How High Curtain Holdbacks

killer

No, martingales are not a new species spider venom. But do a little flashback before beginning the talk: we are Wednesday, June 23, it is 8am, the crumbs of cereal cookies that I have to swallow still litter the table and say to myself: "Come on, I watching an episode of The Simpsons and I go to work ".

I then open my favorite streaming site (not, for pity's sake do not tell on me) and like all the sites streaming I have to fourteen bear pop-up ads and various get up before my show. And there, as usual, I let out a chuckle when he saw an ad arrogant like "Earn 250 € per day without leaving home." Yet that day, my curiosity prompted me to click on just to see what scam they hope to feed me.

I came across a video shot by a charming young man named Jonathan, but who has a bad tendency to speak to the viewer as a moron. After an introduction where I suspect a phishing attempt , he presents his infallible technique (But as old as the world) to win at roulette martingale what the classic (though it does not mention the name). What's this?

The strategy is as follows. Consider a game of chance like roulette where you can bet on "even" or "odd." For example, if you put € 1 on "pair", it gains 2 € if the figure comes out even and you lose up otherwise. So we have a chance of winning. What he proposes is to always bet 1 € on "pair". When we win, we win our pockets and is replayed exactly the same way. When we lose, we double the bet until you win again.

The idea is that if one has lost € 1 and € 2 replays that we find ourselves in the following situation. If we win, we recovered € 4, a net gain of 1 € (4 € least two bets). If it loses again, the net loss is 3 €. We put then 4 €. If we win, we retrieve € 8, a net gain of 1 € (8 € - 4 € - 2 € € € -1 = 1). If we lose, we double up again. We put therefore 8 €. If we win, it cancels all previous losses and realizing a net gain of 1 € and if we lose, we have only to double down and continue. Intuition is that when we began to lose force replay, you end up necessarily win at least once and cancel all its losses. So ultimately, we can not lose!

What's wrong?

note several things:

* First, if the game actually gives us a chance of doubling our bet and a chance of losing our bet, then mathematically expectancy winning the game is zero. That means that if you play a very large number of times and no matter how you play or what strategy you adopt, your wins and losses will vanish in the long term. There is no strategy to average to earn money. In contrast, we see that there are strategies to lose for sure :-)

* Then we can see that with this strategy, the gains seem relatively safe but are very weak. It gets 1 € after another. So if you have a high probability of earning some money and as the hope of winning the game is zero, there is necessarily a small probability of losing a lot of money at once!

now dismantle the mechanical Let the game you start playing with 100 € in my pocket. What is the thing that makes the strategy outlined above does not work? Let's look more specifically how many times maximum you can afford to lose in a row.

• If you lose once, you have € 99 and you have bet 2 €.
• If you lose twice, you have € 97 and you must wager 4 €.
• If you lose three times, you have € 93 and you have to bet € 8.
• If you lose four times, you have 85 € and you have to bet € 16.
• If you lose five times, you still € 69 and you have to bet € 32.
• If you lose six times, you have 37 € and you have to bet € 64 but you do not have enough!

So if you lose six times in a row, you do not have enough money to continue and you will get lost in the final 63 €. What is the probability of losing six in a row? It's (half) sixth power, ie 1 chance in 64.

Conclusion, when you have 100 € in my pocket and you apply this strategy, every time you bet, your chances of winning are:

• 63 chance to win 1 of 64 €.
• a chance on losing 64 of 63 €.

You can check the average earnings is zero. But then you say, just come with more money! If we redo the calculation with 1500 € in my pocket at first, then you can afford to lose up to 10 times in a row. You play the next game:

• 1023 to 1024 chances to win 1 €.
• a chance of losing to 1024 € 1023.

