The Power of the Fed

The other day in class I was talking about the power of the Fed. Even small word changes can make or break folks on Wall Street. From Brad Delong:

Yes, Virginia, Cheap Talk Can Move Markets
From the Whiskey Bar:

Billmon: You Can't Please Everyone: The Federal Reserve's Federal Open Market Committee changed exactly nine little words... and managed to wipe out about $120 billion in stock market capitalization in the process. Not too bad for government work. The nine words are the bolded ones in the following sentence, which was included in every previous statement issued by the FOMC for the past five months: "With inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period."

But in yesterday's statement that same sentence was changed to read: "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

That's it -- that was the only change. The Fed didn't raise rates. It didn't even hint that it would raise rates. But it became infinitesimally less willing to guarantee that rates will stay low for the indefinite future. And Wall Street didn't like that one little bit.

Actually, only four words were changed: "policy accommodation," "can," "maintained," and "be" remain the same. The words "for a considerable period" are replaced by "it," "patient," and "in removing its."

Keywords: ECO301, ECO120, Fed

Promotion and your "Teaching Philosophy"

Damn, a day late and dollar short. Newmark's Door points to several links on developing a "Teaching Philosophy". Fortunately I was able to get promoted despite my "Teaching Philosophy".


Keywords: Teaching

Anyone out there?

So through the wonders of the internet I've been caught reading and cribbing stuff from Newmark's Door. It's rapidly becoming one of my favorite economics related blogs, and I'm not just saying that because he links to my department's web page. It's because he is able to capture and filter what is interesting about economics, much like Tyler and Alex over at Marginal Revolution. If students don't find some of these posts interesting then I doubt there is much of substance that will. It is hard to read blogs with as many diverse interests and such profound intellectual curiosity as these and not get excited about economics in particular and learning in general.

That's exactly what first turned me on to Brad Delong's blog, but alas I think he is being sucked into the shrill black hole that is Paul Krugman's life these days.

Keywords: Economics, Blogs

Reading as Ideological Affirmation

This link points to a network map by Valdis Krebs.

Divided We Stand... StillLast year I created a network map of political books based on purchase patterns from major web book retailers. The network revealed a divided populace... at least amongst book readers. I was curious to see what, if anything, had changed in the patterns in 2004.

I used the political books on the New York Times Bestseller List as a starting point for 'snowball sampling'. In the network map above, two books are linked if they were bought together. The network is organized and displayed by an algorithm that looks at the pattern of connections and finds the emergent structure. Nodes with only one or two links, and unrelated clusters that had no bridging role, were removed for clarity.

It appears that the many of the books have changed from last year but the pattern is the same. Two distinct clusters, with dense internal ties have emerged. These political books are preaching to the converted! This year we find more bridges between the clusters. Yet, this network of 67 books is dependent on just 2 nodes to remain connected -- Sleeping with the Devil and Bush at War.

So, if you are working a 2004 political campaign what do you do with this information? Obviously you will not be successful in removing a reader from deep in one cluster and transplanting them into the other cluster. All you can do is focus on the edge nodes and the bridges. See someone reading Sleeping with the Devil? That is someone you can talk to about your candidate. If they are reading Bushwacked or Dereliction of Duty -- the most central books in each cluster -- then either give them a high-five or a sneer, you won't change their views.



There are disappointingly few bridges between the red and blue. If readers were truly interested in understanding and learning they would confront a more diverse set of views than this picture suggests. Of course if they were really interested in learning they probably wouldn't have bought any of these books.

Keywords: Politics

Up or Down? Toilet seat etiquette.

I have found another unusual article. In my quest to find articles written by economists applying the tools of the trade unique problems not normally thought of as economic in nature, I found this one, by Jay Choi.

So what is the most efficient rule to follow when leaving the toilet seat? Always up? Always down? The intuition is pretty easy, since lifting the toilet seat is as costly as putting it down, the rule that minimizes the number of times you have to move the seat is optimal. So both the "always up" and "always down" rules fail because they may require one person to move it twice, and there is still a positive probability that the next person would also have to move it twice. So the optimal rule is one that at most requires everyone to move it exactly once. Once up, or once down. So ladies, you are better off training your man to pee sitting down, in which case the always down rule would become the default.

