Portfolio.com: Odd Numbers

Is Text Messaging a Rip-Off?

Zubin Jelveh — Mon, 12 May 2008 21:37:51 GMT

Making the rounds today: A University of Leicester scientist estimates that the cost of sending a text message is over four times the price of downloading data from the fancy Hubble Space Telescope.

Nigel Bannister calculates that sending one megabyte's worth of text messages would cost $734. The same amount of data would run about $166 per megabyte for Hubble.

But there is potentially a big problem with Bannister's calculation for those of us in the U.S. He assumes that the average price charged for sending a text message is roughly $0.10. This may very well be the case in the United Kingdom, but it's a different story over here.

If you sign up for your wireless provider's text messaging plan, as most heavy users of texting are likely to do, the price per message comes down dramatically.

For example, T-Mobile charges $4.99 per month for 400 messages, Nextel $5.00 for 300, and AT&T $5.00 for 200. That averages out to a little under $0.02 per message. While most users aren't going to use up all of those messages each month (driving up the average cost), the plans all allow for sending data-heavy pictures and video at no extra charge (driving down cost).

At $0.02 per message the cost of sending a megabyte's worth of text messages is closer to $150, lower than Bannister's calculation for Hubble transmissions. Still, even though his metric for how expensive texting is for the average user doesn't seem to work for the U.S., the main question still remains: Is texting a rip-off?

Last year, BusinessWeek estimated that profit margins for data services are in the 75 to 90 percent range. Couple that with the fact that you can send texts for free on the web, and you can see why data was one of the few bright spots in Sprint's weak earnings announcement today.

Legalizing Insider Trading, With a Catch

Zubin Jelveh — Fri, 09 May 2008 21:34:18 GMT

Following up on Felix's case for why insider trading should be illegal, allow me to paraphrase another argument along those lines:

Imagine four types of investors:

- noise - those who trade on information they believe to be good, but is actually wrong (a large chunk of us)
- insider - those with intimate knowledge of the workings of a firm
- information - those who invest in finding information about firms (e.g. analysts)
- liquidity - buy and hold-type investors who don't care about the real economics of a firm. This group is likely to buy indexes of stocks. (another sizable group)

The tension among these four is between insider and information traders.

Let's say an insider sells some stocks. An information trader, not knowing the source of the transaction, will think that the stock is now undervalued so he/she will go long. Once the information that the insider traded on reaches the market, the info trader is toast. In the long run (and in the extreme), insider trading drives information traders out of the market.

What's wrong with this scenario?

The best argument is that insiders have the information but they may not be the one's best able to take advantage of it. The reason for this is that insiders are likely to only concentrate on their own business, or possibly their own sector, but not general economic forces. When information is made available to everyone at the same time, there is competition to get the most value out of it. And we know how much everybody likes competition.

As for noise and liquidity traders, the former aren't hurt one way or another by this dynamic. But the presence of info traders provides liquidity to the latter group.

Perhaps one solution could be to legalize all types of insider trading but with the stipulation that each and every transaction be made public. That way, insiders can attempt to both profit from and signal their information to the market.

Real Housewives of NYC -- A Lot of Them

Zubin Jelveh — Thu, 08 May 2008 23:10:37 GMT

The Big Apple likes to see itself as the heart of capitalism where business can be conducted at all hours. But a sizable chunk of the New York City-area population has quietly managed to keep itself out of that rat race.

If you're a married woman living in the New York City area, there's a better than 50 percent chance that you don't work, according to a recent analysis of Census data by economists affiliated with the St. Louis Federal Reserve Bank.

More specifically, only 49 percent of white high school-educated married women in their prime working ages were holding down jobs in the New York area as of the 2000 Census. To put that in perspective, there are roughly 2 million woman over 15-years-old who are married in the New York area.

The national average for this particular demographic is 67 percent. At the other end of the spectrum is Minneapolis where almost 80 percent of these married women are employed -- that's larger than the percentage of working men aged 25 and older in the U.S.

And the phenomenon isn't a recent one. Since the 1970's married women in the Twin Cities have been living by the Protestant Ethic more than their New York counterparts. (The disparity isn't as drastic if you only look at college-educated married women -- highest rate goes to Albany with 80 percent and lowest to Honolulu with 64 percent -- but it's still there.)

The chart below shows the percentage of white high school-educated married women in the labor force between 1940 and 2000 (data for 1960 are missing):

So what explains the difference? Do married women in New York just like to bust their butts less?

The researchers, Dan Black of the University of Chicago, Natalia Kolesnikova of the St. Louis Fed Reserve Bank, and Lowell J. Taylor of Carnegie Mellon University, looked at the most obvious factors that could be responsible: wages, housing costs, and labor market conditions. In places where home prices or incomes are high, or the employment rate is low, you'd expect higher employment rates. But they found little evidence that these factors are influential at all.