Each time you increase the amount you have in your pocket, you reduce the chances of losing but you increase dramatically the amount of potential loss ! Some will perhaps scoff, saying only one chance in 1024 of losing is not much. Let's do another calculation. Say you you set a reasonable threshold gain, say 150 €. You will then repeat this strategy until winning this amount then stop. What are your chances of winning? Approximately 86.4%. That is to say that if you try to earn 150 € with this method, you have 13.6% chance of losing € 1023, which is far from being negligible!

So it's a gamble that may at any time you lose a large sum.

But even if you like the risk you're willing to assume, then you better put his money on a stock market portfolio. That's about the same thing: you risk losing a lot if there is a crack but it makes all the difference with gambling is that on average you earn money stock market *!

Earlier, I told you that there is no strategy to win money on average at roulette but there are strategies that allow 'in lose for sure. How is this possible if the expected gain is zero? In fact, you lose nothing in average if you have unlimited funds. But if like me you have a limited supply of money, by dint of playing, you will eventually need one time or another by having a big stroke of bad luck and lose everything. It can happen very early or very late, after 100 parts or 10000 or more, but to force, it will happen. So it's always a very bad idea to play this kind of game in order to earn money. Only playing for fun to play, hopefully without anything.

A final comment. If there were an easy way to win for sure a lot of money, it would long as people would have exploited. So what kind of pub is always a scam.

Well, I'll watch my episode of The Simpsons. But suddenly, I'll come much later work. Dirt pub.

* Note, I speak good investment, not speculation.

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congestion charge Paris: a good idea?

Recently, the The idea of congestion charging in Paris was handed up to date . The concept, already tested among others in London and Singapore, is to pay a small sum to all drivers entering a zone determined. This policy is typically very popular among economists and very unpopular among non-economists. Why?

Once is not custom, we'll do some theory. We will try to imagine a simplified world in which a large number of people simultaneously want to go from point A to point B. To make this journey, they have a choice between taking their cars or take public transit. We will make several assumptions to simplify the analysis. First, we assume that the only concerns of individuals is to minimize travel time and the cost of one mode or another is the same *. Second, we assume that public transport has a great capacity and reliability does not depend on the number of passengers. Simply put, we say that the journey by public transport always takes 1 hour, regardless of the number of passengers (we return to this assumption earlier). Third, we will say that the travel time by car depends on the number of people who chose to take their car at the same time (because of congestion).

two minutes

Let's think about how people will behave. If the drive takes less than an hour, then people who used to take public transport will change their mind and choose to take their car, increasing congestion and also travel time by car. If the drive takes over an hour, then some people taking their car will change its mind and take public transportation instead. Whatever you do, ultimately, the travel time by car is, in this simplified world, equal to the travel time by public transport because any other configuration will push some people to change their minds. This is called a "balance" in our jargon.

Why is this a problem? If I'm in a hurry, it bothers me to have to be forced to have an hour of transport, whatever means of transport. Maybe I'll be ready to pay a small sum to save time. Let us for example, that I would find beneficial to pay 5 € to be able to make the journey in half an hour. But in this configuration, I can not.

But what happens if the authorities decide to set up a toll? For example, they may decide to pay 5 € to all those who travel by car. So, the travel time by car will no longer be equal to the long travel time by public transport. Some people will choose to leave their cars at home and take public transport, which will result directly reduce congestion. In the end what would there be? Each individual may choose between taking public transport and make his way in an hour or take his car, and pay 5 € to its course in 40 minutes.

Ultimately, the situation has improved for everyone . Individuals "slow", not wishing to pay for twenty minutes will make the transport as before. Those, however, prefer to pay a little more expensive to gain a bit of time will be happy to do so. With the tax on road use, it has improved its use of resources in our fictional world **.

What can we learn from all this? First, we see that the fundamental assumption of the model is that there is an alternative to the car, that is to say, Transit capacity and quality. However, in Paris, the transport is already saturated at peak hours. Anyone who is already mounted on the RER A in the morning was realizing it. How does this change he's analysis?