Thanks to the Marginal Revolution for the pointer.

Another wonderful source of articles of this nature is Steven Landsburg's Everyday Economics columns in Slate. Like this one: Should you peel your bananas from the bottom or the top?

Keywords: ECO120

The Economics of Ecstasy (not the drug)

Wow, so interesting and so timely. This paper by Hugo Mialon looks at the signaling embedded in the (sometimes faked) human orgasm. In my money and banking class this week we were discussing examples of asymmetric information and what clearer example of private information is there then if a women's orgasm was real or fake? Of course Austin Powers would say "Who cares?", but Mialon produces a nice theoretical model to predict when and how often a woman or man - yes man- will fake an orgasm. This is also a brilliant example for my ECO120 class where I was arguing economics is as much about a way of thinking as it is a field of study. Certainly few people would think this topic falls under the traditional areas of economics.

From the Marginal Revolution:

The Economics of Orgasm
I've been an economist for so long that I don't flinch when the paper abstract starts as follows:

"This paper models love-making as a signaling game. In the act of love-making, man and woman send each other possibly deceptive signals about their true state of ecstasy. Each has a prior belief about the other's state of ecstasy. These prior beliefs are associated with the other's sexual response capacity..."

Or if that is not enough for you: "In this paper, love is formally defined as a mixture of altruism and possessiveness. Love is shown to alter the man and the woman's payoff functions in a way that increases the equilibrium probability of faking, but more so for the woman than for the man."

Here is the full paper. I could go on with quotations, but why don't we look at the empirical results, drawn from an extensive data set and questionnaire:

1. 72 percent of women admit to having faked it in their current or most recent relationship, for men the number is 26 percent.

2. You are more likely to fake an orgasm if you are in love. "It was the men I deceived the most that I loved the most," said Marguerite Duras.

3. Being in love and faking are less positively correlated for men than for women. Perhaps men want to look like studs, regardless of the seriousness of the relationship.

4. Women mind less if their partners fake orgasm. (Might some be positively relieved to have it over?)

5. Faking is correlated with age, but in complicated ways. It depends on whether you love your partner, whether you are a man or woman, and how old you are.

6. The more education you have, the more likely you are to fake orgasm. I found this to be the most interesting result.

The author, Hugo Mialon, is on the job market right now and he has a forthcoming co-authored AER piece, plus a revise-and-resubmit at the Rand Journal. His dissertation is "Five Essays on the Economics of Law and Language."

OK, the orgasm stuff is not his most marketable side, but Hugo seems to be a guy with both ideas and good technical skills. Hire this man. If we had a slot at GMU I would be pushing for him, even though he probably fakes his orgasms.

Thanks to Newmark's Door for the initial pointer to the paper.

Update: It looks like Steven Landsburg has picked this up.

Keywords: ECO301, ECO120, signaling, asymmetric information

Asymmetric Information and eBay

I just finished the lecture in money and banking where I talk about the importance of asymmetric information. In fact I always use the quote:

"The secret of success is to know something nobody else knows" -Aristotle Onassis

Well it looks as though, despite great spell checkers (which I'm sometimes too lazy to use), knowing how to spell can be the secret to success. From the Marginal Revolution:

A whole group of people trolls eBay looking for items that are "misplaced" because their descriptions are spelled incorrectly. If you list your "Haitian" painting as a "Hatian" painting no one will find it with a key word search. In essence this means that no one will find it at all, except of course for these noble entrepreneurs, these enforcers of spelling correctness.

I haven't sold much on eBay, but I've often wondered how important the listing info is to the final selling price, and clearly its very important. I bet there are a lot of other arbitrage opportunities. Even just from the different ways people classify things. If I have some old cycling stuff do I post it in sporting goods or in memorabilia? While you can currently cross list things, you pay full price for the second listing. So you want to try to list the item in the category that is going to attract the largest number of buyers, but if you're not a collector, and only selling one of these items, you might not hit the right category or key words. Then the arbitragers step in to profit from your lack of information...

Keywords: ECO301