Posts Tagged ‘Economics’
Incentive Problem in Cancer Drug Trials
I saw this brief New York Times article syndicated in the San Jose Mercury News. Evidently, one of the challenges in identifying new cancer treatments is recruiting enough patients for drug trials. The issue is that oncologists have little incentive to encourage their patients to enroll in drug trials.
Evidently, 60% to 80% of an oncologist’s revenues come from providing chemotherapy. When a patient enrolls in a trial, his doctor loses that revenue. As Scott Schaefer recently posted, the evidence is pretty clear that doctors respond to financial incentives. Result: a dearth of volunteers. So here’s an idea. Let’s pay a significant finder’s fee to oncologists that refer patients to trials. You could even start a “charity” to do this.
Is Money an Emergent Phenomenon?
The two economists that have most informed my view of the current macroeconomy are Arnold Kling and Scott Sumner. In both cases, their models and explanations make sense to me. They use solid reasoning and evidence; I don’t feel I’m getting a lot of hand waving. Unfortunately, at first glance, their views seem mutually exclusive. Kling believes business cycles are the result of many planning errors by individual agents (for example, this recent post and this follow up). Sumner believes business cycles are the result of contractionary monetary policy by the central bank (for example, this recent post and this one).
How can they both be right? I think they are operating at different levels. Yes, individual agents make their particular planning decisions. In aggregate, these decisions drive monetary variables like interest rates, exchange rates, liquidity demand, etc. However, these variables then feed back into the next round of planning decisions. Moreover, at least some of these plans take into account the effect of the agent’s actions on the monetary variables. So you get classic chaotic/complex behavior with temporarily stable attractors, perturbations, and establishing new regimes. There may even be aspects of synchronized chaos. I think the monetary variables are the key emergent phenomena here. They are like “meta prices” that provide a shared signal across just about every modern economic endeavor.
Food for thought. I’m going to keep this in mind when processing future articles on the economy and see if it helps my thinking.
(Price) Inflation Is All In Your Mind
I apologize for the non-existent blogging the past few weeks. I’ve been really busy with my new company. I’m going to try blogging more short items rather than my trademark essays in the hope that reduced barrier to entry will result in more supply.
First up is a provocative post by the ever-interesting Scott Sumner. Rafe in particular should read it because Sumner starts from one of Rafe’s favorite premisse that “laws” of nature are purely cognitive constructs. We should measure them by their usefulness and not ascribe to them any independent existence. So Newton’s laws of motion are useful in certain contexts. Einstein’s are useful in others. But neither are ground truth. Moreover, we will never find ground truth. Just successively more accurate models.
Sumner uses this bit of philosophy to justify abolishing inflation, not, “…the phenomenon of inflation, but rather the concept of inflation.” More specifically, price inflation. He explains why this concept is ill-defined and not only unnecessary, but confusing, for understanding the macroeconomy. He asserts that we should expunge it from our models. It doesn’t really exist anyway, so if models do better without it, we won’t miss it in the least.
Wall Street Wizards? Not so Much.
Here’s a nice post on how little old Amherst Holdings of Austin, TX got the best of J.P. Morgan Chase, Royal Bank of Scotland, and Bank of America. Amherst sold them all Credit Default Swaps (CDSs) against mortgages that were already under water. CDSs pay out if the underlying mortgages default. Everyone knew these mortgages were in bad trouble. Sure thing for the big guys, right? Wrong.
Will The Real AGW Skeptic Please Stand Up?
Normally, I don’t debate random bloggers on Anthropogenic Global Warming (AGW). However, I made an exception for Robin Hanson. For those who don’t already know of him, he was both an early proponent of decision markets and has a reasonably well known journal article on why two Bayesian rationalists can’t agree to disagree. I’m a fan of his work and have been reading his blog for years.
Yesterday, he put up a post titled CO2 Warming Looks Real. He’s not an expert. Like me, he has an economics background and did some detailed research. Yet from the title and body of the post, I though he must have reached a very different conclusion than I did. So I thought I’d try to engage him to find out where we differ. The results were interesting.
More on the California State Budget
A number of people responded to my recent post on the California budget. So I thought I’d dig a little deeper into the issue. The three points I’d like to address at the moment are whether spending as a percentage of income is rising, where the extra spending is going, and whether the extra spending is beneficial.
Disgusted with the California Budget
First, let me apologize for the posting lull. I’ve been busy with work and also struggling with a sinus issue that has sapped my discretionary intellectual energy. But enough about me.
In honor of California’s special election on budget measures, I thought I’d shed a little light on the fundamental problem. Contrary to what polticians are saying, the cause of the budget problem is not falling revenues in a recession. Rather, the cause is a dramatic increase in spending over the last 10 years.
You Can’t Pick Winners at the Seed Stage
[EDITED 05/08/2009: see here] The majority of people I’ve talked to like the idea of revolutionizing angel funding. Among the skeptical minority, there are several common objections. Perhaps the weakest is that individual angels can pick winners at the seed stage.
Now, those who make this objection usually don’t state it that bluntly. They might say that investors need technical expertise to evaluate the feasibility of a technology, or industry expertise to evaluate the likelihood of demand materializing, or business expertise to evaluate the evaluate the plausibility of the revenue model. But whatever the detailed form of the assertion, it is predicated upon angels possessing specialized knowledge that allows them to reliably predict the future success of seed-stage companies in which they invest.
It should be no surprise to readers that I find this assertion hard to defend. Given the difficulty in principle of predicting the future state of a complex system given its initial state, one should produce very strong evidence to make such a claim and I haven’t seen any from proponents of angels’ abilities. Moreover, the general evidence of human’s ability to predict these sorts of outcomes makes it unlikely for a person to have a significant degree of forecasting skill in this area.
Revolutionizing Angel Funding
[EDITED 05/08/2009: see here] We are finally ready to go semi-public with our revolutionary new angel funding concept! For the last year, Dave Lambert (the Tiltboy also known as Diceboy) and I have been working on an alternative mechanism for delivering seed funding to technology companies. [REDACTED 05/08/2009: see here].
Here’s the summary. The market for seed capital is clearly broken. Most individual angels will only do about 1 deal per year, which means their portfolios lose money 40% of the time due to insufficient diversification. Even premier angel groups like the Band of Angels say they only do about 8 deals per year. Our math says you need to do 125 to achieve good diversification. On the other side of the table, only 14% of entrepreneurs who want angel funding will find it. Those that do will spend about 6 months looking for money instead of building their businesses.
This is a sorry state of affairs for a market where the overall annual return is 25%+. Here’s a straightforward application of portfolio theory that can fix it. Have a large enough pool of money so one entity can do 125-200 deals per year. Then use an online screening process to give founders a yes or no in two weeks. Obviously, there are a ton of details beyond this, but those are what we’ve spent the last year figuring out. If you’re curious, let me know in a comment here and I will contact you privately.[Links to files REDACTED 05/08/2009: see here].
More Environmental Tradeoffs
The Corporate Average Fuel Economy (CAFE) standards will rise from 27.5 mpg to 35 mpg from now until 2020. That should decrease any pollutant associated with burning fossils fuels. All good, right? Wrong.
There is a trade off in safety. You are much more likely to die in a small car. The WSJ Online reports on a recent Insurance Insititute for Highway Safety (IIHS) study that shows small cars like the Honda Fit and Toyota Yaris fair very poorly in two-car frontal offset crash tests against the Honda Accord and Toyota Camry. This is against mid-sized cars from the same manufacturer, so a reasonable comparison.