If public transport themselves are congested, a congestion charge is unlikely to change behavior. Result, this tax will be an extra weight in the budget of individuals without real counterpart. To be effective, requires that individuals have choice in their modes of transportation. If indeed there is a bus line unsaturated allows me to make the journey that I am currently in the car, then a tax will change behavior and individuals improve the efficiency of the system. The problem also arises for Areas served by public transport. If I live in a town lost in the suburbs (because I can not afford to live closer), I have no other choice but to take the car and the toll will be ineffective.

So if you want the system works in Paris it is imperative increase the supply of transport. The London authorities had committed themselves at the time of the introduction of congestion charging, reusing the revenue collected to improve the quality of public transport common, which proves that they had grasped this part of the problem.

Some mention the environmental aspects. Obviously if the congestion charge has a significant effect on behavior, emissions of greenhouse gas emissions will decrease. But that should not be the main objective of this policy. Why? Because 1) there are other more appropriate policies to fight against pollution as the carbon tax and 2) contrary to popular belief, pollution per capita in cities is much lower than pollution per capita in rural areas. If cities are more polluted, it's simply because there are many more people, but on average, each inhabitant pollute less (partly because fewer long journeys and there is greater energy efficiency in homes and transport).

* We could easily generalize the assumption that individuals have preferences for one or the other modes of transport based on comfort and each transportation mode has a different monetary cost, but it would complicate the model without changing the conclusions.

** Those who have done a little economy here will recognize the concepts of externality and Pigouvian tax. When a person takes his car, it imposes an external cost to all others because it increases traffic. By charging the cost to the individual through a tax, it improves the efficiency of the market because it can lead individuals to internalize the externality.

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The political limits of globalization economists

The controversy around the tender on U.S. tanker aircraft show that despite the continuous decline in transportation costs, the Protectionism remains a political choice. Even if one imagined a world where we could teleport free goods from across the globe, the tensions surrounding the closure of borders to foreign products would limit international trade.

Two economists are trying to show that the ability of countries to trade between them is limited by nationalistic sentiments and militarists. According to them, when nationalist ideas are spread within a nation, it will tend to withdraw into himself and demand the implementation of protectionist policies.

In support of their argument, they claim that nationalism caught in a broad sense is usually associated with a renewed vigor militaristic doctrines, including the American experience of September 11 provides an illustration so perfect that it borders on caricature. However, they find that, over twenty years, when a country increases its military spending or the size of its army, the share of foreign trade in GDP tends to decline (even when limiting the analysis to countries at peace). So, the link between increased military spending and fall in the trade may be indicative of the impact of nationalism on the refusal to buy imported products.

This is confirmed by previous studies (including this one and this one), which show that nationalist feelings in an individual are typically associated with support for protectionist policies.

however, difficult to know what we actually measure in this kind of statistical exercise. The idea that the increase of military expenditure is the result of "the political mood of the moment" and in particular the resurgence of nationalism seems fairly convincing. Asserting that the fall of trade associated with it is the consequence of that patriotism is plausible. The problem is that the statistical methods used by these two economists push them to remain deliberately vague about what they really intend to "nationalism". It is understood that, as part of their argument, it would be a general feeling of mistrust vis-à-vis foreigners. They argue that the real definition is not important since other work led to the conclusion that all the statistical measures of nationalism that could be built from field surveys were highly correlated with spending countries' military.

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Why are they fascinated by the market?

I'm rereading a book that really liked me, entitled The Company of Strangers by Paul Seabright . In the first few pages (available in English here ), the author describes market which helps explain why economists are all fascinated by its functioning (attention, it has nothing to do with "being fanatical market" or with some form of neoliberalism ). I offer you a free translation of the first three pages and I encourage teachers to read it to students in economics.

