previously had bought noncallable Treasuries to offset the risk of their mortgages, mortgage investors have unwound that hedge, selling their Treasuries," Forsyth writes.

Essentially reading the long-term out of fluctuations of the market is a fool's errand.

p.s. Great line from Gross:

In evaluating the relative claims of the pessimists and the optimists, you also have to evaluate the messengers. And in this instance, the Fergusonians lack credibility. H.L. Mencken tagged the Puritans as people possessed of the "haunting fear that someone, somewhere, may be happy." Ferguson represents a strain of intellectual Toryism bedeviled by the haunting fear that someone, somewhere may be getting social insurance. (Fellow sufferers include Clive Crook, Andrew Sullivan, and George Will.)

What I'm reading...

Image: from New York Times article on the lovely Lara Logan

Big fan of the lovely Lara Logan... Pictures of "Thinking People's Sex Symbols" will grace this feature... As I find them (or you non-existent readers) send them to me...

From the Times, there is Ross Douthat . I know I'm supposed to be a fan of Douthat, because he is a Conservative with ideas, he's young, former blogger, blah, blah, blah... But reading he and Brooks today make me think that a banality which expresses itself as superficially clever is the key feature for an NYTimes column.

Citing the ways that the Supreme Court has become a legislature by other means, he proposes installing a super-majority vote, to remind voters that the court is "answerable, when all is said and done, to us." Except it isn't... It's answerable to the Constitution. Do Justices legislate from the bench? Yes, it is impossible not to. However, the goal is to find justices who do it inadvertently rather than explicitly. With the departure of Souter, this may be a pipe dream (as Douthat suggests), but it should indicate that rather than changing the court, we should be improving our legislators' understanding of how the court functions.

Douthat understands this is a republic not a democracy, right?

I've been underwhelmed by Douthat.

Big fan of "How the World Works" from Andrew Leonard... However, I thought everyone agreed that the global spike in oil prices last year this time was bubblicious?

Oh, yeah GM is bankrupt

Here's why:

*The WSJ [shocker] blames the UAW...
*Brooks blames everyone, but mostly the Unions (and the Gov't).

Me? I would have shorted the company had I ever met this guy before the 60 minutes special on electric cars, where after repeatedly mispronouncing Silicon as Silicone and denying global warming, he wonders why people think Detroit is dumb:


http://en.wikipedia.org/wiki/Robert_Lutz

How this blog (waste of time? opinion rag without paper?) got started...

Unemployed dissertation writer that I am, I read a lot of blogs on politics and then, (when the economy and my future as an educator at the post-secondary level went in the tank) finance. I'd read something stupid and post a comment about it-- see here, for instance.

What set me off most was this post from Andrew Sullivan. Irritated by his misunderstanding of the issue (see the great bronte capital for an explanation of this misunderstanding), I fired off a snarky email...

Dear Mr. Sullivan,

I am a long term reader of your blog and admire you for your independent stances on numerous issues. However, when you use a term such as "zombie banks" to describe the current situation (with its connotations to Japanese banking and its "lost decade"), you misunderstand the nature of these Japanese problems and of the problems here in the United States. They are not at all alike.

Granted you are parroting your talking points from public intellectuals who are similarly misstating and I could explain this to you more clearly, but I think it ridiculous that someone who is paid to "blog" on these issues should be receiving free explanations. Instead I would point out that the fact that you continually misunderstand these economic issues should serve as a reminder of the old saw, "Better to remain silent and be thought a fool than to speak and remove all doubt."

The capital lesson of intellectual responsibility...

Impolitic and snarky, yes, but it gets to my fundamental point... I don't have a particular axe to grind other than thinking most of the punditocracy is a waste. There is way too much information out there for you to have a valid opinion on everything...

Though I'm going to try-- since as is often attributed to Mark Twain (though I think Robert K. Mueller actually said it):

Those who think they know it all are very annoying to those of us who do.

No, really, my goal is to treat issues as in depth as possible and try to point out certain short cuts in people's thinking that ignore the multitude of factors involved in particular issues or over or under-emphasize those factors... I should make clear that I am not an econ. or quant guy, public policy specialist, etc. merely what we would call an over-informed citizen with too much time on his hands...

Welcome

Hello, welcome to "Ignorance Arbitrage." I will be posting a "mission statement" at some point, but I wanted to begin with a comment on a recent article from on Harvard Univeristy's Endowment that Felix Salmon posted as well.

I think most commentaries on overlook in this discussion is that Harvard was without a fund manager (though, in his defense Felix Salmon did note this here). Active institutional portfolio management strategies when crossed with passive management equals the liquidity disasters that Harvard may be (have been, see my second point) facing. Yale-- under Swensen's tenure-- while losing money has largely avoided these liquidity difficulties as Swensen is happy to point out.

Moreover, one wonders how much the reporting of Harvard's difficulties is lagging the data-- now that credit is "easier," I imagine that Harvard's illiquid assets are more liquid than they were two or three or six months ago. Some of their value may have returned as well. Moreover, the data on "calls" from PE firms hasn't changed in several months-- is it still a current and pressing crisis?

I'm not denying Harvard (and the Academy in general)may be hurting right now, but to extrapolate from this moment to declare this the end of Harvard or to use this information to condemn the "new" endowment strategies is a bit short-sighted (ignoring, for instance, the fact that illiquidity allowed Harvard to have 34 billion to fall from). I'm not one for predictions, but I can't help but think that the return from crisis in the financial world is going to make us think that the reaction to this particular aspect of the crisis may be overblown and a bit late.