Child-care costs also don't seem to be a big factor since married women with and without children exhibit the same patterns.

Married women in New York and Minneapolis seem to be taking into account some things that are specific to their cities when deciding to work or not. Surprisingly, the economists argue, the most important specific thing seems to be traffic.

Take a look at the table reproduced from the paper at the bottom of this post. You'll notice that cities similar to New York in the percentage of married women who work are also the cities with the most traffic congestion.

Time spent in traffic is costly, so as congestion increases there may be a certain point where married women decide to either drop out of the labor force or not join it in the first place. The data seem to back this up.

Looking back over time, "Cities in which commuting time increased most rapidly generally also experienced slower growth in female labor force participation," write the researchers.

As for the women who are employed, rising congestion seems to go in hand with working more hours. If commute times increased by one minute, the researchers found that married women spent an additional three to six hours working per year.

The same thing happens for men. If the commute time is longer by 20 minutes in one city compared to another - that's close to the difference between Nashville and New York -- then a man in NYC is likely to work an extra week each year.

And if you work longer, you might want to retire earlier too. While the results aren't overwhelming, it turns out that a man that lives in a city like New York is 1.3 percent more likely to be retired when he's in his 50's and 60's than a man living in a city like Nashville.

It's important to note that the findings show correlation and not causation. Still, the evidence is consistent with the idea that longer commute times are influential factors in keeping some married women at home and other married men and women laboring longer.

And for those of us in New York, it adds one more reason to be upset that plans for congestion pricing are dead.

(Photo credit: Bettmann/Corbis)

When Envy Trumps Ambition

Zubin Jelveh — Wed, 07 May 2008 12:29:38 GMT

Do you know how much your coworkers get paid?

The answer is almost sure to be no, since as both a bargaining strategy and a tool to limit jealousy between cubicle-mates, companies want to keep pay information under wraps. But there's another reason that employers may want to protect compensation information: A worker's knowledge of their own place in the pecking order could "motivate" them to slack off.

There's been a lively debate among economists in recent years over the importance of relative, as opposed to absolute, income. One side, let's call them the absolutists, says people derive feelings of well-being from how much they make regardless of where they are in the food in chain, and the chance to make more money should in most cases motivate people to work harder. The relativists argue that people don't make decisions in a vacuum, and a person's rank (compared with neighbors, coworkers, classmates) influences their actions.

The impact of the green-eyed monster has been shown a number of times in laboratory settings. The typical setup goes like this: John is given the task of splitting up $10 between himself and Matt. When John offers Matt a deal that has John keeping most of the money, Matt tends to reject the offer -- even though on an absolute scale, Matt would be better off.

The criticism leveled against these experiments is just that: Since they're conducted in an unnatural lab environment, they're not representative of how people act in real-world situations.

Evidence of how we might change our behavior in the face of perceived inequity has been hard to come by since, as I mentioned above, companies aren't keen on giving that information out. So a group of Swiss economists turned to the tried-and-true world of sports research where both pay and performance data is easily available.

The researchers looked at how the performance of athletes in the N.B.A. and the German premiere league was influenced by their relative income rank on their team. Did the higher salaries at the top motivate a player getting paid below average to improve his performance? The short answer is a big fat no.

They found that while a player's absolute level of play had a large impact on his output, the lower-ranked a player was on the pay scale, the higher the chance that his output would drop -- regardless of his natural ability. (Overall, the positive impact of a player's salary was twice the size of the negative impact from having a low rank.)

The researchers also looked at what happened to an N.B.A. player's output when his pay rank changed (either through a trade or a new salary). In cases where a player went from a high ranking to a low ranking, his output dropped by about 16 percent. The opposite move had a much smaller positive impact. Still, it appears that, at the top of the pay scale, player performance did improve as pay rose.

But overall, the researchers say that envy trumps ambition: the negative impact of relative position outweighed the positive effects of pay incentives.

It's hard to argue, however, that the finding could be applied broadly to more conventional working environments. In the N.B.A., for example, players know how much their teammates make. If you don't know your colleague's salary, you'd be much less likely to change your effort. And the relatively higher wages professional athletes make may give them more of a cushion to slack off. Someone making 5-figures is more likely to be concerned with things like food and shelter than a player making $1 million per year.

Still, in places where an employee's output is more visible and is directly linked to his pay (like sales or asset management), incentive pay arrangements may be causing more harm than employers realize.

Achieving Universal Coverage at No Extra Cost

Zubin Jelveh — Thu, 01 May 2008 15:19:48 GMT

While the health care plans of Hillary Clinton, John McCain, and Barack Obama have understandably gotten most of the attention, there is another proposal working its way through Congress that might be better than all three.