The Needs of World Population Shirts

This morning I went out and bought a shirt. There is nothing very strange about that: on the planet, perhaps 20 million people doing the same thing today. What is more surprising, however, is that, like most of the 20 million other people, I tell anyone that I intended to do. Yet, this shirt, although rather basic in terms of achievements of modern technology, represents a miracle of international cooperation. The cotton grown in India, from seeds developed in the United States; artificial fiber present in the son comes from Portugal and the components that allowed the manufacture of dyes from at least six other countries, the lining of the cervix from Brazil and the machines that were used in weaving, carving and sewing from Germany; the shirt itself was made in Malaysia. The project which led to make a shirt and deliver it next to my home in Toulouse was planned long, long before this day two years ago when an Indian farmer began plowing his land on the red plains near Coimbatore. Cologne engineers and chemists in Birmingham were already involved in preparing many years before. The most surprising is that despite all the obstacles he had to overcome to make this shirt and given the very large number of persons involved in this process is a beautiful and stylish jacket (on the scale that can express my opinion in this area). I am extremely happy with the result. And yet, I'm pretty sure nobody knew I was going to buy a shirt of this type today, myself, I did not know the day before. Each of the fibula, which has worked hard to make sure I get this shirt did not know me and not worry about me. To make the task even more difficult, they (or other workers almost similar) also had to work to provide shirts and 20 million other people very heterogeneous in terms of sizes, tastes and income, and dispersed across six continents, who decided independently of each other to buy a shirt at the same time as me. And that is just for customers today. Tomorrow there will be 20 million more, maybe more.

If there was one person responsible for providing shirts for the entire world population, the complexity of the task that it would take the size of a battle or war. One can imagine the president of the United States who were present a report entitled The Needs Shirts World Population . He trembled reading its contents and would immediately set up a crisis unit. The United Nations Conferences on ways to improve international cooperation in the manufacture of shirts, and there would be debates as to whether it is the United Nations or the United States should lead the operation. The Pope and the Archbishop of Canterbury initiate a call to unite to address the needs of the planet and religious personalities and stars of the song remind us regularly that can wear a shirt is part of Human Rights. The humanitarian organization Tailors without Borders airlift of aid to clothing the poorest regions. Experts would be interviewed to discuss the merits of making passes in Brazil for shirts made in Malaysia and then re-exporting to Brazil. Other experts would argue that reducing the diversity of styles of shirts, wasteful shameless, it could greatly increase the total number of shirts produced. Plants that have achieved the productivity gains the most spectacular in the manufacture of women would receive awards and their leaders would be interviewed on television. Militant groups claiming that manifest the "folders" are sexist and racially connoted clothes and suggest other more neutral clothes like blouses, tunics, and a whole myriad of other items that are worn above the waist. The Chronicles of different newspapers discuss priorities and needs. In this general cacophony, I wonder if I could still buy my shirt.

In fact, nobody is responsible to take care of everything. This process titanic which provides thousands of shirts in different styles to millions of people takes place without anyone being in charge of coordination. The Indian farmer who plants the cotton is only interested in the price at which a trader is willing to buy his production, raw material cost and effort required for harvest. The managers of the German company that manufactures the machines are concerned that export orders and their relationships with suppliers and workers. Manufacturers of chemical dye can not be less interested in the design of my shirt. Although some parts of the process require explicit coordination: a large firm like ICI or Coats Viyella has several thousand employees working directly or indirectly under the command of a CEO. But even the largest companies have only for a very small share of the overall production of shirts. In general, nobody takes care of the overall process. Sometimes you plague against the system and wondering if it works as well as it should (I had to replace the broken buttons of my shirt a little too often). But it is already extremely surprising that the system works.

citizens of industrialized countries with market economies have lost the ability to marvel at the fact that they can spontaneously decide to go out and find food, clothing, furniture and thousands of Other useful items pretty, frivolous or that can save lives, and when making that decision, someone will have already anticipated and made these properties available for purchase. For our ancestors who roamed the plains in search of game or scratching the earth to grow seeds in a capricious sky, such a prospect would have seemed miraculous, and the possibility that this can happen without some understanding of invervention to coordinate everything would have seemed incredible. Even when adventurous travelers have opened the first trade routes and that the citizens of Europe and Asia have had for the first time the chance to share their wealth, he had still a good dose of luck hope to reach port, so much so that it was a source of inspiration for the theater until the time of Shakespeare. (Imagine The Merchant of Venice in a supermarket).

