Wednesday, October 11, 2017

Endowment Effect as a Rational Strategy Part 2: Don't Be A Sucker

Many seemingly irrational decision-making biases can be rational in some settings which differ from typical experimental settings. For example, psychologists and economists scratch their heads that in single-round games, people will expend resources to punish wrongdoers, even when there is no net benefit for the punisher. But in multi-round games, expending resources to punish wrong-doers may actually provide a net benefit and act as a deterrent against future wrongdoing. The irrationality arises because some of these behaviors are rigid with respect to setting, and even in single-round games where we'll never see people again (e.g. someone who cut you off on the freeway) we continue to punish wrongdoers regardless of setting or expected net benefit.

The endowment effect is a bias where we place irrationally high value on things already in our possession, as opposed to the open market. ("That car over there is a clunker, he'll never get three grand for it. But mine? Same year, same condition? Five grand easy. Great car.") Curiously, a group of hunter-gatherers without access to markets (i.e., roads) do not show the endowment effect. Their close relatives who do have access to markets, DO show the endowment effect. I speculated that this could be because the endowment effect is in fact a defense against information asymmetry. Somebody who buys and sells cars for a living knows how much your car is worth more than you do, and they can screw you. Consequently the endowment effect gives you a cushion. If you've never been screwed in an open market before, you don't develop this defense. (So goes my theory anyway.)

Sure enough, Data Colada brings us a paper by Weaver and Frederick which strongly suggests it's trying to avoid a bad deal which is what motivates the endowment effect.

Saturday, September 23, 2017

Little Correlation Between Box Office and Film Quality

[Added later: this post was prophetic. The Blade Runner sequel (2049) came out two weeks later and as I'm adding this comment, has been out for a few days. There couldn't be a better illustration of this principle. Reviews from critics and moviegoers alike are extremely positive (including my own here - major spoilers) yet it's underperforming even its modest first-weekend projections. Whether or not word of mouth will increase revenues, it's certainly following in the footsteps of its predecessor, a classic which was initially written off as a box office failure. Movie studio stocks have plummeted as investors realized: even if you make a movie this good, in this day and age, you can't make back your initial investment, and maybe movies are dead as a commercial project, especially relative to video games (see end of linked post.]

I'd been wanting to do an analysis like this for some time. Fortunately a professional (Yves Bergquust at USC) has beaten me to it. It's worth reading the whole article because it's loaded with quantitative analysis of the American film industry, but the upshot for our purose is that there is no correlation between quality (Rotten Tomatoes rating) and box office.

This reinforces the studios' disinterest, judging by their output and stated explicitly when they're speaking honestly, in making "critically-acclaimed award bait." As with most entertainment, Hollywood doesn't know much about what results in success, but they DO know that spending effort or money on making a good movie has no connection to financial success. Given the medium, that's critically important. A failed experimental painting or short story wastes a few days and dollars of a single person's resources. But movies are intense, multi-million dollar temporary startups. You MUST consider ROI.

To that end, I was also interested to see if budget or ROI are related to quality, and it turns out tgey are - but of course based on the non-relationship discussed above, that doesn't mean big budget equals big box office. And, bad news for Hollywood, what budget-box office relationship DOES exist is getting weaker over time - which is disastrous, because that means they can't predict ROI anymore.

I'd also like to see if total take (not just box office, also including back-end, ie video) has any better relationship to quality. Cult films that develop a following long after they leave theaters suggest that if there is a profit-quality signal, it would be more likely to emerge using the total take. I would also assume that as distribution channels have multiplied, that box office is less important as a fraction and predictor of overall revenue.

Sunday, August 6, 2017

What Determines Amount of International Tourism?

I was looking at Gunnar Garfors's 25 Least Visited Countries in the world. I had always wondered about this, so for fun I decided to compare the tourist numbers he provides against the countries' populations, areas, population densities and per capita income. There is not a strong correlation for any of these, but population had the strongest with r^2=0.15. Grouping countries by island vs. landlocked vs non-landlocked, island countries had a lower average visitation rate.

The real relation is likely going to be an equation of cost and payout - that is, the average cost of visiting, versus what people think they'll get out of visiting there. Countries that are safe with developed tourist infrastructure (which per capita income is a proxy for) and good promotion (which increases the perceived value) and at least tolerable climate will be the best in terms of payout, but the average cost is going to be more complicated - to get lots of tourists, you need lots of countries relatively near you with money, and minimal administrative barriers (i.e. no unfriendly ergo uncooperative political relationships.) This reads like a description of Europe, and not surprisingly, 6 of the 10 most visited countries are in Europe, and the U.S. is the only one in the western hemisphere. If you wonder if local culture is in danger of being destroyed by all these tourists, most-touristed-country France has more tourists per year than its total population, and French culture seems to be in no danger of disappearing. If you're wondering, North Dakota is the least-touristed state in the U.S.

Defense Contractors - Is War Profitable?

Companies like Boeing get some of the revenue from selling consumer (civilian) hardware, and some from defense. Other companies are far more dedicated to producing military hardware (north of 90% of their sales in some cases.) Of the top 10 defense contractors in the world per Wikipedia, I looked only at the 7 U.S. ones that would exist in a similar tax and regulatory environment. The correlation is that the more arms sales, the less revenue.

So why be a defense contractor then? What often matters more is measures of unit profitability (indices like EPS, P:E - or if you're an employee, profitability per employee.) And sure enough, excluding outlier L3, the more military business, the more profitable per employee.

Tuesday, July 25, 2017

War Requires Material Capacity and Lack of Institutional Constraint

In Never at War, Spencer Weart shows that in the modern era, democracies are extremely unlikely to fight other democracies, but that non-democracies fight democracies, and each other, much more often. You can try to think of counterexamples (Mexican-American War, maybe) but you'll be straining to do so.

A new paper by Blank, Dincecco and Zhukov show that prior to the modern era (i.e., 1200-1800) parliamentary states were actually MORE likely to go to war than absolutist states were. Their argument is that parliamentary states were successful in that they actually had more capacity to make war than the absolutist states, but they had not yet developed institutional constraints to prevent them from doing so, as presumably occurred in the modern era. (H/T slatestarcodex)

Tuesday, June 13, 2017

Education Ratings by State

This is from Education Week. No Bad Stripe visible here, but the Northeast sure does stand out. Looks like those Puritans and Midlanders are doing something right! To ask this more provocatively: are educators demanding to find out what they're doing in the Northeast so we do it everywhere? If not, why not? (Not that genes and geography are destiny - I have no ready explanations for Wyoming and Idaho, aside from good and bad policy decisions respectively.)

Thursday, May 25, 2017

Per Capita Income and the Bad Stripe

The Bad Stripe runs southwest from extreme SW Pennsylvania through West Virgina, turning westward through Kentucky and part of Tennessee, crossing the Mississippi through the Ozarks and into eastern Oklahoma. As seen in previous posts about it, it sticks out as a more-or-less contiguous zone of low happiness and quality of life indicators which is a border zone between North/Midwest and South, and is thought of by many as Greater Appalachian (or the greater reach of the Border Reavers, if Albion's Seed is your bag.) Long ago I thought this was just an area of contiguous mountains and hills, hence low population density and slower development, but you can't say that about western Kentucky and Tennessee or eastern Oklahoma.

The county-level per capita income map shows a poorer area roughly paralleling the Bad stripe, along with some of the Black Belt to the south and east of the Southern fall line cities.