A preliminary evaluation of a proposal by Senators Ron Wyden (Dem. - WY) and Bob Bennett (Rep. - UT) by the Congressional Budget Office finds that the pair's universal coverage plan could potentially be revenue neutral for the government.

The same can't be said for even McCain's proposal, which, while encouraging a free market for insurance, would still include a federally-subsidized component for those higher risk patients who still couldn't find insurance. McCain's economic adviser, Douglas Holtz-Eakin, told NYT that this safety net could cost between $7-$10 billion per year.

Obama's universal health care plan, which is similar to the one which covers members of Congress, would cost between $50-$65 billion. Clinton's proposal, which uses a mandate system similar to Massachusetts, is estimated to cost about $110 billion.

Wyden and Bennett's plan also requires individuals to purchase insurance, but what sets it apart is that it ends the tax exclusion for employer-based health insurance premiums.

This from the CBO, which looked at a hypothetical 2014 when the plan would be fully operational:

Overall, our preliminary analysis indicates that the proposal would be roughly budget-neutral in 2014. That is, our analysis suggests that your proposal would be essentially self-financing in the first year that it was fully implemented. That net result reflects large gross changes in Federal revenues and outlays that would roughly offset each other.

More specifically, under your proposal, most health insurance premiums that are now paid privately would flow through the Federal budget. As a result, total Federal outlays for health insurance premiums in 2014 would be on the order of $1.3 trillion to $1.4 trillion. Those costs would be approximately offset by revenues and savings from several sources: premium payments collected from individuals through their tax returns; revenue raised by replacing the current tax exclusion for health insurance with an income tax deduction; new tax payments by employers to the Federal government; Federal savings on Medicaid and SCHIP; and state maintenance-of-effort payments of their savings from Medicaid and SCHIP.

To be fair, the other candidates say they can pay for their proposals at little or no extra cost by either repealing President Bush's tax cuts (Obama and Clinton) or by redirected funds from other programs (McCain). Still, Wyden and Bennett's is the most revolutionary, and since there's things in it that piss off all sides, it might also be the best of the bunch.

Gambling Strategies: Always Bet on White (Referees)

Zubin Jelveh — Thu, 01 May 2008 02:10:00 GMT

Justin Wolfers and Joseph Price showed us evidence last year that NBA referees tend to call less fouls on players of their own ethnicity -- and that this could influence the outcome of games.

Wolfers and Price (joined by Tim Larsen of BYU) have now turned their attention to the betting market's ability to exploit this inefficiency.

In research to appear in the Journal of Quantitative Analysis in Sports, the trio, I think unsurprisingly, find that point spreads don't appear to take into account the racial bias.

They write:

"This is a useful contrast to a long literature typically finding that betting markets are extremely efficient aggregators of information."

And wherever there is market inefficiency, there is profit opportunity. It turns out that a simple betting strategy of picking the team with the greatest racial similarity to the officiating crew when the crew is either all black or all white -- 4,493 games between 1991 and 2005 -- is successful in beating the spread 51.48% of the time. That's not quite profitable however, since you typically have to bet $11 to win $10 -- which requires at least a 52.38% success rate.

Through some statistical gymnastics, the researchers find that a betting strategy in which all referees are white and difference between the percentage of total playing time for black players on one team is at least 30% greater than for the other team yields a success rate of 56.76%. Unfortunately, there were only 508 games that had this configuration over 15 years. Still, the betting profit on this strategy would've been 7.48%.

A quick search of the playoffs finds one game that comes close to fitting the bill: Game 2 of the Raptors vs. Magic series. All three refs were white and the difference in playing time for black players for the Magic vs. the Raptors was 28 percent. But betting on the Magic wouldn't have been profitable here, as although they beat the Raptors 104-103, the Magic couldn't cover the 6.5-point spread.

(Hat tip: Sabermetric Research)

Unanswered Questions: To Pause or Not to Pause?

Zubin Jelveh — Wed, 30 Apr 2008 19:39:44 GMT

Most Fed watchers were expecting the FOMC to signal in its post-meeting statement that rates would remain steady after today's cut. That view was boosted when this short phrase on growth prospects in the March statement went missing:

"However, downside risks to growth remain."

Bloomberg and WSJ interpreted the actions as a signal from the Fed that it was pausing. The FT and NYT, on the other hand, went looking for even firmer wording from Bernanke and crew that the current Fed cycle was over, but didn't find any.

Which is closer to truth?

Prior to today's announcement, interest rate futures had priced in a zero percent probability that the Fed would cut rates at its next meeting in June. Afterwards, rate futures signaled about a 20 percent chance of a rate cut.

If the Fed was looking to send a clear signal today, it fell quite short.