In Eastern Europe and the countries that belonged to the Soviet Union, even after the collapse of the centralized economy, people could not understand how a society can aspire to prosperity without planning. About two years after the end of the Soviet Union, I met a Russian bureaucrat who was previously responsible for organizing the production of bread in St Petersburg. "Understand that we are quite ready to transit to a market economy," he said. "But we need to understand the basic elements that make this system work. For example, tell me who is in charge of the bread supply in the city of London?" There was nothing naive about this question because the answer ("no one cares"), when you think about it, is incredibly difficult to believe. Only in the industrialized West we've forgotten how strange it is.

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Wine tasting, social norms and market norms

I had the opportunity last weekend to do a short tour in Burgundy. After the visit of the Hospices de Beaune, we decided to take a little trip to the Cave des Cordeliers , right side, just to moisten his throat with some local wines.

What characterizes this tasting is that it pays: 7 € to taste five wines including a vintage * to over 50 € a bottle.

Intuitively, a neoclassical economist (bouuuh. .. let's stone him!) Looks like a wine connoisseur rationally prefer a free tasting at a wine tasting fee: the less you pay, the more one is happy. Yet it was exactly the opposite.

Those who have already visited the cellars are familiar with this dilemma. When you taste wines at a wine shop, one dare not leave without buying anything, it would be rude. Suddenly, you feel obliged to take at least a bottle while the wine is disgusting. That's what happened a little later in the day when we made a second cellar in a village lost. The guy gave us a plonk not terrible. In addition, it was obviously a bit forced to drink so he started a lengthy monologue that prevented us from leaving. We then bought a bottle to cut off power and flee.

The head of the Cave des Cordeliers has understood that and he understood very well that we could oust certain social standards by introducing market norms **.

This mechanism has long been known by social scientists whose experience is most illustrative of care in Israel ***. In these centers, parents souent arrived late to pick up their children. To try to fight against this phenomenon embarrassing, we tried to introduce fines proportional to delay time. Neoclassical economists (Ouuhh. .. they are beheaded!) Would have thought that this would reduce delays. However, this was exactly the opposite: increased delays. Before the introduction of the fine, it was a social norm that kept parents arrived (too) late. We try to avoid pointing to the flock because "it fucks wrong." But once the fine in place, a market standard just replace the social norm. Understood: it pays for the delay, so we had no discomfort at being late. The social incentive was replaced by a monetary incentive, less efficient (because the amount of the fine was not very high).

Here, the fact to pay the tasting because it is no longer perceived as an act of generosity in inviting reciprocity and therefore the purchase a bottle. Instead, the tasting is seen as a commodity exchange and thus is no longer the feeling of "having" something to cellar. Thus, we feel much more comfortable!

Well, it still took two or three bottles because wine was really good. These included a small white, Meursault 2004, which commanded respect.

Mh, I smell a note written in disaster after a weekend vacation this.

* But as a gift, you keep the glass anyway :-)

** There is an entire chapter devoted this theme in the book by Dan Ariely is (really?) me who decides.

*** recounted in the first chapter of Freakonomics .

var

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A fractal approach markets: Risk, lose and win

* This book, written by Benoit Mandelbrot and Richard Hudson, is a critical book on orthodox financial theory. Regular readers of my blog may remember that I had already commented on a book on the same theme, that of Taleb. After reading the Mandelbrot, I can tell you that Taleb's book deserves nothing but the trash because it is ultimately the same thing, except that Taleb says the arrogance and widespread criticism of any science without economic or the arguments nor the knowledge to make a relevant critical.

Let us leave aside Taleb and talk about this new book. What he tells us interesting?

It begins with a history of the Orthodox financial theory with a very clear statement on its foundations. It includes it depends quite critical of several key assumptions, including the price moves following a normal, that is to say that once we have identified their volatility, we know so specific enough in how often they will change. We particularly appreciate the fact that it is beyond the rhetoric "Oh dear, but it's completely stupid, how economists (they are stupid) could believe such a thing?!. "Instead, Mandelbrot shows how financial theory is built around this assumption then has slowly degenerated to the point where they forgot how the assumptions were demanding. Scientists were attracted by the simplicity of the model and the financial sector players were attracted by its flexibility and convenience (including asset valuation exotic).

Then It dismantles the edifice. He shows us with relatively convincing evidence (again, he prefers we use solid scientific work rather than turning into ridicule the theory) that the standard theory in finance, systematically underestimate the risk. By its very construction, the theory gum significant changes in large-scale asset prices such as those observed during the last crisis.

Then he introduced the application of fractal geometry to finance. He said he had not yet fully developed theory, but the initial results are very encouraging. Her disappointment is rather on the fact that there is little research programs that attempt deepen this work.

His theory does not explain asset prices but sets a simple goal: to understand the statistical laws that govern their development and find a way to describe this evolution. The most interesting aspect of his theory concerning the question of time. For him, time is not a homogeneous market. There are times "quiet" during which courses are relatively stable periods of "turbulence" during which events are accelerating.

It shows, for example to support, how the models' time multifractal "can reproduce these alternations of calm and turbulent periods. It is thus possible to describe the" peaks "in the development of courses that may not appear in the standard theory.

I'm not going further in the presentation of his theory, already because I did not very well understood myself, and secondly because this is probably not the most interesting part of the book, except perhaps for economists finance.

What we remember from the book is that we (finally) a full and coherent, based on the history of economics, which explains why financial theory was planted in 2007 in style. It does not seek to transform it into an ideological battle, or to humiliate the inventors of the classical theory. It does not simplify either for the purpose of caricature, but instead offers a fairly detailed description of the standard theory so as to make critical targeting model assumptions. Moreover, it does not just criticize the assumptions but also shows how approximate models may have led to such an underestimation of risk in financial markets.

As for blame, it does not really bother to hide the fact that "sells" his theory through this book, since it is still the inventor of fractal geometry. Can you blame him? I think not. It's a way to show that there are other avenues of research that the classical pathway. Also, note that passage, he throws a few extra picks against the standard theory by attacking the rationality of agents and the assumption of homogeneity of the agents. This is not the most interesting point of his criticism as these assumptions can be relaxed without undermining entire building, which is not the case with the assumption of normality (heart of the criticism of Mandelbrot). We feel that it adds a bit to give more weight to his words, knowing well that these additional arguments not survive the confrontation with the most recent advances in the standard theory. Strangely, I did not upset. Perhaps because the character was not a tone full of arrogance, as is too often the case in this kind of work.

In short, this is a reference book if you seek to understand the real criticism that can be done in modern finance. And it is all the more credible that the author does not need to use any ounce of aggression to convince the reader (even a pure orthodox like me!).

* I have read to me the English version of the book. I do not know what is the French translation.

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How to find that your partner is the victim of a bias staffing?

The other day my sweet and tender leaves of a women's magazine preferred while I spent time to play mini-games all the more stupid than the other . Without warning, she exclaims "Oh, look! By sending an SMS, you can win a pendant in the shape of the key to Alice in Wonderland !!!". While she frantically seized his laptop, I shrug my shoulders, knowing that any attempt to discourage would make me look like a killjoy whose cynical part of childhood was irrevocably destroyed by a background in economics a little too far.

And then the unbelievable happens: she wins. Amid the various comments on it expresses his girlfriends will be jealous and she had the chance to win when she did not believe she uttered this sentence: "In addition, it is not shit, this is something that is worth at least 90 euros! ". Then I take this time to chill the atmosphere in casant some behavioral economics:

"90 Euros? So you'll sell it on eBay?