Grim Budget Outlook Forces Treasury to Bring Back 1-Year Bill

Zubin Jelveh — Wed, 30 Apr 2008 15:58:04 GMT

First it was the rebirth of the long bond in 2006, and now, after a 7-year hiatus, the 1-year bill has been given new life as worsening economic conditions mean less tax revenue.

But the rebirth of the 1-year bill won't provide sufficient financing, worried securities industry advisors to the Treasury. From a release today:

The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term.

Other options include bringing back the 3-year note -- which was dumped last May as corporate profits increased tax revenues -- reviving the 7-year note or issuing more 10-year notes.

But the latter two options are unlikely, RBS Greenwich Capital's Stephen Stanley wrote in a research note:

"Treasury will want to think long and hard about locking in hefty issuance for 7 or 10 years, if big deficits are boing to be a two- or three-year cyclical phenomenon."

Does It Make Sense to Buy Forever Stamps?

Zubin Jelveh — Wed, 30 Apr 2008 01:58:09 GMT

The United States Postal Service announced yesterday that the one-year-old Forever stamp -- 1st-class postage that will be good any time in the future even if mailing prices go up -- has been a hot seller as the date of a one-cent hike approaches.

Over 6 billion have been purchased since last April comprising roughly 17 percent of all stamps sales.

"We introduced these stamps as a customer convenience to ease the transition during price changes, and they also deliver economic value," the Postal Service said in a press release.

Does that claim hold up? Looking back at rate hikes over the past 30 years, it would be hard to make a good case for buying Forevers as they haven't kept up with inflation.

If the Forever stamp had been introduced in 1978, you would've been better off spending the $0.15 on most anything else. At all points in the following 30-years the inflation-adjusted price of stamps was less than $0.15. There would have been no point in hedging against rising stamp prices.

For individuals, the economic loss is tiny, if you'd stocked up with $100 worth of Forever stamps in 1978 and used them over the next 30 years, you'd be out $2. But for the postal service, the overall gains would've provided a small boost to revenues. (People who would've put off buying stamps until after a price hike would now have some incentive to buy Forevers instead.)

Going forward, the Forever stamps still won't make sense economically for consumers since rate hikes are capped at C.P.I.

But because of the small costs involved, the first part of the Postal Service quote above seems accurate: If I was about to buy a packet of stamps before the price hike next month, I'd opt for the Forever stamps. There is something defeating about having to buy one-cent stamps so you can use your old postage.

When Jews and Christians Compete

Zubin Jelveh — Tue, 29 Apr 2008 02:05:51 GMT

Last week, Jews around the world observed Passover, the holiest event on the Judaic calendar.

Christians typically celebrate Easter around the same time, but this year the anniversary of Jesus Christ's rise from the dead fell in late March. (The two holy days will be much closer next year with Passover starting on April 9 and Easter on April 12.)

Jews and Christians also celebrate another pair of holidays that happen to fall close to one another: Christmas and Hanukkah, otherwise known as "Jewish Christmas."

What's interesting about this pair is that, unlike Passover, Hanukkah is not an important holiday for all Jews around the world, primarily just those in the U.S.

The reason for the disparity, say three Israeli economists at Stanford University, can be seen through the lens of competition. Much like Microsoft may update a product with a feature found in a competitor's program, U.S. Jews co-opted some of the consumer-friendly (i.e. giving lots of gifts to children) elements of Christmas in order to keep the religion attractive to younger generations and prevent children from feeling left out amid the December festivities.

Stanford's Ran Abramitzky, Liran Einav, and Oren Rigbi hypothesized that if such competition did exist, you'd likely find it among Jews who had children, were less religious, and, hence more likely to marry a shiksa or a shegetz.

But how do you measure Hanukkah celebration? By getting creative.

The U.S. National Jewish Population Survey asked about 5,000 Jews earlier this decade which holidays they celebrated, and, if Hanukkah was one of them, how many menorah candles they lit. The Festival of Lights is eight days long, so the Stanford researchers counted each lit candle as a unit of celebratory intensity.

They found that the effect of having children on how intensely a family celebrated Hanukkah was lowest among Orthodox Jews, got higher for Conservative Jews, and rose again for both Reform and non-religious Jews but to roughly the same level.

To make sure their results weren't merely showing that having children was the cause of more celebration, the researchers also looked at how likely respondents were to celebrate Passover and Rosh Hashana, two holidays not likely to be in competition with Christian rivals. They found that having children had much less of an effect on whether families celebrated these holidays.

So, if competition does indeed exist between Christmas and Hanukkah (at least for Jewish families that want their children to hold on to a Jewish identity), why isn't it the case for Passover with the major Easter typically so close?

It could be that Passover is just too important of a holiday for Jews to mess with, or it could be that Easter bunnies, scavenger hunts, and decorated eggs just don't have the same pull that Wiis and Play Station 3s do.