- Kwaaaa! It will not! I won , I care!

- But then'd have been willing to spend 90 euros to buy?

- No, I do not think it's too expensive. I was not prepared to EUR 90 in there. "

Fearing an early separation, I refrained from making the comment that I will develop now in this post. Behind this attitude ultimately little surprising, one who shares my life has a behavior that is inconsistent with regard to standard economics.

For the economist "standard" a little silly and locked in his neo-classical (bouh. .. at stake!), Naomi (his name) is not interested in money as such, but goods that money can get. If she has 90 euros, it prefers to buy the pendant, she prefers to be another good *, put a two-day park asterix example (if you count lunch, ice, souvenirs and parking, we must not be far from that price!).

If she refuses to buy the pendant to 90 euros, she reveals she prefers to use the money for something else, such as the Parc Astérix. Parc Asterix is preferred the pendant.

If it receives a pendant and refuses to sell it to collect 90 euros would be used to go to Parc Asterix, this means that the pendant is preferred Park Asterix.

Where an inconsistency! Normally, or you prefer to have the pendant, or you'd rather have the 90 euros (or the day at Parc Asterix we can afford to).

Seen otherwise perfectly rational for an individual, the maximum price which he is prepared to buy a property should be strictly equal to the minimum price at which he is willing to sell that property **. These two prices are equal to the subjective value the individual attaches to the property.

However, we observe in many experiments, that once a person owns property, it is not prepared to sell unless they offered him a substantial sum ***. This phenomenon is called "bias staffing" and refers to the fact that the subjective value that attaches to a property is much higher when has it that when you do not have.

This bias staffing allows us to understand why For example, I still keep the video games I do not play more instead of selling them on the internet (yet, to snitch, I could not be further from 150 to 200 euros), why some investors are reluctant to sell financial assets whose prices collapse, or why many French people refuse to place not even a penny of their hard earned money in risky assets that yield twice as much on average a savings account (but run the risk of losing the fruits of his labor at which it is attached !)****.

How is it that the human brain is not affected by this "lack of rationality" ?

evolutionary economics can offer us some ideas. In our society, markets are functioning relatively well. If I want to sell my possessions at the flea market, it is unlikely that an interested buyer m'assome a blow to steal my possessions, leaving me motionless on the pavement. Similarly, I can leave my apartment without fear (exceedingly) to find it broken and emptied of its contents.

However, it was not too long (that is to say, the prehistory), this scenario was not so unlikely as that. The exchange was not a natural act and easy because of the risk of attack and rob. Thus, individuals who gave an excessive value to their possessions were probably an advantage and have been selected by evolution. Our brain is "programmed" to protect our possessions, and through staffing is a tool that evolution has found to achieve this goal.

Today, the environment has changed: the police protects us, the law can enforce contracts, they punish the thieves, we can find markets for buying and selling anything and everything ... But our brain, it has not had time to adapt and still has the properties that were useful there are over 5000 years, but which are now cons-productive.

This theory is more convincing than through staffing is not observed in humans but also in monkeys !

Meanwhile, Naomi has received the pendant and it is very nice :-)

* Some will say it can also save the money. That said, if you consider the savings as deferred consumption, we can always imagine that she hesitated between buying the pendant today or buy another property later and it is the same.

** The most finicky I will point out that it is true that in the absence of transaction costs. Indeed, sell an item on eBay requires some effort: you have to post the ad, answer questions from potential buyers, ship the package ... Nevertheless, the gap between the reserve price to purchase and reserve price for sale is so huge that the only transaction costs can not explain it.

*** See for example the chapter on staffing through the work of Dan Ariely It's (Really) I who decides.

**** There is a great proximity between the bias and the endowment loss aversion, the fact that assesses different losses and gains in a risky environment (on average, people give weight twice as large losses as gains in their decision-making).

Who Is Pinky Pinkerton

Competition and wage stability

Competition is typically a topic which economists and non-economists have opposing views. Economists see it as a force which pushes firms to innovate, which contributes to keeping prices as low as possible and encourages people to give the best of themselves. Non-economists often put forward the fact that competition increases the volatility of markets and imposes additional pressure on workers.

I just found a study that will probably help reduce the gap between economists and non-economists. It dates from 2004 and its author, Marianne Bertrand , was entitled "From the invisible handshake to the invisible hand?". What does she mean by that?

A little theory: risk sharing between employer and employee

Imagine a perfectly competitive labor market. In this scenario unrealistic, there are a large number of employers and a large number of potential workers. Thus, a worker can take advantage of competition between firms. As long as we pay him a salary less than its actual productivity, another company's interest to offer him a salary slightly higher for the debauch. After all, a company has no reason not to take the opportunity to recruit someone who brings in more than what it costs. Therefore, in this fictional world, wages are always equal to the productivity of workers.

In practice, the productivity of an employee is not a fixed and invariant in time. The economic environment is changing very fast. The manpower needs as well. One type of jurisdiction may be sought at a very time T but abandoned by the same company at a time T +1. If wages were to be always equal to productivity, there are permanent changes. An employee could never predict how it would be paid next month.

For a company employing a large number of employees, it would not be very disturbing to adjust salaries every day (except for administrative costs that would entail). If the risk is spread a large number of workers, the law of large numbers shows that the risk will be relatively diluted with enterprise-wide *. In contrast, across the employee, the uncertainty is unbearable. The events following the attempted introduction of CPE show that many people hate working in an uncertain environment.

In economists' jargon, we say that the employee is more risk averse than the firm, because the variation of wages has a much bigger impact on him than on the company.

The consequence of this is that at the time of hire, the employer and the worker have an incentive to enter into an implicit contract. The employer will offer the following deal:

"Ok, I'll pay a little less than what you are worth, but in exchange, I can guarantee the stability of your salary."

is why some economists say the labor market is governed by an "invisible handshake" by an "invisible hand".

This implied contract is to transfer some risk to the employee's employer which I think you will agree, is more desirable.

What relationship with the competition ?

How competitive pressure disrupts the implicit contract

A firm that stabilizes the wages of its employees taking a risk. It will not reduce wages if economic conditions are unfavorable. In doing so, it runs the risk of being robbed market share from other firms with more flexible wage policies. Thus, increased the intensity of competition may jeopardize the firms that adopt a wage policy is too rigid and particularly those who spent an implied contract.

How do I know if this mechanism work in practice? The author tells us that if it does, we should observe the following phenomenon:

• When competition is less intensive, salaries are influenced by conditions at the time of hiring and vary little by on.
• When competition is intensive, salaries are relatively independent of the economic situation at the time of hire and depend mainly economic fluctuations.

To test this theory, it uses the variations in exchange rates (which affect the consumer prices of imported products and therefore the degree of competition) and look determine if these fluctuations wage policies.

And indeed, she found that when competition becomes more intense, wages become more sensitive to economic fluctuations and gain instability, which is detrimental to employees.

Typically, this study highlights a cost associated with the creative-destruction process that is often overlooked by economists in theoretical models. Typically, we teach by example, models of international trade by making a comparison between before and after the opening of borders. In the standard case, we conclude that the "total welfare" is greater after open borders. However, a strict minimum teacher must not only specify that some are winners and others losers but also that changes in the economic environment imply a cost for a non-negligible number of individuals as seen in this study.

* This analysis is not entirely accurate. The law of large numbers holds only if the variations in the productivity of individual employees are all independent. However, in practice, companies may suffer shocks that affect productivity of all employees at a time. For example, suppose that the company undergoes a demand shock that causes it to lower its prices. As each product is cheaper, all employees see their productivity drop if it is assessed by value. The simplified proof in the body of the ticket is simply to show that the risk is greater in scale than the employee's company-wide.